Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-000152-000152 – 2026 |
| Diary Number | 25974/2020 |
| Judge Name | HON’BLE MR. JUSTICE R. MAHADEVAN |
| Bench |
|
| Precedent Value | Binding authority on taxability under Section 28 of benefits received in kind on amalgamation of stock-in-trade |
| Overrules / Affirms |
|
| Type of Law | Direct tax law – interpretation of Income Tax Act, 1961 (Sections 2, 28, 45, 47) |
| Questions of Law |
|
| Ratio Decidendi | The Court held that Section 28’s charging provision is wide enough to tax “profits and gains of business” arising in kind, including the receipt of freely realisable shares on amalgamation. Upon allotment of new shares in substitution of trading stock—where the old stock ceases to exist and new shares have an ascertainable market value—there is a commercial realisation triggering tax under Section 28. Taxability arises on actual receipt of shares, not on the appointed date or sanction. |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities Relied Upon by the Court | Section 28 is a broad charging provision taxing profits and gains of business “in cash or in kind”; the “real income” principle requires commercial realisability and definite valuation at the point of substitution; statutory substitution of shares on amalgamation extinguishes old trading stock and replaces it with a freely tradable asset of known value; Section 47(vii) exemption applies only to capital‐asset transfers. |
| Facts as Summarised by the Court | The appellants held shares of Jindal Ferro Alloys Ltd. as stock-in-trade and promoter holdings. JFAL amalgamated with Jindal Strips Ltd. under Court-approved schemes (appointed date 01.04.1995, effective date 22.11.1996), with an exchange ratio of 45:100. Assessing Officer treated JFAL shares as trading stock, denied exemption under Section 47(vii), and taxed the value of JSL shares under Section 28. Tribunal held no taxable event; High Court remanded to determine nature of holding and held that, if shares were trading stock, substitution gave rise to business income. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts and Income‐tax Appellate Tribunals |
| Persuasive For | High Courts considering taxability of in-kind benefits and stock-in-trade restructurings |
| Overrules | Tribunal’s view in Rasiklal Maneklal to the extent that no profit can arise on substitution of trading stock |
| Distinguishes | Commissioner of Income Tax, Bombay v. Rasiklal Maneklal (HUF) & Ors. – inapplicable to Section 28 charging of business profits |
| Follows | Orient Trading Co. Ltd. v. CIT (Calcutta); Commissioner of Income-tax, Cochin v. Grace Collis – extends realisation concepts to business income under Section 28 |
What’s New / What Lawyers Should Note
- Clarifies that receipt of shares of the amalgamated company in lieu of stock-in-trade shares under a court-sanctioned amalgamation scheme can constitute a realisable commercial gain and is taxable under Section 28.
- Establishes that taxability arises on actual allotment of new shares, when the old trading stock ceases to exist and new shares possess an ascertainable market value.
- Reinforces that Section 28’s charging provision is independent of the “transfer” definition in Section 2(47) and extends to benefits in kind.
- Differentiates capital‐gains exemption under Section 47(vii) (limited to capital‐asset transfers) from business profits under Section 28 in amalgamation contexts.
- Emphasizes the “real income” principle: only gains which are presently realisable and capable of definite valuation attract business‐income tax.
Summary of Legal Reasoning
-
Statutory framework:
- Section 2(14): stock-in-trade excluded from capital assets.
- Section 2(47): “transfer” defined only for capital assets (relevant to capital gains).
- Section 28: wide charging provision taxing “profits and gains of business or profession” in cash or kind.
- Section 45 & 47(vii): capital‐gains charging and specific exemption for shareholder transfers on amalgamation.
- Section 28 does not require a legal “transfer,” sale or exchange; it taxes realisable profits in business context.
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Real-income principle (E.D. Sassoon, Royal Insurance, Californian Copper):
- Profit is realised when an old asset ceases to figure and a new asset of ascertainable value is received.
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Commercial-realisability test:
- Old stock-in-trade must cease in the books.
- New shares must have definite market value and be freely tradable.
- Allotment triggers tax; appointed date or sanction alone do not.
- Capital‐gains exemption (Section 47(vii)) applies only to capital assets; stock-in-trade substitution falls under Section 28.
- Conclusion: substitution of trading stock by realisable shares on amalgamation gives rise to taxable business income under Section 28; remand required to decide factual tradeability and nature of holding.
Arguments by the Parties
Petitioner (Appellants):
- High Court exceeded its Section 260A jurisdiction by deciding Section 28 taxability without framing a substantial question of law.
- Substitution of shares on amalgamation is not a “sale,” “exchange,” or “transfer” and no asset exists to be transferred.
- Section 2(47) “transfer” concept is irrelevant to stock-in-trade; business‐income tax under Section 28 arises only on actual sale or transfer.
- Real income arises only upon actual realisation; notional appreciation on allotment is hypothetical.
- Legislature taxes notional or deemed benefits only by explicit provision; absent such a clause, no tax on substitution.
Respondent (Department):
- Section 28 taxes “profits and gains of business” regardless of form of realisation; no requirement of transfer.
- Receipt of new shares in substitution constitute commercial realisation taxable under Section 28.
- High Court correctly interpreted Section 28’s broad charging scope, independent of Section 47(vii).
- Orient Trading Co. Ltd. v. CIT (Calcutta) directly supports taxation of substitution of stock-in-trade assets.
- Under the scheme, allotment of new shares reflects an enforceable obligation and constitutes a vesting of a presently realisable benefit.
Factual Background
- Between Assessment Year 1997-98, appellants held shares of Jindal Ferro Alloys Ltd. (JFAL) as stock-in-trade and in promoter capacity.
- JFAL amalgamated with Jindal Strips Ltd. (JSL) by Court-approved schemes (appointed date 01.04.1995; filed 22.11.1996).
- Shareholders received 45 JSL shares for every 100 JFAL shares; appellants claimed exemption under Section 47(vii) treating shares as capital assets.
- Assessing Officer treated JFAL shares as trading stock, denied Section 47(vii) exemption, and taxed the value of JSL shares under Section 28; Tribunal held no taxable event on substitution.
- High Court remanded to determine nature of holding and held that, if shares were stock-in-trade, substitution gave rise to tax under Section 28.
Statutory Analysis
- Section 2(1B) (Amalgamation): statutory vesting of assets and liabilities in amalgamated company.
- Section 2(14): defines “capital asset,” excludes stock-in-trade.
- Section 2(47): defines “transfer” for capital‐gains purposes.
- Section 28: charges “profits and gains of business or profession,” including benefits in kind, with no mention of “transfer.”
- Section 45: capital‐gains charging provision on transfer of capital assets.
- Section 47(vii): exempts shareholder transfers in amalgamation if shares are capital assets.
Alert Indicators
- ✔ Precedent Followed – Orient Trading Co. Ltd. v. CIT (Calcutta); Grace Collis
- 🔄 Conflicting Decisions – overturns Tribunal’s reliance on Rasiklal Maneklal for Section 28 purposes
- 📅 Time-Sensitive – timing of taxability fixed at allotment of new shares rather than appointed date