Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “E”, NEW DELHI
Before: SHRI R. K. PANDA & SHRI KULDIP SINGH
Assessee by : Shri Ajay Vohra, Sr. Adv. Dr. Shashwat Bajpai, Adv. Shri Sharad Agarwal, Adv. : Shri S. R. Senapati, Sr.DR Department by Date of hearing : 12-04-2018 Date of pronouncement : 08-06-2018 O R D E R
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 09.05.2008 of CIT(A)- II, New Delhi relating to assessment year 2005-06.
2. Although a number of grounds have been raised by the assessee, they all relate to the order of ld. CIT(A) in confirming the addition of Rs.85,59,900/- made by Assessing Officer on account of conversion of stock-in-trade to investment at cost price instead of market value. 2.1 This is the second round of litigation before the Tribunal. Facts of the case, in brief, are that the assessee is an HUF and filed its return of income on 31.10.2005 declaring total income of Rs.57,63,774/-. During the year under consideration, the assessee has shown income from advisory services, profit from sale of agriculture Joint Venture and Profit from sale of investment. From the details furnished by the assessee, the Assessing Officer observed that during the year stock-in-trade of shares and securities of certain companies have been transferred to investment account as on 01.04.2004 at the same value as on 31.03.2004. The Assessing Officer, therefore, asked the assessee to explain as to why this stock-in-trade was converted to investment, the valuation as on 01.04.2004 and under which provision of law it is allowed. The assessee in response to the same replied as under :-
“1. During the year, the assessee has converted its stock-in-trade into investments as on 01.04.2004. The assessee has decided not to trade or deal in the shares and securities in future and decided to make only investments in the shares/securities to earn income by way of appreciation in the value of investments, dividend, etc. It has stooped the business of trading and dealing in the shares and securities from 01.04.2004 onwards. In view of the same, the stock-in-trade held as on 31.03.2004 has also been converted into investments as on 01.04.2004.
The conversion of stock-in-trade into investments is not prohibited in the Income-tax Law. There is no provision in the Act about the tax implications of the conversion of the Income-tax Act, 1961 (the Act) for conversion of investments into Stock-in-trade. The conversion of stock-in-trade into investments and to carry on investment activities is the decision of the assessee and it is not governed by the law. There is no restriction in making investments in Shares/Securities. Therefore, the conversion of stock-in-trade into investments in fully allowable and within the four corner of law.”
3. However, the Assessing Officer was not satisfied with the explanation given by the assessee. He observed that the assessee has converted the stock-in- trade to investment as on 01.04.2004 at the same value as on 31.03.2004 and the period of holding for computation of the capital gain accounted from 01.04.2004. According to the Assessing Officer, though the conversion of stock-in-trade to investment is not legally prohibited in law, still the motive of the assessee needs to be seen. He observed that the assessee in the instant case has tried to evade the payment of tax by converting the stock-in-trade to investment on 01.04.2004 at the same value as on 31.03.2004 instead of converting the same at fair market value since the assessee’s motive was to avoid the payment of taxes or to pay low taxes. He, asked the assessee to explain (a) as to why the income from shares should not be treated as business income and (b) why the shares held as stock-in-trade has been converted into investment at closing stock value instead of market value which could have resulted business profit of Rs.85,59,900/- and why it should not be taxed.
Rejecting the various explanations given by the assessee, the Assessing Officer made addition of Rs.85,59,900/- to the total income of the assessee by observing as under :-
“The above submission of the assessee is considered and the assessee should not get both benefit due to following reasons : (1) Though there is no specific provision in Income tax Act which prohibits the conversion of stock in trade to investment, but reason given by the assessee that it has stopped in trading the sale/purchasing of share but the frequency of transaction shows contrary and it is still indulged in large scale sale/purchase of shares and profit earned by it qualified to be called as business profit. If this is adopted the entire gain offered by the assessee should be taxed as business profit. (2) As the assessee even prior to conversion of stock-in-trade to investment has also invested in certain shares/securities in investment account. Therefore, it may close the fresh investment in shares/securities on investment account. However, it should convert the existing shares/securities which are on account of ‘stock-in-trade’ to investment account by drawing the analogy from section 45(2) it should have converted at market price and difference should be taxed as ‘business profit’ of the assessee and cost of acquisition for determining the capital gain on subsequent sale should be market value on the date of conversion. As per this methodology, the business profit on conversion of stock in trade to investment comes out to be Rs.85,59,900/- and short term gain of Rs.75,706/- instead of short term capital gain of Rs.72,04,189/- offered by the assessee. Therefore, the submission of the assessee is not justifiable that should not be taxed in the manner stated as above.”
4. In appeal, the ld. CIT(A) upheld the action of the Assessing Officer by observing as under :-
“The submissions of the appellant were considered carefully and facts have been examined scrupulously to appreciate the issue for proper adjudication. The question to be answered in this appeal is whether the profit derived on sale of shares should be assessed as business profits as done in earlier years or under capital gains. All along the assessee is engaged in purchase and sale of shares very aggressively and declared profit or loss under business head. Apart from trading in shares, the assessee also acquired shares as investment. There is sea of difference between these two activities. In trading activity shares arc purchased and sold by closely following the trends of market highs and lows. Transactions are put through without taking physical delivery or routing through demat account and without passing of money. Many a times the resultant gain or loss will be booked in the books of account without payment/receipt of consideration. In a day there will be a number of transactions of purchase and sale in the shares of one company alone. The trader do not look for returns on such purchases i.e. dividends, bonus etc. His main aim would be to look for immediate gains on such acquisitions. On the contrary in the case of investments invariably there is physical or electronic possession of shares, the period of holding of such shares is considerably for longer duration. Without exception payments are made in all cases. The basic motive of investments is to derive dividends and other gains declared by the companies in the form of free shares or low cost shares offered to existing share holders. Usually shares acquired for the purpose of investment would not be sold unless for compelling economic reasons. In the above context the appellant was asked to furnish the details of purchases and sales of shares. The details filed by the assessee were perused. Assessee continues to engage in trading activity even in current year also. Shares of single company were sold in different lots on different dates. In the same way shares of one company sold in consecutive days. Normally in a case of investments such aggressive transactions do not find place. For example take the case of Dhampur Sugars shares. The same were sold on 7/5/04, 9/9/04, 10/9/04, 13/12, 03/2/05, 14/2, 03/03 etc. Same is the case of other company shares also. If the intention of the appellant is to hold them as investment, then such frequent sales would not have been seen. The assessee has continued the trading activity in normal manner only. As held by AO there are separate shares for investment purpose in which such frequency of transactions is missing. Such conduct of the appellant in claiming the hitherto stock in trade as investments needs further analysis. The AO is not precluded from probing the real motive of assessee to such conversion of stock in trade as investments. Is it done on sound basis or only to escape tax incidence. It is well known fact that during the year there is change in the taxation of capital gains. Whereby the rate of tax on short term capital gains is reduced to ten percent. It is this lowering of tax rate induced the appellant to take altogether a new stand to escape higher incidence of tax on profits accruing on sale of shares. The contention advanced by the assessee that the amendment was brought to statute only in July 2004, hence there is no occasion for the appellant to know this prospective law as on 1st April '04, is deserves to rejected for the simple reason that the so called conversion has no other credible evidence except his own submissions. It is assessee's self made confession to claim that the stock in trade was converted to investments. There is no other contemporaneous record to confirm such conversion as on 1/4/2004. By making certain adjustments in the books by itself does not authenticate the claim so made by the assessee that the stock in trade was converted to investments on the first day of previous year relevant to the current assessment year. On the contrary the activity of trading continued in the same manner as in past. There is no trace of investment features to these shares. Assessee is carrying on the business of purchase and sale of shares for many years in the past and claimed huge expenditure which runs into lakhs of rupees. By ignoring all the costs incurred in acquiring these shares in the past years, the assessee cannot convert them at cost or market price whichever is low on the date of conversion to investments. It is a clear case of reducing the higher tax by taking the advantage of amended provision made in the year under reference. If the assessee's intention is clear and transparent then the conversion of stock could have taken place at market price on the date of conversion only. In the course of appellate proceedings, it is submitted by the assessee that the shares/securities acquired upto 1.4.93 were kept as it is under the investment account and the shares purchased by the assessee from 1.4.93 to 31.3.04 are treated as stock in trade and then converted as investments on 1.4.2004 sans logic and no basis for such differential treatment meted out to the shares held by it. It cannot treat the shares as it like to suite its convenience. Merely because there is no specific provision in the Act to tax the conversion of stock in trade into investments the profits so derived on such conversion cannot escape taxation as contended. It is a clear benefit acquiring to the assessee by virtue of business or profession carried on by it over so many years. If the assessee wants to make fresh investment in the shares which it converted from its own stock, it has to shell down the market value to acquire the same in open market. The concept of one cannot make profit out of himself is no longer valid in view of plethora amendments brought into tax statue i.e. reference is invited to sect ion 45(4) of I.T.Act, wherein profits against arising out of transfer of assets by wav of dissolution of firm or AOP or body of Individual shall he chargeable to tax as income of the firm or AOP or body of individuals in that year accordingly. Hence it is not always necessary to have two different entities for taxing the income on any transaction. When the circumstances compels the profit on conversion can be brought to tax. In view of the above discussion, it is well established that the entire exercise carried by the assessee to convert the stock in trade of shares into investments and the consequent of sale of such shares and declaring them under the head 'capital gain' is a device adopted to reduce the tax incidence as the sole motive. Hence the assessing officer has rightly rejected the claim of the assessee and treated the profit gain on sale of such shares of Rs. 85,59,900/- as business income of the assessee. Consequently the short term capital gain is to be adopted at Rs. 75,706/- as against amount shown by the assessee. Accordingly, the appeal of the assessee is dismissed.”
The assessee approached the Tribunal and the Tribunal vide order dated 25.10.2010 deleted the addition made by the Assessing Officer and upheld by the ld. CIT(A) by observing as under :-
“6. We have heard rival submissions and have gone through the entire material available on record. It has not been disputed by the learned DR that Sec.45(2) deals specifically with the conversion of investment into stock in trade and it does not deal with the conversion of stock in trade into investment. Under these circumstances, respectfully following Mumbai ITAT judgment in the case of Bright Star Investment (P) Ltd. (supra), we accordingly hold that addition cannot be made in this year on notional basis, which is deleted.”
6. The Revenue went in appeal before the Hon’ble High Court and the Hon'ble High Court vide order dated 18.11.2011 restored the issue to the file of the Tribunal with the following observations :-
“9. The ITAT, it is disenable and apparent, has not dealt with and examined the first issue and the reasoning given by the Assessing Officer which was upheld by the CIT (Appeals) that rejects the conversion of ‘stock in trade’ into ‘investment’. There is no decision by the ITAT on the said aspect. This was the first and core issue which the ITAT was required to consider, adjudicate and decide. The first question was whether or not conversion of shares from “stock in trade” to “investment” was correct and justified in law and accordingly whether income from sale of shares was taxable as business income or as capital gains. The ITAT has assumed that the conversion of stock in trade into investment was legal and valid and has decided whether after conversion, the difference in purchase price and market price was taxable by applying the analogy of section 45(2) of the Act. This first issue of conversion has not been decided and adjudicated by the ITAT. The second issue whether or not the conversion from ‘stock in trade’ to ‘investment’ should be at the Closing Stock Value or market value is a second aspect but the said aspect cannot and should not have been decided without deciding the first issue. As the ITAT has not decided and adjudicated the first aspect, the impugned order dated 25 October, 2010, is set aside and the ITAT is directed to advert to and decide the first aspect and, then if required, examine and decide the second aspect. We make it clear that we have not decided the second aspect or commented upon the reasoning of the ITAT relying upon judgment of Bright Star Investment (supra). It would be open to the respondent assessee to rely upon the said judgment and equally open to the appellant to state that the judgment is not applicable or that the matter is required to be referred to a larger Bench. We further clarify that in case the matter is decided against the Revenue, it would be open to the Revenue to challenge the reasoning on the second aspect also.
10. We have passed the aforesaid order in view of the fact that without deciding the first aspect, the second aspect cannot be adjudicated and decided. We may also note that the learned counsel for the respondent assessee had accepted during the course of arguments that the shares in question had been sold in the year in question. The learned counsel for the respondent assessee, however, was not able to give the exact details of the sales. The question relating to validity of transfer or conversion from stock in trade to investment or capital asset has to be decided in this year.
11. The contention of the respondent assessee that the Assessing Officer had not objected to the conversion of the shares from “stock in trade” into “investment” but had merely taxed the difference, is not correct and has to be rejected. We have quoted the relevant portion of the assessment order as well as the questions which were raised in the assessment proceedings by the Assessing Officer. We have also quoted the observations and the findings recorded by the CIT (Appeals). ITAT in paragraph 3.3 of its order has quoted the findings and the reasoning given by the CIT (Appeals) in which he had held that the entire exercise carried out by the assessee to convert the “stock in trade” into “investment” and the consequent sale and gain under the head of capital gain, was illegal and rightly rejected and the profit on the sale of the shares should be treated as business income.
Decision of the Supreme Court in Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd. AIR 1962 SC 1314 does not support the contentions and arguments raised by the respondent. In the said case, while examining the scope of second appeal under section 110 of the code of civil procedure, 1908, the Supreme Court examined the term/expression “substantial question of law” and referred to the views of the Bombay High Court and Nagpur High Court. The Bombay High Court had taken a narrower view and held that section 110 of the code would apply if there is some reasonable divergence of opinion about the correctness of the view taken and if a case involves a point of law such as would call for fresh decision and enunciation. This narrower interpretation, however, was not accepted by the Supreme Court. Paragraphs 5 and 6 of the said decision read as under:- “5. The other case relied upon was Rimmalapudi Subba Rao v. Noony Veeraju. In that case the test of the kind suggested by Bose, C.J, was rejected on the ground that logically it would lead to the position that even a palpably absurd plea raised by a party would involve a substantial question of law because the decision on the merits of the case would be directly affected by it. What was, however, said was that when a question of law is fairly arguable, where there is room for difference of opinion on it or where the Court thought it necessary to deal with that question at some length and discuss alternative views, then the question would be a substantial question of law. On the other hand if the question was practically covered by the decision of the highest court or if the general principles to be applied in determining the question are well settled and the only question was of applying those principles to the particular facts of the case it would not be a substantial question of law.
6. We are in general agreement with the view taken by the Madras High Court and we think that while the view taken by the Bombay High Court is rather narrow the one taken by the former High Court of Nagpur is too wide. The proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this Court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law.” (emphasis supplied) 13. The question raised by the appellant directly and substantially affects the rights of the parties.
14. The appeal is allowed in terms of the aforesaid directions. Question of law is accordingly answered. In the facts and circumstances of the case, there will be no order as to costs. Parties will appear before the Assistant Registrar, ITAT on 12.12.2011 when a date of hearing will be fixed.”
7. The ld. counsel for the assessee submitted that the question that has to be decided in the impugned ground is regarding whether or not conversion of shares from stock-in-trade to investment was correct and justified in law and accordingly the Tribunal has to adjudicate as to whether income from sale of shares was taxable as business income or capital gain. Referring to page 137 of the Paper Book, ld. counsel for the assessee drew the attention of the Bench to the note on conversion of stock-in-trade into investments, which reads as under :-
“During the year, the assessee has converted its stock-in-trade into investment as on 01.04.2004. The assessee has decided not to trade or deal in shares and securities in future and decided to make only investments in the shares/securities to earn income by way of appreciation in the value of investments, dividend etc. The stock-in-trade held as on 31.03.2004 has been converted into investments as on 01.04.2004 at the same value at which those were valued as on 31.03.2004. The valuation system for valuing the stock was lower of cost or market value and the same was followed by the assessee in past. Therefore, at the same value of Rs.1,04,11,158.14, the stock-in-trade was converted into investments as on 01.04.2004. The said conversation has resulted into no profit/loss.”
Referring to page 133 of the Paper Book, he drew the attention of the Bench to the investments shown at Rs.2,64,78,512/-. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Express Securities P.
Ltd. reported in 364 ITR 488, he submitted that the Hon'ble High Court in the said decision has held that where the shares were sold nearly two years after the date of conversion of stock-in-trade into investment with specific declaration, merely because section 10(38) was introduced w.e.f. 01.04.2005, that does not mean that the conversion was improper or illegal. He submitted that it is the right of the assessee to change from stock-in-trade to investment and no justifiable reason was brought on record by the Assessing Officer to reject the claim of the assessee except assuming that it is a colourable device. He submitted that after the conversion of stock-in-trade into investment, no share was held as stock-in-trade.
Referring to the decision of the Hon’ble Delhi High Court in the case of Express Securities P. Ltd. (supra), he submitted that the 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 when there is no discussion in the assessment order and nothing has been brought on record by justifiable reasons to uphold the contention of the Revenue that the shares continued to be held as stock-in-trade and not as an investment, the claim of the assessee cannot be rejected.
Referring to the decision of the Hon’ble Calcutta High Court in the case of Deeplok Financial Services Ltd. vs. CIT reported in 80 taxmann.com 51, he submitted that the Hon'ble High Court in the said decision has held that where the assessee converted its shares held as stock-in-trade into investment and sold them at later stage, profit arising from sale of share would be deemed to be long term capital gain.
Referring to the Memorandum explaining the rationalization of provision relating to conversion of stock-in-trade into capital asset as per section 28(via), ld. counsel for the assessee submitted that the amendment to provisions of section 28(via) has been brought into this statute book w.e.f. assessment year 2019-20. He drew the attention of the Bench to the said explanation which reads as under :-
“(via) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner; Section 45 of the Act, inter-alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock-in-trade is converted into, or treated as capital asset, the existing law does not provide for its taxability. In order to provide symmetrical treatment and discourage the practice of deferring the tax payment by converting the inventory into capital asset, it is proposed to amend the provisions of section 28 were - “(i) section 28 so as to provide that any profit or gains arising from conversion of inventory into capital asset or its treatment as capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment; (ii) clause (24) of section 2 so as to include such fair market value in the definition of income; (iii) section 49 so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition; (iv) clause (42A) of section 2 so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment.
These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.”
12. Referring to the decision of the Hon’ble Gujarat High Court in the case of Aditya Medisales Ltd. vs. DCIT vide Special Civil Application No.10217 of 2011 order dated 10.08.2016, he submitted that under identical circumstances the Hon'ble High Court decided the issue in favour of the assessee by holding that mere transfer of shares by the company from its stock-in-trade to investment account would result in no profits and gains of the business. While doing so, the Hon'ble High Court had followed the decision of the Hon’ble Supreme Court in the case of Sir Kikabhai Premchand vs. CIT reported in 24 ITR 506. Relying on various other decisions, he submitted that the order of the ld. CIT(A) be set-aside and the ground raised by the assessee be allowed.
The ld. DR on the other hand heavily relied on the orders of the authorities below. He submitted that the Assessing Officer had categorically held that the assessee has adopted a colourable device and the conversion of shares from stock-in-trade to investment is not genuine. He submitted that the Balance Sheet filed by the assessee cannot be treated as sacrosanct. The various decisions relied on by the ld. counsel for the assessee are not applicable to the facts of the present case since in none of the cases it was decided in the line of colourable device. Referring to the decision of the Delhi Bench of the Tribunal in the case of ITO vs. M/s Reema Construction Pvt. Ltd. vide order dated 07.09.2012 he submitted that the Tribunal has reversed the decision of the ld. CIT(A) and held that the ld. CIT(A) was not justified in holding that the land in question shown as stock-in-trade will not convert the transaction into a business transaction until or unless there is circumstantial evidence to this effect. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Swan River Financial Ltd. vs. ITO vide ITA No.3588/Mum/2010 order dated 14.09.2012 for assessment year 2005-06, he submitted that the Tribunal has upheld the action of the Assessing Officer in treating the conversion of shares by the assessee from stock-in-trade to investment was to avoid payment of tax. He accordingly submitted that the order of the ld. CIT(A) be upheld and the grounds raised by the assessee be dismissed.
Ld. counsel for the assessee, in his reply, submitted that the two decisions relied on by the ld. DR are not applicable to the facts of the present case. In case of M/s Reema Construction Pvt. Ltd. (supra) the issue was regarding the conversion of agricultural land. In the case of Swan River Financial Ltd. (supra), the Tribunal has not considered the decisions of various High Courts which were pronounced subsequently. He submitted that the Assessing Officer in the instant case has himself accepted the conversion from stock-in-trade to investment as legal. His only objection is regarding the motive of the assessee.
He accordingly submitted that the order of the ld. CIT(A) be set-aside and the grounds raised by the assessee be allowed.
We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the ld. CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has converted its stock-in- trade of shares and securities of certain companies to investment as on 01.04.2004 at the same value as on 31.03.2004. We find the Assessing Officer while holding that the law does not prohibit the assessee from converting its stock-in-trade to investment, has however, rejected the explanation given by the assessee on the ground that the assessee is still dealing in shares and securities which is evidenced by the frequency of transactions. He, therefore, made addition of Rs.85,59,900/- to the income of the assessee being business profit on conversion of stock-in-trade to investment which has been upheld by the ld. CIT(A). It is the submission of the ld. counsel for the assessee that such conversion is bona-fide since the assessee has held such shares and securities in the investment account and no share has been held under the head stock-in- trade. It is also his argument that it is the right of the assessee to convert the shares from stock-in-trade to investment as long as the conduct of the assessee is bona-fide and he is following the method consistently. We find some force in the arguments advanced by the ld. counsel for the assessee. As mentioned earlier, the assessee in its note to accounts has given reason for conversion of stock-in-trade to investment which has already been reproduced in the preceding paragraph. We find the Assessing Officer accepts that such conversion is legal but doubting about the bonafideness of the assessee treating such conversion as colourable device to avoid payment of tax. We find the Hon’ble Delhi High Court in the case of Express Securities P. Ltd. (supra) while deciding an identical issue has decided the issue in favour of the assessee by observing as under :- “2. The assessee is a company. In the return for the year in question, it had declared long-term capital gain of Rs.3,34,65,931/- and the said gain was claimed as exempt under Section 10(38) of the Income Tax Act, 1961 (Act, for short). The respondent-assessee had claimed before the Assessing Officer that they were maintaining two sets of portfolio, i.e., investment and trading portfolio and the shares, which were sold and subject matter of long-term capital gains, were held in the investment portfolio. This factual position was not disputed.
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-assessee 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 "investment" on 1 st 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. 5. 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 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 stock 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 assessee. He took into account the period of holding by the assessee 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.”
We find the Hon’ble Gujarat High Court in the case of Aditya Medisales Ltd. (supra) while deciding an identical issue has observed as under :-
“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 silvers 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 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.”
The two decisions relied on by the ld. DR are not applicable to the facts of the present case. In the case of M/s Reema Construction Pvt. Ltd. (supra), the land was situated on highway and was purchased only for development or for industrial activities and no prudent person would purchase such land for carrying out agricultural activities. It was accordingly held that the Assessing Officer has rightly treated the said land as non-agricultural land. Therefore, the said decision is not applicable to the facts of the present case. Similarly, in the case of Swan River Financial Ltd. (supra) is prior to the decision of the Hon’ble Delhi High Court in the case of Express Securities Pvt. Ltd. (supra). Since the decision of the Hon’ble Delhi High Court would prevail over the order of the Tribunal which was decided prior to the decision of the Hon’ble Delhi High Court, therefore, the decision relied on by the ld. DR is not applicable to the facts of the present case. In this view of the matter and following the decisions relied on by ld. counsel for the assessee cited (supra), we hold that the ld. CIT(A) was not justified in upholding the action of the Assessing Officer in making the addition of Rs.85,59,900/-. We, therefore, set-aside the order of the ld. CIT(A) and direct the Assessing Officer to delete the addition.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on this 08th day of June, 2018.