Income-tax Act, 1961 – Section 28
Profits and gains of business – Stock-in-trade – Amalgamation
Where shares of an amalgamating company, held as stock-in-trade, are substituted by shares of the amalgamated company pursuant to a court-sanctioned scheme of amalgamation, and such substituted shares are realisable in money and capable of definite valuation, the substitution constitutes commercial realisation giving rise to taxable business income under Section 28.
(Paras 30, 31)
Income-tax Act, 1961 – Sections 2(47), 45 and 47(vii)
Transfer – Capital assets – Distinction from stock-in-trade
Section 47(vii) exempts only transfers of capital assets in a scheme of amalgamation. The exemption does not extend to shares held as stock-in-trade, which fall outside the capital gains regime and are governed by Section 28.
(Paras 12, 27)
Income-tax Act, 1961 – Section 28
Real income – Receipt in kind – Commercial realisability
Business income under Section 28 may arise in kind and does not require an actual sale or exchange, provided the assessee receives a real and presently realisable commercial benefit. Mere statutory substitution without realisability does not attract tax.
(Paras 15, 18, 24)
Amalgamation – Nature and effect
Amalgamation results in the extinguishment of the corporate identity of the amalgamating company and statutory substitution of rights in the amalgamated company. Such substitution may amount to commercial realisation when trading assets are replaced by assets of definite market value.
(Paras 16, 18, 19)
Accrual and timing of taxability – Section 28
In cases of amalgamation involving stock-in-trade, taxability under Section 28 arises only upon allotment of the new shares, and not on the appointed date or date of court sanction.
(Paras 25, 30)
High Court jurisdiction – Section 260A
The High Court does not exceed jurisdiction under Section 260A by dealing with incidental or collateral questions of law necessary for deciding the appeal, even if not formally framed, provided parties had full opportunity to address them.
(Paras 9–9.6)
ANALYSIS
1. Core controversy
The principal issue was whether, upon amalgamation, substitution of shares held as stock-in-trade by shares of the amalgamated company results in taxable business income under Section 28, or whether taxation arises only upon subsequent sale.
2. Tribunal vs High Court
The Tribunal declined to decide whether the shares were capital assets or stock-in-trade, holding that no income accrues without sale or transfer. The High Court reversed this approach, holding that if shares were stock-in-trade, substitution itself could result in taxable business income, and remitted the matter for factual determination.
3. Supreme Court on Section 260A
The Court rejected the objection that the High Court exceeded jurisdiction, holding that:
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the issue of Section 28 taxability was incidental to the framed questions;
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parties were fully heard; and
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no prejudice was caused.
(Paras 9–9.6)
4. Scope of Section 28
The Court emphasised that:
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Section 28 is a wide charging provision;
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it does not depend on “transfer” as defined in Section 2(47);
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profits may arise in cash or kind;
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the decisive test is real income and commercial realisability.
(Paras 15–15.3)
5. Amalgamation and real income
Amalgamation is a statutory substitution. Mere substitution does not automatically create income. However, where:
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stock-in-trade ceases to exist;
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substituted shares have definite and ascertainable market value; and
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such shares are freely tradable,
the transaction results in commercial realisation.
(Paras 18–18.6, 24)
6. Timing
Taxability does not arise:
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on the appointed date, or
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on court sanction of the scheme.
It arises only on allotment of shares, when the assessee acquires a realisable commercial benefit.
(Paras 25, 30)
7. Capital vs business field
The Court highlighted the legislative distinction:
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Capital assets → protected by Section 47(vii);
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Stock-in-trade → no such protection; governed by Section 28.
Extending Section 47(vii) to stock-in-trade would undermine the business-income tax base.
(Paras 27–27.4)
8. Result
The High Court’s judgment was affirmed. The legal principle was settled in favour of the Revenue, while factual application was remitted to the Tribunal.
RATIO DECIDENDI
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Where shares of an amalgamating company are held as stock-in-trade and are substituted by shares of the amalgamated company pursuant to amalgamation, such substitution constitutes taxable business income under Section 28, provided the substituted shares are realisable in money and capable of definite valuation.
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Section 47(vii) applies only to capital assets and does not exempt transactions involving stock-in-trade.
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Taxability under Section 28 arises only upon allotment of the substituted shares, and not on the appointed date or date of sanction of the scheme.
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The High Court may consider incidental or collateral questions under Section 260A without formally framing them, where such consideration is necessary to decide the appeal and parties have been heard.
