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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR
PER PRADIP KUMAR KEDIA - AM:
The captioned appeals have been filed at the instance of the Revenue against the respective orders of the Commissioner of Income Tax (Appeals)-5, Vadodara (‘CIT(A)’ in short), dated 25.11.2014, 23.08.2016 & 30.08.2016 arising in the respective assessment orders dated 18.03.2013, 04.03.2015 & 30.12.2015
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passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning assessment years 2010-11, 2012-13 & 2013-14.
The assessee has also filed cross objections in AY 2010-11 & 2012-13 and cross appeal in AY 2013-14 in the Revenue’s appeals as captioned above.
As noted above, the captioned appeals are bunch of six appeals concerning assessment years 2010-11, 2012-13 & 2013-14. As claimed on behalf of the assessee, the facts are similar and common issues are involved in all the assessment years and therefore all the appeals were heard together and disposed of by common order.
ITA No. 742/Ahd/2015-AY 2010-11 (Revenue’s appeal)
The grounds of appeal raised by Revenue read as under:
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition on account of difference in shares without appreciating the fact that by converting an asset from stock-in-trade to the capital asset, if the gain is taxed, the same would amount to taxing an income without there being a third party sale. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in recalculating the disallowance under Rule 8D without appreciating the fact that the borrowed interest bearing funds were utilized for earning exempt dividend income.”
As per Ground No.1, the AO has challenged the reversal of addition by the CIT(A) on account of conversion of shares at a book value from trading asset (stock-in-trade) to capital asset (Investments). It is the case of the AO that such conversion gives rise to the taxable event and the difference in the market price of
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stock-in-trade prevailing on the date of conversion qua the book value at which stock-in-trade was converted into investment tantamounts to transfer and is thus chargeable to tax. It is thus contention on behalf of the Revenue that the notional difference between the market price and the cost price at which the conversion has taken place from trading asset to capital asset is taxable as business income. In essence, the central case of the Revenue is that the difference between cost and market price of the sales held as stock-in-trade on the date of conversion/transfer is chargeable to tax as business income. With the assistance of the learned AR for the assessee, we find that the issue of treatment of gains arising from conversion of trading asset into capital asset is squarely covered in favour of the assessee by the decision of the Hon’ble Gujarat High Court in the case of Aditya Medisales Ltd. vs. DCIT [2016] 73 taxmann.com 197 (Guj) and the decision of the co-ordinate bench in ACIT vs. Bright Star Investments (P) Ltd. 120 TTJ 498 (Mum). The CIT(A) has taken cognizance of the aforesaid decisions and adjudicated the issue in favour of the assessee as under:
“3.2.1. In appeal the learned Authorized Representative submitted that- "Conversion of shares from Stock in trade to Investment: 1. Vide Ground nos. 1, 2 and 3, the Appellant has challenged the action of the AO in holding that the conversion of shares from stock in trade to investment gives rise to taxable event and thereby making addition of Rs.2,11,70,633/-. The AO has contended that the classification of stock in trade to investments gives rise to taxable event. For working out the income based on said classification, the AO has contended that the difference between the market price as on the date of transfer and cost represents business income. 2. The Appellant is a partnership firm engaged in the business of dealing and investing in shares and stocks of various companies. The Appellant has filed return of income declaring income of Rs. Nil on 13-10-2010. During the year under consideration, the Appellant had classified 2,85,000 shares
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amounting to Rs.31,40,36,767/- from stock in trade to investment account at book value. The detailed working of the same is given herein below.
Cumulativ Date of Name of the No of Cost per Total Amount e no of classification Scripts Shares share (in Rs.) Shares
Sun 01-04-2009 Pharmaceutical 1,33,000 1,33,000 1089.46 14,48,98,180 Industries Ltd.
Sun 18-06-2009 Pharmaceutical 31,000 1,64,000 1089.46 3,37,73,260 Industries Ltd.
Sun 06-07-2009 Pharmaceutical 21,000 1,85,000 1089.46 2,28,78,660 Industries Ltd.
Sun 11-08-2009 Pharmaceutical 25,000 2,10,000 1089.46 2,72,36,500 Industries Ltd.
Sun 08-09-2009 Pharmaceutical 25,000 2,35,000 1089.46 2,72,36,500 Industries Ltd.
Sun 27-10-2009 Pharmaceutical 50,000 2,85,000 1160.27 5,80,13,667 Industries Ltd.
Total 31,40,36,767
Necessary declaration of the partners of the Appellant firm in respect of transfer of shares from stock in trade to investments is attached at page nos. 46 to 57. The Appellant has transferred 2,35,000 shares from the opening balance and the remaining 50,000 shares from the purchase made during the year. The Appellant had opening balance of 3,26,719 shares which were carried at Rs.1,089.46/- per share in the books of accounts. The Appellant has transferred 2,35,000 shares @ Rs.1,089.46/- from opening balance to investment account While remaining 50,000 shares were transferred from the purchases made during the year. The working of the cost price is give at page nos. 62 & 63 of the paper book. The ledger account and copy of accounting entries are attached at page nos. 39 to 45 of the paper book.
The AO was not in the agreement with the accounting treatment given for classification of shares from stock in trade to investment account. The AO has contended that:
• The conversion of shares from stock in trade to investment gives rise to taxable event;
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• The conversion of shares from stock in trade to investment should be at market price as on the date of transfer; and • The difference between the market price as on the date of transfer of shares and the cost price should be charged to tax as business income.
In view of the above, the AO has added Rs.2,11,70,633/- to the income of the Appellant treating it as business income.
We most respectfully submit that the AO has made addition without appreciating the facts in proper perspective. The AO during assessment proceedings had directed the Appellant to furnish the detail in respect of number of shares transferred, holding period of shares as stock in trade and the rate at which the shares were transferred i.e. whether at cost price or market price. In response to the same, the Appellant had submitted detailed working of the shares transferred to investment account (refer page nos. 58 to 63). The AO has treated the conversion of shares from stock in trade to investment as transfer and taxed the conversion of stock in trade to investment.
In the present case, the Appellant has classified the shares from one account to another. This is not the case of sale of shares to outside party. This transaction does not give rise to taxable event. The Appellant has transferred the shares from one portfolio to another. Moreover, the shares were not transferred to any outside party. The Appellant has restructured its investment portfolio and stock portfolio. It was also stated that the main reason for restructuring the portfolio was that, that the shares of Sun Pharmaceutical Industries Limited ("SPIL") were held under pledge. The shares of SPIL were pledged with JM Financial Services Pvt. Limited and Barclay Securities (India) Pvt. Ltd. Since the shares were required to be pledged for long period it was deem fit to transfer the shares from stock in trade to investment portfolio. It may be mentioned that these shares are till today held under pledge. Copy of the confirmation received from JM Financial Services Pvt. Ltd. substantiating the fact that the shares are held under pledge as produced before the AO is attached at page no 108 of paper book.
Your kind office would appreciate that in the current year no commercial transaction has taken place. There was change in the classification of shares and there was no sale nor any transfer of shares. In view of the same there is no taxable event arising out of classification of shares as investments. The Appellant still remains the owner of the shares.
In case of Bai Shirinbai Kooka 44 ITR 86 (SC) it was held that "it was well settled law that a man cannot sell to himself nor can he make a loss or profit out of the transactions with himself. This
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fact on the face of it is not only absurd but against all canons of Mercantile and Income Tax Law".
In view of the above decision, we submit that the AO cannot tax the transaction of conversion of shares from stock in trade to investment. This is not the case of sale of shares but a case of classification from trading stock to the investment account. No profit or loss arises in such classification as there is no third party involved in the transactions. In view of the same, we submit that the conversion of shares from stock in trade to investment does not give rise to taxable event.
We most respectfully submit that section 2(47)(iv) of the Act deals with the situation of transfer of capital asset into stock in trade. According to section 45(2) capital gain would be taxable in the previous year in which such stock in trade would be transferred or sold and not in the year in which the investment is converted into stock in trade. Your kind office would notice that there is no specific provision in the Act to deal with a situation of transfer of stock in trade to investments. Also as per section 45(2) the capital gain arises on transfer of capital assets would be chargeable to tax in the year in which the stock was sold and not in the year of transfer. The principle enunciated in the decision of SC in case of Bai Shirinbai Kooka supra has been duly acknowledged in the Act. In the given case, the AO has taxed the transaction at the time of conversion of stock in trade to investment. This interpretation done by the AO is not as per law and therefore we submit that the addition made is required to be deleted.
For the purpose of income tax, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits or losses which may be made in another year, in present case, the Appellant has classified the shares from stock in trade to investment. This is the case of classification of shares from one portfolio to another and not the sale / transfer of shares to any third party. This is not a business transaction and by this act the business made no profit or gain nor did it sustain a loss and the Appellant derived no income from it. The Appellant has not derived any immediate pecuniary gain and the Income Tax Act has no power to tax a potential future advantage. The tax would be on the income profits and gain made in the relevant accounting year and not leviable on future income, profits and gain. We therefore submit that the action of the AO in taxing the classification of shares is not as per law.
The AO in the assessment order has contended that the classification of shares from of stock in trade to investments
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is not recognized under the income tax law. In view of the same the AO has proceeded to tax the conversion as business income. We have already submitted that a person cannot make profits by selling to himself. Also we have stated that there is no transaction in the form of transfer or sale which has been undertaken during the year. In view of the same no notional income can be taxed.
With respect to the contention of the AO that classification from stock to investments cannot be made, we respectfully submit that the income tax law is not alien to such classifications. In the case of CIT v. Dhanuka & Sons [1980] 124 ITR 24 (Cal) the High Court has recognized such principle and it was held that loss arising on such classification cannot be allowed.
''Business Loss - Transfer of shares from trading account to investment account Transaction is not in course of business with third party - No sale involved in transaction as a person cannot sell to himself and make profit out of himself – Loss arising in such transaction is not allowable as trading loss."
The facts in the case of Kalyani Exports & Investments (P) Ltd. v. DCIT (2001) 78 ITD 95 (Pune)(TM) are as under:
a. Assessee-company had acquired the shares of BFL in March, 1977 followed by issue of bonus shares in June, 1981 and again in October, 1989.
b. Shares initially shown as stock in trade were converted into capital asset on 1-7-1988, at original purchase price of Rs. 17 per share, which was the original purchase price in 1977.
c. Assessee sold these shares in AY 1995-96 and declared capital gains and while adopting the cost of acquisition, exercised option of adopting fair market value of shares as on 1-4-81 in accordance with section 55(2)(b)(i).
d. The AO rejected the computation of capital gains done by the Appellant and had held that it was the original cost of Rs. 17 per share which has be taken for computation of capital gains. The order of the AO was reversed and appeal was decided in favour of company.
e. At page 141 para 23 of the reported decision it has also been held that section 45(2) provides for a situation of conversion of capital asset into
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stock in trade. In such a case the profits accruing have been expressly made taxable. There is no express provision in the Income Tax Act to provide for taxing the notional profits, if any, where stock in trade is converted at a higher price or at the market value into a capital asset.
Similarly the Bombay Tribunal in the case of ACIT v. Bright Star Investment (P.) Ltd. [2008] 120 TTJ 498 (Mum) had held that:
"Section 45, read with section 28(1), of the Income-tax Act, 1961 - Capital gains - Chargeable as - Assessment year 2000-01 - Assessee had converted some shares from stock-in-trade to investment as on 1-4-1998 at its book value – Thereafter, assessee during relevant assessment year sold some of shares out of above shares and offered profit earned on sale of shares as long-term capital gain - Assessing Officer invoking provisions of section 45(2) computed income of assessee separately as business income till date of conversion of shares from stock to investment and thereafter as long-term capital gain - Commissioner (Appeals), however, held that action of Assessing Officer to segregate long-term capital gain into business income and capital gain was unjustified and he should have accepted long-term capital gain declared by assessee - Whether in absence of specific provision in section 45(2) to deal with a situation where stock-in-trade is converted into investment and later on investment is sold on profit, formula which is favourable to an assessee should be accepted - Held, yes Whether, therefore. Commissioner (Appeals) rightly directed Assessing Officer to accept capital gain offered by assessee - Held, yes"
Considering the above we submit that the contention of the AO that classification of shares from stock to investments cannot be done is not as per the law. We may also like to mention that there is no provision to tax such classification of stock into investment in the Act and therefore the action of the AO in applying the market rate and taxing the same as business income is also not as per law.
The Appellant had rescheduled the stock in trade to investment at cost price while the AO is of the opinion that transfer should be at market price and accordingly the AO had made an addition of Rs.2,11,70,633/- to the income of the Appellant (refer page no. 19 of the assessment order). The AO has made the addition of
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notional income. The AO has made the addition of income which the Appellant has never earned. One cannot make profit by selling to himself. We submit that this is a case of conversion of a portfolio from stock portfolio to investment portfolio and hence this is not the case of transfer as contemplated in the Act. This is not the case of sale/transfer to third party. Therefore, question of generating any income does not arise.
The AO in the assessment order has also stated that the Appellant has classified the shares from stock in trade to investments in view to claim benefit of section 10(38). We have already stated that the shares were converted from stock to investments as these were to be held for a long time under pledge. Further, claiming of benefit u/s. 10(38) at a future date cannot be a reason to treat the conversion as taxable.
The issue raised by the AO is directly covered in favour of the Appellant by the following decisions:
a. CIT (Central) v. Express Securities Pvt. Ltd. dated 22-10-2013 (page 142 to 144)
"3. The Assessing Officer has recorded that as per the business activities undertaken by the assessee, they were dealing and trading in shares and financial securities in Bombay Stock Exchange, Delhi Stock Exchange and Calcutta Stock Exchange. The respondent - as5essee was a registered broker with the said exchanges. The Assessing Officer held that the business of the assessee was not to invest in shares but to deal with the shares as a stock broker and trader. He observed that conversion of stock in trade into investment was done with the intention not to pay taxes as Section 10(38) was introduced by Finance Act, 2004 with effect from 1st April, 2005. Accordingly, he held that the entire amount was taxable as a "trading receipt" and not under the head "capital gains".
The assessment order does not mention the date on which the shares in question were purchased. We also note that the assessment order records that the assessee had converted and transferred the shares in question under the head
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"investment" on 1st April, 2004. This factual position was not disputed or questioned. The shares in question were sold during the period ending 31st March, 2006, nearly 2 years after the date of conversion of stock in trade into investment with a specific declaration. Mere fact that Section 10(38) was introduced in the statute by Finance Act, 2004 with effect from 1st April, 2005, does not mean that the said conversion was improper or illegal. After the said Section was inserted, the assessee on noticing the tax benefit, was entitled to convert and change his holding from stock in trade into investment. Such conversion cannot be dealt with and rejected on the ground that Section 10(38) of the Act was introduced with effect from the said date. Conversion may be rejected for other reasons and grounds like the intention was not to convert and the assessee still continued to treat and regard the shares as stock in trade and not investment. But there is hardly any discussion in the assessment order in this regard. Justification and reasons have not been elucidated and brought on record to uphold the contention of the Revenue that the shares were continued to be held as stock in trade and not as an investment.
The Commissioner (Appeals) noticed that the shares in question as held on 31st March, 2004 and their book value was as under :-
Scrip Name Quantity Book Value as on 31/03/2004 Global Tele 3,35,000 2,09,14,050/- Himachal 6,15,000 75,27,600/- Futuristic NIIT 20,000 33,97,200/-
The Commissioner (Appeals) has observed that in the balance sheet as on 31st March, 2005 the shares were shown under the head "inventories" and in the subsequent balance sheet as on 31st March, 2006 shares were again shown under the head "investment at book/fair value on 1st April, 2004". Thus, the assessee converted the
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aforesaid stock in trade of Rs.3,18,38,850/- to the head "investment at book/fair value on 1st April, 2004" and the said disclosure was made in the balance sheets as on 31st March, 2005 and 31st March, 2006. In the first year, the Assessing Officer did not disturb the aforesaid conversion and accepted the same. The Commissioner (Appeals) noticed that for the Assessment Year 2005-06 assessment was concluded under Section 143(3) vide order dated 27th November, 2007 but the Assessing Officer did not object to the said conversion. These shares were subsequently sold as detailed in paragraph 2.9 of the order of the Commissioner (Appeals) in August, 2005, September, 2005 and substantial portion was sold in March, 2006 and long-term capital gains was declared. He observed that statute did not reject or frown upon conversion of in trade into investment and the said conversion was permissible. Commissioner (Appeals) referred to the Circular No.4/2007 dated 15th June, 2007 issued by the Central Board of Direct Taxes, which stipulates that two portfolios one for stock in trade and one in respect of investments could be maintained by the same assesses. He took into account the period of holding by the assesses and the fact that the conversion into investment was made on 1st April, 2004 and outlay was disclosed in the audited accounts for the Assessment Year 2005-06. The sales made, as noticed above, were after considerable delay of approximately two years thereafter.
In view of the aforesaid factual findings recorded by the Commissioner (Appeals) and the tribunal, we do not see any reason to interfere and issue notice on the main appeal. Accordingly, we are not inclined to issue notice on the application for the condonation of delay and the same and consequentially the appeal are dismissed." (emphasis supplied)
b. ACIT v. Bright Star Investment (P.) Ltd. [2008] 120 TTJ 498 (Mum) 6. Having heard the rival submissions and from careful perusal of the record, we find that the shares held in stock-in trade were converted into investment at the book value shown in the books of account. Later
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on, the shares held in investment were sold and the assessee offered the capital gain accrued on the sale of shares. Admittedly the provisions of s. 45(2) of the IT Act, deals with the issue of capital gain where the investment is converted into stock-in- trade. According to this section the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock-in- trade of a business carried on by him, shall be chargeable to tax as the income from the previous year in which such stock-in-rade is sold or otherwise transferred by him, and for the purpose of s. 48, fair market value of the asset on the date of such conversion or treatment, shall be deemed to be the full value of the consideration received or accruing as a result of transfer of the capital asset. While incorporating the sub-s. (2) tos. 45, the legislature has not visualized the situations in other way round, where, the stock-in-trade is to be converted into the investments and later on the investment was sold on profit. In the absence of a specific provision to deal with this type of situation, a rational formula should be worked out to determine the profits and gains on transfer of the asset. We are also conscious about the judgments in the cases of Sir Kikabhai Premchand (supra) and Dhanuka & Sons (supra) in which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in a different account of the assessee himself. The question of gain or loss would arise only in future when the stock transferred to the investment account might be dealt with by the assessee. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In the absence of a specific provision to deal with the present situation, two formulae can be evolved to work out the profits and gains on transfer of the assets. One formula which has been adopted by the AO i.e., difference between the book value of the shares and the
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market value of the shores on the date of conversion should be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as a capital gain. The other formula which is adopted by the assessees i.e., the difference between the sale price of the shares and the cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. In the absence of a specific provision, out of these two formulae, the formula which is favourable to the assessee, should be accepted. We, therefore, of the view that CIT(A) has properly examined this issue in the present situation and directed the AO to accept the capital gain offered by the assessee. We, accordingly, confirm his order."
c. Also see Neha Business & Investment P Ltd. v. ITO (ITA No. 1791/Mum/2010 dated 23-9-2011 - AY 2006-07) (page nos. 155 to 162)
d. Supra Investments Pvt. Ltd. v. Dy CIT (ITA No. 570/Hyd/2010) AY 2006-07 dated 6-7- 2012 (page nos. 151 to 154)
The allegation of the Revenue is that the said conversion was made to avail the benefits of exemption under S. 10(38) of the Act. So far as this allegation of the Revenue is concerned, considering the fact of entries in the books and decisions of company, we find that this is a case of tax planning for which the Revenue should not have any objection, since it is not a case of tax evasion. Nothing has been brought on record to show that the object of the assessee is to indulge in tax evasion. Regarding conversion, there is a provision for conversion of a capital asset into stock in the provisions of S. 45(2) of the Act. As such, there is no provision for reverse conversion. This is a case of reverse conversion for which there are no provision. This situation was analysed by the Bombay
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Bench of the Tribunal in the case of Bright Star Investment Pvt. Ltd. (supra), wherein the Tribunal held that the formula discussed in para 6 of the order, which is favourable to the assessee should be accepted by the Revenue, and they discussed the formula in the said order of the Tribunal. It is also made out by the said decision that profits on the sale of the said investment should be treated as capital gain, which is the ratio, which has not been altered till date. In these circumstances, the conversion is rightly done and the profits on the sale of such investment is chargeable to tax under the head 'capital gain’ as done by the assessee in the present case.
e. ACIT v. R Roman (HUF) (2011) 48 SOT 28 (Mad) - AY 2005-06 Bench considered the rival submissions and have carefully treaded through each and every aspect of this complicated issue. After considering the written submission filed before the ld. CIT(A) on which the ld. AR has heavily relied on and the reasoning given by the Assessing Officer in his order which Bench had extracted in the earlier part of this order, Bench had found that the assessee had been holding shares for a long time as mentioned above and the details furnished before the Assessing Officer as well as before the Id. CIT(A) show that some of the shares were purchased 14-15 years prior to this assessment year and the remaining were purchased before 3-4 years prior. The assessee has converted stock-in- trade into investment at the book value shown in the books of account. Subsequently, the shares so held in investment were sold and the assessee offered capital gains accrued on the sale of shares. Provisions of section 45(2) deals with the issue of capital gains when the investment is converted into stock-in-trade. According to this section, profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in- trade of a business carried on by him shall
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be chargeable to tax as his income from the previous year in which stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the to tax as the income from the previous year in which such stock-in-trade is sold or otherwise transferred by him, and for the purpose of s. 48, fair market value of the asset on the date of such conversion or treatment, shall be deemed to be the full value of the consideration received or accruing as a result of transfer of the capital asset. While incorporating the sub-s. (2) tos. 45, the legislature has not visualized the situations in other way round, where, the stock-in-trade is to be converted into the investments and later on the investment was sold on profit. In the absence of a specific provision to deal with this type of situation, a rational formula should be worked out to determine the profits and gains on transfer of the asset. We are also conscious about the judgments in the cases of Sir Kikabhai Premchand (supra) and Dhanuka & Sons (supra) in which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in a different account of the assessee himself. The question of gain or loss would arise only in future when the stock transferred to the investment account might be dealt with by the assessee. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In the absence of a specific provision to deal with the present situation, two formulae can be evolved to work out the profits and gains on transfer of the assets. One formula which has been adopted by the AO i.e., difference between the book value of the shares and the market value of the shares on the date of conversion should be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be
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taken as a capital gain. The other formula which is adopted by the assessees i.e., the difference between the sale price of the shares and the cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. In the absence of a specific provision, out of these two formulae, the formula which is favourable to the assessee, should be accepted." 3.3.2. It must also be mentioned here that the shares which were converted to investment out of the appellant's stock-in-trade have remained pledged with the Appellant's lenders till date and they have not been sold or otherwise transferred. I also find substance in the Appellant's argument that there is no transfer and the Appellant's reliance in the case of Bai Shirinbai Kooka (supra) where the Supreme Court has decisively held that one cannot make a profit out of himself. This is also the case in the Dhanuka's case and Sir Kikabhai Premchand in which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved. In light of the facts of the case and the judicial principles laid down in the various cases cited, I hold that there is no business income arising on account of conversion of one's own stock in trade to investment. The addition of Rs. 2,11,70,633/- is directed to be deleted. In the result these three grounds of appeal are allowed.”
We find that the present situation is exactly opposite to what is addressed under s.45(2) of the Act. In the instant case, stock –in- trade is being converted into capital asset and notional gain on such conversion is in question. CIT(A) has appreciated the issue in correct legal perspective and in in sync with host of judgments holding the field in this regard. Therefore, there is no perceptible reason to interfere with the order of the CIT(A).
Pertinently, we also take note of the clause (via) to Section 28 of the Act as specifically inserted by the Finance Act, 2018 w.e.f. AY 2019-20. The relevant clause (via) seeks to address the aforesaid situation. As per clause (via), the fair market value of inventory as on the date on which it is converted into or treated as
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capital asset determined in the prescribed manner shall be chargeable to tax as business income in the year of conversion regardless of actual consummation. The aforesaid clause is however applicable prospectively w.e.f. 2019-20 and seeks to create charge of tax on such conversion. This also impliedly means that the differential price on conversion was not susceptible to tax in AY 2010-11 in question. Therefore, the case of the Revenue fails on this ground also.
In the result, Ground No.1 of the Revenue’s appeal is dismissed.
Ground No.2 of the Revenue’s appeal concerns reversal of disallowance of Rs.47,78,697/- on account of proportionate interest costs disallowance presumably attributable to the average investments yielding tax free income in terms of Rule 8D(2)(ii) of the IT Rules. With the assistance of the learned AR for the assessee, we notice that the CIT(A) has rightly appreciated the issue having regard to the fact that the assessee holds interest free surplus funds of its own at its disposal in excess of the corresponding investment. In the wake of such facts, the CIT(A) in our view has rightly deleted the disallowance to the extent of Rs.47,78,697/- after taking cognizance of the various judicial precedents. It may be apt to reproduce the relevant operative para of the order of the CIT(A) with which we fully agree:
“43.3. I am of the opinion that once the nexus regarding the expenditure on account of interest as being attributable to taxable income is proved before the Assessing Officer no disallowance can be made from interest payment which is directly relatable to taxable income. During the year under consideration, Appellant has shown to have sufficient interest free funds available with it, Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat Industrial Development
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 18 –
Corporation [2013] 318 Taxman 142 (Guj.) has held that it is for the revenue to establish a nexus between the interest bearing funds borrowed and those invested by the assessee respondent and only when it is shown that the interest free funds are not available with the assessee, the question would arise of fastening the tax liability on the assessee. Other decisions of jurisdictional High Court that support the view point of the appellant are CIT Vs. Torrent Power Ltd. [2014] 222 Taxman 367 (Guj.) and CIT Vs. UTI Bank Ltd. [2013] 215 Taxman 8 (Guj.)(Mag.). In the case of CIT Vs. Hitachi Home and Life Solutions (I) Ltd. [2014] 41 Taxman 540 (Guj.), Hon'ble Gujarat High Court has held that where assessee's interest free funds far exceeded investments made for earning exempted dividend income and Assessing Officer had also failed to establish nexus between borrowed funds and investments made, no disallowance could be made under section 14A. As the Appellant has shown the nexus of the interest expenditure to separate direct sources of income chargeable to tax, the application of Rule 8D(2)(ii) does not arise and I am of the view that the Assessing Officer has erred in calculating the amount of Rs.47,78,697/- under this sub rule. Considering various judicial decisions cited by the Appellant including the jurisdictional High Court which are in favour of the appellant, this addition is directed to be deleted.
This apart, we also notice another significant plea of the assessee that direct nexus was also proved between the borrowed funds and the taxable income by the assessee and consequently proportionate disallowance of interest expenditure purportedly incurred for tax free income in terms of Rule 8D(2)(ii) is uncalled for. We thus decline to interfere with the conclusion drawn by the CIT(A) in this regard. Ground No.2 of the Revenue’s appeal is accordingly dismissed.
In the result, appeal of the Revenue in ITA No. 742/Ahd/2015 for AY 2010-11 is dismissed.
We shall now turn to the cross objection of the assessee bearing CO No. 76/Ahd/2015 towards administrative expenditure computed in terms of Rule 8D(2)(iii) of the IT Rules, 1962 under the umbrella of Section 14A of the Act. When the matter was
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 19 –
placed for argument, the learned AR for the assessee could not substantiate the objection raised in this regard and fairly submitted that it may be treated as withdrawn.
In the result, cross objection of the assessee is dismissed as withdrawn.
ITA No. 3078/Ahd/2016-AY 2012-13 (Revenue’s appeal)
The grounds of appeal raised by Revenue read as under: “1. On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) erred in recalculating the disallowance under Rule 8D without appreciating the fact that the borrowed interest bearing funds were utilized for earning exempt dividend income.”
It is claimed on behalf of the assessee that interest free own funds of the assessee firm are in excess of corresponding investments yielding tax free income. Thus, in the light of the decision of Hon’ble Gujarat High Court in the case of CIT vs. UTI Bank Ltd. (2013) 32 taxmann.com 370 (Guj) and in parity with the view taken in para no. 9-11 (supra) concerning Revenue’s appeal in AY 2010-11, We decline to interfere with the order of the CIT(A).
In the result, appeal of the Revenue in ITA No. 3078/Ahd/2016 for AY 2012-13 is dismissed.
The assessee moved cross objection of the assessee bearing CO No. 09/Ahd/2017 in Revenue’s appeal seeking to impugn the disallowance made by the AO under s.14A as computed in Rule 8D(2)(iii) of the IT Rules amounting to Rs.15,70,184/-.
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 20 –
In the course of hearing, the learned AR could not support this cross objection and fairly submitted that same may be treated as withdrawn.
The cross objection of the assessee is thus dismissed.
ITA No. 3077/Ahd/2016-AY 2013-14 (Revenue’s appeal)
The grounds of appeal raised by Revenue read as under:
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in recalculating the disallowance under Rule 8D without appreciating the fact that the borrowed interest bearing funds were utilized for earning exempt dividend income.”
The issue involved in the Revenue’s appeal is identical to Ground No.2 of the Revenue’s appeal in AY 2010-11 and solitary Ground of the Revenue’s appeal in AY 2012-13. In view of the admitted fact that own capital of the assessee firm (without bearing interest burden) surpasses the corresponding investments giving rise to tax free income, we find no reason to interfere with the conclusion drawn by the CIT(A) in favour of the assessee.
In the result, appeal of the Revenue in ITA No. 3077/Ahd/2016 for AY 2013-14 is dismissed.
ITA No. 3087/Ahd/2016-AY 2013-14 (Assessee’s cross appeal)
The grounds of appeal raised by assessee read as under:
“1. The learned Commissioner of Income Tax (Appeals)-5, Vadodara (“the CIT(A)) erred in fact and in law in confirming the action of the Ld. Deputy Commissioner of Income Tax, Circle 1(2), Baroda (“the AO”) in invoking the provisions of section 14A of the Income Tax Act, 1961 (“the Act”).
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 21 –
The learned CIT(A) erred in fact and in law confirming the addition to the extent of Rs.15,72,748/- made by the AO u/s. 14A r.w.r. 8D(iii) being one half percent of average investment. 3. The CIT(A) erred in fact and in law in confirming the disallowance of Rs.9,66,533 made by the AO invoking section 43B of the Act. 4. Without prejudice to Ground No.3 above, the learned CIT(A) erred in fact and in law in confirming the disallowance of Rs.2,30,316/- out of Rs.9,66,533 made by the AO being ex-gratia without appreciating the fact that ex-gratia payment is not covered by the provisions of Section 43B of the Act.”
Ground Nos. 1 & 2 pertaining to disallowance under 14A r.w. Rule 8D(2)(iii) was not pressed on behalf of the assessee. Accordingly Ground Nos. 1 & 2 of the assessee’s appeal are dismissed as not pressed.
Ground No.3 concerns disallowance of Rs.9,66,533/- under s. 43B of the Act. In the course of hearing, the learned AR submitted that the aforesaid amount has been actually paid in the subsequent assessment years and sought suitable direction for allowance thereof in the respective assessment years. The AO is thus directed to give credit and allow the deduction of the aforesaid amount to the extent paid in the subsequent assessment year(s). Ground No.3 is thus allowed in part.
Ground No.4 concerns disallowance of Rs.2,30,317/- under s.43B of the Act. The learned AR for the assessee in the course of hearing submitted that the aforesaid amount represents ex-gratia to some employees based on their respective performances and does not fall within the purview of Section 43B of the Act as the same cannot be equated with statutory liabilities. The aforesaid amount is only a provision which has been paid subsequently. The learned DR could not controvert the averments made on behalf of the assessee.
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Accordingly, we find merit in the case of the assessee for exclusion of ex-gratia from the ambit of Section 43B of the Act. The assessee shall however be obliged to submit evidences before the AO towards actual payment of such ex-gratia in the subsequent year(s) for its allowability. The issue is thus remitted back to the file of AO.
In the result, Ground No.4 of the assessee’s appeal is allowed in part.
In the result, appeal of the assessee in ITA No.3087/Ahd/2016 for AY 2013-14 is partly allowed.
In the combined result, all appeals of the Revenue and cross objections of the assessee are dismissed but cross appeal filed by the assessee in AY 2013-14 is partly allowed.
This Order pronounced in Open Court on 29/01/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 29/01/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 23 –
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ ‘B’ अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR आयकर अपील सं./I.T.A. Nos. 742/Ahd/2015, 3078 & 3077/Ahd/2016 With Cross Objection No. 76/Ahd/2015 & 9/Ahd/2017 & I.T.A. No. 3087/Ahd/2016 (In I.T.A. Nos. 742/Ahd/2015, 3078 & 3077/Ahd/2016) & (�नधा�रण वष� / Assessment Years : 2010-11, 2012-13 & 2013-14)
The Deputy Commissioner बनाम/ M/s. Pratham of Income Tax Investments Vs. Circle-1(2), 2nd Floor, Pratham, Makarand Desai Aayakar Bhavan, Race Road, Near Mother’s Course Circle, Baroda School, Baroda – 390021 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AACFJ7207J (Appellant/ Respondent) .. (Respondent/Cross Objector /Appellant) राज�व क� ओर से/Revenue by : Shri Mudit Nagpal, Sr. D.R. Shri Milind Mehta, A.R. अपीलाथ� ओर से /Assessee by :
सुनवाई क� तार�ख / Date of 16/01/2019 Hearing घोषणा क� तार�ख /Date of 07/02/2019 Pronouncement
CORRIGENDUM
PER PRADIP KUMAR KEDIA - AM:
It has come to the notice of the Tribunal that ITA number has been wrongly mentioned in the heading portion on page no. 2 to page nos. 23 as ITA No. 747/Ahd/14 [M/s. Pratham Investments
ITA No. 747/Ahd/14 [M/s. Pratham Investments vs. DC IT] A.Y. 2005-06 - 24 –
vs. DCIT] A.Y. 2005-06 instead of the correct position as mentioned in the first page of the same order. Thus, the error crept in the heading second page onwards stands rectified and may be read as DCIT vs. M/s. Pratham Investments ITA No. 742/Ahd/2015 & Ors. A.Y. 2010-11 & Ors. This corrigendum shall form part of the main order in ITA No. 742/Ahd/2015 & Ors. pronounced on 29.01.2019.
This Corrigendum pronounced on 07/02/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 07/02/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।