TaxTMI 
TaxTMI 
2026 (1) TMI 491
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....ema Bengani, Adv., Mr. Preeti Rani, Adv., Mr. Digvijay Dam, Adv. JUDGMENT PER 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 Delhi ["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 Tribunal ["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, 1961 ["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 (....
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....(HUF) and others (1989) 177 ITR 198 : (1989) 2 SCC 454, the Tribunal concluded that there was no transfer of shares and, consequently, no taxable profit could be said to have accrued to the appellants. 3.5. The Revenue challenged the Tribunal's decision before the High Court, raising the following substantial questions of law: "1. Whether shares received by the assesses on amalgamation are entitled to the benefit of section 47(vii) without the Tribunal concluding that the said shares were held by the assesses as capital assets? 2. Whether the benefit of Section 47(vii) is limited to determination of capital gains and only in regard to capital assets? 3. Whether income would accrue to the assesses on shares received by amalgamations and will be taxable in view of non-applicability of Section 47(vii)?" 3.6. After hearing both sides, the High Court, by the impugned judgment, disposed of the appeals in favour of the Revenue and against the assessees. In doing so, it held that the Tribunal had erred in placing reliance on Rasiklal Maneklal while failing to consider the later and binding decision of this Court in Commissioner of Income-tax, Cochin v. Grac....
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....gamating company stands dissolved and consequently, its shares cease to exist. Therefore, when shareholders receive shares of the amalgamated company in lieu of the extinguished shares of the amalgamating company, there is no subsisting property capable of being exchanged and accordingly, no taxable business income arises from such transaction. Moreover, the definition of "transfer" under Section 2(47) is relevant only for the purpose of computing capital gains and has no application to stock-in-trade. Only the exploitation or realisation of stock-in-trade gives rise to business income, which is to be computed strictly in accordance with Section 28 of the I.T. Act. 4.2. Reliance was placed on the decision of this Court in Vania Silk Mills P. Ltd v. Commissioner of Income-Tax (1991) 191 ITR 647 (SC), wherein it was held that the mere destruction or loss of an asset does not constitute a "transfer". The term "transfer" in Section 45 connotes that there must be something transferred to someone - some property, right, or interest passing from one person to another. When an asset ceases to exist, there can be no such transfer. Further reliance was placed on Commissioner of Inco....
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....TR 295 (SC). Even if the fair market value of the shares allotted in the amalgamated company on the date of allotment exceeds the book value of the shares in the amalgamating company, such appreciation is purely notional. Real income would arise only upon the actual sale of the allotted shares, and until such realisation no business income accrues. 4.5. It was also emphasized that the scheme of the Act itself supports this view. Wherever the legislature intends to tax notional or deemed income, it has enacted specific provisions, for example, Section 28(iv) or valuation rules such as Rule 11UAB. Further, Section 49(1)(iii)(e) specifically provides that for capital gains, the cost of shares in the amalgamated company shall be deemed to be the cost of shares in the amalgamating company. By parity of reasoning, in the case of stock-in-trade also, the original cost must be preserved and any profit should be recognized only at the time of realisation. 4.6. It was finally submitted that the receipt of shares of the amalgamated company in lieu of shares held in the amalgamating company, even when such shares are held as stock-in-trade, does not constitute a "sale" or "exchange" givi....
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....tion of business income. To this extent, the appellants do not dispute the High Court's finding. Yet, the appellants continue to contend that realisation of stock-in-trade giving rise to taxable business income can only be through sale or exchange. Such a submission has no basis in light of Section 28. 5.4. It was further submitted that the plain language of Section 28 makes it clear that profits and gains of business or profession are chargeable irrespective of whether they arise by way of sale, exchange, or otherwise. Unlike Section 45, which specifically requires a transfer of a capital asset, Section 28 is agnostic to the manner in which income accrues. In particular, Sections 28(i) and 28(iv) bring out this position, covering profits, gains, and benefits arising from business activities, whether convertible into money or not. 5.5. Reliance was placed on Orient Trading, where this Court held that the exchange of securities by a share dealer amounted to realisation of stock-in-trade, resulting in taxable profits. The said decision directly answers the appellants' contention as it involved stock-in-trade and upheld that realisation may occur upon exchange, and not merely up....
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....l submitted that the High Court's reasoning is sound, the Tribunal's judgment is unsustainable, and the present appeals deserve to be dismissed. ANALYSIS AND FINDINGS 6. We have heard learned counsel appearing for the parties and perused the materials available on record. 7. By order dated 10.02.2021, this Court stayed the effect and operation of the impugned judgment and order under challenge. 8. Apparently, the appellants were shareholders of JFAL. Pursuant to the orders of the High Courts of Andhra Pradesh and Punjab and Haryana dated 19.09.1996 and 03.10.1996, JFAL merged with JSL, a widely held public company. Upon the amalgamation become effective, JFAL ceased to exist as a legal entity. In terms of the share exchange ratio approved under the scheme, shareholders were allotted 45 shares of JSL against 100 shares of JFAL. 8.1. During the relevant assessment year, the appellants claimed exemption under Section 47(vii) of the I.T. Act in respect of the receipt of JSL shares, contending that the shares of JFAL were held as capital assets. The Assessing Officer, however, denied exemption, holding that the shares of JFAL constituted stock-in-trade in the hands of the....
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....eet that case. The following paragraphs are apposite in this context: "18. It can be seen that the substantial question of law that was raised by the High Court did not contain any question as to whether the non-compete fee could be taxed under any provision other than Section 28(ii)(a) of the Income Tax Act, 1961. Without giving an opportunity to the parties followed by reasons for framing any other substantial question of law as to the taxability of such amount as a capital receipt in the hands of the assessee, the High Court answered the substantial question of law raised as follows: (Shiv Raj Gupta case [CIT v. Shiv Raj Gupta, 2014 SCC OnLine Del 7305: (2015) 372 ITR 337], SCC OnLine Del paras 63 & 65) "63. In view of the aforesaid discussion, we deem it appropriate and proper to treat Rs 6.60 crores as consideration paid for sale of shares, rather than a payment under Section 28(ii)(a) of the Act. ... ... 65. The substantial question of law is accordingly answered in favour of the appellant Revenue and against the respondent-assessee but holding that Rs 6.60 crores was taxable as capital gains in the hands of the respondent-assessee being a ....
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....t an appeal after the expiry of the period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period. (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which- (a) has not been determined by the Appellate Tribunal; or (b) has been wrongly d....
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....tion 47, but more broadly the taxability of the amalgamation transaction under the Act. * Second, in appeal, the High Court framed the following substantial question of law: "Whether the Tribunal was correct in holding that where the assessee gets shares of the amalgamated company in lieu of shares of the amalgamating company, no transfer takes place?" This formulation was wide enough to cover not only the application of Section 47 but also the broader question of taxability of such substitution of shares under the Act. The High Court did not itself assess income under Section 28, but only clarified that if the shares were stock-in-trade, the exemption of Section 47 would not apply, and the matter required reconsideration by the Tribunal so as to determine whether the shares were held as stock-in-trade or as capital assets, as without that determination the taxability or eligibility for exemption could not be ascertained. * Third, there was no violation of natural justice in the present case, unlike in Shiv Raj Gupta where an altogether new head of income was introduced without notice to the assessee. Here, the High Court expressly recorded the p....
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.... be said to be incidental or collateral. Even otherwise, in view of the decision of this Court in Anjum M.H. Ghaswala [CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633] holding that the levy of interest under Section 234-A is statutory interest and mandatory and automatic, thereafter the said issue cannot be said to be a question of law." (Emphasis Supplied) 9.6. Accordingly, the High Court cannot be said to have exceeded its jurisdiction under Section 260A in making the impugned observation on Section 28 before remanding the matter. The preliminary contention of the appellants is, therefore, devoid of merit and stands rejected. 10. Now, another issue that arises for determination in these appeals is whether the High Court, while remanding the matter to the Tribunal to ascertain whether the shares of the amalgamating company were held as stock-in-trade or as capital assets, was justified in recording a finding that, if such shares were held as stock-in-trade, the allotment of shares of the amalgamated company pursuant to a court-sanctioned scheme of amalgamation would give rise to taxable business income in the hands of the appellants under Section 28 of the I.T. Act. ....
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....(a) property of any kind held by an assessee, whether or not connected with his business or profession, (b) ... (c) ... but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession. (j) ..." Section 2(47) - Transfer "transfer", in relation to a capital asset, includes, (a) the sale, exchange or relinquishment of the asset; or (b) the extinguishment of any rights therein; or (c) the compulsory acquisition thereof under any law ..." Section 28 - Profits and gains of business or profession "The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ... (iv) the value of any benefit or perquisite arising from business or the exercise of a profession, whether- (a) convertible into money or not; or (b) in cash or i....
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....le. Only if the transaction is taxable can there be an exemption. Therefore, the transfer of shares arising out of an order of amalgamation, even if it is treated as a capital asset, is generally taxable but would be exempt from taxation only if both the requirements under Section 47 (vii) are satisfied. 13. On behalf of the appellants, it was contended that no taxable event arises at the stage of amalgamation. According to them, income can be said to arise only upon the actual realisation or sale of the substituted shares, and not at the point of their allotment in the amalgamated company. The scheme of the Act, it was submitted, proceeds on the foundational premise that only real income is taxable unless Parliament, by express words, enacts a contrary legal fiction. Illustratively, Section 28(via) expressly deems the fair market value of inventory converted into a capital asset to be taxable, even without the receipt of money. This demonstrates that where the legislature intends to tax notional accretions, it does so explicitly. In the absence of any analogous deeming provision in respect of amalgamations, Section 28 cannot be judicially expanded to cover hypothetical or unrea....
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....rovision itself is wide. 15.1. In Mazagaon Dock Ltd v. Commissioner of Income Tax and Excess Profits Tax AIR 1958 SC 861, this Court held that the language of Section 42(2) of the 1922 Act, though strict in nature, could not be artificially restricted. Expressions such as "business' and "profits derived" were held to be of wide import in fiscal statutes and must be construed broadly to give effect to the legislative intent. The Court rejected the narrow interpretation urged by the assessee and clarified that wide words used in charging provisions cannot be cut down merely to avoid unusual or harsh consequences. Similarly, in Ujagar Prints Etc. v. Union of India and others Etc. (1989) 3 SCC 488, the Court reiterated that wide statutory language must receive its full amplitude and cannot be artificially confined. Further, in Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company and others (2018) 9 SCC 1 (5-Judge Bench), this Court clarified that "strict interpretation" does not connote a literal or pedantic reading. Instead, legislative intent must be combined with the words of the statute to arrive at a meaning that is neither too narrow nor too broad. 15.2. Thus....
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....d into and continue within the transferee. As held in Saraswati Industrial Syndicate Ltd v. Commissioner of Income Tax 1990 Supp SCC 675, the transferor company ceases to exist, and the transferee emerges with a blended corporate personality, inheriting all rights and liabilities. Stroud's Judicial Dictionary of Words and Phrases (9th Edn.) describes amalgamation as the "welding or blending of two or more concerns into one". Black's Law Dictionary (11th Edn.) similarly defines it as the "act of combining or uniting; consolidation; amalgamation of two small companies to form a new corporation". In Walker's Settlement, In re 1935 Ch 567 (CA), amalgamation was explained as the state of two companies being so joined as to form a third, or of one company being absorbed into another [See: Religare Finvest Ltd. v. State (NCT of Delhi (2024) 1 SCC 797]. 16.1. Notably, the Companies Act, 2013 contains no express definition of amalgamation. Instead, Sections 230 - 232 prescribe the procedure and spell out the legal effect, namely, the extinguishment of the transferor's corporate identity and the vesting of its assets, rights, and obligations in the transferee. Thus, amalgamation - ordinar....
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....e companies are fused into one by merger or by taking over by another. Reconstruction or "amalgamation" has no precise legal meaning. The amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company become substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company. Strictly "amalgamation" does not cover the mere acquisition by a company of the share capital of other company which remains in existence and continues its undertaking but the context in which the term is used may show that it is intended to include such an acquisition. See: Halsbury's Laws of England, 4th Edn., Vol. 7, para 1539. Two companies may join to form a new company, but there may be absorption or blending of one by the other, both amount to amalgamation. When two companies are merged and are so joined, as to form a third company or one is absorbed into one or blended with another, the amalgamating company loses its entity. 6. In General ....
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.... of the Act. The High Court was in error in holding that even after amalgamation of two companies, the transferor company did not become non-existent instead it continued its entity in a blended form with the appellant company. The High Court's view that on amalgamation there is no complete destruction of corporate personality of the transferor company instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that when two companies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business. However, their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective." "30. In Bhagwan Dass Chopra v. United Bank of India [Bhagwan Dass Chopra v. United Bank of India, 1987 Supp SCC 536] it was held that in every case of transfer, devolution, merger or s....
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....form of holding for another. The shareholder's interest in the transferor company is replaced by a corresponding interest in the transferee company. For the purposes of Section 28, the first test is whether such substitution constitutes either a receipt or an accrual of income. 17.1. It is settled law that income yielding business profits may be realised not only in money but also in kind. Thus, where an assessee receives shares of the amalgamated company in place of its shares held as trading stock, there is, in form, a receipt of consideration in kind. Though such amalgamations receive the sanction of the Court/Tribunal to be effectuated, they are preceded by decisions taken in meetings of shareholders. In such meetings, valuation reports are placed before the shareholders, and for the amalgamation to be approved, 90% of the shareholders must vote in favour of the amalgamation. The report contains details of the share exchange ratio. Though the value of each share is determined at that stage, it is not tradable, as no right is vested at that point. Ordinarily, such receipt arises only upon the actual allotment of shares, since until that point no asset is placed in the hands o....
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.... in consequence of the amalgamation and thereby of its business, has obtained a profit that is real and presently realisable. The well-known real-income principle, as emphasised in E.D. Sassoon and Shoorji Vallabhdas, must be applied. Therefore, the enquiry for the Court is whether, as a result of the amalgamation, the assessee has in fact realised a profit in the commercial sense. This assessment may turn on whether: (A) The old stock-in-trade has ceased to exist in the assessee's books; (B) The shares received in the amalgamated company possess a definite and ascertainable value; and (C) The assessee, immediately upon allotment, is in a position to dispose of such shares and realise money. 18.4. If these conditions are satisfied, the substitution bears the character of a commercial realisation and the profit may be taxed under Section 28. Where, however, the allotment of shares is merely a statutory substitution mandated by the scheme of amalgamation, without yielding an immediately realisable benefit, no income can be said to accrue or be received at that stage, and taxability arises only upon the eventual sale of the shares. For instance: ....
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.... At that point, the old investment is regarded as closed and a new investment is treated as having commenced. The emphasis is that realisation is not merely a matter of accounting entries, but arises where the former asset is replaced by a new and distinct asset of ascertainable value, thereby crystallising the economic outcome of the earlier holding. Lord Trayner, in Californian Copper Syndicate Ltd v. Inland Revenue 5 TC 159 observed that "no doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit except when that is paid in cash, the shares were realisable and could have been turned into cash". On this reasoning, even the exercise of an option, such as the choice to accept shares of the amalgamated company in lieu of the old holding, may amount to a realisation of the old asset, subject to the other conditions being satisfied, as discussed. The relevant portions of the judgment in Orient Trading, are as under: "8. The decision of Rowlatt, J. in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] was approved in the said case. In the case of Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 4....
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....o do so. I cannot think that income tax is due or not according to the manner in which the person making the profit pleases to deal with it." 11. The subsequent decision of the House of Lords in British South Africa Co. v. Varty (Inspector of Taxes) [1966 AC 381 : (1965) 2 All ER 395 : (1965) 3 WLR 47] does not lend assistance to the submission of Shri Puri. In that case the appellant-company in 1953 had lent 200,000 pounds to a gold mining company and in return had received, inter alia, an option to subscribe for 100,000 shares in the mining company at 1 pound per share, the value of the shares then being 19 Sh. 6 d a share. In 1954 when the value of the shares had gone up to 43 Sh. 6 d a share the appellant exercised the option and obtained shares worth 217,500 pounds for which they paid 100,000 pounds. The company was assessed for income tax on a profit of 11,75,000 pounds. On behalf of the company it was urged that upon the exercise of the option there was a realisation because the option which was a "trading asset" or an item of "stock-in-trade" was exchanged for or was replaced by a different item of stock-in-trade which had a value in money's worth. The said con....
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.... Council in Raja Raghunandan Prasad Singh v. Commissioner of Income Tax (1933) 1 ITR 113 : 1933 SCC OnLine PC 8, recognised that income may be received in kind as well as in cash, and that the equivalent of cash may constitute income, but stressed that what is received must be "money's worth". It was clearly observed that there must be an actually realised or realisable profit or loss. The following passages are pertinent in this regard: "Their Lordships fully recognise that income may be received in kind as well as in cash and that the receipt of an equivalent of cash may be a receipt of income. In the case of Californian Copper Syndicate v. Harris [(1905) 6 F. 894 : 5 Tax. Cas. 159.], a company which dealt in mining properties sold certain property for fully-paid shares in another company and was held to be liable to income-tax on the profit made on the transaction although no cash passed, but this was on the ground that the shares taken in exchange were realisable and were thus money's worth and the equivalent of cash. In the case of Royal Insurance Company, Ltd. v. Stephen [(1928) 44 T.L.R. 630 : 14 Tax. Cas. 22.], an insurance company, which admitted that any prof....
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....rtgage were not identical with the grantor of the original mortgage and the property mortgaged was greater in extent, but the substitution effected cannot in any real sense, be described as the equivalent of a realisation of the original mortgage, principal and interest. What happened was that the assessees received a new and substituted security for an existing debt. To give security for a debt is not to pay a debt. If the assessees had received payment in kind of the amount outstanding on the original mortgage, in the shape, say, of realisable shares or bonds, the case would have been different, but they merely received further and better security for their debt. It is, in their Lordships' view, quite immaterial that the assessees discharged the original mortgage and all liability under it, for that was merely an incident in the transaction whereby the new security was substituted for the old. Their Lordships accordingly hold that the assessees did not by virtue of the transaction of 1904 receive payment of the arrears of interest amounting to Rs.2,33,135 then outstanding on the mortgage of 1894; that the assessees were not liable to be taxed on this sum as being income recei....
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....n of an obligation, income which is embedded in the value of the assets is deemed to be received : the receipt of income is not deferred till the asset is realized in terms of cash or money. It makes no difference whether the receipt of assets is in pursuance of an agreement or that the trader is compelled by law to accept the assets from the debtor. Once title of the trader to an asset received is complete, whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset. In Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes) [5 TC 159] Lord Trayner in dealing with a case of assessment to income tax of a Company formed for the purpose, inter alia, of acquiring and reselling mining property resold the whole of its assets to a second Company and received payment in fully paid shares of the purchasing Company, observed: "A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been tur....
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....1) 1 Ch 92] observed at p. 98: "The word 'profit' has * * * a well-defined legal meaning and this meaning coincides with the fundamental conception of profits in general parlance; although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. 'Profit' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets at the two dates." In the gross receipts of a business day after day or from transaction to transaction lie embedded or dormant profit or loss: on such dormant profit or loss undoubtedly taxable profits, if any, of the business will be computed. But dormant profits cannot be equated with profits charged to tax under Sections 3 & 4 of the Income Tax Act. The concept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law. If profits accrue to the ....
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....st that the profits of the company could accrue from day to day or even from month to month". The working of the company from day to day could certainly not indicate any profit or loss, even the working of the company from month to month could not be taken as a reliable guide for this purpose. If the profit or loss has to be ascertained by a comparison of the assets at two stated points, the most businesslike way would be to do so at stated intervals of one year and that would be a reasonable period to be adopted for the purpose. In the case of large business concerns the working of the company during a particular month may show profits and the working in another month may show loss. The business during the earlier part of the year may show profit or loss and in the later part of the year may show loss or profit which would go to counterbalance the profit or loss as the case may be in the earlier part of the year. It would therefore be reasonable to determine the profit or loss as the case may be at the end of every year so that on such calculation of net profits the managing agents may be paid their remuneration or commission at the percentage stipulated in the managing agency agr....
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....le proceeds received by the Agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of Section 4(1)(a) were immediately attracted and the income profits and gains so received became chargeable to tax under Section 3 of the Act." 8. These observations were, it may be noticed, made in rejecting the contention raised by counsel for the taxpayer that in the gross sale proceeds received by him in India, there was no income at all. Counsel for the Indian Company said that the gross sale proceeds were merely credit items in the account and that several amounts were to be debited in the same account and if there remained any credit balance, such balance alone could be regarded as stamped with the formal impress of income capable of being dealt with as such : income could therefore be said to have been received only at that stage. The Court did propound that when gross sale proceeds are received in which is embedded income, that income will enter the ultimate computation of the total profits assessable to tax. But that is not to say that the profits accrue or aris....
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....ticularly that profits can be ascertained only by a comparison of assets at two defined points in time, and that unrealised gains embedded in stock-in-trade are not brought to charge unless and until they are crystallised in terms of money's worth. The following paragraphs are apposite: "28. One more aspect needs to be highlighted. Under Section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading Section 37(1) with Section 145. 29. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. Whil....
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....fit" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profits and gains made by business during the year can only materialise when a comparison of the assets of the business at two different dates is taken into account." 24.2. Accordingly, in the context of amalgamation, the issue does not turn on the accrual of income in the abstract sense, but on whether the assessee has received a commercially realisable consideration in kind. Upon sanction of the scheme, there is only a statutory substitution of rights; no asset then exists in the hands of the assessee that is capable of commercial realisation. The charge under Section 28 crystallises only upon allotment of the new shares, when the assessee actually receives realisable instruments capable of valuation in money's worth. At that point, the old stock-in-trade ceases to exist and stands replaced by new shares having a definite market value. Since these shares are received in the course of business and in substitution of trading assets, their receipt represents a commercial profi....
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.... value capable of immediate realisation. Even if the scheme contemplates the issue of shares in a certain ratio from the appointed date, until allotment there is no identifiable scrip or tradable asset in existence in the hands of the assessee. Thus, the charge under Section 28 is not attracted on the mere sanction of the scheme or on the appointed date, but only upon the receipt of the new shares, when the statutory substitution translates into a concrete, realisable commercial advantage. 26. Without prejudice to the broader question of chargeability under Section 28, it was contended on behalf of the appellants that even if the fair market value of the shares allotted in the amalgamated company exceeded the book value of the shares held in the amalgamating company, such excess would be merely hypothetical and illusory until the shares were sold, given that market value is inherently fluctuating. As discussed, the test under Section 28 is not postponed until an actual sale, but is satisfied once the assessee comes into possession of an asset of determinable and presently realisable value in substitution of its trading stock. The fact that such value may fluctuate subsequently d....
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....t be equated with a mere continuation of an investment. It represents a commercial realisation in kind, for the new shares are distinct assets with a definite and presently realisable market value. 27.3. If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion. 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. Equally, losses could be engineered and shifted across entities to depress taxable income. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus; to exempt them from charge at the point of substitution would undermine the integrity of the tax base. 27.4. Accordingly, while the Act makes an express exception for amalgamation of capital assets, no such exception is contemplated in the case of business assets. Section 28 is deliberately cast in wide terms to bring to tax real and presently realisable profits arising in the course of business, and in the cont....
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.... the benefit received is real and presently realisable. 30. 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 I.T. Act. The charge under Section 28 is, however, attracted only upon the allotment of new shares. At earlier stages namely, the appointed date or the date of court sanction, no such benefit accrues or is received. 31. Accordingly, the main issue is answered in favour of the Revenue, in principle holding that the receipt of shares of the amalgamated company in substitution of stock-in-trade can give rise to taxable business profits under Section 28. However, the actual application of this principle to the facts of the present case, including whether the shares received are freely realisable or otherwise subject to restrictions, or whether the shares are held only as investment, is a matter requiring factual determination. In these circumstances, the proper course is to remit....