The Supreme Court on Thursday delivered a detailed ruling on a long-running income tax dispute involving investment companies of the Jindal Group, laying down important principles on how shares received during corporate amalgamations should be taxed. While the Court did not itself compute the tax liability, it upheld the Delhi High Court’s approach and sent the matter back to the Income Tax Appellate Tribunal for a fresh factual determination.
The judgment came in a batch of civil appeals arising from assessment year 1997–98 and involved companies that received shares following the merger of two group entities.
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Background of the Case
The appeals were filed by M/s Jindal Equipment Leasing & Consultancy Services Ltd and other group companies against the Income Tax Department. The dispute traces back to the amalgamation of Jindal Ferro Alloys Limited (JFAL) with Jindal Strips Limited (JSL) under court-approved schemes.
Under the approved amalgamation, shareholders of JFAL were allotted 45 shares of JSL for every 100 shares they held. The assessees claimed that these shares were capital assets and sought exemption under Section 47(vii) of the Income Tax Act, which shields certain amalgamation-related transfers from capital gains tax.
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The Assessing Officer disagreed, treating the JFAL shares as stock-in-trade rather than investments. On that basis, the tax department brought the value difference to tax as business income. While the Income Tax Appellate Tribunal initially ruled in favour of the assessees, the Delhi High Court set aside that decision and ordered a fresh look at the nature of the shareholding.
Before the Supreme Court, the assessees argued that the High Court had exceeded its jurisdiction by going beyond the specific questions framed in appeal. They also contended that merely receiving shares in an amalgamation does not amount to a sale or exchange, and therefore no taxable business income could arise at that stage.
The Revenue, on the other hand, maintained that if shares are held as stock-in-trade, any real commercial gain arising from their substitution during amalgamation could fall under “profits and gains of business or profession”.
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Court’s Observations
Rejecting the assessees’ procedural objection, the Supreme Court held that the High Court was entitled to address issues incidental to the main question before it. The bench noted that determining whether the shares were capital assets or stock-in-trade went “to the very root of taxability”.
On substance, the Court drew a clear distinction between capital gains provisions and business income provisions under the Income Tax Act. It explained that Section 47(vii) operates only when shares are held as capital assets. If shares are held as stock-in-trade, that exemption does not apply.
However, the Court also cautioned that taxation under business income cannot be automatic. “The true test,” the bench observed, “is whether the assessee has obtained a real and presently realisable commercial benefit.”
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The judgment underlined that a mere statutory substitution of shares during amalgamation does not, by itself, create taxable income. Factors such as whether the shares received are freely tradable, have an ascertainable market value, and can be immediately realised in commercial terms would be crucial.
Decision
Upholding the Delhi High Court’s remand, the Supreme Court declined to interfere and dismissed the appeals. It directed that the Income Tax Appellate Tribunal must now decide, as a matter of fact, whether the shares in question were held as capital assets or as stock-in-trade, and then apply the law accordingly.
With this, the Court brought the matter back to the fact-finding stage, clarifying the legal principles but leaving the final tax outcome to be determined by the Tribunal.
Case Title: M/s Jindal Equipment Leasing & Consultancy Services Ltd vs Commissioner of Income Tax
Case No.: Civil Appeal No. 152 of 2026 (with connected appeals)
Case Type: Income Tax – Civil Appeal
Decision Date: 9 January 2026
