Tax on amalgamation share allotment replacing trading stock: Section 47(vii) denied; Section 28 taxability remitted for valuation facts

Section 47(vii) applies only where the original shares were held as capital assets; if held as stock-in-trade, the exemption is inapplicable and taxability falls for consideration under Section 28. Under Section 28, substitution of trading stock by shares on amalgamation constitutes a receipt in kind, but a taxable business profit arises only on allotment of the new shares and only if they confer a real, presently realisable commercial advantage with ascertainable value; mere statutory vesting or hypothetical accretion is insufficient, and the burden lies on the Revenue. The SC affirmed, in principle, that such receipt can be taxable business income, and remitted the factual application to the Tribunal.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the High Court exceeded its jurisdiction under Section 260A by addressing the consequence of taxability under Section 28 while remanding, despite not formally framing a separate substantial question on Section 28.

(ii) Whether, when shares of the amalgamating company are held as stock-in-trade, their substitution by shares of the amalgamated company pursuant to a court-sanctioned scheme of amalgamation can constitute a real and presently realisable commercial profit taxable as "profits and gains of business or profession" under Section 28, and the stage at which such charge, if any, arises.

(iii) What conditions must be satisfied for taxation under Section 28 on such substitution, and whether taxation is necessarily deferred until an actual sale of the substituted shares.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Jurisdiction under Section 260A to consider Section 28 aspect while remanding

Legal framework (as discussed): Section 260A confines the High Court to substantial questions of law formulated, but permits consideration of other substantial questions for recorded reasons; incidental/collateral issues arising from the controversy and argued by parties may be dealt with, and absence of a separate formal formulation is not fatal if no prejudice is caused.

Interpretation and reasoning: The Court held that the Section 28 consequence went to the root of the controversy because the transaction's taxability depended on whether the shares were capital assets (where Section 47(vii) could operate) or stock-in-trade (where Section 47(vii) is inapplicable and Section 28 may apply). The High Court's framed question on whether "no transfer takes place" was treated as wide enough to cover the broader taxability consequences arising from the Tribunal's approach, and the parties had an opportunity to address the Section 28 aspect before remand.

Conclusion: The High Court did not transgress Section 260A jurisdiction by indicating the Section 28 consequence while remanding; the objection was rejected.

Issue (ii)-(iii): Taxability under Section 28 on substitution of shares held as stock-in-trade; timing and conditions

Legal framework (as discussed): Section 28 taxes "profits and gains of business or profession" in wide terms, including the value of any benefit/perquisite arising from business, whether in cash or in kind; it does not import the definition of "transfer" under Section 2(47) (which is framed in relation to capital assets). Section 47(vii) exempts only transfers of capital assets in amalgamation for capital gains purposes and does not govern stock-in-trade.

Interpretation and reasoning: The Court held that Section 28 does not require a conventional "sale", "exchange", or "transfer" as a precondition; the controlling enquiry is whether, in the course of business, the assessee has obtained a real income-a concrete commercial benefit that is presently realisable and capable of definite valuation. Amalgamation results in statutory substitution of the shareholder's holding; this is not automatically taxable at the substitution stage unless the substituted shares confer a real, monetisable advantage.

The Court articulated a fact-sensitive test: taxation under Section 28 may arise where (a) the old trading stock ceases to exist in the assessee's holding, (b) the shares received have a definite and ascertainable value, and (c) the assessee is in a position, immediately upon allotment, to dispose of such shares and realise money (i.e., they are freely marketable/"money's worth"). Where these attributes are absent-e.g., restrictions on sale or lack of a real market-mere statutory substitution does not generate taxable business income at that stage, and incidence may arise only upon actual realisation.

Timing: The Court held that the charge under Section 28, if attracted, arises only upon allotment of the new shares, because only then does the assessee receive a concrete, tradable asset; neither the appointed date nor court sanction by itself yields a presently realisable asset in the shareholder's hands.

Conclusions: (a) Where shares of the amalgamating company are held as stock-in-trade and are substituted by shares of the amalgamated company pursuant to amalgamation, and the substituted shares are realisable in money and capable of definite valuation, the substitution can give rise to taxable business income under Section 28. (b) Taxability is not necessarily deferred until a later sale if the allotment itself confers a real, presently realisable commercial benefit. (c) Whether the conditions are met (including whether the holding is stock-in-trade or investment and whether the shares are freely realisable) requires factual determination by the Tribunal; remand was therefore appropriate, while affirming the High Court's legal principle.

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