M/s Alpha Investments Ltd., an investment company, held 2,00,000 shares of Beta Alloys Ltd. as stock-in-trade. Pursuant to a court-approved scheme…

CA Final · Direct Tax Laws and International Taxation · RTP · November 2026
M/s Alpha Investments Ltd., an investment company, held 2,00,000 shares of Beta Alloys Ltd. as stock-in-trade. Pursuant to a court-approved scheme of amalgamation, Beta Alloys Ltd. was amalgamated with Gamma Metals Ltd. Under the scheme, Alpha Investments Ltd. was allotted 90,000 shares of Gamma Metals Ltd. in exchange for its shares in Beta Alloys Ltd. The shares of Gamma Metals Ltd. allotted to Alpha Investments Ltd. were freely marketable, had an ascertainable market value and could be sold immediately after allotment. Alpha Investments Ltd. contended that the receipt of Gamma Metals Ltd. shares was merely a statutory substitution and, therefore, no taxable income arose until those shares were actually sold. Based on the principles laid down by the Supreme Court, which of the following is the most appropriate?
(A) (A) The receipt is exempt under section 47(vii), since shares were allotted pursuant to an amalgamation scheme, irrespective of whether the original shares were capital assets or stock-in-trade.
(B) (B) No taxable income arises until Alpha Investments Ltd. actually sells the shares of Gamma Metals Ltd., since section 28 applies only when there is an actual sale of stock-in-trade.
(C) (C) The allotment of shares of Gamma Metals Ltd. gives rise to taxable business income under section 28, since the original shares were held as stock-in-trade and the substituted shares were freely realisable and capable of definite valuation.
(D) (D) The transaction is taxable only under the capital gains provisions because the extinguishment of the shares of Beta Alloys Ltd. constitutes a transfer under section 2(47).

Suggested Answer and Working Notes:

Correct Answer: Option (C)

The allotment of shares of Gamma Metals Ltd. gives rise to taxable business income under section 28, since the original shares were held as stock-in-trade and the substituted shares were freely realisable and capable of definite valuation.

Topics: Transfer Pricing, Double Taxation Relief, Non-Resident Taxation

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