Taxable business income arises from the substitution of shares held as stock-in-trade in an amalgamation when such shares are marketable and possess definite value, invoking Section 28 of the Income Tax Act.

JUDGMENT :

R. MAHADEVAN, J.

Leave granted.

2. The present appeals arise out of a common judgment and final order dated 07.08.2020 passed by the High Court of Delhi¹[Hereinafter referred to as “the High Court”] in ITA Nos. 935, 822, 853, and 961 of 2005, pertaining to the Assessment Year 1997-98. By the impugned judgment, the High Court remanded the matters to the Income Tax Appellate Tribunal²[For short, “the Tribunal”] for fresh adjudication on the question of whether the shares held in the amalgamating company constituted stock-in-trade or capital assets, upon observing that, if the shares were, in fact, held as stock-in-trade, the transaction would fall outside the purview of Section 47(vii) of the INCOME TAX ACT , 1961³[For short, “the I.T. Act”], and its taxability would consequently be governed by Section 28 under the head “profits and gains of business or profession”.

FACTUAL MATRIX

3. The facts, which are common to all these appeals, may be briefly stated as under:

3.1. The appellants are investment companies of the Jindal Group. The shares of the operating companies, namely Jindal Ferro Alloys Limited (JFAL) and Jindal Strips Limited (JSL), were held as part of the promoter holding, representing controlling interest. The appellants had also furnished non-disposal undertakings to the financial institutions / lenders who had advanced loans to the operating companies. These shares were reflected as investments in the balance sheets of the appellants.

3.2. During the previous year relevant to the assessment year 1997-98, pursuant to a scheme of amalgamation approved by orders dated 19.09.1996 and 03.10.1996 of the High Courts of Andhra Pradesh and Punjab & Haryana respectively, under Sections 391 – 394 of the COMPANIES ACT , 2013, JFAL was amalgamated with JSL. As per the sanctioned scheme, the appointed date of amalgamation was 01.04.1995, and the orders sanctioning the amalgamation were filed with the Registrar of Companies on 22.11.1996 (the effective date). Under the scheme of amalgamation, the shareholders of JFAL were allotted 45 shares of JSL for every 100 shares of JFAL held by them. Accordingly, the appellants were allotted shares of JSL in lieu of the shares of JFAL.

3.3. The appellants, in their returns of income filed for the assessment year in question, claimed exemption under Section 47(vii) of the I.T. Act in respect of the receipt of JSL shares in lieu of JFAL shares, treating the same to be capital assets. However, in the assessment completed under Section 143(3) vide order dated 29.02.2000, the Assessing Officer treated the shares of JFAL as stock-in- trade, denied the exemption under Section 47(vii), and brought to tax the value of JSL shares as business income, computed with reference to their market value. The said order was upheld by the Commissioner of Income Tax (Appeals).

3.4. On further appeals, the Tribunal vide order dated 17.02.2005, allowed the assessees’ appeals by observing that it was unnecessary to decide whether the shares were held as stock-in-trade or capital assets since no profit accrues unless the shares held by the appellants are either sold or transferred for consideration, irrespective of the nature of holding. It was further observed that there was admittedly no sale of shares and, therefore, the only question for consideration was whether the allotment of JSL shares in lieu of JFAL shares under the scheme of amalgamation amounted to a “transfer”. Following the decision of this Court in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal (HUF) and others , (1989) 177 I