Legal Review and Analysis of Jindal Equipment Leasing & Ors vs Commissioner Of Income Tax 2026 INSC 46

Synopsis

This landmark judgment by the Supreme Court of India settles a significant and long-debated question under the Income Tax Act, 1961 (“the Act”): Whether the receipt of shares of an amalgamated company in lieu of shares held as stock-in-trade in an amalgamating company, pursuant to a court-sanctioned scheme of amalgamation, gives rise to taxable business income under Section 28 of the Act at the stage of allotment itself.

The Court affirmed the Delhi High Court's view, holding that such a substitution can constitute a commercial realization of trading assets, resulting in taxable business profits under Section 28, provided the newly allotted shares are freely realisable and possess a definite market value. The Court clarified that the chargeability is not deferred until the actual sale of the new shares if a real, presently realisable commercial benefit is received in kind. The matter was remitted to the Income Tax Appellate Tribunal (ITAT) for factual determination of the nature of holdings and the realisability of the shares.

1. Basic Information of the Judgment

Judgment Name : Jindal Equipment Leasing & Ors. vs. Commissioner Of Income Tax

Coram: Justice J.B. Pardiwala & Justice R. Mahadevan
Bench: Division Bench of the Supreme Court of India
Citation: 2026 INSC 46 (Reportable)
Date of Judgment: January 09, 2026

II. Legal Framework & Relevant Precedents

A. Primary Statutory Provisions (Income Tax Act, 1961):

1. Section 2(14): Definition of "Capital Asset" – specifically excludes stock-in-trade.

2. Section 2(47): Definition of "Transfer" – includes sale, exchange, relinquishment, or extinguishment of rights in relation to a capital asset.

3. Section 28: Charging provision for "Profits and gains of business or profession". It is a wide provision taxing benefits arising from business, whether in cash or kind.

4. Section 45(1): Charging provision for "Capital Gains" – triggered by the transfer of a capital asset.

5. Section 47(vii): Exemption provision – states that transfer of a capital asset (shares) in a scheme of amalgamation, in consideration of allotment of shares in the amalgamated company, is not regarded as a transfer for capital gains purposes.

B. Key Judicial Precedents Relied Upon:

1. CIT v. Grace Collis & Others (2001): Held that amalgamation involves a "transfer" u/s 2(47) for capital gains purposes, overruling the narrower view in Vania Silk Mills.

2. Orient Trading Co. Ltd. v. CIT (1997): Crucially held that an exchange of securities by a share dealer amounts to realisation of stock-in-trade, resulting in taxable profits u/s 28.

3. CIT v. Rasiklal Maneklal (HUF) (1989): Held that allotment of shares on amalgamation is not an "exchange" in the legal sense, but a statutory substitution.

4. E.D. Sassoon & Co. Ltd. & Shoorji Vallabhdas & Co.: Established the "real income" doctrine – income accrues when a vested right to receive is created.

5. CIT v. Excel Industries Ltd. (2013): Reiterated that income accrues when it becomes due and a corresponding liability exists.

6. Shiv Raj Gupta v. CIT (2020): Laid down the procedural mandate u/s 260A that the High Court cannot decide an un-framed substantial question of law without due process.

III. Relevant Facts of the Case

1. Parties: The appellants were investment companies of the Jindal Group (Jindal Equipment Leasing, Nalwa Investments, etc.).

2. Holdings: They held shares in operating companies, Jindal Ferro Alloys Ltd. (JFAL) and Jindal Strips Ltd. (JSL). These shares were reflected as "investments" in their balance sheets.

3. Amalgamation: During AY 1997-98, JFAL amalgamated with JSL under a court-approved scheme. Shareholders of JFAL received 45 shares of JSL for every 100 shares of JFAL held.

4. Tax Treatment & Litigation History:
   Assessee's Claim: Claimed exemption u/s 47(vii), treating the transaction as a non-taxable transfer of a capital asset.
   Assessing Officer (AO) & CIT(A): Held the shares were stock-in-trade, denied exemption u/s 47(vii), and taxed the difference in market value as business income u/s 28.
   ITAT: Allowed the assessee's appeal, relying on Rasiklal Maneklal. It held that since there was no "sale," no profit accrued, making the nature of holding (capital vs. stock-in-trade) irrelevant.
   Delhi High Court: Set aside the ITAT order. It held that if shares are stock-in-trade, the profit on substitution is taxable u/s 28. It remanded the case to ITAT to first determine the nature of the holdings.

5. Appeal to Supreme Court: The assessees appealed against the High Court's remand order and its findings on taxability u/s 28.

IV. Issues Before the Supreme Court

1. Preliminary Issue: Whether the High Court exceeded its jurisdiction u/s 260A of the Act by deciding on the applicability of Section 28 without formally framing it as a substantial question of law?

2. Substantive Issue: Whether, upon amalgamation, the receipt of shares of the amalgamated company in lieu of shares held as stock-in-trade in the amalgamating company, constitutes a taxable event giving rise to "profits and gains of business or profession" under Section 28 of the Income Tax Act, 1961, at the stage of allotment itself?

3. Ancillary Issue: What are the legal tests to determine if such a receipt results in a real, taxable income?

V. Ratio Decidendi & Judgment of the Court

The Supreme Court answered the preliminary issue in the negative and the substantive issue in the affirmative, in principle. The detailed reasoning is as follows:

A. On Jurisdiction of High Court (Section 260A):

The Court rejected the appellant's contention. It held:

• The question of taxability u/s 28 was incidental and collateral to the framed question on "transfer."

• The issue went to the root of the matter and was argued by both parties.

• The High Court did not violate natural justice as in Shiv Raj Gupta, as parties had a full opportunity to address it.

• Following Mansarovar Commercial Pvt. Ltd., the High Court was within its power to consider such an intertwined issue.

B. On Core Substantive Issue – Taxability u/s 28:

The Court delivered a nuanced judgment, establishing the following principles:

1. Dichotomy Between Capital Assets and Stock-in-Trade is Fundamental:
 Section 47(vii) provides an exemption only for transfers of capital assets during amalgamation. This reflects a legislative policy that amalgamation in the investment context is mere restructuring, not realization.
Section 28, governing business profits, contains no such exemption. Stock-in-trade (circulating capital) is meant for conversion into money in the ordinary course of business.

2. Section 28 is a Wide Charging Provision:
Unlike Section 45, which is predicated on a "transfer," Section 28 has no such precondition. It taxes "profits and gains of business," however realized.
It encompasses profits received in cash or in kind, whether convertible into money or not. (Ref: Mazagaon Dock, Ujagar Prints).

3. The "Real Income" Doctrine and the Three-Pronged Test:
The Court held that for a receipt in kind (like shares) to be taxable as business income u/s 28 upon amalgamation, it must satisfy the test of commercial realization. This requires:
(A) Cessation of Old Asset: The original stock-in-trade (shares of amalgamating co.) must cease to exist in the assessee's books.
(B) Receipt of New Asset with Definite Value: The shares received in the amalgamated company must possess a definite and ascertainable market value.
(C) Present Realisability: The assessee must, immediately upon allotment, be in a position to dispose of such shares and realise money. The shares must be freely tradable.

4. Timing of Taxability – Allotment is the Crucial Date:
Taxability arises not on the "appointed date" or the date of "court sanction," but only upon the actual allotment of new shares.
Only at allotment does the assessee receive a concrete, realisable asset. Prior stages involve only a statutory fiction of substitution.

5. Distinction from "Exchange" and "Transfer":
The Court agreed with Rasiklal Maneklal that amalgamation is not an "exchange" in the legal sense due to the dissolution of the transferor company.
However, following Grace Collis, it acknowledged that amalgamation does involve a "transfer" u/s 2(47) for the purposes of the Act.
Crucially, for Section 28, the legal labels of "exchange" or "transfer" are not determinative. The focus is solely on commercial realization.

6. Application to the Case & Remand:
The Court affirmed the High Court's remand order.
It held that the ITAT must first determine the factual nature of the holdings (capital asset or stock-in-trade).
If held as stock-in-trade, the ITAT must then apply the three-pronged test established above to ascertain if the receipt of JSL shares constituted a real, taxable business profit in AY 1997-98.

VI. Legal Framework Established & Novelty of the Judgment

This judgment provides critical doctrinal clarity on a previously ambiguous area:

1. Settles the Section 28 vs. Section 47(vii) Conundrum: It authoritatively establishes that the exemption route u/s 47(vii) is unavailable for stock-in-trade. Such transactions fall for consideration under the broader, separate charging provision of Section 28.

2. Introduces the "Commercial Realization" Test for Amalgamation: The three-condition test (Cessation, Definite Value, Present Realisability) provides a concrete, principled framework for tribunals and authorities to distinguish between a mere paper substitution and a taxable event.

3. Clarifies Timing of Tax Incidence: By pinpointing the "date of allotment" as the taxable event (and not earlier dates in the amalgamation process), the judgment brings certainty to the point of income recognition.

4. Decouples Section 28 from Technical "Transfer": It firmly holds that the existence of a "transfer" as defined in Section 2(47) is not a sine qua non for invoking Section 28. This affirms the independent and wide ambit of the charge on business profits.

VII. Court's Examination & Analysis of Concepts

The Court's analysis was meticulous and layered:

1. Statutory Interpretation: The Court employed a purposive interpretation, reading Sections 28, 45, and 47 harmoniously to give effect to the distinct legislative treatment for business income and capital gains.

2. Conceptual Analysis of Amalgamation: It distinguished amalgamation from liquidation or simple exchange, characterizing it as a statutory process of substitution where the transferor company's identity is extinguished, but its business continues within the transferee.

3. Doctrinal Synthesis: The Court reconciled seemingly conflicting precedents:
   It used Orient Trading for the principle of realization in kind.
   It limited Rasiklal Maneklal to its context (defining "exchange") and noted its capital gains focus.
   It applied the "real income" doctrine from E.D. Sassoon and Excel Industries to prevent taxation of notional gains.

4. Policy Considerations: The Court implicitly considered anti-avoidance. It noted that treating stock-in-trade substitution as non-taxable could open avenues for tax evasion through shell amalgamations, undermining the tax base.

VIII. Critical Analysis & Final Outcome

Final Outcome: The Supreme Court dismissed the appeals, upheld the High Court's judgment, and remanded the matters to the ITAT for fresh factual determination in accordance with the legal principles laid down.

Critical Analysis:

• Strengths of the Judgment:
  Doctrinal Clarity: It successfully resolves a complex, long-pending issue with a clear, test-based framework.
  Balanced Approach: It balances the need to tax real business profits with the protection against taxing hypothetical gains, staying true to the "real income" doctrine.
  Practical Guidance: The three-pronged test offers practical benchmarks (like lock-in periods, market liquidity) for lower authorities to apply.

• Potential Challenges & Ambiguities:
  Fact-Intensive Remand: The remand places a heavy factual burden on the ITAT. Determining "present realisability" and "definite market value" for unlisted shares in 1997-98 could be contentious.
  Valuation Difficulties: The judgment mandates "definite valuation," but valuing unquoted shares, especially in a group amalgamation, often involves estimation, which may lead to disputes.
  Burden of Proof: While the Court states the burden lies on the Revenue, in practice, the assessee may need to lead evidence to disprove realisability.

Conclusion: This judgment is a significant contribution to Indian fiscal jurisprudence. It reinforces the principle that the form of a corporate restructuring (amalgamation) does not override the substance of a transaction for a business entity. By laying down a principled yet flexible test, it aims to ensure that genuine business profits are taxed appropriately while safeguarding taxpayers from liability on mere notional accruals.

IX.  (MCQs)

1. As per the Supreme Court's judgment, the exemption under Section 47(vii) of the Income Tax Act, 1961, is available in a scheme of amalgamation when the shares held in the amalgamating company are?
a) Held as stock-in-trade and are readily marketable.
b) Held as capital assets.
c) Held for controlling interest in the company.
d) Subject to a lock-in period as per the amalgamation scheme.

2. The Supreme Court held that for the receipt of shares in an amalgamated company to be taxable as business income under Section 28, which of the following is NOT a required condition?
a) The shares received must have a definite and ascertainable market value.
b) The assessee must have an immediate right to sell the shares upon allotment.
c) The amalgamation scheme must have been sanctioned by the National Company Law Tribunal (NCLT).
d) The original shares held as stock-in-trade must cease to exist.

3. According to the judgment, the chargeability to tax under Section 28 in an amalgamation scenario is triggered at which specific point in time?
a) The appointed date mentioned in the scheme of amalgamation.
b) The date when the court sanctions the amalgamation scheme.
c) The date of actual allotment of shares in the amalgamated company.
d) The date when the amalgamating company is dissolved.

4. The Supreme Court reconciled the precedent in Orient Trading Co. Ltd. v. CIT by holding that it established the principle that?
a) Amalgamation does not involve a 'transfer' of shares.
b) Receipt of an asset of definite money's worth in substitution for trading stock can amount to commercial realization u/s 28.
c) Section 47(vii) applies to both capital assets and stock-in-trade.
d) Business income can only accrue upon the sale of an asset for cash.