Summary
The Supreme Court held that when shares of an amalgamating company held as stock-in-trade are replaced by shares of the amalgamated company, the substitution gives rise to business income taxable under Section 28 of the Income Tax Act if the new shares are realisable in money and capable of definite valuation. The charge arises only on allotment of the new shares, not on the appointed date or on sanction of the scheme. The High Court's remand to the Tribunal to decide whether the shares were stock-in-trade or capital assets was affirmed.
Issues
- Whether the High Court exceeded its jurisdiction under Section 260A by addressing taxability under Section 28 without formally framing that as a substantial question of law.
- Whether the allotment of shares of the amalgamated company in place of shares of the amalgamating company held as stock-in-trade gives rise to taxable business income under Section 28, or whether income arises only on later sale.
- If such income is taxable, what conditions must be satisfied and at what point of time does the charge arise?
Provisions considered
- Section 260A, Income Tax Act, 1961Confines appeals to the High Court to substantial questions of law, with a proviso permitting other questions for recorded reasons. Held not breached: taxability under Section 28 was incidental to the framed question, arose from the Tribunal's own issue, and the parties were fully heard. (¶¶ 9, 9.1, 9.2, 9.3, 9.4, 9.5, 9.6)
- Section 28(i) and (iv), Income Tax Act, 1961A wide charging provision covering profits and gains of business and benefits arising from business, in cash or in kind. It does not require a transfer, sale or exchange, but the profit must be real, presently realisable and ascertainable. (¶¶ 12, 12.1, 15, 15.1, 15.2, 15.3, 24.2, 27.4, 29, 30)
- Section 47(vii), Income Tax Act, 1961Exempts from capital gains a shareholder's transfer, in a scheme of amalgamation, of shares held as a capital asset in consideration of shares in an Indian amalgamated company. The exemption is confined to capital assets and does not extend to stock-in-trade. (¶¶ 12, 12.1, 27, 27.4, 28)
- Sections 2(14), 2(47) and 45, Income Tax Act, 1961Stock-in-trade is excluded from 'capital asset', and 'transfer' and the capital gains charge apply only to capital assets. These provisions therefore operate in a field distinct from Section 28. The High Court's finding that amalgamation is a transfer of shares held as capital assets was not disputed before the Court. (¶¶ 8.3, 12, 12.1, 15)
- Section 2(1B), Income Tax Act, 1961Definition of amalgamation, read with company-law principles to characterise amalgamation as a statutory substitution of holdings rather than an exchange. (¶¶ 12, 16, 16.1, 18.1)
Held
- The High Court did not exceed its jurisdiction under Section 260A. The Section 28 question went to the root of the matter, was incidental to the question framed, flowed from the issue the Tribunal itself framed, and was argued by both sides, so there was no prejudice or breach of natural justice. The High Court did not itself assess income; it only remanded. (¶¶ 9.3, 9.4, 9.5, 9.6)
- Section 28 is a comprehensive charging provision that reaches all real profits arising in the course of business, in money or in kind, whether or not there is a sale, exchange or transfer in the strict legal sense. Unlike Section 45, it does not import the definition of transfer in Section 2(47). (¶¶ 15, 15.2, 15.3, 18.3, 18.6)
- Amalgamation is a statutory substitution of one holding for another and not an exchange in the legal sense. The test under Section 28 is whether, as a result, the assessee has obtained a real and presently realisable profit: the old stock-in-trade must have ceased to exist, the new shares must have a definite and ascertainable value, and the assessee must be able to dispose of them on allotment. (¶¶ 17, 18, 18.1, 18.2, 18.3, 18.4)
- Where the allotted shares are not immediately realisable, for example because of a statutory lock-in or because the amalgamated company is closely held and its shares are unquoted, the substitution yields no taxable income at that stage, and taxability arises only on eventual sale. Section 28 cannot be extended by analogy to tax hypothetical accretions. (¶¶ 18.4, 18.5, 23, 24.2)
- The charge under Section 28 crystallises only on allotment of the new shares, which requires actual receipt, present realisability and ascertainable value. It is not triggered on the appointed date or on the court's sanction of the scheme, when there is only a substitution of rights without any tradable asset in the shareholder's hands. (¶¶ 24.2, 25, 30)
- Later fluctuation in market value does not make the gain notional; valuation is done as on the date of allotment. (¶ 26)
- The exemption for amalgamations in Section 47 is limited to capital assets. Stock-in-trade is circulating capital held for conversion into money, so its substitution by realisable shares of definite value is a commercial realisation. Insulating such substitutions from tax would open an avenue for tax evasion. (¶¶ 27, 27.1, 27.2, 27.3, 27.4)
- Whether the test is met is a fact-sensitive inquiry, with the burden on the Revenue. Whether the shares were stock-in-trade or investments, and whether they were freely realisable, must be decided by the Tribunal. (¶¶ 24.3, 31)
Result
Appeals disposed of; the High Court's judgment remanding the matter to the Tribunal affirmed, the principle being answered in favour of the Revenue, with the Tribunal to decide afresh on the facts; no order as to costs.