Nalwa Investment Ltd. Vs CIT (Supreme Court of India)
Substitution of Shares on Amalgamation Not Automatically Business Income: Realisable Profit Test Laid Down
These civil appeals before the Supreme Court arose from a common judgment dated 07.08.2020 of the Delhi High Court in ITA Nos. 935, 822, 853 and 961 of 2005 relating to AY 1997-98. The High Court had remanded the matters to the ITAT for fresh adjudication on whether shares held in the amalgamating company were stock-in-trade or capital assets, observing that if they were stock-in-trade, the transaction would fall outside Section 47(vii) and taxability would be governed by Section 28. The appellants were investment companies of the Jindal Group holding shares of operating companies (JFAL and JSL) as promoter holding with controlling interest, supported by non-disposal undertakings to lenders, and shown as investments in their balance sheets. Under a court-approved amalgamation scheme (orders dated 19.09.1996 and 03.10.1996), JFAL was amalgamated with JSL, with appointed date 01.04.1995 and effective date 22.11.1996. Shareholders of JFAL were allotted 45 shares of JSL for every 100 shares of JFAL. In their returns, appellants claimed exemption under Section 47(vii) treating the shares as capital assets; however, the Assessing Officer treated JFAL shares as stock-in-trade, denied the exemption, and taxed the value difference as business income. CIT(A) upheld this and held the acquisition was an adventure in the nature of trade attracting Section 28. The Tribunal allowed the assessees’ appeals without deciding the nature of holding, holding that no profit accrues unless shares are sold or transferred for consideration, relying on Rasiklal Maneklal. The High Court disagreed, holding that if shares were capital assets, amalgamation constitutes a “transfer” within Section 2(47) though exempt under Section 47(vii), and if stock-in-trade, receipt of shares could lead to business profit taxable under Section 28, relying on Orient Trading, and remanded the matter to the Tribunal.
