Supreme Court: Share Substitution in Amalgamation Taxable as Business Income Under Section 28
Court Applies “Commercial Realisability” Test to Mergers
Implications for Traders, Investors, and Corporate Restructuring
By Our Legal Reporter
New Delhi: January 15, 2026:
In a landmark judgment, the Supreme Court of India has held that the substitution of shares during a corporate amalgamation is taxable as business income under Section 28 of the Income Tax Act, 1961, if the original shares were held as stock-in-trade. The ruling, delivered in Jindal Equipment Leasing & Consultancy Services Ltd. v. CIT (2026), clarifies that such transactions are not tax-neutral events but constitute a commercial realization of trading assets.
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This decision is expected to reshape the taxation landscape for corporate mergers and amalgamations, particularly for traders and companies holding shares as trading stock.
Case Background
- The Dispute: The core issue was whether receiving shares of an amalgamated company in exchange for shares of the amalgamating company (held as stock-in-trade) gives rise to taxable income immediately, or only when the substituted shares are sold.
- Assessee’s Argument: The companies argued that taxation should occur only upon the actual sale of substituted shares, not at the time of amalgamation.
- Revenue’s Stand: The tax department maintained that substitution itself created a taxable event under Section 28.
- Supreme Court Bench: Justices J.B. Pardiwala and R. Mahadevan delivered the ruling, affirming the Delhi High Court’s earlier decision.
Supreme Court’s Observations
The Court made several important clarifications:
- Section 28 vs Section 45:
- Section 45 deals with capital gains and requires a “transfer” of a capital asset.
- Section 28 is broader, taxing “profits and gains of business” even without a conventional transfer.
- Commercial Realisability Test: The Court emphasized that business profits can arise in kind, not just in cash. If a trading asset is extinguished and replaced with another asset of ascertainable commercial value, taxable income accrues.
- Amalgamation as Substitution: Shares of the amalgamating company cease to exist, and shareholders receive new shares of the amalgamated company. This substitution amounts to realization of trading assets.
- Timing of Taxation: The Court rejected the argument that taxation must wait until sale. Once the new shares are received and have definite value, business income accrues.
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Key Precedents Considered
The Court relied on and distinguished several earlier rulings:
- Grace Collis (2001): Confirmed that amalgamation involves a transfer in tax law.
- Shiv Raj Gupta (2020): Distinguished, as it dealt with capital gains rather than business income.
- Excel Industries (2013): Reiterated that income accrues when there is a vested right to receive it.
Implications of the Ruling
For Traders and Investors
- Immediate Tax Liability: Traders holding shares as stock-in-trade must recognize taxable income upon amalgamation.
- Notional Gains Taxed: Even if shares are not sold, their substitution creates taxable business profits.
- Higher Litigation Risk: The ruling may trigger disputes over valuation of substituted shares.
For Corporate Restructuring
- Tax Planning Impact: Mergers and amalgamations will need careful tax planning to account for immediate business income recognition.
- Balance Sheet Adjustments: Companies must reflect substituted shares as realized trading assets.
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For Policymakers
- Clarity in Law: The ruling provides judicial clarity but may prompt calls for legislative amendments to reduce uncertainty.
- Revenue Protection: Ensures that tax is collected on commercial gains realized through mergers.
Wider Economic Impact
- Investor Confidence: While the ruling ensures tax compliance, it may discourage traders from holding shares as stock-in-trade during mergers.
- Corporate Strategy: Companies may reconsider structuring mergers to minimize tax exposure.
- Global Comparisons: Similar principles apply in other jurisdictions, where share swaps in mergers are treated as taxable events if they yield immediate commercial benefits.
Conclusion
The Supreme Court’s ruling in Jindal Equipment Leasing & Consultancy Services Ltd. v. CIT marks a turning point in India’s tax jurisprudence on amalgamations. By applying the commercial realisability test, the Court has clarified that substitution of shares held as stock-in-trade is a taxable event under Section 28, even without an actual sale.
For traders, investors, and corporates, the message is clear: mergers are not tax-neutral when trading assets are involved. This judgment strengthens revenue protection while reinforcing the principle that business profits can arise in kind as well as in cash.
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