Introduction

One of the most significant issues related to the amalgamation of two or more companies is the determination if all or part of the stock issued in an amalgamation qualifies as a “long-term investment” or a “business asset”. On 9 January 2026, the Supreme Court of India in the case of M/s Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax, considered the question of whether income received by way of an allotment of shares approved by the court constitutes income from business under Section 28 of the Income Tax Act, where there is no transfer. The companies claimed exemption from the tax, while the Revenue Department asserted that the receipt of shares from an inventory-stocked basis was to be treated as commercial realisation by way of profit.

The Court developed a framework to avoid taxation of hypothetical gains by applying the Doctrine of Real Income. As a result, the ruling clarifies that the taxable amount of an entity’s business income is determined based on both the actual structure and objective of the transaction.

Case Background

In the present case, the appellants are the investment companies of the Jindal Group. These companies held shares in two other group companies, Jindal Ferro Alloys Ltd. (“JFAL”) and Jindal Strips Ltd. (“JSL”), as part of their promoter holdings. This granted these companies control over JFAL and JSL. The shares were recorded as investments in their balance sheets. They also offered non-disposal undertakings to lenders who granted loans to operating companies.

During the assessment year 1997-98, JFAL was amalgamated with JSL in pursuance of a scheme sanctioned by the High Courts in terms of sections 391-394 of the Companies Act. This resulted in the shareholders of JFAL being allotted 45 shares of JSL in exchange for every 100 shares of JFAL that they held. Consequently, the Appellants received shares of JSL in exchange for their shareholding in JFAL

In their income tax returns, the appellants claimed exemption under Section 47(vii) of the Income Tax Act, stating that the transfer qualified as a tax-exempt transfer of capital assets. However, the Assessing Officer treated JFAL shares as stock-in-trade and assessed the value of the newly allotted shares under Section 28 as business income. The Commissioner of Income Tax (Appeals) upheld the same.

Upon further appeal, the Tribunal held that there could be no taxable profit since there was neither a sale nor a transfer for consideration.  The Revenue appealed to the High Court and reversed the decision of the Tribunal, ruling that where the shares were held to be stock-in-trade, the substitution of the shares would mean that the business is realising the trading assets, resulting in taxable business profits. The matter was further remanded to the tribunal to determine whether the shares were capital assets or stock-in-trade. Aggrieved by this, the companies approached the Supreme Court.

Decision of the Case

The Supreme Court of India determined a landmark precedent regarding the taxation of shares transferred as part of a corporate amalgamation. The Court concurred with the Delhi High Court’s direction to refer the matter back to the Tribunal for the determination of the nature of the company’s shareholdings. Most importantly, the Court confirmed that the provisions of Section 47(vii) governing the taxability of capital assets do not protect stock-in-trade from taxation.

The Court has made it clear that under section 28, taxpayers are taxed on all profits from the business, regardless of whether received in cash or otherwise. When businesses provide a trading asset in exchange for an asset of greater value, the act of doing so creates a commercial realisation, resulting in the taxpayer having to incur an income tax liability.

To establish when this occurs, the Court has developed a “Real Income Test” that will be employed to clarify how income will be taxed under section 28 based on the economic substance of the transaction, as opposed to the form. When considering how to apply the Real Income Test, the Court has concluded that an individual taxpayer does not become liable for income tax on the appointed date of the amalgamation, nor on the date that the Amalgamation was approved by the Court, as both dates are merely legal fictions and not real transfers of title to assets.

Consequently, a taxpayer is not liable for income tax derived from an amalgamation until such time that shares have actually been issued to the taxpayer. Shares must have a determined market value and be readily available to sell for this ruling to apply. Shares that cannot be sold are considered closely held by the issuer, and a lack of an active secondary market will result in their holders deferring their tax liability on those gains until such assets are sold or made available to be sold.

Analysis

The judgment resolves one of the most controversial questions, whether the receipt of new shares on amalgamation amounts to a taxable event in respect of business assets. In disjoining Section 28 from the technical requirement of a “transfer” under Section 2(47), the Court established profits from business within the broader ambit of the “commercial realisation” paradigm as laid down in the cases of Mazagaon Dock Ltd v. Commissioner of Income Tax and Excess Profits Tax and Ujagar Prints Etc. v. Union of India and others Etc.

To avoid over-taxation of the notional growth and at the same time prevent commercial profits from escaping taxes, a specific three-condition test was introduced by the Supreme Court, including cessation of the old asset, receipt of a new asset with definite valuation, and present realisability, bringing out clarity and vindicating the real income doctrine enunciated in the cases of Commissioner of Income Tax, Bombay City I v. Shoorji Vallabhdas & Co.

The decision addresses an important loophole in corporate restructuring, preventing the use of amalgamations to convert business profits into tax-exempt capital accretions, which would otherwise be achieved by shell corporations, alignment of promoters, or group reorganisations. Through the imposition of Section 28 on the stock-in-trade substitution, the Court makes sure that the real and presently disposable advantages are subjected to taxation in the same way as the cash sale. This is in line with the intention of the law of taxing the “profits and gains”. In this regard, the corporate reorganisation procedure is not devised as a disguise to convert revenue income into tax-free or lower-taxed capital holdings.

The decision allowed the taxpayer to be charged tax on the realised profits of the business at the time when there is a true realisation of those profits through the effective marketing of the business stock. It further states that the taxpayer cannot be charged with a tax on hypothetical profits, nor on any assumptions about realising future profits.

The judgment is, therefore, a validation of the tripartite test, which states that the existence of real-life indicators, including market lock-in arrangements, an existing and active market, and a definitively established and reliable valuation, is necessary to support any claim for tax liability under Section 28. In addition, the court found that taxing an amount under this section does not occur until that amount is finally allocated; thus, removing the possibility of premature taxation during a company’s attempt to reorganise itself.

While we applaud the court’s decision, there are also some potential pitfalls moving forward. One such challenge is the required “definite valuation” of the assets, which in the case of unquoted shares is especially challenging in cases of company group amalgamation, as those shares often necessitate a valuation that is based on estimates through different accounting methodologies, leading to disputes and uncertainties.

The court held that the onus lies upon the Revenue to prove that the shares were “realisable and definitely valued” and, therefore, be considered as business income. This could also be another problem because, in practice, the assessee may be forced to place before the court evidence to disprove realisability.

Way Forward

This landmark ruling establishes a definitive framework for taxing business assets during corporate amalgamations. It prioritises the economic substance of a transaction over its technical form.  Thus, stock-in-trade will remain taxable whenever commercial realisation occurs. The “Real Income Test” protects the tax base from hypothetical gains being taxed by requiring that a corporation actually has an allotment of shares, a defined value of shares, and realisable proceeds available to the corporation at the time of amalgamation.

Henceforth, corporations will be required to rigorously document the purpose for which they are holding shares and will need to consider marketability in their pre-amalgamation assessments. This ruling was intended to prevent individuals from attempting to evade taxation by using shell entities while also protecting taxpayers from being taxed on unrealised, non-marketable gains.