Legal Provisions Involved: Sections 28 and 47(vii) of the Income Tax Act, 1961.

Judgement by: Supreme Court of India

Judge/Bench: Justice J.B. Pardiwala and Justice R. Mahadevan

Facts

The companies involved were holding shares of another company as part of their business. Later, under a court-approved amalgamation, those old shares were replaced with shares of the new, merged company. The tax department treated this as business income and taxed the value of the new shares. The companies argued that no tax should be charged because the shares were received due to amalgamation.

Key Legal Provisions

Sections 28 and 47(vii) of the Income Tax Act, 1961.

Issues Raised

Whether receiving new shares in place of old ones, when the old shares were held for business, creates taxable income immediately.

Arguments of the Case

The companies said income should be taxed only when the shares are sold. The tax department said that getting valuable and sellable shares itself is a business gain.

Judgement 

The Supreme Court held that if shares are held as stock-in-trade and the new shares received can be sold and have a clear market value, then taxable business income arises at the time of allotment itself. The case was sent back to the ITAT to check the facts and decide accordingly.

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