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Informist, Friday, Jan. 9, 2026

 

NEW DELHI – The Supreme Court Friday held if a company holds shares of an amalgamating company as "stock-in-trade" and the same are substituted by shares of the merged company, it can give rise to taxable business profits and, hence, liable for taxation under Income Tax Act, 1961. "We, thus, hold that where the shares of an amalgamating company held as stock-in-trade are substituted by shares of the amalgamated company pursuant to a scheme of amalgamation and such shares are realisable in money and capable of definite valuation, the substitution gives rise to taxable business income within the meaning of Section 28 of the Income Tax Act," said the top court. 

 

"Stock-in-trade" in shares refers to shares that a person or entity holds with the primary intention of reselling them for a profit in the short term, rather than holding them as a long-term investment for capital appreciation or dividends. 

 

If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion, said the court. Enterprises could create shell entities, warehouse trading stock or unrealised profits therein, and then amalgamate so as to convert them into new shares without ever subjecting the commercial gain to tax, said the court. Equally, losses could be engineered and shifted across entities to depress taxable income, the court added. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus, said the court, adding that to exempt them from charge at the point of substitution would undermine the integrity of the tax base.

 

The top court said that "stock-in-trade" represents circulating capital and it is held not for preservation or appreciation, but for conversion into money in the ordinary course of business. The substitution of one trading asset by another, such as the receipt of shares in an amalgamated company in lieu of shares held as stock-in-trade in the amalgamating company, cannot be equated with a mere continuation of an investment, said the court. It represents a commercial realisation in kind, for the new shares are distinct assets with a definite and presently realisable market value, the court said.

 

The case has its genesis from Jindal Equipment Leasing Consultancy Services Ltd. and others holding shares of Jindal Ferro Alloys Ltd. and Jindal Strips Ltd., as part of the promoter holding, representing controlling interest. In 1996, Jindal Ferro Alloys was merged with Jindal Strips. According to the merger scheme, the shareholders of Jindal Ferro Alloys were allotted 45 shares of Jindal Strips for every 100 shares of the former held by them. Accordingly, Jindal Equipment Leasing and others were allotted shares of Jindal Strips in lieu of the shares of Jindal Ferro Alloys.

 

While Jindal Equipment Leasing and others treated the receipt of Jindal Strips' shares as capital assets, the income tax department said these were "stock-in-trade". The Income Tax Appellate Tribunal held that there was no transfer of shares under Section 2(47) of the 1961 Act, relating to the transfer for calculating capital gains tax. However, the Delhi High Court and the Supreme Court held that there was transfer of shares and if these shares were held as stock in trade, it would be taxable under the law. However, both the high court and Supreme Court remanded the matter to the appellate tribunal to decide whether these shares were actually stock in trade or capital assets, which the appellate tribunal had not decided previously.  End
 

Reported by Surya Tripathi

Edited by Akul Nishant Akhoury

 

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