Full Judgment Text
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REPORTABLE
IN THE SUPREME COURT OF INDIA
2026 INSC 46
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 152 OF 2026
[Arising out of S.L.P. (C) No. 2028 of 2021]
M/S JINDAL EQUIPMENT LEASING
CONSULTANCY SERVICES LTD ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – II, NEW DELHI ... RESPONDENT(S)
WITH
CIVIL APPEAL NO. 153 OF 2026
[Arising out of S.L.P. (C) No. 2190 of 2021]
M/S NALWA INVESTMENT LTD. ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX – V
NEW DELHI ... RESPONDENT(S)
Signature Not Verified
WITH
Digitally signed by
NITIN TALREJA
Date: 2026.01.09
16:59:31 IST
Reason:
CIVIL APPEAL NO. 154 OF 2026
[Arising out of S.L.P. (C) No. 2188 of 2021]
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M/S ABHINANDAN TRADEX LTD. (EARLIER KNOWN AS
M/S ABHINANDAN INVESTMENT LTD) ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – I, NEW DELHI ... RESPONDENT(S)
WITH
CIVIL APPEAL NO. 155 OF 2026
[Arising out of S.L.P. (C) No. 2197 of 2021]
M/S MANSAROVER TRADEX LTD (EARLIER KNOWN AS
M/S MANSAROVER INVESTMENT LTD) ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – II, NEW DELHI ... RESPONDENT(S)
J U D G M E N T
R. MAHADEVAN, J.
Leave granted.
2. The present appeals arise out of a common judgment and final order
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dated 07.08.2020 passed by the High Court of Delhi in ITA Nos. 935, 822,
853, and 961 of 2005, pertaining to the Assessment Year 1997-98. By the
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Hereinafter referred to as “the High Court”
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impugned judgment, the High Court remanded the matters to the Income Tax
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Appellate Tribunal for fresh adjudication on the question of whether the shares
held in the amalgamating company constituted stock-in-trade or capital assets,
upon observing that, if the shares were, in fact, held as stock-in-trade, the
transaction would fall outside the purview of Section 47(vii) of the Income Tax
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Act, 1961 , and its taxability would consequently be governed by Section 28
under the head “profits and gains of business or profession”.
FACTUAL MATRIX
3. The facts, which are common to all these appeals, may be briefly stated
as under:
3.1. The appellants are investment companies of the Jindal Group. The shares
of the operating companies, namely Jindal Ferro Alloys Limited (JFAL) and
Jindal Strips Limited (JSL), were held as part of the promoter holding,
representing controlling interest. The appellants had also furnished non-disposal
undertakings to the financial institutions / lenders who had advanced loans to
the operating companies. These shares were reflected as investments in the
balance sheets of the appellants.
3.2. During the previous year relevant to the assessment year 1997-98,
pursuant to a scheme of amalgamation approved by orders dated 19.09.1996
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For short, “the Tribunal”
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For short, “the I.T. Act”
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and 03.10.1996 of the High Courts of Andhra Pradesh and Punjab & Haryana
respectively, under Sections 391 – 394 of the Companies Act, 2013, JFAL was
amalgamated with JSL. As per the sanctioned scheme, the appointed date of
amalgamation was 01.04.1995, and the orders sanctioning the amalgamation
were filed with the Registrar of Companies on 22.11.1996 (the effective date).
Under the scheme of amalgamation, the shareholders of JFAL were allotted 45
shares of JSL for every 100 shares of JFAL held by them. Accordingly, the
appellants were allotted shares of JSL in lieu of the shares of JFAL.
3.3. The appellants, in their returns of income filed for the assessment year in
question, claimed exemption under Section 47(vii) of the I.T. Act in respect of
the receipt of JSL shares in lieu of JFAL shares, treating the same to be capital
assets. However, in the assessment completed under Section 143(3) vide order
dated 29.02.2000, the Assessing Officer treated the shares of JFAL as stock-in-
trade, denied the exemption under Section 47(vii), and brought to tax the value
of JSL shares as business income, computed with reference to their market
value. The said order was upheld by the Commissioner of Income Tax
(Appeals).
3.4. On further appeals, the Tribunal vide order dated 17.02.2005, allowed the
assessees’ appeals by observing that it was unnecessary to decide whether the
shares were held as stock-in-trade or capital assets since no profit accrues unless
the shares held by the appellants are either sold or transferred for consideration,
irrespective of the nature of holding. It was further observed that there was
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admittedly no sale of shares and, therefore, the only question for consideration
was whether the allotment of JSL shares in lieu of JFAL shares under the
scheme of amalgamation amounted to a “transfer”. Following the decision of
this Court in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal
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(HUF) and others , the Tribunal concluded that there was no transfer of shares
and, consequently, no taxable profit could be said to have accrued to the
appellants.
3.5. The Revenue challenged the Tribunal’s decision before the High Court,
raising the following substantial questions of law:
“1. Whether shares received by the assesses on amalgamation are entitled to
the benefit of section 47(vii) without the Tribunal concluding that the said
shares were held by the assesses as capital assets?
2. Whether the benefit of Section 47(vii) is limited to determination of
capital gains and only in regard to capital assets?
3. Whether income would accrue to the assesses on shares received by
amalgamations and will be taxable in view of non-applicability of Section
47(vii)?”
3.6. After hearing both sides, the High Court, by the impugned judgment,
disposed of the appeals in favour of the Revenue and against the assessees. In
doing so, it held that the Tribunal had erred in placing reliance on Rasiklal
Maneklal while failing to consider the later and binding decision of this Court
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in Commissioner of Income-tax, Cochin v. Grace Collis and others . The High
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(1989) 177 ITR 198 : (1989) 2 SCC 454
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(2001) 248 ITR 323 (SC) : (2001) 3 SCC 430
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Court observed that where the shares of the amalgamating company were held
as capital assets, the receipt of shares of the amalgamated company would
constitute a “transfer” within the meaning of Section 2(47) of the I.T. Act,
though such transfer would be exempt under Section 47(vii). However, in the
alternative scenario where the shares were held as stock-in-trade, the High
Court held that upon the assessees receiving shares of the amalgamated
company in lieu of those held in the amalgamating company, the assesses had,
in effect, realised the value of their trading assets, and the difference in value
would be taxable as business profit under Section 28. In reaching this
conclusion, the High Court relied upon the decision of this Court in Orient
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Trading Company Ltd. v. Commissioner of Income Tax, Calcutta .
Accordingly, the matter was remanded to the Tribunal for determination of the
nature of the appellants’ holding of JFAL shares, i.e., whether such holdings
constituted capital assets or stock-in-trade.
3.7. Aggrieved thereby, the appellants have preferred the present appeals
before this Court.
CONTENTIONS OF THE PARTIES
4. Mr. Ajay Vohra, learned Senior Counsel for the appellants, primarily
submitted that the impugned judgment of the High Court is liable to be set aside
as it travels beyond the jurisdiction conferred under Section 260A of the I.T.
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(1997) 224 ITR 371 (SC) : (1997) 3 SCC 340
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Act. It was pointed out that the appeals before the High Court were admitted on
a limited question, namely, whether the Tribunal was correct in holding that
where the assessees get shares of the amalgamated company in lieu of shares of
the amalgamating company, no transfer takes place. However, while disposing
of the appeals, the High Court went further and proceeded to examine the
taxability of such receipt, treating it as stock-in-trade or a capital asset. Since
that issue was neither specifically raised nor framed at the time of admission,
the adjudication was impermissible and contrary to the framework laid down by
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this Court in Shiv Raj Gupta v. Commissioner of Income-Tax, Delhi .
4.1. It was further submitted that the receipt of shares of the amalgamated
company does not amount to either a “sale” or an “exchange”. It was urged that
upon amalgamation, the amalgamating company stands dissolved and
consequently, its shares cease to exist. Therefore, when shareholders receive
shares of the amalgamated company in lieu of the extinguished shares of the
amalgamating company, there is no subsisting property capable of being
exchanged and accordingly, no taxable business income arises from such
transaction. Moreover, the definition of “transfer” under Section 2(47) is
relevant only for the purpose of computing capital gains and has no application
to stock-in-trade. Only the exploitation or realisation of stock-in-trade gives rise
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(2020) 425 ITR 420 (SC)
8
to business income, which is to be computed strictly in accordance with Section
28 of the I.T. Act.
4.2. Reliance was placed on the decision of this Court in Vania Silk Mills P.
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Ltd v. Commissioner of Income-Tax , wherein it was held that the mere
destruction or loss of an asset does not constitute a “transfer”. The term
“transfer” in Section 45 connotes that there must be something transferred to
someone – some property, right, or interest passing from one person to another.
When an asset ceases to exist, there can be no such transfer. Further reliance
was placed on Commissioner of Income-Tax, Andhra Pradesh v. Motors &
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General Stores (P) Ltd wherein, it was held that to constitute an “exchange”,
there must be a subsisting property capable of being transferred or exchanged.
Reference was also made to Rasiklal Maneklal, in which, it was held that the
receipt of shares of an amalgamated company in lieu of shares held in the
amalgamating company under an approved scheme of amalgamation, does not
amount to an “exchange”. Consequently, it was submitted that the allotment of
shares in the amalgamated company, in substitution for the shares held in the
amalgamating company, does not amount to a realisation of stock-in-trade by
way of sale or exchange, so as to give rise to taxable business income.
4.3. The learned Senior Counsel submitted that the authorities relied upon by
the High Court were distinguishable from the present case. In Orient Trading ,
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(1991) 191 ITR 647 (SC)
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(1967) 66 ITR 692 (SC)
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the assessee had exchanged shares of one existing company for shares of
another; that case did not involve amalgamation or dissolution of the company
whose shares were exchanged. Likewise, the English decision in Royal
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Insurance Co. Ltd v. Stephen dealt with realisation of investments, not stock-
in-trade by an insurance company assessed under a special statutory regime, and
is inapplicable under Indian law. Similarly, Hindustan Lever and another v.
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State of Maharashtra and another concerned the legislative competence to
levy stamp duty on an order of amalgamation. Observations therein as to the
transfer of property between amalgamating and amalgamated companies were
made in a wholly different context and cannot govern the computation of
business income.
4.4. On the concept of accrual of business income, it was urged that taxable
income arises only when a debt in praesenti is created in favour of the assessee,
though payable in future, as laid down in E.D. Sassoon & Co. Ltd v.
12
Commissioner of Income-Tax . Hypothetical or illusory benefits cannot
constitute taxable income, as held in Commissioner of Income Tax, Bombay
13
City I v. Shoorji Vallabhdas & Co. , State Bank of Travancore v.
14
Commissioner of Income-Tax, Kerala , Godhra Electricity Co. Ltd v.
10
14 Tax Cases 22
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(2004) 9 SCC 438
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(1954) 26 ITR 27 (SC)
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(1962) 46 ITR 144 (SC)
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(1986) 158 ITR 102 (SC)
10
15
Commissioner of Income-Tax and Commissioner of Income-Tax v. Excel
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Industries Ltd. and another . Even if the fair market value of the shares
allotted in the amalgamated company on the date of allotment exceeds the book
value of the shares in the amalgamating company, such appreciation is purely
notional. Real income would arise only upon the actual sale of the allotted
shares, and until such realisation no business income accrues.
4.5. It was also emphasized that the scheme of the Act itself supports this
view. Wherever the legislature intends to tax notional or deemed income, it has
enacted specific provisions, for example, Section 28(iv) or valuation rules such
as Rule 11UAB. Further, Section 49(1)(iii)(e) specifically provides that for
capital gains, the cost of shares in the amalgamated company shall be deemed to
be the cost of shares in the amalgamating company. By parity of reasoning, in
the case of stock-in-trade also, the original cost must be preserved and any
profit should be recognized only at the time of realisation.
4.6. It was finally submitted that the receipt of shares of the amalgamated
company in lieu of shares held in the amalgamating company, even when such
shares are held as stock-in-trade, does not constitute a “sale” or “exchange”
giving rise to taxable business income. Any benefit is, at best, hypothetical until
the shares are actually sold. The impugned judgment of the High Court, which
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(1997) 225 ITR 746 (SC)
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(2013) 358 ITR 295 (SC)
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disregards settled principles and binding precedents, is erroneous and liable to
be set aside.
5. On the other hand, the learned Additional Solicitor General appearing for
the respondent(s) – Department opposed the present appeals and supported the
impugned judgment of the High Court. It was submitted that if shares are held
as stock-in-trade, the profit accruing from the receipt of shares of the
amalgamated company in lieu of those of the amalgamating company would be
taxable under the head “profits and gains of business or profession”. For the
purpose of analyzing this issue, it is assumed that the assessees held the shares
of the amalgamating company as stock-in-trade prior to the amalgamation,
though this issue remains to be decided by the Tribunal on remand.
5.1. It was submitted that the Tribunal fell in error in holding that no profit
accrues unless the shares held by an assessee are either sold or transferred
otherwise for consideration, irrespective of the nature of holding. The Tribunal
did not refer to any sub-section of Section 28 of the I.T. Act to support its
conclusion that a sale or transfer alone can give rise to “profits and gains of
business or profession”. It failed to engage with Section 28 entirely, relying
instead solely on Rasiklal Maneklal . That decision, it was pointed out, is
relevant only to the taxation of capital gains under the Income- tax Act, 1922,
and has been clarified to be inapplicable by this Court in Grace Collis . Since the
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issue of Section 45 is not under contest in these proceedings, Rasiklal Maneklal
has no further bearing.
5.2. It was submitted that the High Court rightly held that the spotlight should
not entirely be on the concept of “transfer” but instead on whether there is
business income in the hands of the assessee, and further that income is
recognised when it is earned or realized, irrespective of whether it is in cash or
kind”. This finding demonstrates that transfer is not a necessary precondition for
taxation of business income under Section 28.
5.3. According to the learned Senior Counsel, the appellants themselves
admitted in their written submissions that the definition of “transfer” under
Section 2(47) has no application to the computation of business income. To this
extent, the appellants do not dispute the High Court’s finding. Yet, the
appellants continue to contend that realisation of stock-in-trade giving rise to
taxable business income can only be through sale or exchange. Such a
submission has no basis in light of Section 28.
5.4. It was further submitted that the plain language of Section 28 makes it
clear that profits and gains of business or profession are chargeable irrespective
of whether they arise by way of sale, exchange, or otherwise. Unlike Section 45,
which specifically requires a transfer of a capital asset, Section 28 is agnostic to
the manner in which income accrues. In particular, Sections 28(i) and 28(iv)
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bring out this position, covering profits, gains, and benefits arising from
business activities, whether convertible into money or not.
5.5. Reliance was placed on Orient Trading , where this Court held that the
exchange of securities by a share dealer amounted to realisation of stock-in-
trade, resulting in taxable profits. The said decision directly answers the
appellants’ contention as it involved stock-in-trade and upheld that realisation
may occur upon exchange, and not merely upon sale.
5.6. Applying the above legal principles, the learned Senior Counsel
submitted that the High Court was correct in concluding that upon
amalgamation, the shares of the amalgamating company cease to exist and their
value stands realised either in cash (for dissenting shareholders) or in shares of
the amalgamated company (for approving shareholders). Such realisation, when
resulting in profit, is taxable under Section 28.
5.7. The learned Senior Counsel submitted that the appellants’ reliance on
cases such as E.D. Sassoon & Co. Ltd and Motors & General Stores (P) Ltd is
misplaced. E.D. Sassoon, in fact, supports the Revenue’s case by holding that
income accrues when the right to receive is acquired, even if actual receipt is
later. Motors & General Stores has already been distinguished in Orient
Trading as being confined to the meaning of “sale” in Section 10(2)(vii) of the
1922 Act, and is therefore inapplicable. Similarly, Rasiklal Maneklal and
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Vania Silk Mills pertain to capital gains and transfer under Section 45, which
the appellants themselves concede, have no bearing on the computation of
business income.
5.8. It was further submitted that the levy in the present case is not on
hypothetical income. As explained in Excel Industries , income accrues when it
becomes due and when there exists a corresponding liability on the other party.
Here, by virtue of the amalgamation scheme sanctioned by the Court, there was
a corresponding liability on the amalgamated company to issue shares (or pay
cash to dissenters) in exchange for the extinguished shares of the amalgamating
company. This satisfies the test of real income under Excel Industries .
5.9. Even assuming, without conceding, that the Tribunal was correct in
requiring a “sale” or “transfer”, it was argued that a scheme of amalgamation
itself has “all the trappings of a sale”, as held in Hindustan Lever. Thus, even
on the appellants’ theory, the taxable event occurred.
5.10. Finally, on the appellants’ contention regarding valuation of shares, the
learned Senior Counsel submitted that this issue was considered and rejected by
the CIT(A) with cogent reasoning, and that the Tribunal may examine this
factual issue afresh on remand, if necessary. That issue, however, need not
detain this Court, which is concerned only with the legal question.
5.11. Accordingly, the learned Senior Counsel submitted that the High Court’s
reasoning is sound, the Tribunal’s judgment is unsustainable, and the present
appeals deserve to be dismissed.
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ANALYSIS AND FINDINGS
6. We have heard learned counsel appearing for the parties and perused the
materials available on record.
7. By order dated 10.02.2021, this Court stayed the effect and operation of
the impugned judgment and order under challenge.
8. Apparently, the appellants were shareholders of JFAL. Pursuant to the
orders of the High Courts of Andhra Pradesh and Punjab and Haryana dated
19.09.1996 and 03.10.1996, JFAL merged with JSL, a widely held public
company. Upon the amalgamation become effective, JFAL ceased to exist as a
legal entity. In terms of the share exchange ratio approved under the scheme,
shareholders were allotted 45 shares of JSL against 100 shares of JFAL.
8.1. During the relevant assessment year, the appellants claimed exemption
under Section 47(vii) of the I.T. Act in respect of the receipt of JSL shares,
contending that the shares of JFAL were held as capital assets. The Assessing
Officer, however, denied exemption, holding that the shares of JFAL
constituted stock-in-trade in the hands of the appellants. He accordingly taxed
the difference between the value of the JSL shares (as on the appointed date)
and the book value of JFAL shares. The CIT(A) upheld this view, dismissing
the appeals on the finding that the appellants’ acquisition of shares was an
adventure in the nature of trade, attracting taxation under Section 28 of the I.T.
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Act. Thus, there were concurrent findings that the assessees belonging to the
same group which controlled JFAL, engaged in a scheme for profit-making by
exchanging their stock-in-trade holdings in JFAL for shares of JSL.
8.2. On further appeals, the Tribunal, by order dated 17.02.2005, allowed the
assessees’ claims. It declined to decide the factual question whether the JFAL
shares were held as capital assets or as stock-in-trade, holding instead that no
profit accrues unless the shares are either sold or transferred for consideration,
irrespective of the nature of holding.
8.3. In the Revenue’s appeals, the High Court by the impugned judgment, set
aside the Tribunal’s order and remitted the matter for fresh consideration. The
High Court returned two findings: first, that if shares are held as capital assets,
an amalgamation is indeed a transfer within the meaning of Section 2(47) of the
I.T. Act, though exempt under Section 47(vii). The assessees no longer dispute
this finding before this Court. Second, the High Court held that if the shares are
held as stock-in-trade, the profit arising to the assessees from the receipt of JSL
shares in lieu of JFAL shares would be taxable as “profits and gains of business
or profession” under Section 28. It is the second finding, which has necessitated
the present appeals before this Court.
9. At the outset, the learned Senior Counsel appearing for the appellants
raised a preliminary objection that the High Court had transgressed its
jurisdiction in remitting the matter to the Tribunal with an observation that, if
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the shares were stock-in-trade, the taxability would arise under Section 28 of the
I.T. Act. It was urged that such an issue was neither expressly framed as a
substantial question of law by the High Court nor raised by the Revenue in its
appeals. Reliance was placed on Shiv Raj Gupta , where this Court held that the
High Court cannot decide a new question of law without formally framing it
under Section 260A (4) and without affording the parties an opportunity to meet
that case. The following paragraphs are apposite in this context:
“18. It can be seen that the substantial question of law that was raised by the
High Court did not contain any question as to whether the non-compete fee
could be taxed under any provision other than Section 28(ii)(a) of the Income
Tax Act, 1961. Without giving an opportunity to the parties followed by
reasons for framing any other substantial question of law as to the taxability
of such amount as a capital receipt in the hands of the assessee, the High
Court answered the substantial question of law raised as follows : (Shiv Raj
Gupta case [CIT v. Shiv Raj Gupta, 2014 SCC OnLine Del 7305: (2015) 372
ITR 337], SCC OnLine Del paras 63 & 65)
“63. In view of the aforesaid discussion, we deem it appropriate and
proper to treat Rs 6.60 crores as consideration paid for sale of shares,
rather than a payment under Section 28(ii)(a) of the Act. …
…
65. The substantial question of law is accordingly answered in favour of
the appellant Revenue and against the respondent-assessee but holding
that Rs 6.60 crores was taxable as capital gains in the hands of the
respondent-assessee being a part of the full value sale consideration paid
for transfer of shares. The appellant Revenue will be entitled to costs as
per the Delhi High Court Rules.”
Clearly, without any recorded reasons and without framing any substantial
question of law on whether the said amount could be taxed under any other
provision of the Income Tax Act, the High Court went ahead and held that the
amount of INR 6.6 crores received by the assessee was received as part of the
full value of the sale consideration paid for transfer of shares — and not for
handing over management and control of CDBL and is consequently not
taxable under Section 28(ii)(a) of the Income Tax Act. Nor is it exempt as a
capital receipt being non-compete fee, as it is taxable as a capital gain in the
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hands of the respondent-assessee as part of the full value of the sale
consideration paid for transfer of shares. This finding would clearly be in the
teeth of Section 260-A (4), requiring the judgment to be set aside on this score.”
9.1. Undoubtedly, Section 260A envisages that an appeal to the High Court
lies only where a substantial question of law arises. Sub-sections (3) and (4)
mandate the formulation of such questions, while the proviso to sub-section (4)
preserves the Court’s power, for recorded reasons, to entertain any other
substantial question of law not earlier framed. For ease of reference, the said
provision is reproduced as follows:
“ 260-A. Appeal to High Court .—(1) An appeal shall lie to the High Court from
every order passed in appeal by the Appellate Tribunal before the date of
establishment of the National Tax Tribunal, if the High Court is satisfied that the
case involves a substantial question of law.
(2) The Principal Chief Commissioner or Chief Commissioner or the Principal
Commissioner or Commissioner or an assessee aggrieved by any order passed
by the Appellate Tribunal may file an appeal to the High Court and such appeal
under this sub-section shall be—
(a) filed within one hundred and twenty days from the date on which the order
appealed against is received by the assessee or the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner;
(b)….
(c) in the form of a memorandum of appeal precisely stating therein the
substantial question of law involved.
(2-A) The High Court may admit an appeal after the expiry of the period of one
hundred and twenty days referred to in clause (a) of sub-section (2), if it is
satisfied that there was sufficient cause for not filing the same within that
period.
(3) Where the High Court is satisfied that a substantial question of law is
involved in any case, it shall formulate that question.
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(4) The appeal shall be heard only on the question so formulated, and the
respondents shall, at the hearing of the appeal, be allowed to argue that the case
does not involve such question:
Provided that nothing in this sub-section shall be deemed to take away or
abridge the power of the court to hear, for reasons to be recorded, the appeal on
any other substantial question of law not formulated by it, if it is satisfied that
the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver
such judgment thereon containing the grounds on which such decision is
founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a
decision on such question of law as is referred to in sub-section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil
Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far
as may be, apply in the case of appeals under this section.”
9.2. The scheme is consciously modelled on Section 100 of the Code of Civil
Procedure, 1908, which similarly confines jurisdiction in second appeal to
substantial questions of law. Both provisions embody the legislative policy of
limiting higher appellate interference to questions of law, while at the same
time, permitting the Court to deal with necessary or incidental questions that
arise, provided reasons are recorded and parties are heard. In a recent judgment
in R. Nagaraj (dead) through legal heirs and another v. Rajamani and
17
others , this Court held that although a separate issue need not be framed on
every point, a finding on a disputed question, while deciding a connected issue,
is sufficient.
17
2025 Livelaw SC 416
20
9.3. In the present case, the High Court did not specifically frame the question
of law as to whether the substitution of shares was taxable under Section 28 of
the I.T. Act. However, the said issue went to the very root of the matter, and the
High Court was bound to consider it in view of the issue already framed by the
Tribunal and the submissions advanced by both sides before the Tribunal as
well as before the High Court. Such a question was incidental or collateral to
the main issue, and the absence of a formal formulation would not vitiate the
impugned judgment of the High Court.
9.4. Furthermore, the present case does not fall within the mischief noticed in
Shiv Raj Gupta for the following reasons:
• First, the Tribunal itself had framed the substantial issue as “ whether any
income accrues to the appellants on the event of substitution of shares of
Jindal Ferro Alloys Ltd. by the shares of Jindal Strips Ltd. under the
scheme of amalgamation approved by the High Court of Andhra Pradesh
and High Court of Punjab & Haryana ”. While answering this question in
the negative, the Tribunal left open the determination of whether the
shares were held as investments or as stock-in-trade. Once such a finding
was recorded, the real question of law was not merely the applicability of
Section 47, but more broadly the taxability of the amalgamation
transaction under the Act.
• Second, in appeal, the High Court framed the following substantial
question of law: “Whether the Tribunal was correct in holding that where
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the assessee gets shares of the amalgamated company in lieu of shares of
the amalgamating company, no transfer takes place?” This formulation
was wide enough to cover not only the application of Section 47 but also
the broader question of taxability of such substitution of shares under the
Act. The High Court did not itself assess income under Section 28, but
only clarified that if the shares were stock-in-trade, the exemption of
Section 47 would not apply, and the matter required reconsideration by
the Tribunal so as to determine whether the shares were held as stock-in-
trade or as capital assets, as without that determination the taxability or
eligibility for exemption could not be ascertained.
• Third, there was no violation of natural justice in the present case, unlike
in Shiv Raj Gupta where an altogether new head of income was
introduced without notice to the assessee. Here, the High Court expressly
recorded the preliminary objections and submissions of the appellants
with respect to Section 28 and dealt with them. Thus, the parties had full
opportunity to address this aspect before remand. Merely because a
specific substantial question of law was not framed, it cannot be
concluded that prejudice was caused to the parties, if both parties had the
opportunity to address the issues in dispute.
22
9.5. Reference may also be made to Mansarovar Commercial Pvt. Ltd v.
18
Commissioner of Income-Tax , where a similar contention was raised based
on Shiv Raj Gupta . This Court held that issues incidental or collateral, on which
the parties have been fully heard, can be considered by the High Court even if
not expressly framed as substantial questions of law, especially where they arise
directly from the Tribunal’s findings. The following paragraphs from the said
decision are pertinent in this regard:
“45.13. As regards the reliance placed upon the decision of this Court in Shiv
Raj Gupta v. CIT [Shiv Raj Gupta v. CIT, (2021) 11 SCC 58 : AIR 2020 SC
3556], by the learned Senior Counsel appearing on behalf of the appellants on
non-framing of substantial question of law in terms of Section 260-A of the Act
so far as the interest liability is concerned, it is submitted that the said decision
shall not be applicable to the facts of the case at hand and more particularly in
case of an interest which is automatic and mandatory. It is submitted that in the
said case, the dispute was with respect to capital gains which by its very nature
is a separate head of income and the issue relates to the very taxability. That
therefore, failure to raise a question of taxability of capital gains in a particular
case may tantamount to a failure in raising a substantial question of law in
terms of Section 260-A of the Act. However, the same may not apply on interest
as the interest is automatic and mandatory.”
“85. As regards the submission on behalf of the assessees that no substantial
question of law was framed on levy of interest, at the outset, it is required to be
noted that both the parties made submissions on levy of interest elaborately
which have been dealt with and considered by the High Court in light of the
Constitution Bench decision of this Court in Anjum M.H.
Ghaswala [CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633] . Even
otherwise, the said issue can be said to be incidental or collateral. Even
otherwise, in view of the decision of this Court in Anjum M.H.
Ghaswala [CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633] holding that the
levy of interest under Section 234-A is statutory interest and mandatory and
automatic, thereafter the said issue cannot be said to be a question of law.”
(Emphasis Supplied)
18
(2023) 454 ITR 1 (SC)
23
9.6. Accordingly, the High Court cannot be said to have exceeded its
jurisdiction under Section 260A in making the impugned observation on Section
28 before remanding the matter. The preliminary contention of the appellants is,
therefore, devoid of merit and stands rejected.
10. Now, another issue that arises for determination in these appeals is
whether the High Court, while remanding the matter to the Tribunal to ascertain
whether the shares of the amalgamating company were held as stock-in-trade or
as capital assets, was justified in recording a finding that, if such shares were
held as stock-in-trade, the allotment of shares of the amalgamated company
pursuant to a court-sanctioned scheme of amalgamation would give rise to
taxable business income in the hands of the appellants under Section 28 of the
I.T. Act.
11. These appeals, therefore, raise a substantial question concerning the
taxability of gains said to arise on amalgamation, where shares of the
amalgamating company held by the assessees as stock-in-trade, stand
substituted by shares of the amalgamated company. The core controversy is
whether such substitution, in and of itself, constitutes a realisation giving rise to
taxable business income under Section 28 and if so, the conditions under which
such accrual or receipt can be said to arise in the commercial sense, or whether
the incidence of taxation arises only upon the subsequent sale of the substituted
shares.
24
12. Before proceeding further, it is apposite to refer to the statutory
framework covering the issue involved in the present appeals. The relevant
provisions of the I.T. Act are extracted below, for better appreciation:
Section 2(1B) – Amalgamation
“‘amalgamation’, in relation to companies, means the merger of one or more
companies with another company or the merger of two or more companies to
form one company (the company or companies which so merge being referred to
as the amalgamating company or companies and the company with which they
merge or which is formed as a result of the merger, as the amalgamated
company) in such a manner that—
(i) all the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company by
virtue of the amalgamation;
(ii) all the liabilities of the amalgamating company or companies immediately
before the amalgamation become the liabilities of the amalgamated company by
virtue of the amalgamation;
(iii) shareholders holding not less than [three-fourths] in value of the shares in
the amalgamating company or companies (other than shares already held
therein immediately before the amalgamation by, or by a nominee for, the
amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by
another company pursuant to the purchase of such property by the other
company or as a result of the distribution of such property to the other company
after the winding up of the first-mentioned company.”
Section 2(14) – Capital asset
"capital asset" means –
(a) property of any kind held by an assessee, whether or not connected with his
business or profession,
(b) …
(c) …
but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b)],
consumable stores or raw materials held for the purposes of his business or
profession.
(j) …”
25
Section 2(47) – Transfer
“transfer”, in relation to a capital asset, includes,
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law
…”
Section 28 — Profits and gains of business or profession
“The following income shall be chargeable to income-tax under the head
"Profits and gains of business or profession",—
(i) the profits and gains of any business or profession which was carried on by
the assessee at any time during the previous year;
…
(iv) the value of any benefit or perquisite arising from business or the exercise of
a profession, whether—
(a) convertible into money or not; or
(b) in cash or in kind or partly in cash and partly in kind;]
…
(vi-a) the fair market value of inventory on the date on which it is converted into,
or treated as, a capital asset determined in the prescribed manner;
….”
Section 45(1) — Capital gains
“Any profits or gains arising from the transfer of a capital asset effected in the
previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E,
54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head
"Capital gains", and shall be deemed to be the income of the previous year in
which the transfer took place .”
Section 47 – Transactions not regarded as transfer
“Nothing contained in section 45 shall apply to the following transfers:
….
(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital
asset being a share or shares held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment to him of any share or
shares in the amalgamated company except where the shareholder itself is the
amalgamated company, and
(b) the amalgamated company is an Indian company;
….”
26
12.1. The above provisions make it clear that the scope of taxability on
amalgamation depends on the nature of the shares held. Section 2(14) excludes
stock-in-trade from the definition of a capital asset, while Section 2(47) defines
“transfer” only in relation to capital assets. Section 28 casts a wide net, taxing
the “profits and gains of business or profession”, including benefits or
perquisites arising from business, whether convertible into money or not, or in
cash or kind. Section 45 imposes capital gains tax only on the transfer of a
capital asset, subject to exceptions under Section 47, including the transfer of
shares in a scheme of amalgamation. Section 47(vii) specifically exempts from
capital gains tax any transfer by a shareholder of a capital asset being shares of
the amalgamating company, in consideration of the allotment of shares in the
amalgamated company, provided the amalgamated company is an Indian
company. There is a difference between a charging provision and an exemption
provision. A provision that enables the levy of tax on a particular transaction is
a charging provision. Only a transaction that is covered by a charging provision
is taxable. Only if the transaction is taxable can there be an exemption.
Therefore, the transfer of shares arising out of an order of amalgamation, even if
it is treated as a capital asset, is generally taxable but would be exempt from
taxation only if both the requirements under Section 47 (vii) are satisfied.
27
13. On behalf of the appellants, it was contended that no taxable event arises
at the stage of amalgamation. According to them, income can be said to arise
only upon the actual realisation or sale of the substituted shares, and not at the
point of their allotment in the amalgamated company. The scheme of the Act, it
was submitted, proceeds on the foundational premise that only real income is
taxable unless Parliament, by express words, enacts a contrary legal fiction.
Illustratively, Section 28(via) expressly deems the fair market value of
inventory converted into a capital asset to be taxable, even without the receipt of
money. This demonstrates that where the legislature intends to tax notional
accretions, it does so explicitly. In the absence of any analogous deeming
provision in respect of amalgamations, Section 28 cannot be judicially
expanded to cover hypothetical or unrealised gains.
14. Conversely, on behalf of the Revenue, it was submitted that Section 28
does not predicate the existence of a “transfer”, “sale” or “exchange”. What the
provision taxes are the “profits and gains of business or profession”, which may
be realised either in cash or in kind. Where stock-in-trade ceases to exist and is
substituted by another commodity or asset of ascertainable value, profit accrues.
According to the Revenue, the language of Section 28 is wide enough to
encompass all benefits or advantages arising from business activity, irrespective
of the form of realisation. Therefore, once the shares held as stock-in-trade in
the amalgamating company ceases to exist and are replaced by shares of the
28
amalgamated company of higher value, a business profit arises which is liable
to be taxed under Section 28.
Scope of Section 28
15. Before considering the rival submissions, it is necessary to delineate the
scope of Section 28. The provision contemplates the chargeability of the
“profits and gains of any business or profession” carried on by the assessees
during the relevant previous year. What is material, therefore, is that there must
be income arising from or in the course of business to be treated as profits or
gains. Such profit must be ascertainable with reasonable definiteness at the
relevant point of time, and the assessees must have either received it, or
acquired a vested right to receive and commercially realise it, even if the receipt
is in kind. It is not necessary for the benefit to be capable of being converted
into money. Significantly, Section 28 does not prescribe any precondition as to
the precise mode through which the profit must arise. The moment any income
arises out of business or profession, the provision becomes applicable. It does
not incorporate the definition of “transfer” under Section 2(47), unlike Section
45. It is sufficient if there is “income”, and the “transfer”, whether it is actual,
material, or immaterial, is not relevant. The two provisions thus operate in
distinct and independent fields. As already mentioned, the language of Section
28 – “the profits and gains of any business or profession” is deliberately wide,
i.e., the charge itself is cast in wide terms. It is well settled that charging
29
provisions, while construed strictly, are not to be read in an unduly narrow
manner when the language of the provision itself is wide.
15.1. In Mazagaon Dock Ltd v. Commissioner of Income Tax and Excess
19
Profits Tax , this Court held that the language of Section 42(2) of the 1922
Act, though strict in nature, could not be artificially restricted. Expressions such
as “business’ and “profits derived” were held to be of wide import in fiscal
statutes and must be construed broadly to give effect to the legislative intent.
The Court rejected the narrow interpretation urged by the assessee and clarified
that wide words used in charging provisions cannot be cut down merely to
avoid unusual or harsh consequences. Similarly, in Ujagar Prints Etc. v. Union
20
of India and others Etc. , the Court reiterated that wide statutory language
must receive its full amplitude and cannot be artificially confined. Further, in
Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company
21
and others , this Court clarified that “strict interpretation” does not connote a
literal or pedantic reading. Instead, legislative intent must be combined with the
words of the statute to arrive at a meaning that is neither too narrow nor too
broad.
15.2. Thus, business profits may accrue or be realised in diverse circumstances,
even in the absence of a conventional sale, transfer, or exchange in the strict
legal sense. To confine the operation of Section 28 to such modes would unduly
19
AIR 1958 SC 861
20
(1989) 3 SCC 488
21
(2018) 9 SCC 1 (5-Judge Bench)
30
restrict a provision that Parliament has intentionally couched in broad terms.
Illustratively, waiver of a trading liability has been treated as taxable business
income under Section 28, as held in Commissioner of Income Tax v. T.V.
22
Sundaram Iyengar & Sons Ltd. Again, in Commissioner of Income Tax v.
23
Meghalaya Steels Ltd , this Court noted that under Section 28, income from
cash assistance, by whatever name called, received or receivable by any person
against exports under any scheme of the Government of India, would be income
chargeable to income tax under the head “Profits and gains of business or
profession”. It was held that if cash assistance received or receivable against
exports schemes is included as income under the head “Profits and gains of
business or profession” subsidies which go to the reimbursement of cost in the
production of goods of a particular business would also have to be included
under the same head, and not under the head “Income from other sources”.
Likewise, in Commissioner of Income Tax, Delhi v. Woodward Governor
24
India P. Ltd , this Court held that foreign exchange fluctuations on trading
items directly affect the profit and loss account, thereby forming part of the
computation of business profits. Although that case concerned the deduction of
fluctuation losses, its reasoning underscores that real income under Section 28
may accrue without any conventional “transfer”.
22
(1996) 222 ITR 344 (SC)
23
(2016) 383 ITR 217 (SC)
24
(2009) 312 ITR 254 (SC)
31
15.3. It therefore emerges that Section 28 is a comprehensive charging
provision designed to bring within the tax net all real profits and gains arising in
the course of business, whether convertible into money or received in money or
in kind, and irrespective of whether such accrual or receipt of income is
accompanied by a legal transfer in the strict sense.
Amalgamation – Concept and Legal character
16. Amalgamation, in corporate law, signifies the statutory blending of two
or more undertakings into one. It is distinct from winding up: while the
transferor company ceases to exist as a separate corporate entity, its business,
assets, and liabilities are absorbed into and continue within the transferee. As
25
held in Saraswati Industrial Syndicate Ltd v. Commissioner of Income Tax ,
the transferor company ceases to exist, and the transferee emerges with a
blended corporate personality, inheriting all rights and liabilities. Stroud’s
Judicial Dictionary of Words and Phrases (9th Edn.) describes amalgamation as
the “welding or blending of two or more concerns into one”. Black’s Law
Dictionary (11th Edn.) similarly defines it as the “act of combining or uniting;
consolidation; amalgamation of two small companies to form a new
26
corporation”. In Walker’s Settlement, In re , amalgamation was explained as
the state of two companies being so joined as to form a third, or of one company
25
1990 Supp SCC 675
26
1935 Ch 567 (CA)
32
being absorbed into another [See: Religare Finvest Ltd. v. State (NCT of
27
Delhi ] .
16.1. Notably, the Companies Act, 2013 contains no express definition of
amalgamation. Instead, Sections 230 – 232 prescribe the procedure and spell out
the legal effect, namely, the extinguishment of the transferor’s corporate
identity and the vesting of its assets, rights, and obligations in the transferee.
Thus, amalgamation – ordinarily effected through a scheme of compromise or
arrangement sanctioned by the Court or Tribunal – is founded on agreement
between shareholders and creditors, but its legal effect is statutory: upon
sanction, all assets, rights, and liabilities of the transferor vest in the transferee
by operation of law. In other words, amalgamation is more than a mere
contractual transfer; it is a statutory process of substitution.
28
16.2. In Commissioner of Income Tax v. Mahagun Realtors (P) Ltd , this
Court explained that amalgamation is unlike liquidation. Though the corporate
shell of the transferor disappears, its business continues within the transferee,
and courts therefore identify the successor-in-interest upon whom rights and
obligations devolve. The relevant paragraphs are extracted below for proper
understanding:
“19. Amalgamation, thus, is unlike the winding up of a corporate entity. In the
case of amalgamation, the outer shell of the corporate entity is undoubtedly
destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate
venture continues — enfolded within the new or the existing transferee entity. In
other words, the business and the adventure lives on but within a new corporate
27
(2024) 1 SCC 797
28
(2022) 19 SCC 1
33
residence i.e. the transferee company. It is, therefore, essential to look beyond
the mere concept of destruction of corporate entity which brings to an end or
terminates any assessment proceedings. There are analogies in civil law and
procedure where upon amalgamation, the cause of action or the complaint does
not per se cease — depending of course, upon the structure and objective of
enactment. Broadly, the quest of legal systems and courts has been to locate if a
successor or representative exists in relation to the particular cause or action,
upon whom the assets might have devolved or upon whom the liability in the
event it is adjudicated, would fall.”
“21. In Saraswati Syndicate [Saraswati Industrial Syndicate Ltd. v. CIT, 1990
Supp SCC 675], the facts were that after amalgamation, the transferee company
claimed exemption from tax, of a sum which had been allowed as a trading
liability, on accrual basis, in the hands of the transferee company which had
ceased to exist. The Revenue disallowed that claim; that view was upheld. This
Court stated that : (SCC pp. 679-81, paras 5-6)
“5. … In amalgamation two or more companies are fused into one by
merger or by taking over by another. Reconstruction or “amalgamation”
has no precise legal meaning. The amalgamation is a blending of two or
more existing undertakings into one undertaking, the shareholders of
each blending company become substantially the shareholders in the
company which is to carry on the blended undertakings. There may be
amalgamation either by the transfer of two or more undertakings to a
new company, or by the transfer of one or more undertakings to an
existing company. Strictly “amalgamation” does not cover the mere
acquisition by a company of the share capital of other company which
remains in existence and continues its undertaking but the context in
which the term is used may show that it is intended to include such an
acquisition. See: Halsbury's Laws of England, 4th Edn., Vol. 7, para
1539. Two companies may join to form a new company, but there may be
absorption or blending of one by the other, both amount to
amalgamation. When two companies are merged and are so joined, as to
form a third company or one is absorbed into one or blended with
another, the amalgamating company loses its entity.
6. In General Radio & Appliances Co. Ltd. v. M.A. Khader [General
Radio & Appliances Co. Ltd. v. M.A. Khader, (1986) 2 SCC 656], the
effect of amalgamation of two companies was considered. M/s General
Radio and Appliances Co. Ltd. was tenant of a premises under an
agreement providing that the tenant shall not sublet the premises or any
portion thereof to anyone without the consent of the landlord. M/s
General Radio and Appliances Co. Ltd. was amalgamated with M/s
National Ekco Radio and Engineering Co. Ltd. under a scheme of
amalgamation and order of the High Court under Sections 391 and 394
34
of Companies Act, 1956. Under the amalgamation scheme, the transferee
company, namely, M/s National Ekco Radio and Engineering company
had acquired all the interest, rights including leasehold and tenancy
rights of the transferor company and the same vested in the transferee
company. Pursuant to the amalgamation scheme the transferee company
continued to occupy the premises which had been let out to the transferor
company. The landlord initiated proceedings for the eviction on the
ground of unauthorised subletting of the premises by the transferor
company. The transferee company set up a defence that by amalgamation
of the two companies under the order of the Bombay High Court all
interest, rights including leasehold and tenancy rights held by the
transferor company blended with the transferee company, therefore the
transferee company was legal tenant and there was no question of any
subletting. The Rent Controller and the High Court both decreed the
landlord's suit. This Court in appeal held that under the order of
amalgamation made on the basis of the High Court's order, the
transferor company ceased to be in existence in the eye of the law and it
effaced itself for all practical purposes. This decision lays down that
after the amalgamation of the two companies the transferor company
ceased to have any entity and the amalgamated company acquired a new
status and it was not possible to treat the two companies as partners or
jointly liable in respect of their liabilities and assets. In the instant case
the Tribunal rightly held that the appellant company was a separate
entity and a different assessee, therefore, the allowance made to Indian
Sugar company, which was a different assessee, could not be held to be
the income of the amalgamated company for purposes of Section 41(1) of
the Act. The High Court was in error in holding that even after
amalgamation of two companies, the transferor company did not become
non-existent instead it continued its entity in a blended form with the
appellant company. The High Court's view that on amalgamation there is
no complete destruction of corporate personality of the transferor
company instead there is a blending of the corporate personality of one
with another corporate body and it continues as such with the other is
not sustainable in law. The true effect and character of the amalgamation
largely depends on the terms of the scheme of merger. But there cannot
be any doubt that when two companies amalgamate and merge into one
the transferor company loses its entity as it ceases to have its business.
However, their respective rights or liabilities are determined under the
scheme of amalgamation but the corporate entity of the transferor
company ceases to exist with effect from the date the amalgamation is
made effective.”
“30. In Bhagwan Dass Chopra v. United Bank of India [Bhagwan Dass
Chopra v. United Bank of India, 1987 Supp SCC 536] it was held that in every
35
case of transfer, devolution, merger or scheme of amalgamation, in which rights
and liabilities of one company are transferred or devolved upon another
company, the successor-in-interest becomes entitled to the liabilities and assets
of the transferor company subject to the terms and conditions of contract of
transfer or merger, as it were. Later, in Singer India Ltd. v. Chander Mohan
Chadha [(2004) 7 SCC 1] this Court held as follows: (SCC p. 10, para 8)
“8. … there can be no doubt that when two companies amalgamate and
merge into one, the transferor company loses its identity as it ceases to
have its business. However, their respective rights and liabilities are
determined under the scheme of amalgamation, but the corporate identity
of the transferor company ceases to exist with effect from the date the
amalgamation is made effective.”
16.3. At this juncture, it must be noted that the High Court relied on Hindustan
Lever , which, though not in the context of taxation, observed that amalgamation
bears all the “trappings of a sale”. We shall, however, proceed to analyse
Section 28 in the context of amalgamation since the test under Section 28 is
somewhat different: it does not hinge on whether there is a sale, transfer, or
exchange in the strict legal sense, as already discussed. At the same time, it
cannot be overlooked that this Court in Grace Collis , overruling Vania Silk
Mills , held that amalgamation, for the purposes of capital gains under Section
45, does involve a “transfer” of shares. Even if that ratio was rendered in the
context of capital gains, once this Court has recognized that amalgamation
entails a transfer, that conclusion cannot be ignored while considering the ambit
of Section 28.
16.4. The real question, therefore, is whether an amalgamation – though, in
company law, it operates as a statutory substitution of rights – nonetheless gives
36
rise to taxable business profits under Section 28 of the I.T. Act. That enquiry is
not concluded merely by characterising the event as a “transfer”. It requires a
deeper examination of whether the substitution of shares 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.
Whether there is receipt or accrual of income upon amalgamation
17. In the context of amalgamation, what transpires is essentially a statutory
substitution of one form of holding for another. The shareholder’s interest in the
transferor company is replaced by a corresponding interest in the transferee
company. For the purposes of Section 28, the first test is whether such
substitution constitutes either a receipt or an accrual of income.
17.1. It is settled law that income yielding business profits may be realised not
only in money but also in kind. Thus, where an assessee receives shares of the
amalgamated company in place of its shares held as trading stock, there is, in
form, a receipt of consideration in kind. Though such amalgamations receive the
sanction of the Court/Tribunal to be effectuated, they are preceded by decisions
taken in meetings of shareholders. In such meetings, valuation reports are
placed before the shareholders, and for the amalgamation to be approved, 90%
of the shareholders must vote in favour of the amalgamation. The report
contains details of the share exchange ratio. Though the value of each share is
37
determined at that stage, it is not tradable, as no right is vested at that point.
Ordinarily, such receipt arises only upon the actual allotment of shares, since
until that point no asset is placed in the hands of the assessee. It cannot,
however, be ruled out that in certain cases, the terms of the sanctioned scheme
may themselves create, from an earlier date, a vested and imminent enforceable
right to allotment; in such situations, one may speak of “accrual”. The general
position, nevertheless, is that what the law recognises in amalgamation is the
receipt of shares in substitution of trading assets.
Commercial realisability
18. Coming to the next test, it must be underscored that mere receipt of
shares does not suffice to attract Section 28; commercial realisability is also
required when income is received in kind. Moreover, in Kanchanganga Sea
29
Foods Ltd v. Commissioner of Income Tax , it was observed that the recipient
of income must have control over the income received, emphasising that mere
receipt in kind is not enough.
18.1. It must also be clarified at this stage that amalgamation, in strict legal
terms, does not amount to an “exchange.” In Rasiklal Maneklal , this Court held
that the allotment of shares in the amalgamated company under a court-
sanctioned scheme is not the result of a bilateral bargain between two parties,
i.e., there is no mutual or reciprocal transfer of ownership. Since the
29
(2010) 11 SCC 144
38
amalgamating company itself ceases to exist, the element of mutual transfer that
characterises an exchange is absent. Therefore, amalgamation, as held in other
decisions, is to be understood as a statutory substitution of holdings, and not as
an “exchange” in the legal sense.
18.2. Thus, the jurisprudence discloses three related strands: first, cases such as
Orient Trading , relying on English decision ( Royal Insurance Co. Ltd. v.
Stephen ), which will be discussed later, emphasise that receipt of an asset of
definite money’s worth in substitution for another may amount to commercial
realisation attracting Section 28; second, the decision in Rasiklal Maneklal ,
which clarifies that allotment on amalgamation is not an “exchange”, along with
other decisions holding it to be a statutory substitution; and third, the ruling in
Grace Collis , which makes it clear that, notwithstanding its statutory character,
amalgamation does involve a “transfer” within the meaning of the Income-tax
Act.
18.3. Reconciling these strands, the true test under Section 28, as already noted,
is not the legal label of “exchange” or “transfer”, but whether the assessee, in
consequence of the amalgamation and thereby of its business, has obtained a
profit that is real and presently realisable. The well-known real-income
principle, as emphasised in E.D. Sassoon and Shoorji Vallabhdas , must be
applied. Therefore, the enquiry for the Court is whether, as a result of the
amalgamation, the assessee has in fact realised a profit in the commercial sense.
This assessment may turn on whether:
39
(A) The old stock-in-trade has ceased to exist in the assessee’s books;
(B) The shares received in the amalgamated company possess a definite and
ascertainable value; and
(C) The assessee, immediately upon allotment, is in a position to dispose of
such shares and realise money.
18.4. If these conditions are satisfied, the substitution bears the character of a
commercial realisation and the profit may be taxed under Section 28. Where,
however, the allotment of shares is merely a statutory substitution mandated by
the scheme of amalgamation, without yielding an immediately realisable
benefit, no income can be said to accrue or be received at that stage, and
taxability arises only upon the eventual sale of the shares. For instance:
(A) If a shareholder of Company A receives shares of Company B pursuant to a
court-sanctioned amalgamation, but such shares are subject to a statutory lock-
in period during which they cannot be sold in the market, the allotment cannot
be equated with a commercial realisation. It represents only a replacement of
one form of holding by another, without any immediate gain capable of
monetisation.
(B) Similarly, where the amalgamated company is closely held and its shares
are not quoted on any recognized stock exchange, the mere allotment of such
shares does not generate a realisable profit, since no open market exists to
ascribe a fair disposal value.
40
18.5. These illustrations, which are not exhaustive, underline that unless the
assessee is, by virtue of the substitution, placed in possession of an asset which
is freely tradable and of an ascertainable market value, the principle of real
income bars taxation at the stage of amalgamation. Thus, the substitution of
shares upon amalgamation does not, by itself, give rise to taxable income under
Section 28. What must be established is that the transaction has the attributes of
a commercial realisation resulting in a real and presently disposable advantage.
Where this test is satisfied, taxability may arise at the stage of substitution.
Otherwise, the accrual or receipt of income is deferred until actual sale.
18.6. In other words, as noted earlier, the governing test under Section 28 is not
the presence of a sale, exchange, or extinguishment of rights in the technical
sense, but whether the assessee has, in consequence of business operations,
come into possession of a real and presently realisable commercial benefit. This
may take the form of money directly received, or assets in kind capable of being
immediately disposed of for money’s worth. The shares, therefore, must be
readily available for trading to be treated as stock-in-trade.
19. We may now refer to the judgment in Orient Trading. Although it dealt
with an exchange, the observations therein as to the nature of “realisation” are
of general application. The Court, relying on English decision ( Royal Insurance
Co. Ltd. v. Stephen ), explained that a realisation takes place when the old
investment ceases to figure in the affairs of the company and its worth –
41
whether by way of profit or loss – can be determined with finality in monetary
terms. At that point, the old investment is regarded as closed and a new
investment is treated as having commenced. The emphasis is that realisation is
not merely a matter of accounting entries, but arises where the former asset is
replaced by a new and distinct asset of ascertainable value, thereby crystallising
the economic outcome of the earlier holding. Lord Trayner, in Californian
30
Copper Syndicate Ltd v. Inland Revenue observed that “no doubt here the
price took the form of fully paid shares in another company, but, if there can be
no realised profit except when that is paid in cash, the shares were realisable and
could have been turned into cash”. On this reasoning, even the exercise of an
option, such as the choice to accept shares of the amalgamated company in lieu
of the old holding, may amount to a realisation of the old asset, subject to the
other conditions being satisfied, as discussed. The relevant portions of the
judgment in Orient Trading , are as under:
“8. The decision of Rowlatt, J. in Royal Insurance Co. Ltd. v. Stephen [(1928)
14 TC 22 : 44 TLR 630] was approved in the said case. In the case of Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] the appellant-
company had, under the Railways Act, 1921, to accept new stocks in the
amalgamated companies in exchange for the stock held in the companies which
were absorbed and which resulted in loss to the appellant-company. The claim
of the appellant-company for deduction of such loss was upheld by Rowlatt, J.
who held: (TC pp. 28-29)
“At the bottom of this principle of waiting for a realisation, I think there is this
idea; while an investment is going up or down for income tax purposes the
company cannot take any notice of fluctuations, but it has to take notice of
them when all that state of affairs comes to an end, when that investment is
wound up I will say — ‘wound up’ is an unfortunate expression perhaps and I
will say when an investment ceases to figure in the company's affairs, when it
30
5 TC 159
42
is known exactly what the holding of that investment has meant, plus or minus
to the company, and then the company starts so far as that portion of its
resources is concerned with a new investment. Then one knows where one is
and it is no longer a question of paper, it is a question of fact and that is a
realisation. I think that is the point of view from which it ought to be looked
at, and looking at it from that point of view the company is right. It has done
with the investments in the companies. They have disappeared. It is known
exactly in money. It is known now exactly what their holding of them has
meant to the company. They will never more go up or down. What will go up
or down now are the different shares in the new companies, altogether
different investments really, and therefore I think that the old investment is
closed and realised and a new investment is started.”
9. Similarly in Californian Copper Syndicate Ltd. v. Inland Revenue (Harris,
Surveyor of Taxes) [5 TC 159], decided by the Court of Exchequer in
Scotland, Lord Trayner has said: (TC p. 167)
“But it was said that the profit — if it was profit — was not realised profit and,
therefore, not taxable. I think the profit was realised. A profit is realised when
the seller gets the price he had bargained for. No doubt here the price took the
form of fully paid shares in another company, but, if there can be no realised
profit, except when that is paid in cash, the shares were realisable and could
have been turned into cash, if the appellants had been pleased to do so . I
cannot think that income tax is due or not according to the manner in which the
person making the profit pleases to deal with it.”
11. The subsequent decision of the House of Lords in British South Africa
Co. v. Varty (Inspector of Taxes) [1966 AC 381 : (1965) 2 All ER 395 : (1965) 3
WLR 47] does not lend assistance to the submission of Shri Puri. In that case the
appellant-company in 1953 had lent 200,000 pounds to a gold mining company
and in return had received, inter alia, an option to subscribe for 100,000 shares
in the mining company at 1 pound per share, the value of the shares then being
19 Sh. 6 d a share. In 1954 when the value of the shares had gone up to 43 Sh. 6
d a share the appellant exercised the option and obtained shares worth 217,500
pounds for which they paid 100,000 pounds. The company was assessed for
income tax on a profit of 11,75,000 pounds. On behalf of the company it was
urged that upon the exercise of the option there was a realisation because the
option which was a “trading asset” or an item of “stock-in-trade” was
exchanged for or was replaced by a different item of stock-in-trade which had a
value in money's worth. The said contention was rejected by the House of Lords
(Lord Guest, dissenting). It was held that the appellant-company never, in fact,
realised their option in the sense of passing it on for a consideration to someone
else and that there was neither a sale of the option or its exchange for something
else and that when the company exercised their option or used or availed
themselves of their rights they did not make the end of the trading transaction
43
and that there was merely the end of the beginning of a trading transaction. It
was emphasised that there was no element of exchange as there was in Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and
in Westminster Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1 ITR 65 : 1932
All ER Rep 917, HL]. (See Lord Morris of Borth-Y-Gest at pp. 394-395.) Lord
Guest, in his dissenting judgment, however felt that the option was a trading
asset of the appellant-company and, applying the principles laid down in Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and Westminster
Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1 ITR 65 : 1932 All ER Rep 917,
HL], held that the exercise of option amounted to a realisation of the option
which resulted in a trading profit of 11,75,000 pounds. This would show that the
principles laid down in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 :
44 TLR 630] and Westminster Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1
ITR 65 : 1932 All ER Rep 917, HL] have been affirmed by all the Law Lords and
the difference amongst them was only as regards the applicability of the said
principles to the facts of that case.
13. Having regard to the principles laid down in the decisions aforementioned,
it must be held that the High Court has rightly taken the view that as a result of
their having taken the shares in the second company in exchange of the shares of
the first company the assessee had made realisation of the value of the shares of
the first company and the difference between the price of the shares of the first
company and the second company on the date of such exchange, i.e., Rs
4,06,000, has to be treated as a profit of the assessee and has been rightly
assessed as income of the assessee. We, therefore, do not find any merit in the
appeal and the same is accordingly dismissed, but in the circumstances with no
order as to costs.”
20. The Privy Council in Raja Raghunandan Prasad Singh v.
31
Commissioner of Income Tax , recognised that income may be received in
kind as well as in cash, and that the equivalent of cash may constitute income,
but stressed that what is received must be “money’s worth”. It was clearly
observed that there must be an actually realised or realisable profit or loss. The
following passages are pertinent in this regard:
31
(1933) 1 ITR 113 : 1933 SCC OnLine PC 8
44
“Their Lordships fully recognise that income may be received in kind as well
as in cash and that the receipt of an equivalent of cash may be a receipt of
income . In the case of Californian Copper Syndicate v. Harris [(1905) 6 F.
894 : 5 Tax. Cas. 159.], a company which dealt in mining properties sold
certain property for fully-paid shares in another company and was held to be
liable to income-tax on the profit made on the transaction although no cash
passed, but this was on the ground that the shares taken in exchange were
realisable and were thus money's worth and the equivalent of cash. In the case
of Royal Insurance Company, Ltd. v. Stephen [(1928) 44 T.L.R. 630 : 14 Tax.
Cas. 22.], an insurance company, which admitted that any profit which it made
on the realisation of investments was liable to tax, effected an exchange of
securities in pursuance of a railway amalgamation scheme. The new stocks
received in place of the surrendered stocks had at the date of the exchange a
definite market value which was less than the original cost to the company of the
surrendered stocks. A claim was made by the company in computing its profits
to deduct the difference loss sustained by it. For the Crown it was contended
that there has been no realisation of investments, but merely an exchange of one
set of investments for another. The company's claim was upheld by Rowlatt, J.
on the ground that it had in substance realised its former holdings and received
for them money's worth of, a definite amount. The loss was thus a realised loss
susceptible of exact estimation in money. The transaction was on “a money
basis.” Reference may also be made to the recent case in the House of Lords
of Westminster Bank, Ltd. v. Osler (15th November, 1932) [(1933) A.C. 139.],
where the bank surrendered certain holdings of National War Bonds in
exchange for other Government securities and the Crown claimed tax oil the
excess value of the substituted over the original securities. The question was
whether these transactions were the equivalent of a realisation of the original
holdings, and it was held that they were. “The exchange effected in the present
case,” said Lord Buckmaster, “was in fact the exact equivalent of what would
have I taken place had instructions been given to sell the original stock and
invest the proceeds in the new security.” The bank had thus in effect realised its
profit, for it had deceived it in money's worth of a I definitely ascertained
amount. From these cases it is plain that the essence of the matter is that there
must be an actually realised or realisable profit or loss.
Applying this principle to the assessees' transaction in 1904, their Lordships are
of opinion that there was in the circumstances no realisation of the principal
and interest of the original mortgage of 1894 and that when the assessees
received, the new mortgage for Rs. 7,33,135, which included the principal and
interest of the original mortgage, they did not thereby receive payment or the
equivalent of payment of the principal and interest of the original mortgage. No
doubt the grantors of the new mortgage were not identical with the grantor of
the original mortgage and the property mortgaged was greater in extent, but the
substitution effected cannot in any real sense, be described as the equivalent of a
45
realisation of the original mortgage, principal and interest. What happened was
that the assessees received a new and substituted security for an existing debt.
To give security for a debt is not to pay a debt. If the assessees had received
payment in kind of the amount outstanding on the original mortgage, in the
shape, say, of realisable shares or bonds, the case would have been different,
but they merely received further and better security for their debt. It is, in their
Lordships' view, quite immaterial that the assessees discharged the original
mortgage and all liability under it, for that was merely an incident in the
transaction whereby the new security was substituted for the old. Their
Lordships accordingly hold that the assessees did not by virtue of the
transaction of 1904 receive payment of the arrears of interest amounting to
Rs.2,33,135 then outstanding on the mortgage of 1894; that the assessees were
not liable to be taxed on this sum as being income received when the new
mortgage was granted; and that this sum of arrears of interest (though after
1904 secured by the new mortgage) continued to retain its character and remain
due to the assessees down to the time of the judicial sales of November, 1924,
and January, 1925. In so holding their Lordships find themselves in agreement
in result with the Commissioner and the High Court.”
32
21. In Raja Mohan Raja Bahadur v. Commissioner of Income Tax , this
Court held that where commercial assets are received in satisfaction of an
obligation, income embedded in such assets is deemed to be received when title
passes, irrespective of actual sale. The Court again took note of the observations
made in the Californian Copper Syndicate case. The following paragraphs
from the decision are apposite:
“4. Under Section 4 of the Income Tax Act, 1922, the total income of any
previous year of a resident assessee includes all income, profits and gains from
whatever sources derived which are received or are deemed to be received in
the taxable territories in such year by or on behalf of such person, or accrue or
arise or are deemed to accrue or arise to him in the taxable territories during
such year, or accrue or arise to him without the taxable territories during such
year, or having accrued or arisen to him without the taxable territories before
the beginning of such year and after the 1st day of April, 1933, are brought into
or received in the taxable territories by him during such year. The Act does not
contain much guidance as to cases in which tax is to be levied on income
32
(1967) 66 ITR 378
46
received, and cases in which tax is to be levied on income accrued or arisen.
Section 13 however requires that income, profits and gains for the purposes of
Sections 10 and 12 shall be computed in accordance with the method of
accounting regularly employed by the assessee. If accounts are maintained
according to the mercantile system, whenever the right to receive money in the
course of a trading transaction accrues or arises, even though income is not
realised, income embedded in the receipt is deemed to arise or accrue. Where
the accounts are maintained on cash basis receipt of money or money's worth
and not the accrual of the right to receive is the determining factor. Therefore,
if commercial assets are received by a trade maintaining accounts on cash
basis in satisfaction of an obligation, income which is embedded in the value
of the assets is deemed to be received : the receipt of income is not deferred till
the asset is realized in terms of cash or money. It makes no difference whether
the receipt of assets is in pursuance of an agreement or that the trader is
compelled by law to accept the assets from the debtor. Once title of the trader
to an asset received is complete, whether by a consensual arrangement or by
operation of law, he receives the income embedded in the value of the asset .
In Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of
Taxes) [5 TC 159] Lord Trayner in dealing with a case of assessment to income
tax of a Company formed for the purpose, inter alia, of acquiring and reselling
mining property resold the whole of its assets to a second Company and
received payment in fully paid shares of the purchasing Company, observed:
“A profit is realised when the seller gets the price he has bargained for.
No doubt here the price took the form of fully paid shares in another
company, but, if there can be no realised profit, except when that is paid
in cash, the shares were realisable and could have been turned into cash,
if the appellants had been pleased to do so. I cannot think that Income
tax is due or not according to the manner in which the person making the
profit pleases to deal with it.”
Counsel for the appellant contended that the bonds were intended to renew the
promise to pay the amount due by the debtor through his agent, and by the
renewal of the promise even if the original liability was extinguished and a fresh
liability was substituted, no income was received by the appellant.
5. We are unable to agree with that contention. The Government of the State
undertook to pay the amount of the bonds in satisfaction of the liability of the
debtor. The liability of the original debtor was extinguished and a fresh
obligation was undertaken by the State Government in substitution of the
original liability. The Government had the right to recover the amount due
under the bonds from the landholder, but on that account the Government did
not become the agent of the landholder for payment of his debts. Even if the
Government was unable to recover the money from the landholder, the liability
undertaken by the Government under the bond remained unimpaired. The bond
47
was a security for payment of the debt which completely replaced the original
liability of the debtor.”
22. This Court in Commissioner of Income Tax v. Ashokbhai
33
Chimanbhai , reiterated that profits do not accrue from day to day but are
ascertained by a comparison of assets at two points in time. Further, the test of
accrual is whether the person entitled thereto has a right to claim the profits. The
following paragraphs are relevant in this regard:
“6. Under the Income Tax Act, income is taxable when it accrues, arises or is
received, or when it is by fixation deemed to accrue, arise or is deemed to be
received. Receipt is not the only test of chargeability to tax; if income accrues or
arises it may become liable to tax. For the purpose of this case it is unnecessary
to dilate upon the distinction between income “accruing” and “arising”. But
there is no doubt that the two words are used to contradistinguish the word
“receive”. Income is said to be received when it reaches the assessee : when the
right to receive the income becomes vested in the assessee, it is said to accrue or
arise. Fletcher Moulton, L.J., in In re The Spanish Prospecting Co. Ltd. [(1911)
1 Ch 92] observed at p. 98:
“The word ‘profit’ has a well-defined legal meaning and this *
meaning coincides with the fundamental conception of profits in general
parlance; although in mercantile phraseology the word may at times
bear meanings indicated by the special context which deviate in some
respects from this fundamental signification. ‘Profit’ implies a
comparison between the state of a business at two specific dates usually
separated by an interval of a year. The fundamental meaning is the
amount of gain made by the business during the year. This can only be
ascertained by a comparison of the assets at the two dates.”
In the gross receipts of a business day after day or from transaction to
transaction lie embedded or dormant profit or loss: on such dormant profit or
loss undoubtedly taxable profits, if any, of the business will be computed. But
dormant profits cannot be equated with profits charged to tax under Sections 3
& 4 of the Income Tax Act. The concept of accrual of profits of a business
involves the determination by the method of accounting at the end of the
accounting year or any shorter period determined by law. If profits accrue to the
assessee directly from the business the question whether they accrue de die, in
33
(1965) 56 ITR 42
48
diem or at the close of the year of account has at best an academic significance,
but when upon ascertainment of profits the right of a person to a share therein is
determined, the question assumes practical importance, for it is only on the right
to receive profits or income, profits accrue to that person. If there is no right, no
profits will be deemed to have accrued. This principle was applied by this Court
in E.D. Sassoon & Co. Ltd. v. CIT [26 ITR 27]. The material facts bearing on
that principle were these: E.D. Sassoon & Co. Ltd, — called “Sassoons” —
were the managing agents of a Company which may be called ‘the United Mills’
and were entitled to receive a percentage of annual net profits of the Company
as their remuneration. On December 1, 1943 Sassoons assigned to Messrs
Agarwal & Co. their office as managing agents and all their rights and benefits
under the managing agency agreement. Accounts of the managing agency
commission payable to the managing agents for the calendar year 1943 were
made up in 1944 and commission for the whole year was paid to Messrs
Agarwal & Co. thereafter. In the course of assessment proceeding of Sassoons it
was debated whether in respect of commission earned by the managing agency,
tax was payable on the entirety of the commission by Messrs Agarwal & Co. or
by Sassoons or it was liable to be apportioned between Messrs Agarwal & Co.
and Sassoons. This Court held (Jagannadhadas, J. dissenting) that Messrs
Agarwal & Co. alone were liable to pay tax on the whole of the remuneration
received under the contract of service between the United Mills, because the
managing agency was entire and indivisible, and the remuneration or
commission fell due to the managing agents, only on completion of a definite
period of service and at stated periods it being a condition of recovery of wages
or salary that the service or duty should be completely performed. Remuneration
as managing agents constituted according to the Court “a debt” only at the end
of each such period of service and no remuneration or commission was payable
to the managing agents for broken periods. After referring to the observations of
Fletcher Moulton, L.J. in the Spanish Prospecting Co. Ltd. case [(1911) 1 Ch
92] (already set out), Bhagwati, J., observed that “it would be absurd to suggest
that the profits of the company could accrue from day to day or even from month
to month”. The working of the company from day to day could certainly not
indicate any profit or loss, even the working of the company from month to
month could not be taken as a reliable guide for this purpose. If the profit or loss
has to be ascertained by a comparison of the assets at two stated points, the
most businesslike way would be to do so at stated intervals of one year and that
would be a reasonable period to be adopted for the purpose. In the case of large
business concerns the working of the company during a particular month may
show profits and the working in another month may show loss. The business
during the earlier part of the year may show profit or loss and in the later part
of the year may show loss or profit which would go to counterbalance the profit
or loss as the case may be in the earlier part of the year. It would therefore be
reasonable to determine the profit or loss as the case may be at the end of every
year so that on such calculation of net profits the managing agents may be paid
49
their remuneration or commission at the percentage stipulated in the managing
agency agreement and the shareholders also be paid dividends out of the net
profits of the Company.
7. Counsel for the Commissioner submitted that the judgment in E.D. Sassoon
Co. Ltd. case [26 ITR 27] proceeded upon the special character of a managing
agency agreement and did not purport to lay down a general rule that accrual of
income depends on quantification, or that right to payment of an ascertainable
amount does not arise till accounts are made. Counsel also submitted that in
sale transactions of a trading venture profits accrue to the trader from
transaction to transaction and are embedded in each transaction carried on by
the trader, and the charge imposed by Section 4(1)(a) is not deferred till
settlement of accounts. On that premise, counsel said, that profits dormant or
embedded in the transactions carried on by Messrs Amrit Chemicals accrued
from transaction to transaction till November 12, 1955 and properly belonged to
the assessee and were liable to be taxed in the hands of the assessee
notwithstanding any subsequent disposition of those profits by the assessee. In
support of his contention counsel relied upon Turner Morrison & Co.
Ltd. v. CIT [23 ITR 152] — a case decided by this Court. In that case an Indian
Company received commission on sales effected in India of goods received from
a foreign company. The Indian Company handled the cargo arriving at Calcutta
and made disbursements in connection therewith, collected and after deducting
expenses including their commission remitted the balance to the foreign
principal. It was held by this Court that the income, profits and gains derived
from sale of goods by the Indian Company in British India were assessable to
tax under Section 4(1)(a) as income, profits and gains received in the taxable
territories by the Company on behalf of the foreign principal. The Court in that
case observed at p. 160:
“There can therefore, be no question that when the gross sale proceeds
were received by the Agents in India they necessarily received whatever
income, profits and gains were lying dormant or hidden or otherwise
embedded in them. Of course, if on the taking of accounts it be found that
there was no profit during the year then the question of receipt of
income, profits and gains would not arise but if there were income,
profits and gains, then the proportionate part thereof attributable to the
sale proceeds received by the Agents in India were income, profits and
gains received by them at the moment the gross sale proceeds were
received by them in India and that being the position the provisions of
Section 4(1)(a) were immediately attracted and the income profits and
gains so received became chargeable to tax under Section 3 of the Act.”
8. These observations were, it may be noticed, made in rejecting the contention
raised by counsel for the taxpayer that in the gross sale proceeds received by
him in India, there was no income at all. Counsel for the Indian Company said
50
that the gross sale proceeds were merely credit items in the account and that
several amounts were to be debited in the same account and if there remained
any credit balance, such balance alone could be regarded as stamped with the
formal impress of income capable of being dealt with as such : income could
therefore be said to have been received only at that stage. The Court did
propound that when gross sale proceeds are received in which is embedded
income, that income will enter the ultimate computation of the total profits
assessable to tax. But that is not to say that the profits accrue or arise to a
trader from day to day or from transaction to transaction. The observation that
to the income, profits and gains embedded in the gross receipts Section 4(1) was
immediately attracted also does not warrant the inference that the Court
intended to lay down that profits accrue to a taxpayer before the right thereto
has come into existence. “Profits” as pointed out in E.D. Sassoon Co. Ltd.
case [26 ITR 27] do not accrue from day to day or even from month to month
and have to be ascertained by a comparison of assets at two stated points. The
Court also pointed out in that case that the test for ascertaining whether
profits have accrued or arisen is whether the person who is entitled thereto has
a right to claim the profits.”
23. Accordingly, where under a scheme of amalgamation the shareholder
merely receives, in substitution, shares of the amalgamated company in lieu of
the shares held in the amalgamating company, there is no real or completed
profit capable of being taxed under Section 28, unless it is shown that the shares
are held as stock-in-trade and are readily available for realisation. In the absence
thereof, what takes place is only a statutory vesting and substitution of one form
of holding for another. Unless and until the substituted shares are commercially
realisable – whether saleable, tradeable, or by whatever other mode of
disposition so described – so as to yield real income, no taxable event can be
said to arise.
51
Definite valuation
24. The next test, which is well settled, is that profit must be capable of
definite valuation, so that the real gain or loss stands crystallized. Judicial
decisions have consistently underscored that “profits”, in the commercial sense,
are ascertainable only when the old position is closed and the new position is
determined in terms of money’s worth – whether by sale, transfer, exchange, or
statutory substitution. This principle is an application of the doctrine of real
income and applies with equal force to stock-in-trade as it does to other forms
of commercial receipts. Therefore, the test is not satisfied merely by the receipt
of realisable shares in substitution of earlier holdings; such shares must also be
capable of quantification.
24.1. In Commissioner of Income Tax v. Woodward Governor India (P)
34
Ltd . , this Court reaffirmed the settled principles of commercial accounting,
particularly that profits can be ascertained only by a comparison of assets at two
defined points in time, and that unrealised gains embedded in stock-in-trade are
not brought to charge unless and until they are crystallised in terms of money’s
worth. The following paragraphs are apposite:
“28. One more aspect needs to be highlighted. Under Section 28(i), one needs to
decide the profits and gains of any business which is carried on by the assessee
during the previous year. Therefore, one has to take into account stock-in-trade
for determination of profits. The 1961 Act makes no provision with regard to
valuation of stock. But the ordinary principle of commercial accounting requires
that in the P&L account the value of the stock-in-trade at the beginning and at
the end of the year should be entered at cost or market price, whichever is the
34
(2009) 13 SCC 1
52
lower. This is how business profits arising during the year need to be computed.
This is one more reason for reading Section 37(1) with Section 145.
29. For valuing the closing stock at the end of a particular year, the value
prevailing on the last date is relevant. This is because profits/loss is embedded
in the closing stock. While anticipated loss is taken into account, anticipated
profit in the shape of appreciated value of the closing stock is not brought into
account, as no prudent trader would care to show increased profits before
actual realisation. This is the theory underlying the rule that closing stock is to
be valued at cost or market price, whichever is the lower. As profits for income
tax purposes are to be computed in accordance with ordinary principles of
commercial accounting, unless, such principles stand superseded or modified by
legislative enactments, unrealised profits in the shape of appreciated value of
goods remaining unsold at the end of the accounting year and carried over to
the following year's account in a continuing business are not brought to the
charge as a matter of practice, though, as stated above, loss due to fall in the
price below cost is allowed even though such loss has not been realised actually.
30. At this stage, we need to emphasise once again that the above system of
commercial accounting can be superseded or modified by legislative enactment.
This is where Section 145(2) comes into play. Under that section, the Central
Government is empowered to notify from time to time the accounting standards
to be followed by any class of assessees or in respect of any class of income.
Accordingly, under Section 209 of the Companies Act, mercantile system of
accounting is made mandatory for companies. In other words, accounting
standard which is continuously adopted by an assessee can be superseded or
modified by legislative intervention. However, but for such intervention or in
cases falling under Section 145(3), the method of accounting undertaken by the
assessee continuously is supreme.
…….
33. It is well established, that, on general principles of commercial accounting,
in the P&L account, the values of the stock-in-trade at the beginning and at the
end of the accounting year should be entered at cost or market value, whichever
is lower—the market value being ascertained as on the last date of the
accounting year and not as on any intermediate date between the
commencement and the closing of the year, failing which it would not be
possible to ascertain the true and correct state of affairs. No gain or profit can
arise until a balance is struck between the cost of acquisition and the proceeds
of sale. The word “profit” implies a comparison between the state of business
at two specific dates, usually separated by an interval of twelve months. Stock-
in-trade is an asset. It is a trading asset. Therefore, the concept of profits and
gains made by business during the year can only materialise when a
53
comparison of the assets of the business at two different dates is taken into
account.”
24.2. Accordingly, in the context of amalgamation, the issue does not turn on
the accrual of income in the abstract sense, but on whether the assessee has
received a commercially realisable consideration in kind. Upon sanction of the
scheme, there is only a statutory substitution of rights; no asset then exists in the
hands of the assessee that is capable of commercial realisation. The charge
under Section 28 crystallises only upon allotment of the new shares, when the
assessee actually receives realisable instruments capable of valuation in
money’s worth. At that point, the old stock-in-trade ceases to exist and stands
replaced by new shares having a definite market value. Since these shares are
received in the course of business and in substitution of trading assets, their
receipt represents a commercial profit or gain arising from business activity.
What attracts Section 28 is, therefore, the receipt of shares coupled with their
present realisability and their nexus with business. These three conditions—
actual receipt, present realisability, and ascertainability of value—together
determine the timing of taxability in cases of amalgamation. Consequently, the
profit arising on receipt of the amalgamated company’s shares may be taxed
under Section 28 where the shares allotted are tradable and possess a definite
market value, thereby conferring a presently realisable commercial advantage.
This conclusion flows from the real income principle and not from any
judicially created fiction. Equally, it must be emphasised that where such
54
attributes are absent, the Court cannot, by analogy, extend Section 28 to tax
hypothetical accretions in the absence of an express statutory mandate.
24.3. It is further clarified that the principles enunciated herein lay down a fact-
sensitive test. The enquiry whether, consequent upon an amalgamation, the
allotment of new shares has resulted in a real and presently realisable
commercial benefit must be determined on the facts of each case. The burden
lies on the Revenue to establish the same. It is thereafter for the Tribunal, as the
final fact-finding authority, to apply these principles to the evidence on record.
Timing of Taxability
25. Having established that the charge under Section 28 may be attracted if
the shares are saleable, tradable, etc., and of definite market value, thereby
conferring a presently realisable commercial advantage, it becomes necessary to
clarify the general principle. In the context of amalgamation, three points in
time require to be distinguished. First, the appointed date specified in the
scheme, which determines corporate succession and continuity between the
transferor and transferee companies. Secondly, the sanction of the scheme by
the Court, which gives statutory force to the amalgamation. At these stages,
however, there is only a substitution of rights by legal fiction, without any asset
in the hands of the shareholder capable of commercial exploitation. Thirdly, the
allotment of new shares in the amalgamated company, which alone crystallises
the benefit in the shareholder’s hands, for it is only then that the old stock-in-
55
trade ceases to exist and is replaced by new shares of definite market value
capable of immediate realisation. Even if the scheme contemplates the issue of
shares in a certain ratio from the appointed date, until allotment there is no
identifiable scrip or tradable asset in existence in the hands of the assessee.
Thus, the charge under Section 28 is not attracted on the mere sanction of the
scheme or on the appointed date, but only upon the receipt of the new shares,
when the statutory substitution translates into a concrete, realisable commercial
advantage.
26. Without prejudice to the broader question of chargeability under Section
28, it was contended on behalf of the appellants that even if the fair market
value of the shares allotted in the amalgamated company exceeded the book
value of the shares held in the amalgamating company, such excess would be
merely hypothetical and illusory until the shares were sold, given that market
value is inherently fluctuating. As discussed, the test under Section 28 is not
postponed until an actual sale, but is satisfied once the assessee comes into
possession of an asset of determinable and presently realisable value in
substitution of its trading stock. The fact that such value may fluctuate
subsequently does not render the benefit unreal; valuation for tax purposes is
always carried out at a particular point in time, notwithstanding subsequent
volatility. What matters is that, on the date of allotment, the assessee must have
56
received realisable instruments capable of being valued in money’s worth, and
such receipt constitutes a real, and not a notional, commercial gain.
Distinction between Capital and Business assets
27. Notably, Section 47 of the I.T. Act expressly carves out an exemption in
respect of certain transfers in the context of amalgamation, but that exemption is
confined to capital assets. The rationale is plain. Where a shareholder holds
shares as an investment, the underlying object is to remain invested in the
corporate venture, and a mere amalgamation ordinarily does not alter that
position. While the possibility of tax avoidance in the investment field cannot
be ruled out altogether, the legislative judgment reflects that the risk is
relatively low. The exemption under Section 47 is thus founded on the
recognition that amalgamation, in the capital field, is essentially a corporate
restructuring and not a true realisation of profit. It is also common in business
parlance for entities to hold shares either as investments or as stock-in-trade.
27.1. By contrast, Section 28, which governs profits of business, contains no
such carve-out, nor could it be otherwise. The nature of stock-in-trade is wholly
different from that of an investment. Stock-in-trade represents circulating
capital: it is held not for preservation or appreciation, but for conversion into
57
money in the ordinary course of business. In Commissioner of Income Tax v.
35
Express Newspapers Ltd . it was observed as follows:
“... The profits and gains of business and capital gains are two distinct concepts
in the Income Tax Act: the former arises from the activity which is called
business and the latter accrues because capital assets are disposed of at a value
higher than what they cost the Assessee. They are placed under different heads;
they are derived from different sources; and the income is computed under
different methods…..”
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.
35
MANU/SC/0126/1964 : 1964 INSC 152
58
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
59
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
60
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.
33. In fine, the judgment of the High Court is affirmed, and all these appeals
stand disposed of in the aforesaid terms. There is no order as to costs.
34. Pending application(s), if any, shall stand disposed of.
………………………J.
[J.B. PARDIWALA]
………………………J.
[R. MAHADEVAN]
NEW DELHI;
JANUARY 09, 2026.
REPORTABLE
IN THE SUPREME COURT OF INDIA
2026 INSC 46
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 152 OF 2026
[Arising out of S.L.P. (C) No. 2028 of 2021]
M/S JINDAL EQUIPMENT LEASING
CONSULTANCY SERVICES LTD ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – II, NEW DELHI ... RESPONDENT(S)
WITH
CIVIL APPEAL NO. 153 OF 2026
[Arising out of S.L.P. (C) No. 2190 of 2021]
M/S NALWA INVESTMENT LTD. ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX – V
NEW DELHI ... RESPONDENT(S)
Signature Not Verified
WITH
Digitally signed by
NITIN TALREJA
Date: 2026.01.09
16:59:31 IST
Reason:
CIVIL APPEAL NO. 154 OF 2026
[Arising out of S.L.P. (C) No. 2188 of 2021]
2
M/S ABHINANDAN TRADEX LTD. (EARLIER KNOWN AS
M/S ABHINANDAN INVESTMENT LTD) ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – I, NEW DELHI ... RESPONDENT(S)
WITH
CIVIL APPEAL NO. 155 OF 2026
[Arising out of S.L.P. (C) No. 2197 of 2021]
M/S MANSAROVER TRADEX LTD (EARLIER KNOWN AS
M/S MANSAROVER INVESTMENT LTD) ... APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX
DELHI – II, NEW DELHI ... RESPONDENT(S)
J U D G M E N T
R. MAHADEVAN, J.
Leave granted.
2. The present appeals arise out of a common judgment and final order
1
dated 07.08.2020 passed by the High Court of Delhi in ITA Nos. 935, 822,
853, and 961 of 2005, pertaining to the Assessment Year 1997-98. By the
1
Hereinafter referred to as “the High Court”
3
impugned judgment, the High Court remanded the matters to the Income Tax
2
Appellate Tribunal for fresh adjudication on the question of whether the shares
held in the amalgamating company constituted stock-in-trade or capital assets,
upon observing that, if the shares were, in fact, held as stock-in-trade, the
transaction would fall outside the purview of Section 47(vii) of the Income Tax
3
Act, 1961 , and its taxability would consequently be governed by Section 28
under the head “profits and gains of business or profession”.
FACTUAL MATRIX
3. The facts, which are common to all these appeals, may be briefly stated
as under:
3.1. The appellants are investment companies of the Jindal Group. The shares
of the operating companies, namely Jindal Ferro Alloys Limited (JFAL) and
Jindal Strips Limited (JSL), were held as part of the promoter holding,
representing controlling interest. The appellants had also furnished non-disposal
undertakings to the financial institutions / lenders who had advanced loans to
the operating companies. These shares were reflected as investments in the
balance sheets of the appellants.
3.2. During the previous year relevant to the assessment year 1997-98,
pursuant to a scheme of amalgamation approved by orders dated 19.09.1996
2
For short, “the Tribunal”
3
For short, “the I.T. Act”
4
and 03.10.1996 of the High Courts of Andhra Pradesh and Punjab & Haryana
respectively, under Sections 391 – 394 of the Companies Act, 2013, JFAL was
amalgamated with JSL. As per the sanctioned scheme, the appointed date of
amalgamation was 01.04.1995, and the orders sanctioning the amalgamation
were filed with the Registrar of Companies on 22.11.1996 (the effective date).
Under the scheme of amalgamation, the shareholders of JFAL were allotted 45
shares of JSL for every 100 shares of JFAL held by them. Accordingly, the
appellants were allotted shares of JSL in lieu of the shares of JFAL.
3.3. The appellants, in their returns of income filed for the assessment year in
question, claimed exemption under Section 47(vii) of the I.T. Act in respect of
the receipt of JSL shares in lieu of JFAL shares, treating the same to be capital
assets. However, in the assessment completed under Section 143(3) vide order
dated 29.02.2000, the Assessing Officer treated the shares of JFAL as stock-in-
trade, denied the exemption under Section 47(vii), and brought to tax the value
of JSL shares as business income, computed with reference to their market
value. The said order was upheld by the Commissioner of Income Tax
(Appeals).
3.4. On further appeals, the Tribunal vide order dated 17.02.2005, allowed the
assessees’ appeals by observing that it was unnecessary to decide whether the
shares were held as stock-in-trade or capital assets since no profit accrues unless
the shares held by the appellants are either sold or transferred for consideration,
irrespective of the nature of holding. It was further observed that there was
5
admittedly no sale of shares and, therefore, the only question for consideration
was whether the allotment of JSL shares in lieu of JFAL shares under the
scheme of amalgamation amounted to a “transfer”. Following the decision of
this Court in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal
4
(HUF) and others , the Tribunal concluded that there was no transfer of shares
and, consequently, no taxable profit could be said to have accrued to the
appellants.
3.5. The Revenue challenged the Tribunal’s decision before the High Court,
raising the following substantial questions of law:
“1. Whether shares received by the assesses on amalgamation are entitled to
the benefit of section 47(vii) without the Tribunal concluding that the said
shares were held by the assesses as capital assets?
2. Whether the benefit of Section 47(vii) is limited to determination of
capital gains and only in regard to capital assets?
3. Whether income would accrue to the assesses on shares received by
amalgamations and will be taxable in view of non-applicability of Section
47(vii)?”
3.6. After hearing both sides, the High Court, by the impugned judgment,
disposed of the appeals in favour of the Revenue and against the assessees. In
doing so, it held that the Tribunal had erred in placing reliance on Rasiklal
Maneklal while failing to consider the later and binding decision of this Court
5
in Commissioner of Income-tax, Cochin v. Grace Collis and others . The High
4
(1989) 177 ITR 198 : (1989) 2 SCC 454
5
(2001) 248 ITR 323 (SC) : (2001) 3 SCC 430
6
Court observed that where the shares of the amalgamating company were held
as capital assets, the receipt of shares of the amalgamated company would
constitute a “transfer” within the meaning of Section 2(47) of the I.T. Act,
though such transfer would be exempt under Section 47(vii). However, in the
alternative scenario where the shares were held as stock-in-trade, the High
Court held that upon the assessees receiving shares of the amalgamated
company in lieu of those held in the amalgamating company, the assesses had,
in effect, realised the value of their trading assets, and the difference in value
would be taxable as business profit under Section 28. In reaching this
conclusion, the High Court relied upon the decision of this Court in Orient
6
Trading Company Ltd. v. Commissioner of Income Tax, Calcutta .
Accordingly, the matter was remanded to the Tribunal for determination of the
nature of the appellants’ holding of JFAL shares, i.e., whether such holdings
constituted capital assets or stock-in-trade.
3.7. Aggrieved thereby, the appellants have preferred the present appeals
before this Court.
CONTENTIONS OF THE PARTIES
4. Mr. Ajay Vohra, learned Senior Counsel for the appellants, primarily
submitted that the impugned judgment of the High Court is liable to be set aside
as it travels beyond the jurisdiction conferred under Section 260A of the I.T.
6
(1997) 224 ITR 371 (SC) : (1997) 3 SCC 340
7
Act. It was pointed out that the appeals before the High Court were admitted on
a limited question, namely, whether the Tribunal was correct in holding that
where the assessees get shares of the amalgamated company in lieu of shares of
the amalgamating company, no transfer takes place. However, while disposing
of the appeals, the High Court went further and proceeded to examine the
taxability of such receipt, treating it as stock-in-trade or a capital asset. Since
that issue was neither specifically raised nor framed at the time of admission,
the adjudication was impermissible and contrary to the framework laid down by
7
this Court in Shiv Raj Gupta v. Commissioner of Income-Tax, Delhi .
4.1. It was further submitted that the receipt of shares of the amalgamated
company does not amount to either a “sale” or an “exchange”. It was urged that
upon amalgamation, the amalgamating company stands dissolved and
consequently, its shares cease to exist. Therefore, when shareholders receive
shares of the amalgamated company in lieu of the extinguished shares of the
amalgamating company, there is no subsisting property capable of being
exchanged and accordingly, no taxable business income arises from such
transaction. Moreover, the definition of “transfer” under Section 2(47) is
relevant only for the purpose of computing capital gains and has no application
to stock-in-trade. Only the exploitation or realisation of stock-in-trade gives rise
7
(2020) 425 ITR 420 (SC)
8
to business income, which is to be computed strictly in accordance with Section
28 of the I.T. Act.
4.2. Reliance was placed on the decision of this Court in Vania Silk Mills P.
8
Ltd v. Commissioner of Income-Tax , wherein it was held that the mere
destruction or loss of an asset does not constitute a “transfer”. The term
“transfer” in Section 45 connotes that there must be something transferred to
someone – some property, right, or interest passing from one person to another.
When an asset ceases to exist, there can be no such transfer. Further reliance
was placed on Commissioner of Income-Tax, Andhra Pradesh v. Motors &
9
General Stores (P) Ltd wherein, it was held that to constitute an “exchange”,
there must be a subsisting property capable of being transferred or exchanged.
Reference was also made to Rasiklal Maneklal, in which, it was held that the
receipt of shares of an amalgamated company in lieu of shares held in the
amalgamating company under an approved scheme of amalgamation, does not
amount to an “exchange”. Consequently, it was submitted that the allotment of
shares in the amalgamated company, in substitution for the shares held in the
amalgamating company, does not amount to a realisation of stock-in-trade by
way of sale or exchange, so as to give rise to taxable business income.
4.3. The learned Senior Counsel submitted that the authorities relied upon by
the High Court were distinguishable from the present case. In Orient Trading ,
8
(1991) 191 ITR 647 (SC)
9
(1967) 66 ITR 692 (SC)
9
the assessee had exchanged shares of one existing company for shares of
another; that case did not involve amalgamation or dissolution of the company
whose shares were exchanged. Likewise, the English decision in Royal
10
Insurance Co. Ltd v. Stephen dealt with realisation of investments, not stock-
in-trade by an insurance company assessed under a special statutory regime, and
is inapplicable under Indian law. Similarly, Hindustan Lever and another v.
11
State of Maharashtra and another concerned the legislative competence to
levy stamp duty on an order of amalgamation. Observations therein as to the
transfer of property between amalgamating and amalgamated companies were
made in a wholly different context and cannot govern the computation of
business income.
4.4. On the concept of accrual of business income, it was urged that taxable
income arises only when a debt in praesenti is created in favour of the assessee,
though payable in future, as laid down in E.D. Sassoon & Co. Ltd v.
12
Commissioner of Income-Tax . Hypothetical or illusory benefits cannot
constitute taxable income, as held in Commissioner of Income Tax, Bombay
13
City I v. Shoorji Vallabhdas & Co. , State Bank of Travancore v.
14
Commissioner of Income-Tax, Kerala , Godhra Electricity Co. Ltd v.
10
14 Tax Cases 22
11
(2004) 9 SCC 438
12
(1954) 26 ITR 27 (SC)
13
(1962) 46 ITR 144 (SC)
14
(1986) 158 ITR 102 (SC)
10
15
Commissioner of Income-Tax and Commissioner of Income-Tax v. Excel
16
Industries Ltd. and another . Even if the fair market value of the shares
allotted in the amalgamated company on the date of allotment exceeds the book
value of the shares in the amalgamating company, such appreciation is purely
notional. Real income would arise only upon the actual sale of the allotted
shares, and until such realisation no business income accrues.
4.5. It was also emphasized that the scheme of the Act itself supports this
view. Wherever the legislature intends to tax notional or deemed income, it has
enacted specific provisions, for example, Section 28(iv) or valuation rules such
as Rule 11UAB. Further, Section 49(1)(iii)(e) specifically provides that for
capital gains, the cost of shares in the amalgamated company shall be deemed to
be the cost of shares in the amalgamating company. By parity of reasoning, in
the case of stock-in-trade also, the original cost must be preserved and any
profit should be recognized only at the time of realisation.
4.6. It was finally submitted that the receipt of shares of the amalgamated
company in lieu of shares held in the amalgamating company, even when such
shares are held as stock-in-trade, does not constitute a “sale” or “exchange”
giving rise to taxable business income. Any benefit is, at best, hypothetical until
the shares are actually sold. The impugned judgment of the High Court, which
15
(1997) 225 ITR 746 (SC)
16
(2013) 358 ITR 295 (SC)
11
disregards settled principles and binding precedents, is erroneous and liable to
be set aside.
5. On the other hand, the learned Additional Solicitor General appearing for
the respondent(s) – Department opposed the present appeals and supported the
impugned judgment of the High Court. It was submitted that if shares are held
as stock-in-trade, the profit accruing from the receipt of shares of the
amalgamated company in lieu of those of the amalgamating company would be
taxable under the head “profits and gains of business or profession”. For the
purpose of analyzing this issue, it is assumed that the assessees held the shares
of the amalgamating company as stock-in-trade prior to the amalgamation,
though this issue remains to be decided by the Tribunal on remand.
5.1. It was submitted that the Tribunal fell in error in holding that no profit
accrues unless the shares held by an assessee are either sold or transferred
otherwise for consideration, irrespective of the nature of holding. The Tribunal
did not refer to any sub-section of Section 28 of the I.T. Act to support its
conclusion that a sale or transfer alone can give rise to “profits and gains of
business or profession”. It failed to engage with Section 28 entirely, relying
instead solely on Rasiklal Maneklal . That decision, it was pointed out, is
relevant only to the taxation of capital gains under the Income- tax Act, 1922,
and has been clarified to be inapplicable by this Court in Grace Collis . Since the
12
issue of Section 45 is not under contest in these proceedings, Rasiklal Maneklal
has no further bearing.
5.2. It was submitted that the High Court rightly held that the spotlight should
not entirely be on the concept of “transfer” but instead on whether there is
business income in the hands of the assessee, and further that income is
recognised when it is earned or realized, irrespective of whether it is in cash or
kind”. This finding demonstrates that transfer is not a necessary precondition for
taxation of business income under Section 28.
5.3. According to the learned Senior Counsel, the appellants themselves
admitted in their written submissions that the definition of “transfer” under
Section 2(47) has no application to the computation of business income. To this
extent, the appellants do not dispute the High Court’s finding. Yet, the
appellants continue to contend that realisation of stock-in-trade giving rise to
taxable business income can only be through sale or exchange. Such a
submission has no basis in light of Section 28.
5.4. It was further submitted that the plain language of Section 28 makes it
clear that profits and gains of business or profession are chargeable irrespective
of whether they arise by way of sale, exchange, or otherwise. Unlike Section 45,
which specifically requires a transfer of a capital asset, Section 28 is agnostic to
the manner in which income accrues. In particular, Sections 28(i) and 28(iv)
13
bring out this position, covering profits, gains, and benefits arising from
business activities, whether convertible into money or not.
5.5. Reliance was placed on Orient Trading , where this Court held that the
exchange of securities by a share dealer amounted to realisation of stock-in-
trade, resulting in taxable profits. The said decision directly answers the
appellants’ contention as it involved stock-in-trade and upheld that realisation
may occur upon exchange, and not merely upon sale.
5.6. Applying the above legal principles, the learned Senior Counsel
submitted that the High Court was correct in concluding that upon
amalgamation, the shares of the amalgamating company cease to exist and their
value stands realised either in cash (for dissenting shareholders) or in shares of
the amalgamated company (for approving shareholders). Such realisation, when
resulting in profit, is taxable under Section 28.
5.7. The learned Senior Counsel submitted that the appellants’ reliance on
cases such as E.D. Sassoon & Co. Ltd and Motors & General Stores (P) Ltd is
misplaced. E.D. Sassoon, in fact, supports the Revenue’s case by holding that
income accrues when the right to receive is acquired, even if actual receipt is
later. Motors & General Stores has already been distinguished in Orient
Trading as being confined to the meaning of “sale” in Section 10(2)(vii) of the
1922 Act, and is therefore inapplicable. Similarly, Rasiklal Maneklal and
14
Vania Silk Mills pertain to capital gains and transfer under Section 45, which
the appellants themselves concede, have no bearing on the computation of
business income.
5.8. It was further submitted that the levy in the present case is not on
hypothetical income. As explained in Excel Industries , income accrues when it
becomes due and when there exists a corresponding liability on the other party.
Here, by virtue of the amalgamation scheme sanctioned by the Court, there was
a corresponding liability on the amalgamated company to issue shares (or pay
cash to dissenters) in exchange for the extinguished shares of the amalgamating
company. This satisfies the test of real income under Excel Industries .
5.9. Even assuming, without conceding, that the Tribunal was correct in
requiring a “sale” or “transfer”, it was argued that a scheme of amalgamation
itself has “all the trappings of a sale”, as held in Hindustan Lever. Thus, even
on the appellants’ theory, the taxable event occurred.
5.10. Finally, on the appellants’ contention regarding valuation of shares, the
learned Senior Counsel submitted that this issue was considered and rejected by
the CIT(A) with cogent reasoning, and that the Tribunal may examine this
factual issue afresh on remand, if necessary. That issue, however, need not
detain this Court, which is concerned only with the legal question.
5.11. Accordingly, the learned Senior Counsel submitted that the High Court’s
reasoning is sound, the Tribunal’s judgment is unsustainable, and the present
appeals deserve to be dismissed.
15
ANALYSIS AND FINDINGS
6. We have heard learned counsel appearing for the parties and perused the
materials available on record.
7. By order dated 10.02.2021, this Court stayed the effect and operation of
the impugned judgment and order under challenge.
8. Apparently, the appellants were shareholders of JFAL. Pursuant to the
orders of the High Courts of Andhra Pradesh and Punjab and Haryana dated
19.09.1996 and 03.10.1996, JFAL merged with JSL, a widely held public
company. Upon the amalgamation become effective, JFAL ceased to exist as a
legal entity. In terms of the share exchange ratio approved under the scheme,
shareholders were allotted 45 shares of JSL against 100 shares of JFAL.
8.1. During the relevant assessment year, the appellants claimed exemption
under Section 47(vii) of the I.T. Act in respect of the receipt of JSL shares,
contending that the shares of JFAL were held as capital assets. The Assessing
Officer, however, denied exemption, holding that the shares of JFAL
constituted stock-in-trade in the hands of the appellants. He accordingly taxed
the difference between the value of the JSL shares (as on the appointed date)
and the book value of JFAL shares. The CIT(A) upheld this view, dismissing
the appeals on the finding that the appellants’ acquisition of shares was an
adventure in the nature of trade, attracting taxation under Section 28 of the I.T.
16
Act. Thus, there were concurrent findings that the assessees belonging to the
same group which controlled JFAL, engaged in a scheme for profit-making by
exchanging their stock-in-trade holdings in JFAL for shares of JSL.
8.2. On further appeals, the Tribunal, by order dated 17.02.2005, allowed the
assessees’ claims. It declined to decide the factual question whether the JFAL
shares were held as capital assets or as stock-in-trade, holding instead that no
profit accrues unless the shares are either sold or transferred for consideration,
irrespective of the nature of holding.
8.3. In the Revenue’s appeals, the High Court by the impugned judgment, set
aside the Tribunal’s order and remitted the matter for fresh consideration. The
High Court returned two findings: first, that if shares are held as capital assets,
an amalgamation is indeed a transfer within the meaning of Section 2(47) of the
I.T. Act, though exempt under Section 47(vii). The assessees no longer dispute
this finding before this Court. Second, the High Court held that if the shares are
held as stock-in-trade, the profit arising to the assessees from the receipt of JSL
shares in lieu of JFAL shares would be taxable as “profits and gains of business
or profession” under Section 28. It is the second finding, which has necessitated
the present appeals before this Court.
9. At the outset, the learned Senior Counsel appearing for the appellants
raised a preliminary objection that the High Court had transgressed its
jurisdiction in remitting the matter to the Tribunal with an observation that, if
17
the shares were stock-in-trade, the taxability would arise under Section 28 of the
I.T. Act. It was urged that such an issue was neither expressly framed as a
substantial question of law by the High Court nor raised by the Revenue in its
appeals. Reliance was placed on Shiv Raj Gupta , where this Court held that the
High Court cannot decide a new question of law without formally framing it
under Section 260A (4) and without affording the parties an opportunity to meet
that case. The following paragraphs are apposite in this context:
“18. It can be seen that the substantial question of law that was raised by the
High Court did not contain any question as to whether the non-compete fee
could be taxed under any provision other than Section 28(ii)(a) of the Income
Tax Act, 1961. Without giving an opportunity to the parties followed by
reasons for framing any other substantial question of law as to the taxability
of such amount as a capital receipt in the hands of the assessee, the High
Court answered the substantial question of law raised as follows : (Shiv Raj
Gupta case [CIT v. Shiv Raj Gupta, 2014 SCC OnLine Del 7305: (2015) 372
ITR 337], SCC OnLine Del paras 63 & 65)
“63. In view of the aforesaid discussion, we deem it appropriate and
proper to treat Rs 6.60 crores as consideration paid for sale of shares,
rather than a payment under Section 28(ii)(a) of the Act. …
…
65. The substantial question of law is accordingly answered in favour of
the appellant Revenue and against the respondent-assessee but holding
that Rs 6.60 crores was taxable as capital gains in the hands of the
respondent-assessee being a part of the full value sale consideration paid
for transfer of shares. The appellant Revenue will be entitled to costs as
per the Delhi High Court Rules.”
Clearly, without any recorded reasons and without framing any substantial
question of law on whether the said amount could be taxed under any other
provision of the Income Tax Act, the High Court went ahead and held that the
amount of INR 6.6 crores received by the assessee was received as part of the
full value of the sale consideration paid for transfer of shares — and not for
handing over management and control of CDBL and is consequently not
taxable under Section 28(ii)(a) of the Income Tax Act. Nor is it exempt as a
capital receipt being non-compete fee, as it is taxable as a capital gain in the
18
hands of the respondent-assessee as part of the full value of the sale
consideration paid for transfer of shares. This finding would clearly be in the
teeth of Section 260-A (4), requiring the judgment to be set aside on this score.”
9.1. Undoubtedly, Section 260A envisages that an appeal to the High Court
lies only where a substantial question of law arises. Sub-sections (3) and (4)
mandate the formulation of such questions, while the proviso to sub-section (4)
preserves the Court’s power, for recorded reasons, to entertain any other
substantial question of law not earlier framed. For ease of reference, the said
provision is reproduced as follows:
“ 260-A. Appeal to High Court .—(1) An appeal shall lie to the High Court from
every order passed in appeal by the Appellate Tribunal before the date of
establishment of the National Tax Tribunal, if the High Court is satisfied that the
case involves a substantial question of law.
(2) The Principal Chief Commissioner or Chief Commissioner or the Principal
Commissioner or Commissioner or an assessee aggrieved by any order passed
by the Appellate Tribunal may file an appeal to the High Court and such appeal
under this sub-section shall be—
(a) filed within one hundred and twenty days from the date on which the order
appealed against is received by the assessee or the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner;
(b)….
(c) in the form of a memorandum of appeal precisely stating therein the
substantial question of law involved.
(2-A) The High Court may admit an appeal after the expiry of the period of one
hundred and twenty days referred to in clause (a) of sub-section (2), if it is
satisfied that there was sufficient cause for not filing the same within that
period.
(3) Where the High Court is satisfied that a substantial question of law is
involved in any case, it shall formulate that question.
19
(4) The appeal shall be heard only on the question so formulated, and the
respondents shall, at the hearing of the appeal, be allowed to argue that the case
does not involve such question:
Provided that nothing in this sub-section shall be deemed to take away or
abridge the power of the court to hear, for reasons to be recorded, the appeal on
any other substantial question of law not formulated by it, if it is satisfied that
the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver
such judgment thereon containing the grounds on which such decision is
founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a
decision on such question of law as is referred to in sub-section (1).
(7) Save as otherwise provided in this Act, the provisions of the Code of Civil
Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far
as may be, apply in the case of appeals under this section.”
9.2. The scheme is consciously modelled on Section 100 of the Code of Civil
Procedure, 1908, which similarly confines jurisdiction in second appeal to
substantial questions of law. Both provisions embody the legislative policy of
limiting higher appellate interference to questions of law, while at the same
time, permitting the Court to deal with necessary or incidental questions that
arise, provided reasons are recorded and parties are heard. In a recent judgment
in R. Nagaraj (dead) through legal heirs and another v. Rajamani and
17
others , this Court held that although a separate issue need not be framed on
every point, a finding on a disputed question, while deciding a connected issue,
is sufficient.
17
2025 Livelaw SC 416
20
9.3. In the present case, the High Court did not specifically frame the question
of law as to whether the substitution of shares was taxable under Section 28 of
the I.T. Act. However, the said issue went to the very root of the matter, and the
High Court was bound to consider it in view of the issue already framed by the
Tribunal and the submissions advanced by both sides before the Tribunal as
well as before the High Court. Such a question was incidental or collateral to
the main issue, and the absence of a formal formulation would not vitiate the
impugned judgment of the High Court.
9.4. Furthermore, the present case does not fall within the mischief noticed in
Shiv Raj Gupta for the following reasons:
• First, the Tribunal itself had framed the substantial issue as “ whether any
income accrues to the appellants on the event of substitution of shares of
Jindal Ferro Alloys Ltd. by the shares of Jindal Strips Ltd. under the
scheme of amalgamation approved by the High Court of Andhra Pradesh
and High Court of Punjab & Haryana ”. While answering this question in
the negative, the Tribunal left open the determination of whether the
shares were held as investments or as stock-in-trade. Once such a finding
was recorded, the real question of law was not merely the applicability of
Section 47, but more broadly the taxability of the amalgamation
transaction under the Act.
• Second, in appeal, the High Court framed the following substantial
question of law: “Whether the Tribunal was correct in holding that where
21
the assessee gets shares of the amalgamated company in lieu of shares of
the amalgamating company, no transfer takes place?” This formulation
was wide enough to cover not only the application of Section 47 but also
the broader question of taxability of such substitution of shares under the
Act. The High Court did not itself assess income under Section 28, but
only clarified that if the shares were stock-in-trade, the exemption of
Section 47 would not apply, and the matter required reconsideration by
the Tribunal so as to determine whether the shares were held as stock-in-
trade or as capital assets, as without that determination the taxability or
eligibility for exemption could not be ascertained.
• Third, there was no violation of natural justice in the present case, unlike
in Shiv Raj Gupta where an altogether new head of income was
introduced without notice to the assessee. Here, the High Court expressly
recorded the preliminary objections and submissions of the appellants
with respect to Section 28 and dealt with them. Thus, the parties had full
opportunity to address this aspect before remand. Merely because a
specific substantial question of law was not framed, it cannot be
concluded that prejudice was caused to the parties, if both parties had the
opportunity to address the issues in dispute.
22
9.5. Reference may also be made to Mansarovar Commercial Pvt. Ltd v.
18
Commissioner of Income-Tax , where a similar contention was raised based
on Shiv Raj Gupta . This Court held that issues incidental or collateral, on which
the parties have been fully heard, can be considered by the High Court even if
not expressly framed as substantial questions of law, especially where they arise
directly from the Tribunal’s findings. The following paragraphs from the said
decision are pertinent in this regard:
“45.13. As regards the reliance placed upon the decision of this Court in Shiv
Raj Gupta v. CIT [Shiv Raj Gupta v. CIT, (2021) 11 SCC 58 : AIR 2020 SC
3556], by the learned Senior Counsel appearing on behalf of the appellants on
non-framing of substantial question of law in terms of Section 260-A of the Act
so far as the interest liability is concerned, it is submitted that the said decision
shall not be applicable to the facts of the case at hand and more particularly in
case of an interest which is automatic and mandatory. It is submitted that in the
said case, the dispute was with respect to capital gains which by its very nature
is a separate head of income and the issue relates to the very taxability. That
therefore, failure to raise a question of taxability of capital gains in a particular
case may tantamount to a failure in raising a substantial question of law in
terms of Section 260-A of the Act. However, the same may not apply on interest
as the interest is automatic and mandatory.”
“85. As regards the submission on behalf of the assessees that no substantial
question of law was framed on levy of interest, at the outset, it is required to be
noted that both the parties made submissions on levy of interest elaborately
which have been dealt with and considered by the High Court in light of the
Constitution Bench decision of this Court in Anjum M.H.
Ghaswala [CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633] . Even
otherwise, the said issue can be said to be incidental or collateral. Even
otherwise, in view of the decision of this Court in Anjum M.H.
Ghaswala [CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633] holding that the
levy of interest under Section 234-A is statutory interest and mandatory and
automatic, thereafter the said issue cannot be said to be a question of law.”
(Emphasis Supplied)
18
(2023) 454 ITR 1 (SC)
23
9.6. Accordingly, the High Court cannot be said to have exceeded its
jurisdiction under Section 260A in making the impugned observation on Section
28 before remanding the matter. The preliminary contention of the appellants is,
therefore, devoid of merit and stands rejected.
10. Now, another issue that arises for determination in these appeals is
whether the High Court, while remanding the matter to the Tribunal to ascertain
whether the shares of the amalgamating company were held as stock-in-trade or
as capital assets, was justified in recording a finding that, if such shares were
held as stock-in-trade, the allotment of shares of the amalgamated company
pursuant to a court-sanctioned scheme of amalgamation would give rise to
taxable business income in the hands of the appellants under Section 28 of the
I.T. Act.
11. These appeals, therefore, raise a substantial question concerning the
taxability of gains said to arise on amalgamation, where shares of the
amalgamating company held by the assessees as stock-in-trade, stand
substituted by shares of the amalgamated company. The core controversy is
whether such substitution, in and of itself, constitutes a realisation giving rise to
taxable business income under Section 28 and if so, the conditions under which
such accrual or receipt can be said to arise in the commercial sense, or whether
the incidence of taxation arises only upon the subsequent sale of the substituted
shares.
24
12. Before proceeding further, it is apposite to refer to the statutory
framework covering the issue involved in the present appeals. The relevant
provisions of the I.T. Act are extracted below, for better appreciation:
Section 2(1B) – Amalgamation
“‘amalgamation’, in relation to companies, means the merger of one or more
companies with another company or the merger of two or more companies to
form one company (the company or companies which so merge being referred to
as the amalgamating company or companies and the company with which they
merge or which is formed as a result of the merger, as the amalgamated
company) in such a manner that—
(i) all the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company by
virtue of the amalgamation;
(ii) all the liabilities of the amalgamating company or companies immediately
before the amalgamation become the liabilities of the amalgamated company by
virtue of the amalgamation;
(iii) shareholders holding not less than [three-fourths] in value of the shares in
the amalgamating company or companies (other than shares already held
therein immediately before the amalgamation by, or by a nominee for, the
amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by
another company pursuant to the purchase of such property by the other
company or as a result of the distribution of such property to the other company
after the winding up of the first-mentioned company.”
Section 2(14) – Capital asset
"capital asset" means –
(a) property of any kind held by an assessee, whether or not connected with his
business or profession,
(b) …
(c) …
but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b)],
consumable stores or raw materials held for the purposes of his business or
profession.
(j) …”
25
Section 2(47) – Transfer
“transfer”, in relation to a capital asset, includes,
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law
…”
Section 28 — Profits and gains of business or profession
“The following income shall be chargeable to income-tax under the head
"Profits and gains of business or profession",—
(i) the profits and gains of any business or profession which was carried on by
the assessee at any time during the previous year;
…
(iv) the value of any benefit or perquisite arising from business or the exercise of
a profession, whether—
(a) convertible into money or not; or
(b) in cash or in kind or partly in cash and partly in kind;]
…
(vi-a) the fair market value of inventory on the date on which it is converted into,
or treated as, a capital asset determined in the prescribed manner;
….”
Section 45(1) — Capital gains
“Any profits or gains arising from the transfer of a capital asset effected in the
previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E,
54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head
"Capital gains", and shall be deemed to be the income of the previous year in
which the transfer took place .”
Section 47 – Transactions not regarded as transfer
“Nothing contained in section 45 shall apply to the following transfers:
….
(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital
asset being a share or shares held by him in the amalgamating company, if—
(a) the transfer is made in consideration of the allotment to him of any share or
shares in the amalgamated company except where the shareholder itself is the
amalgamated company, and
(b) the amalgamated company is an Indian company;
….”
26
12.1. The above provisions make it clear that the scope of taxability on
amalgamation depends on the nature of the shares held. Section 2(14) excludes
stock-in-trade from the definition of a capital asset, while Section 2(47) defines
“transfer” only in relation to capital assets. Section 28 casts a wide net, taxing
the “profits and gains of business or profession”, including benefits or
perquisites arising from business, whether convertible into money or not, or in
cash or kind. Section 45 imposes capital gains tax only on the transfer of a
capital asset, subject to exceptions under Section 47, including the transfer of
shares in a scheme of amalgamation. Section 47(vii) specifically exempts from
capital gains tax any transfer by a shareholder of a capital asset being shares of
the amalgamating company, in consideration of the allotment of shares in the
amalgamated company, provided the amalgamated company is an Indian
company. There is a difference between a charging provision and an exemption
provision. A provision that enables the levy of tax on a particular transaction is
a charging provision. Only a transaction that is covered by a charging provision
is taxable. Only if the transaction is taxable can there be an exemption.
Therefore, the transfer of shares arising out of an order of amalgamation, even if
it is treated as a capital asset, is generally taxable but would be exempt from
taxation only if both the requirements under Section 47 (vii) are satisfied.
27
13. On behalf of the appellants, it was contended that no taxable event arises
at the stage of amalgamation. According to them, income can be said to arise
only upon the actual realisation or sale of the substituted shares, and not at the
point of their allotment in the amalgamated company. The scheme of the Act, it
was submitted, proceeds on the foundational premise that only real income is
taxable unless Parliament, by express words, enacts a contrary legal fiction.
Illustratively, Section 28(via) expressly deems the fair market value of
inventory converted into a capital asset to be taxable, even without the receipt of
money. This demonstrates that where the legislature intends to tax notional
accretions, it does so explicitly. In the absence of any analogous deeming
provision in respect of amalgamations, Section 28 cannot be judicially
expanded to cover hypothetical or unrealised gains.
14. Conversely, on behalf of the Revenue, it was submitted that Section 28
does not predicate the existence of a “transfer”, “sale” or “exchange”. What the
provision taxes are the “profits and gains of business or profession”, which may
be realised either in cash or in kind. Where stock-in-trade ceases to exist and is
substituted by another commodity or asset of ascertainable value, profit accrues.
According to the Revenue, the language of Section 28 is wide enough to
encompass all benefits or advantages arising from business activity, irrespective
of the form of realisation. Therefore, once the shares held as stock-in-trade in
the amalgamating company ceases to exist and are replaced by shares of the
28
amalgamated company of higher value, a business profit arises which is liable
to be taxed under Section 28.
Scope of Section 28
15. Before considering the rival submissions, it is necessary to delineate the
scope of Section 28. The provision contemplates the chargeability of the
“profits and gains of any business or profession” carried on by the assessees
during the relevant previous year. What is material, therefore, is that there must
be income arising from or in the course of business to be treated as profits or
gains. Such profit must be ascertainable with reasonable definiteness at the
relevant point of time, and the assessees must have either received it, or
acquired a vested right to receive and commercially realise it, even if the receipt
is in kind. It is not necessary for the benefit to be capable of being converted
into money. Significantly, Section 28 does not prescribe any precondition as to
the precise mode through which the profit must arise. The moment any income
arises out of business or profession, the provision becomes applicable. It does
not incorporate the definition of “transfer” under Section 2(47), unlike Section
45. It is sufficient if there is “income”, and the “transfer”, whether it is actual,
material, or immaterial, is not relevant. The two provisions thus operate in
distinct and independent fields. As already mentioned, the language of Section
28 – “the profits and gains of any business or profession” is deliberately wide,
i.e., the charge itself is cast in wide terms. It is well settled that charging
29
provisions, while construed strictly, are not to be read in an unduly narrow
manner when the language of the provision itself is wide.
15.1. In Mazagaon Dock Ltd v. Commissioner of Income Tax and Excess
19
Profits Tax , this Court held that the language of Section 42(2) of the 1922
Act, though strict in nature, could not be artificially restricted. Expressions such
as “business’ and “profits derived” were held to be of wide import in fiscal
statutes and must be construed broadly to give effect to the legislative intent.
The Court rejected the narrow interpretation urged by the assessee and clarified
that wide words used in charging provisions cannot be cut down merely to
avoid unusual or harsh consequences. Similarly, in Ujagar Prints Etc. v. Union
20
of India and others Etc. , the Court reiterated that wide statutory language
must receive its full amplitude and cannot be artificially confined. Further, in
Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company
21
and others , this Court clarified that “strict interpretation” does not connote a
literal or pedantic reading. Instead, legislative intent must be combined with the
words of the statute to arrive at a meaning that is neither too narrow nor too
broad.
15.2. Thus, business profits may accrue or be realised in diverse circumstances,
even in the absence of a conventional sale, transfer, or exchange in the strict
legal sense. To confine the operation of Section 28 to such modes would unduly
19
AIR 1958 SC 861
20
(1989) 3 SCC 488
21
(2018) 9 SCC 1 (5-Judge Bench)
30
restrict a provision that Parliament has intentionally couched in broad terms.
Illustratively, waiver of a trading liability has been treated as taxable business
income under Section 28, as held in Commissioner of Income Tax v. T.V.
22
Sundaram Iyengar & Sons Ltd. Again, in Commissioner of Income Tax v.
23
Meghalaya Steels Ltd , this Court noted that under Section 28, income from
cash assistance, by whatever name called, received or receivable by any person
against exports under any scheme of the Government of India, would be income
chargeable to income tax under the head “Profits and gains of business or
profession”. It was held that if cash assistance received or receivable against
exports schemes is included as income under the head “Profits and gains of
business or profession” subsidies which go to the reimbursement of cost in the
production of goods of a particular business would also have to be included
under the same head, and not under the head “Income from other sources”.
Likewise, in Commissioner of Income Tax, Delhi v. Woodward Governor
24
India P. Ltd , this Court held that foreign exchange fluctuations on trading
items directly affect the profit and loss account, thereby forming part of the
computation of business profits. Although that case concerned the deduction of
fluctuation losses, its reasoning underscores that real income under Section 28
may accrue without any conventional “transfer”.
22
(1996) 222 ITR 344 (SC)
23
(2016) 383 ITR 217 (SC)
24
(2009) 312 ITR 254 (SC)
31
15.3. It therefore emerges that Section 28 is a comprehensive charging
provision designed to bring within the tax net all real profits and gains arising in
the course of business, whether convertible into money or received in money or
in kind, and irrespective of whether such accrual or receipt of income is
accompanied by a legal transfer in the strict sense.
Amalgamation – Concept and Legal character
16. Amalgamation, in corporate law, signifies the statutory blending of two
or more undertakings into one. It is distinct from winding up: while the
transferor company ceases to exist as a separate corporate entity, its business,
assets, and liabilities are absorbed into and continue within the transferee. As
25
held in Saraswati Industrial Syndicate Ltd v. Commissioner of Income Tax ,
the transferor company ceases to exist, and the transferee emerges with a
blended corporate personality, inheriting all rights and liabilities. Stroud’s
Judicial Dictionary of Words and Phrases (9th Edn.) describes amalgamation as
the “welding or blending of two or more concerns into one”. Black’s Law
Dictionary (11th Edn.) similarly defines it as the “act of combining or uniting;
consolidation; amalgamation of two small companies to form a new
26
corporation”. In Walker’s Settlement, In re , amalgamation was explained as
the state of two companies being so joined as to form a third, or of one company
25
1990 Supp SCC 675
26
1935 Ch 567 (CA)
32
being absorbed into another [See: Religare Finvest Ltd. v. State (NCT of
27
Delhi ] .
16.1. Notably, the Companies Act, 2013 contains no express definition of
amalgamation. Instead, Sections 230 – 232 prescribe the procedure and spell out
the legal effect, namely, the extinguishment of the transferor’s corporate
identity and the vesting of its assets, rights, and obligations in the transferee.
Thus, amalgamation – ordinarily effected through a scheme of compromise or
arrangement sanctioned by the Court or Tribunal – is founded on agreement
between shareholders and creditors, but its legal effect is statutory: upon
sanction, all assets, rights, and liabilities of the transferor vest in the transferee
by operation of law. In other words, amalgamation is more than a mere
contractual transfer; it is a statutory process of substitution.
28
16.2. In Commissioner of Income Tax v. Mahagun Realtors (P) Ltd , this
Court explained that amalgamation is unlike liquidation. Though the corporate
shell of the transferor disappears, its business continues within the transferee,
and courts therefore identify the successor-in-interest upon whom rights and
obligations devolve. The relevant paragraphs are extracted below for proper
understanding:
“19. Amalgamation, thus, is unlike the winding up of a corporate entity. In the
case of amalgamation, the outer shell of the corporate entity is undoubtedly
destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate
venture continues — enfolded within the new or the existing transferee entity. In
other words, the business and the adventure lives on but within a new corporate
27
(2024) 1 SCC 797
28
(2022) 19 SCC 1
33
residence i.e. the transferee company. It is, therefore, essential to look beyond
the mere concept of destruction of corporate entity which brings to an end or
terminates any assessment proceedings. There are analogies in civil law and
procedure where upon amalgamation, the cause of action or the complaint does
not per se cease — depending of course, upon the structure and objective of
enactment. Broadly, the quest of legal systems and courts has been to locate if a
successor or representative exists in relation to the particular cause or action,
upon whom the assets might have devolved or upon whom the liability in the
event it is adjudicated, would fall.”
“21. In Saraswati Syndicate [Saraswati Industrial Syndicate Ltd. v. CIT, 1990
Supp SCC 675], the facts were that after amalgamation, the transferee company
claimed exemption from tax, of a sum which had been allowed as a trading
liability, on accrual basis, in the hands of the transferee company which had
ceased to exist. The Revenue disallowed that claim; that view was upheld. This
Court stated that : (SCC pp. 679-81, paras 5-6)
“5. … In amalgamation two or more companies are fused into one by
merger or by taking over by another. Reconstruction or “amalgamation”
has no precise legal meaning. The amalgamation is a blending of two or
more existing undertakings into one undertaking, the shareholders of
each blending company become substantially the shareholders in the
company which is to carry on the blended undertakings. There may be
amalgamation either by the transfer of two or more undertakings to a
new company, or by the transfer of one or more undertakings to an
existing company. Strictly “amalgamation” does not cover the mere
acquisition by a company of the share capital of other company which
remains in existence and continues its undertaking but the context in
which the term is used may show that it is intended to include such an
acquisition. See: Halsbury's Laws of England, 4th Edn., Vol. 7, para
1539. Two companies may join to form a new company, but there may be
absorption or blending of one by the other, both amount to
amalgamation. When two companies are merged and are so joined, as to
form a third company or one is absorbed into one or blended with
another, the amalgamating company loses its entity.
6. In General Radio & Appliances Co. Ltd. v. M.A. Khader [General
Radio & Appliances Co. Ltd. v. M.A. Khader, (1986) 2 SCC 656], the
effect of amalgamation of two companies was considered. M/s General
Radio and Appliances Co. Ltd. was tenant of a premises under an
agreement providing that the tenant shall not sublet the premises or any
portion thereof to anyone without the consent of the landlord. M/s
General Radio and Appliances Co. Ltd. was amalgamated with M/s
National Ekco Radio and Engineering Co. Ltd. under a scheme of
amalgamation and order of the High Court under Sections 391 and 394
34
of Companies Act, 1956. Under the amalgamation scheme, the transferee
company, namely, M/s National Ekco Radio and Engineering company
had acquired all the interest, rights including leasehold and tenancy
rights of the transferor company and the same vested in the transferee
company. Pursuant to the amalgamation scheme the transferee company
continued to occupy the premises which had been let out to the transferor
company. The landlord initiated proceedings for the eviction on the
ground of unauthorised subletting of the premises by the transferor
company. The transferee company set up a defence that by amalgamation
of the two companies under the order of the Bombay High Court all
interest, rights including leasehold and tenancy rights held by the
transferor company blended with the transferee company, therefore the
transferee company was legal tenant and there was no question of any
subletting. The Rent Controller and the High Court both decreed the
landlord's suit. This Court in appeal held that under the order of
amalgamation made on the basis of the High Court's order, the
transferor company ceased to be in existence in the eye of the law and it
effaced itself for all practical purposes. This decision lays down that
after the amalgamation of the two companies the transferor company
ceased to have any entity and the amalgamated company acquired a new
status and it was not possible to treat the two companies as partners or
jointly liable in respect of their liabilities and assets. In the instant case
the Tribunal rightly held that the appellant company was a separate
entity and a different assessee, therefore, the allowance made to Indian
Sugar company, which was a different assessee, could not be held to be
the income of the amalgamated company for purposes of Section 41(1) of
the Act. The High Court was in error in holding that even after
amalgamation of two companies, the transferor company did not become
non-existent instead it continued its entity in a blended form with the
appellant company. The High Court's view that on amalgamation there is
no complete destruction of corporate personality of the transferor
company instead there is a blending of the corporate personality of one
with another corporate body and it continues as such with the other is
not sustainable in law. The true effect and character of the amalgamation
largely depends on the terms of the scheme of merger. But there cannot
be any doubt that when two companies amalgamate and merge into one
the transferor company loses its entity as it ceases to have its business.
However, their respective rights or liabilities are determined under the
scheme of amalgamation but the corporate entity of the transferor
company ceases to exist with effect from the date the amalgamation is
made effective.”
“30. In Bhagwan Dass Chopra v. United Bank of India [Bhagwan Dass
Chopra v. United Bank of India, 1987 Supp SCC 536] it was held that in every
35
case of transfer, devolution, merger or scheme of amalgamation, in which rights
and liabilities of one company are transferred or devolved upon another
company, the successor-in-interest becomes entitled to the liabilities and assets
of the transferor company subject to the terms and conditions of contract of
transfer or merger, as it were. Later, in Singer India Ltd. v. Chander Mohan
Chadha [(2004) 7 SCC 1] this Court held as follows: (SCC p. 10, para 8)
“8. … there can be no doubt that when two companies amalgamate and
merge into one, the transferor company loses its identity as it ceases to
have its business. However, their respective rights and liabilities are
determined under the scheme of amalgamation, but the corporate identity
of the transferor company ceases to exist with effect from the date the
amalgamation is made effective.”
16.3. At this juncture, it must be noted that the High Court relied on Hindustan
Lever , which, though not in the context of taxation, observed that amalgamation
bears all the “trappings of a sale”. We shall, however, proceed to analyse
Section 28 in the context of amalgamation since the test under Section 28 is
somewhat different: it does not hinge on whether there is a sale, transfer, or
exchange in the strict legal sense, as already discussed. At the same time, it
cannot be overlooked that this Court in Grace Collis , overruling Vania Silk
Mills , held that amalgamation, for the purposes of capital gains under Section
45, does involve a “transfer” of shares. Even if that ratio was rendered in the
context of capital gains, once this Court has recognized that amalgamation
entails a transfer, that conclusion cannot be ignored while considering the ambit
of Section 28.
16.4. The real question, therefore, is whether an amalgamation – though, in
company law, it operates as a statutory substitution of rights – nonetheless gives
36
rise to taxable business profits under Section 28 of the I.T. Act. That enquiry is
not concluded merely by characterising the event as a “transfer”. It requires a
deeper examination of whether the substitution of shares 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.
Whether there is receipt or accrual of income upon amalgamation
17. In the context of amalgamation, what transpires is essentially a statutory
substitution of one form of holding for another. The shareholder’s interest in the
transferor company is replaced by a corresponding interest in the transferee
company. For the purposes of Section 28, the first test is whether such
substitution constitutes either a receipt or an accrual of income.
17.1. It is settled law that income yielding business profits may be realised not
only in money but also in kind. Thus, where an assessee receives shares of the
amalgamated company in place of its shares held as trading stock, there is, in
form, a receipt of consideration in kind. Though such amalgamations receive the
sanction of the Court/Tribunal to be effectuated, they are preceded by decisions
taken in meetings of shareholders. In such meetings, valuation reports are
placed before the shareholders, and for the amalgamation to be approved, 90%
of the shareholders must vote in favour of the amalgamation. The report
contains details of the share exchange ratio. Though the value of each share is
37
determined at that stage, it is not tradable, as no right is vested at that point.
Ordinarily, such receipt arises only upon the actual allotment of shares, since
until that point no asset is placed in the hands of the assessee. It cannot,
however, be ruled out that in certain cases, the terms of the sanctioned scheme
may themselves create, from an earlier date, a vested and imminent enforceable
right to allotment; in such situations, one may speak of “accrual”. The general
position, nevertheless, is that what the law recognises in amalgamation is the
receipt of shares in substitution of trading assets.
Commercial realisability
18. Coming to the next test, it must be underscored that mere receipt of
shares does not suffice to attract Section 28; commercial realisability is also
required when income is received in kind. Moreover, in Kanchanganga Sea
29
Foods Ltd v. Commissioner of Income Tax , it was observed that the recipient
of income must have control over the income received, emphasising that mere
receipt in kind is not enough.
18.1. It must also be clarified at this stage that amalgamation, in strict legal
terms, does not amount to an “exchange.” In Rasiklal Maneklal , this Court held
that the allotment of shares in the amalgamated company under a court-
sanctioned scheme is not the result of a bilateral bargain between two parties,
i.e., there is no mutual or reciprocal transfer of ownership. Since the
29
(2010) 11 SCC 144
38
amalgamating company itself ceases to exist, the element of mutual transfer that
characterises an exchange is absent. Therefore, amalgamation, as held in other
decisions, is to be understood as a statutory substitution of holdings, and not as
an “exchange” in the legal sense.
18.2. Thus, the jurisprudence discloses three related strands: first, cases such as
Orient Trading , relying on English decision ( Royal Insurance Co. Ltd. v.
Stephen ), which will be discussed later, emphasise that receipt of an asset of
definite money’s worth in substitution for another may amount to commercial
realisation attracting Section 28; second, the decision in Rasiklal Maneklal ,
which clarifies that allotment on amalgamation is not an “exchange”, along with
other decisions holding it to be a statutory substitution; and third, the ruling in
Grace Collis , which makes it clear that, notwithstanding its statutory character,
amalgamation does involve a “transfer” within the meaning of the Income-tax
Act.
18.3. Reconciling these strands, the true test under Section 28, as already noted,
is not the legal label of “exchange” or “transfer”, but whether the assessee, in
consequence of the amalgamation and thereby of its business, has obtained a
profit that is real and presently realisable. The well-known real-income
principle, as emphasised in E.D. Sassoon and Shoorji Vallabhdas , must be
applied. Therefore, the enquiry for the Court is whether, as a result of the
amalgamation, the assessee has in fact realised a profit in the commercial sense.
This assessment may turn on whether:
39
(A) The old stock-in-trade has ceased to exist in the assessee’s books;
(B) The shares received in the amalgamated company possess a definite and
ascertainable value; and
(C) The assessee, immediately upon allotment, is in a position to dispose of
such shares and realise money.
18.4. If these conditions are satisfied, the substitution bears the character of a
commercial realisation and the profit may be taxed under Section 28. Where,
however, the allotment of shares is merely a statutory substitution mandated by
the scheme of amalgamation, without yielding an immediately realisable
benefit, no income can be said to accrue or be received at that stage, and
taxability arises only upon the eventual sale of the shares. For instance:
(A) If a shareholder of Company A receives shares of Company B pursuant to a
court-sanctioned amalgamation, but such shares are subject to a statutory lock-
in period during which they cannot be sold in the market, the allotment cannot
be equated with a commercial realisation. It represents only a replacement of
one form of holding by another, without any immediate gain capable of
monetisation.
(B) Similarly, where the amalgamated company is closely held and its shares
are not quoted on any recognized stock exchange, the mere allotment of such
shares does not generate a realisable profit, since no open market exists to
ascribe a fair disposal value.
40
18.5. These illustrations, which are not exhaustive, underline that unless the
assessee is, by virtue of the substitution, placed in possession of an asset which
is freely tradable and of an ascertainable market value, the principle of real
income bars taxation at the stage of amalgamation. Thus, the substitution of
shares upon amalgamation does not, by itself, give rise to taxable income under
Section 28. What must be established is that the transaction has the attributes of
a commercial realisation resulting in a real and presently disposable advantage.
Where this test is satisfied, taxability may arise at the stage of substitution.
Otherwise, the accrual or receipt of income is deferred until actual sale.
18.6. In other words, as noted earlier, the governing test under Section 28 is not
the presence of a sale, exchange, or extinguishment of rights in the technical
sense, but whether the assessee has, in consequence of business operations,
come into possession of a real and presently realisable commercial benefit. This
may take the form of money directly received, or assets in kind capable of being
immediately disposed of for money’s worth. The shares, therefore, must be
readily available for trading to be treated as stock-in-trade.
19. We may now refer to the judgment in Orient Trading. Although it dealt
with an exchange, the observations therein as to the nature of “realisation” are
of general application. The Court, relying on English decision ( Royal Insurance
Co. Ltd. v. Stephen ), explained that a realisation takes place when the old
investment ceases to figure in the affairs of the company and its worth –
41
whether by way of profit or loss – can be determined with finality in monetary
terms. At that point, the old investment is regarded as closed and a new
investment is treated as having commenced. The emphasis is that realisation is
not merely a matter of accounting entries, but arises where the former asset is
replaced by a new and distinct asset of ascertainable value, thereby crystallising
the economic outcome of the earlier holding. Lord Trayner, in Californian
30
Copper Syndicate Ltd v. Inland Revenue observed that “no doubt here the
price took the form of fully paid shares in another company, but, if there can be
no realised profit except when that is paid in cash, the shares were realisable and
could have been turned into cash”. On this reasoning, even the exercise of an
option, such as the choice to accept shares of the amalgamated company in lieu
of the old holding, may amount to a realisation of the old asset, subject to the
other conditions being satisfied, as discussed. The relevant portions of the
judgment in Orient Trading , are as under:
“8. The decision of Rowlatt, J. in Royal Insurance Co. Ltd. v. Stephen [(1928)
14 TC 22 : 44 TLR 630] was approved in the said case. In the case of Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] the appellant-
company had, under the Railways Act, 1921, to accept new stocks in the
amalgamated companies in exchange for the stock held in the companies which
were absorbed and which resulted in loss to the appellant-company. The claim
of the appellant-company for deduction of such loss was upheld by Rowlatt, J.
who held: (TC pp. 28-29)
“At the bottom of this principle of waiting for a realisation, I think there is this
idea; while an investment is going up or down for income tax purposes the
company cannot take any notice of fluctuations, but it has to take notice of
them when all that state of affairs comes to an end, when that investment is
wound up I will say — ‘wound up’ is an unfortunate expression perhaps and I
will say when an investment ceases to figure in the company's affairs, when it
30
5 TC 159
42
is known exactly what the holding of that investment has meant, plus or minus
to the company, and then the company starts so far as that portion of its
resources is concerned with a new investment. Then one knows where one is
and it is no longer a question of paper, it is a question of fact and that is a
realisation. I think that is the point of view from which it ought to be looked
at, and looking at it from that point of view the company is right. It has done
with the investments in the companies. They have disappeared. It is known
exactly in money. It is known now exactly what their holding of them has
meant to the company. They will never more go up or down. What will go up
or down now are the different shares in the new companies, altogether
different investments really, and therefore I think that the old investment is
closed and realised and a new investment is started.”
9. Similarly in Californian Copper Syndicate Ltd. v. Inland Revenue (Harris,
Surveyor of Taxes) [5 TC 159], decided by the Court of Exchequer in
Scotland, Lord Trayner has said: (TC p. 167)
“But it was said that the profit — if it was profit — was not realised profit and,
therefore, not taxable. I think the profit was realised. A profit is realised when
the seller gets the price he had bargained for. No doubt here the price took the
form of fully paid shares in another company, but, if there can be no realised
profit, except when that is paid in cash, the shares were realisable and could
have been turned into cash, if the appellants had been pleased to do so . I
cannot think that income tax is due or not according to the manner in which the
person making the profit pleases to deal with it.”
11. The subsequent decision of the House of Lords in British South Africa
Co. v. Varty (Inspector of Taxes) [1966 AC 381 : (1965) 2 All ER 395 : (1965) 3
WLR 47] does not lend assistance to the submission of Shri Puri. In that case the
appellant-company in 1953 had lent 200,000 pounds to a gold mining company
and in return had received, inter alia, an option to subscribe for 100,000 shares
in the mining company at 1 pound per share, the value of the shares then being
19 Sh. 6 d a share. In 1954 when the value of the shares had gone up to 43 Sh. 6
d a share the appellant exercised the option and obtained shares worth 217,500
pounds for which they paid 100,000 pounds. The company was assessed for
income tax on a profit of 11,75,000 pounds. On behalf of the company it was
urged that upon the exercise of the option there was a realisation because the
option which was a “trading asset” or an item of “stock-in-trade” was
exchanged for or was replaced by a different item of stock-in-trade which had a
value in money's worth. The said contention was rejected by the House of Lords
(Lord Guest, dissenting). It was held that the appellant-company never, in fact,
realised their option in the sense of passing it on for a consideration to someone
else and that there was neither a sale of the option or its exchange for something
else and that when the company exercised their option or used or availed
themselves of their rights they did not make the end of the trading transaction
43
and that there was merely the end of the beginning of a trading transaction. It
was emphasised that there was no element of exchange as there was in Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and
in Westminster Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1 ITR 65 : 1932
All ER Rep 917, HL]. (See Lord Morris of Borth-Y-Gest at pp. 394-395.) Lord
Guest, in his dissenting judgment, however felt that the option was a trading
asset of the appellant-company and, applying the principles laid down in Royal
Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and Westminster
Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1 ITR 65 : 1932 All ER Rep 917,
HL], held that the exercise of option amounted to a realisation of the option
which resulted in a trading profit of 11,75,000 pounds. This would show that the
principles laid down in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 :
44 TLR 630] and Westminster Bank Ltd. v. Osler (Inspector of Taxes) [(1933) 1
ITR 65 : 1932 All ER Rep 917, HL] have been affirmed by all the Law Lords and
the difference amongst them was only as regards the applicability of the said
principles to the facts of that case.
13. Having regard to the principles laid down in the decisions aforementioned,
it must be held that the High Court has rightly taken the view that as a result of
their having taken the shares in the second company in exchange of the shares of
the first company the assessee had made realisation of the value of the shares of
the first company and the difference between the price of the shares of the first
company and the second company on the date of such exchange, i.e., Rs
4,06,000, has to be treated as a profit of the assessee and has been rightly
assessed as income of the assessee. We, therefore, do not find any merit in the
appeal and the same is accordingly dismissed, but in the circumstances with no
order as to costs.”
20. The Privy Council in Raja Raghunandan Prasad Singh v.
31
Commissioner of Income Tax , recognised that income may be received in
kind as well as in cash, and that the equivalent of cash may constitute income,
but stressed that what is received must be “money’s worth”. It was clearly
observed that there must be an actually realised or realisable profit or loss. The
following passages are pertinent in this regard:
31
(1933) 1 ITR 113 : 1933 SCC OnLine PC 8
44
“Their Lordships fully recognise that income may be received in kind as well
as in cash and that the receipt of an equivalent of cash may be a receipt of
income . In the case of Californian Copper Syndicate v. Harris [(1905) 6 F.
894 : 5 Tax. Cas. 159.], a company which dealt in mining properties sold
certain property for fully-paid shares in another company and was held to be
liable to income-tax on the profit made on the transaction although no cash
passed, but this was on the ground that the shares taken in exchange were
realisable and were thus money's worth and the equivalent of cash. In the case
of Royal Insurance Company, Ltd. v. Stephen [(1928) 44 T.L.R. 630 : 14 Tax.
Cas. 22.], an insurance company, which admitted that any profit which it made
on the realisation of investments was liable to tax, effected an exchange of
securities in pursuance of a railway amalgamation scheme. The new stocks
received in place of the surrendered stocks had at the date of the exchange a
definite market value which was less than the original cost to the company of the
surrendered stocks. A claim was made by the company in computing its profits
to deduct the difference loss sustained by it. For the Crown it was contended
that there has been no realisation of investments, but merely an exchange of one
set of investments for another. The company's claim was upheld by Rowlatt, J.
on the ground that it had in substance realised its former holdings and received
for them money's worth of, a definite amount. The loss was thus a realised loss
susceptible of exact estimation in money. The transaction was on “a money
basis.” Reference may also be made to the recent case in the House of Lords
of Westminster Bank, Ltd. v. Osler (15th November, 1932) [(1933) A.C. 139.],
where the bank surrendered certain holdings of National War Bonds in
exchange for other Government securities and the Crown claimed tax oil the
excess value of the substituted over the original securities. The question was
whether these transactions were the equivalent of a realisation of the original
holdings, and it was held that they were. “The exchange effected in the present
case,” said Lord Buckmaster, “was in fact the exact equivalent of what would
have I taken place had instructions been given to sell the original stock and
invest the proceeds in the new security.” The bank had thus in effect realised its
profit, for it had deceived it in money's worth of a I definitely ascertained
amount. From these cases it is plain that the essence of the matter is that there
must be an actually realised or realisable profit or loss.
Applying this principle to the assessees' transaction in 1904, their Lordships are
of opinion that there was in the circumstances no realisation of the principal
and interest of the original mortgage of 1894 and that when the assessees
received, the new mortgage for Rs. 7,33,135, which included the principal and
interest of the original mortgage, they did not thereby receive payment or the
equivalent of payment of the principal and interest of the original mortgage. No
doubt the grantors of the new mortgage were not identical with the grantor of
the original mortgage and the property mortgaged was greater in extent, but the
substitution effected cannot in any real sense, be described as the equivalent of a
45
realisation of the original mortgage, principal and interest. What happened was
that the assessees received a new and substituted security for an existing debt.
To give security for a debt is not to pay a debt. If the assessees had received
payment in kind of the amount outstanding on the original mortgage, in the
shape, say, of realisable shares or bonds, the case would have been different,
but they merely received further and better security for their debt. It is, in their
Lordships' view, quite immaterial that the assessees discharged the original
mortgage and all liability under it, for that was merely an incident in the
transaction whereby the new security was substituted for the old. Their
Lordships accordingly hold that the assessees did not by virtue of the
transaction of 1904 receive payment of the arrears of interest amounting to
Rs.2,33,135 then outstanding on the mortgage of 1894; that the assessees were
not liable to be taxed on this sum as being income received when the new
mortgage was granted; and that this sum of arrears of interest (though after
1904 secured by the new mortgage) continued to retain its character and remain
due to the assessees down to the time of the judicial sales of November, 1924,
and January, 1925. In so holding their Lordships find themselves in agreement
in result with the Commissioner and the High Court.”
32
21. In Raja Mohan Raja Bahadur v. Commissioner of Income Tax , this
Court held that where commercial assets are received in satisfaction of an
obligation, income embedded in such assets is deemed to be received when title
passes, irrespective of actual sale. The Court again took note of the observations
made in the Californian Copper Syndicate case. The following paragraphs
from the decision are apposite:
“4. Under Section 4 of the Income Tax Act, 1922, the total income of any
previous year of a resident assessee includes all income, profits and gains from
whatever sources derived which are received or are deemed to be received in
the taxable territories in such year by or on behalf of such person, or accrue or
arise or are deemed to accrue or arise to him in the taxable territories during
such year, or accrue or arise to him without the taxable territories during such
year, or having accrued or arisen to him without the taxable territories before
the beginning of such year and after the 1st day of April, 1933, are brought into
or received in the taxable territories by him during such year. The Act does not
contain much guidance as to cases in which tax is to be levied on income
32
(1967) 66 ITR 378
46
received, and cases in which tax is to be levied on income accrued or arisen.
Section 13 however requires that income, profits and gains for the purposes of
Sections 10 and 12 shall be computed in accordance with the method of
accounting regularly employed by the assessee. If accounts are maintained
according to the mercantile system, whenever the right to receive money in the
course of a trading transaction accrues or arises, even though income is not
realised, income embedded in the receipt is deemed to arise or accrue. Where
the accounts are maintained on cash basis receipt of money or money's worth
and not the accrual of the right to receive is the determining factor. Therefore,
if commercial assets are received by a trade maintaining accounts on cash
basis in satisfaction of an obligation, income which is embedded in the value
of the assets is deemed to be received : the receipt of income is not deferred till
the asset is realized in terms of cash or money. It makes no difference whether
the receipt of assets is in pursuance of an agreement or that the trader is
compelled by law to accept the assets from the debtor. Once title of the trader
to an asset received is complete, whether by a consensual arrangement or by
operation of law, he receives the income embedded in the value of the asset .
In Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of
Taxes) [5 TC 159] Lord Trayner in dealing with a case of assessment to income
tax of a Company formed for the purpose, inter alia, of acquiring and reselling
mining property resold the whole of its assets to a second Company and
received payment in fully paid shares of the purchasing Company, observed:
“A profit is realised when the seller gets the price he has bargained for.
No doubt here the price took the form of fully paid shares in another
company, but, if there can be no realised profit, except when that is paid
in cash, the shares were realisable and could have been turned into cash,
if the appellants had been pleased to do so. I cannot think that Income
tax is due or not according to the manner in which the person making the
profit pleases to deal with it.”
Counsel for the appellant contended that the bonds were intended to renew the
promise to pay the amount due by the debtor through his agent, and by the
renewal of the promise even if the original liability was extinguished and a fresh
liability was substituted, no income was received by the appellant.
5. We are unable to agree with that contention. The Government of the State
undertook to pay the amount of the bonds in satisfaction of the liability of the
debtor. The liability of the original debtor was extinguished and a fresh
obligation was undertaken by the State Government in substitution of the
original liability. The Government had the right to recover the amount due
under the bonds from the landholder, but on that account the Government did
not become the agent of the landholder for payment of his debts. Even if the
Government was unable to recover the money from the landholder, the liability
undertaken by the Government under the bond remained unimpaired. The bond
47
was a security for payment of the debt which completely replaced the original
liability of the debtor.”
22. This Court in Commissioner of Income Tax v. Ashokbhai
33
Chimanbhai , reiterated that profits do not accrue from day to day but are
ascertained by a comparison of assets at two points in time. Further, the test of
accrual is whether the person entitled thereto has a right to claim the profits. The
following paragraphs are relevant in this regard:
“6. Under the Income Tax Act, income is taxable when it accrues, arises or is
received, or when it is by fixation deemed to accrue, arise or is deemed to be
received. Receipt is not the only test of chargeability to tax; if income accrues or
arises it may become liable to tax. For the purpose of this case it is unnecessary
to dilate upon the distinction between income “accruing” and “arising”. But
there is no doubt that the two words are used to contradistinguish the word
“receive”. Income is said to be received when it reaches the assessee : when the
right to receive the income becomes vested in the assessee, it is said to accrue or
arise. Fletcher Moulton, L.J., in In re The Spanish Prospecting Co. Ltd. [(1911)
1 Ch 92] observed at p. 98:
“The word ‘profit’ has a well-defined legal meaning and this *
meaning coincides with the fundamental conception of profits in general
parlance; although in mercantile phraseology the word may at times
bear meanings indicated by the special context which deviate in some
respects from this fundamental signification. ‘Profit’ implies a
comparison between the state of a business at two specific dates usually
separated by an interval of a year. The fundamental meaning is the
amount of gain made by the business during the year. This can only be
ascertained by a comparison of the assets at the two dates.”
In the gross receipts of a business day after day or from transaction to
transaction lie embedded or dormant profit or loss: on such dormant profit or
loss undoubtedly taxable profits, if any, of the business will be computed. But
dormant profits cannot be equated with profits charged to tax under Sections 3
& 4 of the Income Tax Act. The concept of accrual of profits of a business
involves the determination by the method of accounting at the end of the
accounting year or any shorter period determined by law. If profits accrue to the
assessee directly from the business the question whether they accrue de die, in
33
(1965) 56 ITR 42
48
diem or at the close of the year of account has at best an academic significance,
but when upon ascertainment of profits the right of a person to a share therein is
determined, the question assumes practical importance, for it is only on the right
to receive profits or income, profits accrue to that person. If there is no right, no
profits will be deemed to have accrued. This principle was applied by this Court
in E.D. Sassoon & Co. Ltd. v. CIT [26 ITR 27]. The material facts bearing on
that principle were these: E.D. Sassoon & Co. Ltd, — called “Sassoons” —
were the managing agents of a Company which may be called ‘the United Mills’
and were entitled to receive a percentage of annual net profits of the Company
as their remuneration. On December 1, 1943 Sassoons assigned to Messrs
Agarwal & Co. their office as managing agents and all their rights and benefits
under the managing agency agreement. Accounts of the managing agency
commission payable to the managing agents for the calendar year 1943 were
made up in 1944 and commission for the whole year was paid to Messrs
Agarwal & Co. thereafter. In the course of assessment proceeding of Sassoons it
was debated whether in respect of commission earned by the managing agency,
tax was payable on the entirety of the commission by Messrs Agarwal & Co. or
by Sassoons or it was liable to be apportioned between Messrs Agarwal & Co.
and Sassoons. This Court held (Jagannadhadas, J. dissenting) that Messrs
Agarwal & Co. alone were liable to pay tax on the whole of the remuneration
received under the contract of service between the United Mills, because the
managing agency was entire and indivisible, and the remuneration or
commission fell due to the managing agents, only on completion of a definite
period of service and at stated periods it being a condition of recovery of wages
or salary that the service or duty should be completely performed. Remuneration
as managing agents constituted according to the Court “a debt” only at the end
of each such period of service and no remuneration or commission was payable
to the managing agents for broken periods. After referring to the observations of
Fletcher Moulton, L.J. in the Spanish Prospecting Co. Ltd. case [(1911) 1 Ch
92] (already set out), Bhagwati, J., observed that “it would be absurd to suggest
that the profits of the company could accrue from day to day or even from month
to month”. The working of the company from day to day could certainly not
indicate any profit or loss, even the working of the company from month to
month could not be taken as a reliable guide for this purpose. If the profit or loss
has to be ascertained by a comparison of the assets at two stated points, the
most businesslike way would be to do so at stated intervals of one year and that
would be a reasonable period to be adopted for the purpose. In the case of large
business concerns the working of the company during a particular month may
show profits and the working in another month may show loss. The business
during the earlier part of the year may show profit or loss and in the later part
of the year may show loss or profit which would go to counterbalance the profit
or loss as the case may be in the earlier part of the year. It would therefore be
reasonable to determine the profit or loss as the case may be at the end of every
year so that on such calculation of net profits the managing agents may be paid
49
their remuneration or commission at the percentage stipulated in the managing
agency agreement and the shareholders also be paid dividends out of the net
profits of the Company.
7. Counsel for the Commissioner submitted that the judgment in E.D. Sassoon
Co. Ltd. case [26 ITR 27] proceeded upon the special character of a managing
agency agreement and did not purport to lay down a general rule that accrual of
income depends on quantification, or that right to payment of an ascertainable
amount does not arise till accounts are made. Counsel also submitted that in
sale transactions of a trading venture profits accrue to the trader from
transaction to transaction and are embedded in each transaction carried on by
the trader, and the charge imposed by Section 4(1)(a) is not deferred till
settlement of accounts. On that premise, counsel said, that profits dormant or
embedded in the transactions carried on by Messrs Amrit Chemicals accrued
from transaction to transaction till November 12, 1955 and properly belonged to
the assessee and were liable to be taxed in the hands of the assessee
notwithstanding any subsequent disposition of those profits by the assessee. In
support of his contention counsel relied upon Turner Morrison & Co.
Ltd. v. CIT [23 ITR 152] — a case decided by this Court. In that case an Indian
Company received commission on sales effected in India of goods received from
a foreign company. The Indian Company handled the cargo arriving at Calcutta
and made disbursements in connection therewith, collected and after deducting
expenses including their commission remitted the balance to the foreign
principal. It was held by this Court that the income, profits and gains derived
from sale of goods by the Indian Company in British India were assessable to
tax under Section 4(1)(a) as income, profits and gains received in the taxable
territories by the Company on behalf of the foreign principal. The Court in that
case observed at p. 160:
“There can therefore, be no question that when the gross sale proceeds
were received by the Agents in India they necessarily received whatever
income, profits and gains were lying dormant or hidden or otherwise
embedded in them. Of course, if on the taking of accounts it be found that
there was no profit during the year then the question of receipt of
income, profits and gains would not arise but if there were income,
profits and gains, then the proportionate part thereof attributable to the
sale proceeds received by the Agents in India were income, profits and
gains received by them at the moment the gross sale proceeds were
received by them in India and that being the position the provisions of
Section 4(1)(a) were immediately attracted and the income profits and
gains so received became chargeable to tax under Section 3 of the Act.”
8. These observations were, it may be noticed, made in rejecting the contention
raised by counsel for the taxpayer that in the gross sale proceeds received by
him in India, there was no income at all. Counsel for the Indian Company said
50
that the gross sale proceeds were merely credit items in the account and that
several amounts were to be debited in the same account and if there remained
any credit balance, such balance alone could be regarded as stamped with the
formal impress of income capable of being dealt with as such : income could
therefore be said to have been received only at that stage. The Court did
propound that when gross sale proceeds are received in which is embedded
income, that income will enter the ultimate computation of the total profits
assessable to tax. But that is not to say that the profits accrue or arise to a
trader from day to day or from transaction to transaction. The observation that
to the income, profits and gains embedded in the gross receipts Section 4(1) was
immediately attracted also does not warrant the inference that the Court
intended to lay down that profits accrue to a taxpayer before the right thereto
has come into existence. “Profits” as pointed out in E.D. Sassoon Co. Ltd.
case [26 ITR 27] do not accrue from day to day or even from month to month
and have to be ascertained by a comparison of assets at two stated points. The
Court also pointed out in that case that the test for ascertaining whether
profits have accrued or arisen is whether the person who is entitled thereto has
a right to claim the profits.”
23. Accordingly, where under a scheme of amalgamation the shareholder
merely receives, in substitution, shares of the amalgamated company in lieu of
the shares held in the amalgamating company, there is no real or completed
profit capable of being taxed under Section 28, unless it is shown that the shares
are held as stock-in-trade and are readily available for realisation. In the absence
thereof, what takes place is only a statutory vesting and substitution of one form
of holding for another. Unless and until the substituted shares are commercially
realisable – whether saleable, tradeable, or by whatever other mode of
disposition so described – so as to yield real income, no taxable event can be
said to arise.
51
Definite valuation
24. The next test, which is well settled, is that profit must be capable of
definite valuation, so that the real gain or loss stands crystallized. Judicial
decisions have consistently underscored that “profits”, in the commercial sense,
are ascertainable only when the old position is closed and the new position is
determined in terms of money’s worth – whether by sale, transfer, exchange, or
statutory substitution. This principle is an application of the doctrine of real
income and applies with equal force to stock-in-trade as it does to other forms
of commercial receipts. Therefore, the test is not satisfied merely by the receipt
of realisable shares in substitution of earlier holdings; such shares must also be
capable of quantification.
24.1. In Commissioner of Income Tax v. Woodward Governor India (P)
34
Ltd . , this Court reaffirmed the settled principles of commercial accounting,
particularly that profits can be ascertained only by a comparison of assets at two
defined points in time, and that unrealised gains embedded in stock-in-trade are
not brought to charge unless and until they are crystallised in terms of money’s
worth. The following paragraphs are apposite:
“28. One more aspect needs to be highlighted. Under Section 28(i), one needs to
decide the profits and gains of any business which is carried on by the assessee
during the previous year. Therefore, one has to take into account stock-in-trade
for determination of profits. The 1961 Act makes no provision with regard to
valuation of stock. But the ordinary principle of commercial accounting requires
that in the P&L account the value of the stock-in-trade at the beginning and at
the end of the year should be entered at cost or market price, whichever is the
34
(2009) 13 SCC 1
52
lower. This is how business profits arising during the year need to be computed.
This is one more reason for reading Section 37(1) with Section 145.
29. For valuing the closing stock at the end of a particular year, the value
prevailing on the last date is relevant. This is because profits/loss is embedded
in the closing stock. While anticipated loss is taken into account, anticipated
profit in the shape of appreciated value of the closing stock is not brought into
account, as no prudent trader would care to show increased profits before
actual realisation. This is the theory underlying the rule that closing stock is to
be valued at cost or market price, whichever is the lower. As profits for income
tax purposes are to be computed in accordance with ordinary principles of
commercial accounting, unless, such principles stand superseded or modified by
legislative enactments, unrealised profits in the shape of appreciated value of
goods remaining unsold at the end of the accounting year and carried over to
the following year's account in a continuing business are not brought to the
charge as a matter of practice, though, as stated above, loss due to fall in the
price below cost is allowed even though such loss has not been realised actually.
30. At this stage, we need to emphasise once again that the above system of
commercial accounting can be superseded or modified by legislative enactment.
This is where Section 145(2) comes into play. Under that section, the Central
Government is empowered to notify from time to time the accounting standards
to be followed by any class of assessees or in respect of any class of income.
Accordingly, under Section 209 of the Companies Act, mercantile system of
accounting is made mandatory for companies. In other words, accounting
standard which is continuously adopted by an assessee can be superseded or
modified by legislative intervention. However, but for such intervention or in
cases falling under Section 145(3), the method of accounting undertaken by the
assessee continuously is supreme.
…….
33. It is well established, that, on general principles of commercial accounting,
in the P&L account, the values of the stock-in-trade at the beginning and at the
end of the accounting year should be entered at cost or market value, whichever
is lower—the market value being ascertained as on the last date of the
accounting year and not as on any intermediate date between the
commencement and the closing of the year, failing which it would not be
possible to ascertain the true and correct state of affairs. No gain or profit can
arise until a balance is struck between the cost of acquisition and the proceeds
of sale. The word “profit” implies a comparison between the state of business
at two specific dates, usually separated by an interval of twelve months. Stock-
in-trade is an asset. It is a trading asset. Therefore, the concept of profits and
gains made by business during the year can only materialise when a
53
comparison of the assets of the business at two different dates is taken into
account.”
24.2. Accordingly, in the context of amalgamation, the issue does not turn on
the accrual of income in the abstract sense, but on whether the assessee has
received a commercially realisable consideration in kind. Upon sanction of the
scheme, there is only a statutory substitution of rights; no asset then exists in the
hands of the assessee that is capable of commercial realisation. The charge
under Section 28 crystallises only upon allotment of the new shares, when the
assessee actually receives realisable instruments capable of valuation in
money’s worth. At that point, the old stock-in-trade ceases to exist and stands
replaced by new shares having a definite market value. Since these shares are
received in the course of business and in substitution of trading assets, their
receipt represents a commercial profit or gain arising from business activity.
What attracts Section 28 is, therefore, the receipt of shares coupled with their
present realisability and their nexus with business. These three conditions—
actual receipt, present realisability, and ascertainability of value—together
determine the timing of taxability in cases of amalgamation. Consequently, the
profit arising on receipt of the amalgamated company’s shares may be taxed
under Section 28 where the shares allotted are tradable and possess a definite
market value, thereby conferring a presently realisable commercial advantage.
This conclusion flows from the real income principle and not from any
judicially created fiction. Equally, it must be emphasised that where such
54
attributes are absent, the Court cannot, by analogy, extend Section 28 to tax
hypothetical accretions in the absence of an express statutory mandate.
24.3. It is further clarified that the principles enunciated herein lay down a fact-
sensitive test. The enquiry whether, consequent upon an amalgamation, the
allotment of new shares has resulted in a real and presently realisable
commercial benefit must be determined on the facts of each case. The burden
lies on the Revenue to establish the same. It is thereafter for the Tribunal, as the
final fact-finding authority, to apply these principles to the evidence on record.
Timing of Taxability
25. Having established that the charge under Section 28 may be attracted if
the shares are saleable, tradable, etc., and of definite market value, thereby
conferring a presently realisable commercial advantage, it becomes necessary to
clarify the general principle. In the context of amalgamation, three points in
time require to be distinguished. First, the appointed date specified in the
scheme, which determines corporate succession and continuity between the
transferor and transferee companies. Secondly, the sanction of the scheme by
the Court, which gives statutory force to the amalgamation. At these stages,
however, there is only a substitution of rights by legal fiction, without any asset
in the hands of the shareholder capable of commercial exploitation. Thirdly, the
allotment of new shares in the amalgamated company, which alone crystallises
the benefit in the shareholder’s hands, for it is only then that the old stock-in-
55
trade ceases to exist and is replaced by new shares of definite market value
capable of immediate realisation. Even if the scheme contemplates the issue of
shares in a certain ratio from the appointed date, until allotment there is no
identifiable scrip or tradable asset in existence in the hands of the assessee.
Thus, the charge under Section 28 is not attracted on the mere sanction of the
scheme or on the appointed date, but only upon the receipt of the new shares,
when the statutory substitution translates into a concrete, realisable commercial
advantage.
26. Without prejudice to the broader question of chargeability under Section
28, it was contended on behalf of the appellants that even if the fair market
value of the shares allotted in the amalgamated company exceeded the book
value of the shares held in the amalgamating company, such excess would be
merely hypothetical and illusory until the shares were sold, given that market
value is inherently fluctuating. As discussed, the test under Section 28 is not
postponed until an actual sale, but is satisfied once the assessee comes into
possession of an asset of determinable and presently realisable value in
substitution of its trading stock. The fact that such value may fluctuate
subsequently does not render the benefit unreal; valuation for tax purposes is
always carried out at a particular point in time, notwithstanding subsequent
volatility. What matters is that, on the date of allotment, the assessee must have
56
received realisable instruments capable of being valued in money’s worth, and
such receipt constitutes a real, and not a notional, commercial gain.
Distinction between Capital and Business assets
27. Notably, Section 47 of the I.T. Act expressly carves out an exemption in
respect of certain transfers in the context of amalgamation, but that exemption is
confined to capital assets. The rationale is plain. Where a shareholder holds
shares as an investment, the underlying object is to remain invested in the
corporate venture, and a mere amalgamation ordinarily does not alter that
position. While the possibility of tax avoidance in the investment field cannot
be ruled out altogether, the legislative judgment reflects that the risk is
relatively low. The exemption under Section 47 is thus founded on the
recognition that amalgamation, in the capital field, is essentially a corporate
restructuring and not a true realisation of profit. It is also common in business
parlance for entities to hold shares either as investments or as stock-in-trade.
27.1. By contrast, Section 28, which governs profits of business, contains no
such carve-out, nor could it be otherwise. The nature of stock-in-trade is wholly
different from that of an investment. Stock-in-trade represents circulating
capital: it is held not for preservation or appreciation, but for conversion into
57
money in the ordinary course of business. In Commissioner of Income Tax v.
35
Express Newspapers Ltd . it was observed as follows:
“... The profits and gains of business and capital gains are two distinct concepts
in the Income Tax Act: the former arises from the activity which is called
business and the latter accrues because capital assets are disposed of at a value
higher than what they cost the Assessee. They are placed under different heads;
they are derived from different sources; and the income is computed under
different methods…..”
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.
35
MANU/SC/0126/1964 : 1964 INSC 152
58
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
59
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
60
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.
33. In fine, the judgment of the High Court is affirmed, and all these appeals
stand disposed of in the aforesaid terms. There is no order as to costs.
34. Pending application(s), if any, shall stand disposed of.
………………………J.
[J.B. PARDIWALA]
………………………J.
[R. MAHADEVAN]
NEW DELHI;
JANUARY 09, 2026.