Case Law (SC) – Once the shares of the amalgamating company kept in stock-in-trade ceased to exist and were substituted by shares of the amalgamated company, there was a cession of the old trading stock and its replacement by a new commodity of ascertainable market value. On this footing, it is realisation of business profit and taxable under Section 28.

Jindal Equipment Leasing Consultancy Services Ltd. & Anr v. CIT & Ors. [2026 INSC 46] dated 09.01.2026.

ISSUE BEFORE COURT ARE: -

A.   Whether an amalgamation – though, in company law, it operates as a statutory substitution of rights – nonetheless gives rise to taxable business profits under Section 28 of the I.T. Act.

B.   Whether the substitution of shares kept in stock-in-trade results in real commercial profits, having accrued or arisen in the course of business, so as to be chargeable as business income under Section 28.

DECISION: -

“27.2. In this context, the substitution of one trading asset by another, such as the receipt of shares in an amalgamated company in lieu of shares held as stock-in-trade in the amalgamating company, cannot be equated with a mere continuation of an investment. It represents a commercial realisation in kind, for the new shares are distinct assets with a definite and presently realisable market value.

27.3. If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion. Enterprises could create shell entities, warehouse trading stock or unrealised profits therein, and then amalgamate so as to convert them into new shares without ever subjecting the commercial gain to tax. Equally, losses could be engineered and shifted across entities to depress taxable income. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus; to exempt them from charge at the point of substitution would undermine the integrity of the tax base.

27.4. Accordingly, while the Act makes an express exception for amalgamation of capital assets, no such exception is contemplated in the case of business assets. Section 28 is deliberately cast in wide terms to bring to tax real and presently realisable profits arising in the course of business, and in the context of stock-in-trade, the allotment of shares upon amalgamation constitutes precisely such a taxable realisation. Application to the present case 28. In the present case, the Tribunal, relying on Rasiklal Maneklal, held that no “transfer” occurs in a scheme of amalgamation. The High Court, however, found this view unsustainable, observing that under the 1961 Act, as clarified in Grace Collis, the extinguishment of rights in the shares of the amalgamating company constitutes a “transfer” within the meaning of Section 2(47). Since such transfer is exempt under Section 47(vii) only in respect of capital assets, the High Court proceeded to examine whether shares held as stock-in-trade would nonetheless give rise to taxable business income under section 28.

28.1. The High Court reasoned that once the shares of the amalgamating company ceased to exist and were substituted by shares of the amalgamated company, there was a cession of the old trading stock and its replacement by a new commodity of ascertainable market value. On this footing, it held that a realisation of business profit had occurred, taxable under Section 28. Relying upon Orient Trading and Hindustan Lever, the Court observed that shares received on amalgamation are fundamentally new assets, and the process results in realisation of value irrespective of shareholder status. The taxable event, therefore, depends on the substance of the transaction and not merely accounting entries. On this reasoning, the Tribunal’s findings were set aside, the question of law was answered in favour of the Revenue, and the matter was remitted to the Tribunal.

29. As already noticed, the correctness of this reasoning constitutes the core issue in the present appeals. In view of the foregoing discussions, we reiterate that Section 28 of the I.T. Act is of wide import and encompasses all profits and gains arising in the course of business, even when such profit is realised in kind. The statutory substitution of shares of the amalgamating company by shares of the amalgamated company is not a mere neutral replacement; where the new shares are freely marketable and possess a definite commercial value, the event constitutes a commercial realisation giving rise to taxable business income. The principle laid down in Orient Trading and similar authorities makes it clear that such profit need not await actual sale if the benefit received is real and presently realisable.

30. We thus hold that where the shares of an amalgamating company, held as stock-in-trade, are substituted by shares of the amalgamated company pursuant to a scheme of amalgamation, and such shares are realisable in money and capable of definite valuation, the substitution gives rise to taxable business income within the meaning of Section 28 of the I.T. Act. The charge under Section 28 is, however, attracted only upon the allotment of new shares. At earlier stages namely, the appointed date or the date of court sanction, no such benefit accrues or is received.

31. Accordingly, the main issue is answered in favour of the Revenue, in principle holding that the receipt of shares of the amalgamated company in substitution of stock-in-trade can give rise to taxable business profits under Section 28. However, the actual application of this principle to the facts of the present case, including whether the shares received are freely realisable or otherwise subject to restrictions, or whether the shares are held only as investment, is a matter requiring factual determination. In these circumstances, the proper course is to remit the matter to the Tribunal for fresh adjudication in accordance with law.

32. Before parting, we may observe that business, by its very nature, admits of profits arising in diverse forms, whether in money or in kind, yet the common denominator is that the benefit must be concrete, capable of commercial realisation, and not a mere paper re-arrangement. Amalgamation, as a statutory substitution, ensures continuity of enterprise but also extinguishes one form of holding and replaces it with another. As we have held, where such substitution confers on the assessee realisable assets of definite market value, a commercial 61 realisation takes place, and Section 28 is attracted. At the same time, courts must remain alive to the distinction between genuine commercial gain and hypothetical accretion. The touchstone is, therefore, the doctrine of real income, applied with due regard to the facts of each case, ensuring that the tax charge operates neither oppressively nor evasively, but in harmony with the legislative design, to tax true profits of business, however manifested, while eschewing illusory gains.”