SUPRERIOR FINANCIAL CONSULTANCY SERVICES P.LTD,MUMBAI vs. ASST CIT 1(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “G” BENCH, MUMBAI BEFORE SHRI LALIET KUMAR, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 7501/MUM/2016 (AY: 2003-04) & ITA.No. 3113/MUM/2015 (A.Y. 2006-07) Superior Financial Consultancy v. ACIT – 1(3) Services Pvt. Ltd., Room No. 564, 5th Floor 201, 2nd Floor, Dev Neo-Vikram Aayakar Bhavan, M.K. Road Sahakar Nagar CHS Mumbai - 400020 Above Audi Car Showroom New Link Road, Andheri (W) Mumbai - 400053 PAN: AACCS2302J (Appellant) (Respondent) ITA.No. 3355/MUM/2015 (A.Y. 2006-07) DCIT – 1(3)(1) v. Superior Financial Consultancy Room No. 564, 5th Floor Services Pvt. Ltd., Aayakar Bhavan, M.K. Road 3-3A, Churchgate House Mumbai - 400020 32/34, Veer Nariman Road Fort, Mumbai - 400001 PAN: AACCS2302J (Appellant) (Respondent) Assessee by : Shri V.G. Ginde & Shri Kumar Kale Department by : Shri Hoshang Boman Irani

Date of Hearing : 14.12.2021 Date of Pronouncement : 21.02.2022

2 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., O R D E R PER S. RIFAUR RAHMAN (AM)

3 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., accounting for the income at the time of sale of investment is not correct. This is the issue because the income has accrued at two levels. First, at the time of conversion of stock-in-trade into investments and second, at the time of selling those investments. Thus, the income has accrued for the erstwhile stock-in-trade at the time of its conversion into investment. When the investment is sold, assessee will get capital gain being the difference between sale value and the value adopted at the time of conversion of stock-in-trade into investment. During the assessment proceedings assessee also raised several objections for reopening of the assessment which Assessing Officer has disposed off by passing a speaking order. Accordingly, Assessing Officer made addition to the above said difference of value due to conversion of stock in trade into investment.

4 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., 2. In computing Capital Gains on sale of shares (including those converted from stock-in-trade), our company claimed deduction for the “cost of acquisition” as provided in section 43(1)(ii) of the Act. This treatment is in accordance with the Hon’ble Bombay High Court’s judgment in CT vs. Jaanhavi Investments (P) Ltd. [2008] 304 ITR 276 (Bom). which is based on the earlier judgment in Keshavji Karsondas vs. CIT [1994] 207 ITR 737 (Bom). In Jannhavi Investments’ case (supra), the facts were as follows. The assessee bought shares of some companies in 1977. On the original holding the assessee received bonus shares in the financial year 1981-82 and additional bonus shares in the financial year 1989-90. All the shares were held as stock-in-trade until 6.11.1987, when the same were converted into investments. On sale of the shares, while computing capital gain, the assessee computed fair market price as on 1.4.1981. The AO held that since the assessee was holding the shares as stock-in-trade up to 6.11.1987, and as the said shores were not capital asset as on 1.4.1981, the option adopted as the fair market price as on 1.4.1981 was not available to the assessee. The Tribunal, however, placing reliance on the judgment in Keshavji Karsondas vs. CIT (supra), upheld the assessee’s stand. On appeal by the Revenue, the Hon'ble Bombay High Court dismissed the Revenue’s appeal following its earlier judgment in Keshavji Karsondas vs. CIT (supra), holding that the cost of acquisition on the date of the actual acquisition and the date of conversion is not relevant for this purpose. Therefore, 1 computing capital gains on sale of shares (converted from stock-in-trade), what was deductible is the cost of their acquisition on the date of actual acquisition, ie, the date on which those shares were originally acquired (purchased); the market value or book value of those shares as on the date of conversion was not relevant for this purpose. 3. Copy of the Assessment Order dated 21.11.2006 u/s. 143(3) and the CIT(A)'s order dated 83.2007 for the AY 2004-05 are enclosed and marked as Annexure “B” and Annexure C respectively. 4. A copy of the Journal Entry passed for conversion of Stock-in- trade into Investments as at 1.42002 is enclosed herewith and marked as Annexure “D". 5. The converted shares were purchased on various dates prior to 1.4.2002 and it is difficult to ascertain the exact dates of the purchases. However, we confirm that for the purpose of determining short-term or long term capital gain, the period of holding is reckoned from the date of conversion, Le. 1.4.2002. Though we could have claimed the date of acquisition as the starting point

5 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., instead of the date of conversion, we did not make such a claim for sake of simplicity. Since we have not claimed the date of acquisition (purchase), we submit with respect that the details of the date of purchases may not be really necessary. 6. The learned Assessing Officer assessed a sum of Rs.76,81,824/ as business profit being the difference between the cost of the shares and the book value thereof as on 1.42002, which we hod transferred to “Capital Reserve", However, Your Honour has raised the issue as to why provisions of s. 41(1) of the Act should not be applied to this sum. We respectfully submit that s.41(1) has no application for the following reasons: (i) On mere conversion of stock-in-trade into Investments, no income is ether accrued to, or received by, the assessee. It is merely a book entry that manifests the assessee’s intention to convert stock into investment; it is not a transaction’ that could give rise to any income or profit to the appellant. It is well settled principle of tax jurisprudence that income-tax is a tax levied on income” actually earned or arisen to an assessee; notional income does not attract any income-tax When the assesses passes an accounting entry in his books of account essentially a unilateral act there is no ‘transaction’ that could give rise to any income as such. In this context, reliance is placed on the following judgments: (a) In CIT vs. Hind Construction Ltd. [1972] 83 ITR 211 (SC), it was held that no one can sell his goods to himself. A sale contemplates a sale and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom, (b) In Sir Kikabhai Premchand vs. CIT [1954] 24 ITR 506 (SC), the principle that ‘a man cannot trade with himself has been considered favourably. The Hon'ble Supreme Court held that the assessee was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the assessee derived no income from it. He may have stored up a future advantage for himself but as the transactions were not business ones and as he derived no immediate pecuniary gain the State cannot tax them, for under the IT Act the State has no power to tax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year. (c) In Sanjeev Woollen Mills Ltd. vs. CIT [2005] 279 ITR 434 (SC), it was held as under:

6 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., “……….. anotional imaginary profit cannot be taxed. It is well settled principle as held in Kikabhai Premchand vs. CIT (supra) Constitution Bench judgment that the firm cannot make profit out of itself, The transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the present case by showing the market value of the closing stock the assessee has earned potential profit out of itself in as much as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value does not and cannot bring in any real profit which is necessary for taxing the income under the Act as fs held in Chainrup Sampatram vs. CIT (supra) and CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC). Thirdly, it is settled principle of IT law that it is the real income, which is taxable under the Act. This proposition was enunciated in CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349: (1973) 89 ITR 266 (SC), which was pronounced in CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 [SC)...” In view of above, it is respectfully submitted that conversion by itself cannot generate any income chargeable to tax. Therefore, there is no question of invoking provision of s. 41(1) on conversion of stock into investment so as to charge tax on the difference between the cost at which the investment was recorded and the book value at which stock was reflected in the books prior to the conversion. Without prejudice to above, it is further submitted that even on a bare perusal of s.41(1), it is clear that it refers to any “amount” obtained by the assessee, whether in cash or in any other manner in respect of such loss, which has been earlier allowed as a deduction. As explained above, mere conversion does not result in the appellant obtaining any “amount either in cash or in any other manner. One can obtain any amount from another person; no one can obtain the amount from himself on passing book entry. Therefore, Ss 41(1) has no application to the appellant’s case merely because on conversion of stock into investment some notional credit arose while passing an accounting entry recording the conversion. (iii) Assuming without admitting the amount can, at the best, be said to be obtained by a person only on sale of investment - when actual amount will be received. Therefore, without conceding our stand that s. 41(1) will not be applicable even in that case, as explained below, one may, if at all, consider the applicability of s. 41(1) at the point of time when the converted shares are sold and until then there is no question of invoking that section as it would tantamount to assessing notional/potential future gain which may or may not arise until the shares are actually sold. The possibility of incurring a loss also cannot be ruled out.

7 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., iv) We submit that for the following reason s. 41(1) will not apply even at the stage of actual sale of the converted shares subsequent to the conversion. This can be better illustrated by an example. Suppose the share which has been purchased at a cost of Rs.100/as stock-intrade stood valued at Rs.90/in the books of account just before the date of conversion (at the original cost of Rs.100/-). In this case, on valuation of stock-in-trade at the cost or market price, whichever is lower, the assessee got a deduction of Rs.10/by way of valuation loss in computing his business income. On conversion of those shares into investment at the original cost, the following accounting entry is effected in the books of account; investments Rs.100/ ₹. 100/- (at ……………………Dr. original cost) Stock in trade ₹.90/- …………………………..Cr. (book value) Capital Reserve ₹.10/- …………………………..Cr. (difference between the cost and book vaue)

At the stage of conversion, as explained above, there is no obtaining of any “amount”; the credit of Rs.10/- is only an adjusting entry to balance the accounts and it represents a notional gain. Assuming the share (now as investment) is later sold for Rs,120/-, then in the books of account there will be a profit on sale of investment of Rs.20/[Rs.120/- Rs.100/], in the tax return, the same amount will be offered to tax as capital gain (here the indexed cost of acquisition is not considered for sake of simplicity) The question now arises is whether the assessee has obtained any amount that can be assessed as deemed income u/s. 41(1). In our submission, there is no “amount” obtained by the assessee in respect of the loss of Rs.10/- that was earlier allowed to him by way of valuation loss. It is necessary to appreciate that the assessee does not receive Rs.10/- independent of Rs.120/- ie. the sale consideration, which is already considered in computing capital gains. In other words, there cannot be any dissection of the sale consideration of Rs.120/-; what has been received is sale consideration on sale of shares and this receipt (Rs.120/-) will have to be necessarily processed for the purpose of income-tax under the head “Capital gains” as provided in the Act.

8 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., S.48 provides the mechanism for computation of capital gains, ie. from the full value of consideration (here Rs.120/-) received or accruing as a result of the transfer of the capital asset (here share), two items are deductible, namely = (i) expenditure incurred wholly and exclusively in connection with such transfer (here nil}; and (ii) the cost of acquisition of the asset there Rs.100/- in view of the Bombay High Court's judgment in Jannhavi investments’s case (supra). Therefore, the chargeable capital gain is Rs.20/-. Your Honour will, therefore, appreciate that the amount of Rs 120/- that has been received has been fully considered in computation of capital gains; no Separate sum is paid to the assessee apart form this sum towards recoupment of loss earlier allowed to him. Therefore, having considered the full value of consideration (as per s.48), it will not be permissible to attribute a part of it (Rs.10/-) as an “amount obtained" in respect of such loss. Any attempt to tax the sum of Rs.10/u/s. 41 (1), in our respectful submission, will amount to assessing the same income twice under two different heads of income in the hands of the same assessee for the same assessment year. This is clearly not permissible in law. in view of above discussion, we respectfully submit that even at the time of sale of the converted shares, there cannot be any chargeable income u/s. 41(1) in this case. Your Honour would appreciate that the ostensible benefit of Rs.10/- that the assessee gets in this illustration which is the subject matter of s. 41(1)] is the result of the assessee claiming deduction of Rs.100/- [cost of acquisition] and not Rs.90/-[book value}. But this tax treatment is perfectly in accordance with the provisions of law, Le. 3.48 as has been held by the Hon'ble jurisdictional High Court in Jannhavi Investments’ case (supra). At this place, it would be apt to refer to the classic passage from Cape Brandy Syndicate’ vs. IRC [1921] 1 KB 64, wherein Rowlatt, J. had said: “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.” in view of above, we respectfully submit that the sum of Rs.76,81,824/- being the amount credited to Capital Reserve on conversion of stock-in-trade into investments cannot be assessed u/s.41(1).”

9 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., 4. After considering the detailed submissions filed by the assessee Ld.CIT(A) dismissed the grounds raised by the assessee on reopening of the assessment and also sustained the addition with the following observations: - “7.2. I have carefully considered the submission of the appellant on this issue and the case laws cited by the appellant. The case laws cited are very old and the issue was dealt with recently in many other cases. In one of the recent Judgment in the case of CIT vs Abhinandan Investment Ltd. [2015] [63 taxmann.com 263] (Del.), the Hon’ble Delhi High Court has dealt with this case after considering the earlier cases referred by the appellant. The Hon'ble High Court has adjudicated this issue as to whether in the case of conversion of stock in-trade into investments, value at which asset was held as stock-in-trade and market value on date of its conversion as investment would have be treated as business income/loss and difference between market value of the asset as on date of conversion and value at which it is sold would be in nature of capital asset. The relevant para of the case is reproduced as under:- “In addition to the above, a question may arise as to the computation of the cost of acquisition of an asset which was earlier held as stock-in-trade and subsequently converted as an investment. The conversion of stock-in-trade into investments would not immediately yield-any business income/loss as an assessee cannot be held to trade with itself [see: Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC)]. However, it is possible to contend that once the asset is sold, the income or loss resulting therefore would subsume within it the business income/loss at the time of conversion from stock-in-trade to capital asset. Thus, in the year in which the asset is sold, the income/loss attributable to the period for which the asset was held as stock-in-trade may have to be ascertained and taxed as such. In other words, the difference between the value at which the asset was held as stock-in-trade and the market value on the date of its conversion as investment would have to be treated as business income/loss and the difference between the market value of the asset as on date of conversion and the value at which it is sold would be in the nature of capital gains. However, we must add that none of the counsel addressed any arguments on this issue. In the circumstances we do not consider it appropriate to finally

10 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., decide the same and leave the question open to be decided in an appropriate case. 7.3 The Ld. AR has explained the second limb of the question as dealt with by the Hon’ble Delhi High Court in the above mentioned case that the difference between the market value of the asset as on date of conversion and value at which it is sold would be in nature of capital gains, which he has followed in the subsequent year, However the appellant has wrongly claimed that there is no income/loss when conversion of stock-in-trade into investments will take place and it is only a capital asset, which he has shown in the balance sheet as capital reserve. However, this issue has been clarified by the Hon'ble Delhi High Court that the difference in the value of stock-in-trade as on 01.04.2012 and the market value of the stock-in-trade to the amount to business income /loss as the case may be, the AO has rightly taxed the difference of Rs. 76,81,824/-, in respect of income that has accrued to the appellant on conversion of stock-in-trade into investments as on 01.04.2012. In view of the same, the addition of Rs. 76,81,824/is confirmed. Hence, Ground No. 2 is dismissed.”

11 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., 6. With regard to ground raised by the assessee on reopening of assessment, at the time of hearing Ld. AR has not made any submissions, accordingly the ground relating to reopening is not adjudicated at this stage.

12 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., 8. It is submitted that the facts in this appeal is exactly same to the facts of the present case and the Hon'ble Gujarat High Court by relying on Sir Kikabhai Premchand v. CIT [(1953) 24 ITR 506] held as below: - “12. It can thus be seen that the situation in the present case finds a direct answer in the judgement of the Constitution Bench in case of Kikabhai Premchand (supra) in which, as noted, the assessee had settled a part of his shares and silver bars held as stock into a trust of which he was prime beneficiary and was also in control of the trust. It was held that in the process, the assessee's business made no profit or gain nor did it sustain a loss. The appellant did not derive any income. He may have stored up a future advantage for himself but since transactions did not derive an immediate pecuniary gain, the State cannot tax it since under the Income Tax Act, the State had no power to tax a potential future advantage. Facts of the present case are quite similar. The Assessing Officer had referred to in detail the reasons recorded as a sequence of events under which the assessee converted its shares held as stock-in-trade to investment on 1.4.2004 which was done at the cost price and not market value. The Assessing Officer seems to be having two objections. First, he refers to the conversion of stock at cost price and not market price and second, he refers to profit to the business which would be the difference between the cost of acquisition of the shares and their market value on the date of transfer which should be taxed. In view of the judgement in case of Kikabhai Premchand (supra), mere transfer of shares by the company from its stock-in- trade to investment account would result in no profit or gain to the business. The question of correct valuation at which the same should have been transferred therefore, pales into insignificance when we are concerned with a single question namely, whether on the premise suggested by the Assessing Officer it can be stated that the income of the petitioner chargeable to tax had escaped assessment.”

13 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., 10. Considered the rival submissions and material placed on record, we observe that assessee has converted the shares held as stock in trade into investment and recorded the difference as capital reserves in its balance sheet by increasing the value of investment in its Books of Accounts and the difference was shown as capital reserves in the balance sheet. By observing the difference between market value of the shares on the date of conversion and the book value Assessing Officer is of the opinion that assessee has earned profit on the conversion of shares from the stock in trade to investment. He is of the opinion that the taxable event is occurred on the date of conversion of shares from stock in trade to investment thereby the difference amount is chargeable to tax. Ld.CIT(A) also sustained the above view of the Assessing Officer. Before us, Ld. AR brought to our notice the decision of the Hon'ble Supreme Court in the case of Sir Kikabhai Premchand v. CIT (supra). After careful consideration of the above decision, it is fact on record that assessee has converted the stock in trade into investment but no doubt there is a gain to the assessee on the difference of conversion. But the assessee cannot make any profit on its own merely because it is converted certain shares from stock in trade to investment. As far as the Income-tax is concerned the taxable event occurs when the assessee actually transfers the shares to other

14 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., persons, other than himself. Therefore, when the capital gain is calculated the assessee will consider actual sale consideration and deduct the actual cost of shares acquired. Therefore, on the date of such actual transfer the profit earned by the assessee at the time of transfer is relevant and any conversion taken place earlier by the assessee shall be ignored. It is clear from the decision of the Hon'ble Gujarat High Court that mere conversion of stock in trade into investment will not generate any taxable profit to the assessee. Therefore, we are in agreement that one cannot make profit of its own by converting stock in trade into investment or investment into stock in trade. We observe from the case referred by Ld.CIT(A) in CIT v. Abhinandan Investment Ltd., (supra) that Hon'ble High Court held that “whether in the case of conversion of stock in-trade into investments, value at which asset was held as stock-in-trade and market value on date of its conversion as investment would have be treated as business income/loss and difference between market value of the asset as on date of conversion and value at which it is sold would be in nature of capital asset”. In this case the shares were sold and how the profit earned before conversion and after conversion should be taxed and under what head of income. Whereas in the given case, the shares were never sold. It is only converted and the relevant profit was credited to

15 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., capital reserve. Therefore, we are not in a position to accept the conclusion reached by the Ld.CIT(A). Respectfully following the decision of the Hon'ble Gujarat High Court we decide this issue in favour of the assessee and accordingly, Ground No.2 raised by the assessee is allowed.

ITA.No. 3113/MUM/2015 (A.Y. 2006-07)

ITA.No. 3355/MUM/2015 (A.Y. 2006-07)

16 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., business profits in consonance with the principle enumerated in the decision of Supreme Court in the case of H. Holck Larsen reported in 160 ITR 67?” 4. “Without prejudice to above, whether on the facts and in the circumstances of the case and in Law, the CIT (A) is justified in accepting the cost of acquisition as original cost of purchase, ignoring that part of the cast of purchase had been claimed as loss and so allowed to assessee at the time of conversion of stock-in-trade to investment, thereby necessitating adjusted cost purchase, (after reducing loss so claimed and allowed) to be reduced for computing capital gains?”

Order pronounced on 21.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.

Sd/- Sd/- (LALIET KUMAR) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 21/02/2022 Giridhar, Sr.PS

17 ITA NO. 7501/MUM/2016 (AY: 2003-04) ITA.No. 3113 & 3355/Mum/2015 (A.Y. 2006-07) Superior Financial Consultancy Services Pvt. Ltd., Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum