Supreme Court Rules on Taxability of Shares in Amalgamation: Stock-in-Trade vs. Capital Assets

The appellants, investment companies of the Jindal Group, held shares in Jindal Ferro Alloys Ltd. (JFAL), which amalgamated with Jindal Strips Ltd. (JSL) during the 1997-98 financial year under a High Court–approved scheme. JFAL shareholders received JSL shares in a fixed ratio.

While the assessees claimed exemption under Section 47(vii) treating the shares as capital assets, the Assessing Officer held them to be stock-in-trade and taxed the value differential as business income under Section 28. The ITAT ruled in favour of the assessees; however, the High Court remanded the matter to determine the true nature of the shareholding, which led to the present appeals.

Main Issue: Whether shares received on amalgamation are taxable as business income under Section 28 when the original shares are held as stock-in-trade, and whether Section 47(vii) exemption applies in such cases.

SC Held: The Supreme Court upheld the Hon’ble High Court’s remand order and clarified that the exemption under Section 47(vii) applies only where the transferred shares are capital assets and does not extend to shares held as stock-in-trade.

The Court held that substitution of shares pursuant to an amalgamation results in a real and measurable commercial benefit when the original holding is like trading assets. Business income under Section 28 can arise even without a sale, provided a benefit in kind with ascertainable value is received in the course of business. The allotment of shares itself can therefore trigger taxability where the shares are held as stock-in-trade.

As the factual question of whether the Jindal Group entities held the shares as investments or as stock-in-trade had not been conclusively determined, the matter was remitted to the Tribunal for fresh adjudication limited to this aspect.

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