Courts Must Remain Alive To Distinction Between Commercial Gain & Hypothetical Accretion: Supreme Court

The Supreme Court has emphasised that the Courts must remain alive to the distinction between genuine commercial gain and hypothetical accretion.

The Court emphasised thus in a batch of Civil Appeals arising out of a common Judgment and final Order of the Delhi High Court, which remanded the matters to the Income Tax Appellate Tribunal (ITAT).

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan remarked, “Amalgamation, as a statutory substitution, ensures continuity of enterprise but also extinguishes one form of holding and replaces it with another. As we have held, where such substitution confers on the assessee realisable assets of definite market value, a commercial realisation takes place, and Section 28 is attracted. At the same time, courts must remain alive to the distinction between genuine commercial gain and hypothetical accretion. The touchstone is, therefore, the doctrine of real income, applied with due regard to the facts of each case, ensuring that the tax charge operates neither oppressively nor evasively, but in harmony with the legislative design, to tax true profits of business, however manifested, while eschewing illusory gains.”

The Bench said that business, by its very nature, admits of profits arising in diverse forms, whether in money or in kind, yet the common denominator is that the benefit must be concrete, capable of commercial realisation, and not a mere paper re-arrangement.

Senior Advocates Ajay Vohra and Kavita Jha appeared on behalf of the Appellants, while Additional Solicitor General (ASG) Raghavendra P. Shankar appeared on behalf of the Respondents.

Court’s Observations

The Supreme Court in view of the facts of the case, observed, “… the scope of taxability on amalgamation depends on the nature of the shares held. Section 2(14) excludes stock-in-trade from the definition of a capital asset, while Section 2(47) defines “transfer” only in relation to capital assets. Section 28 casts a wide net, taxing the “profits and gains of business or profession”, including benefits or perquisites arising from business, whether convertible into money or not, or in cash or kind.”

The Court explained that there is a difference between a charging provision and an exemption provision. It said that a provision that enables the levy of tax on a particular transaction is a charging provision and only a transaction that is covered by a charging provision is taxable.

“Only if the transaction is taxable can there be an exemption. … Therefore, the transfer of shares arising out of an order of amalgamation, even if it is treated as a capital asset, is generally taxable but would be exempt from taxation only if both the requirements under Section 47 (vii) are satisfied”, it added.

The Court was of the view that in the absence of any analogous deeming provision in respect of amalgamations, Section 28 of the Income Tax Act, 1961 (ITA) cannot be judicially expanded to cover hypothetical or unrealised gains.

“… once the shares held as stock-in-trade in the amalgamating company ceases to exist and are replaced by shares of the amalgamated company of higher value, a business profit arises which is liable to be taxed under Section 28”, it noted.

The Court further reiterated that charging provisions, while construed strictly, are not to be read in an unduly narrow manner when the language of the provision itself is wide.

“… business profits may accrue or be realised in diverse circumstances, even in the absence of a conventional sale, transfer, or exchange in the strict legal sense. To confine the operation of Section 28 to such modes would unduly restrict a provision that Parliament has intentionally couched in broad terms”, it also said.

The Court clarified that Section 28 is a comprehensive charging provision designed to bring within the tax net all real profits and gains arising in the course of business, whether convertible into money or received in money or in kind, and irrespective of whether such accrual or receipt of income is accompanied by a legal transfer in the strict sense.

Accordingly, the Apex Court disposed of the Appeals and affirmed the impugned Judgment.

Cause Title- M/s Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi (Neutral Citation: 2026 INSC 46)

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