SHIBIR INDIA LIMITED,KOLKATA vs. DCIT, CIRCLE-1, KOLKATA, KOLKATA

Per Shri P.M. Jagtap, A.M..: This appeal filed by the assessee is directed against the order of Id. Commissioner of Income Tax (Appeals)­17, Kolkata dated 12.05.2016, whereby he confirmed the action of the Assessing Officer in treating the Short Term Capital Gain of Rs.35,37,966/­ as business income of the assessee.

6. A detailed list of these shares showing therein the transfer value, sale value and dosing balance has already been filed with your goodself. (b) From the enclosed list, it can be seen that part of these shares were sold within one or two months of transfer to the "investment Portfolio". In this regard, it is submitted that though the intention was to hold these shares long term and not to sell them in the short period, exigencies of the situation forced the assessee company to sell part of the investment portfolio. (c) It is pertinent to [late here that CBDT vide Circular No. 412007 dt.15. 06.2007 has clarified that a tax payer has a liberty to decide in this regard and may also have two types of portfolios ­ Investment Portfolio and Trading Portfolio. Para 10 of the said circular is quoted as under for the sake of convenience. "The Central Board of Direct Taxes also wishes to emphasize that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock­in­trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e. Capital Gains as well as Business income". The aforesaid circular has also referred to a Supreme Court judgment at Para 5 which given prerogative to the taxpayer to decide on which amount account he wishes to hold the shares. Para 5 of the circular is quoted as under­ "In the case of CIT vs. Associated Industrial Company (P) Limited (1971) 82 ITR 586, the Supreme Court observed that (head note) : Whether a particular holding of shares is by way of investment or forms part of the stock in trade is a matter which is within the knowledge of the assessee who holds the shares and he should in normal circumstances, be in a position to produce evidence from his records as to whether he has maintained any distinction between those shares which are his stock in trade and those which are held by way of investment. In our case we certainly have pre­decided to hold all the shares by way of investments. It can further be seen from the books of accounts produced ./2016 Assessment year: 2007­2008 Page 4 of 8

that separate accounts are being maintained for the two types of portfolios. This complies with the requirement of maintaining a clear cut distinction between the nature of holdings".

"Asssseee's intention was trading at the time of purchase of shares.

Shares were held as trading stock upto 31.03.2006.

Shares were sold within a very short time after transfer from trading to investment on 01.04.06/01.07.06. Frequent and substantial nature of transactions indicate trading.

Assessee company's primary intention was to make profit from short term transactions which is more of trading than investment. It is proved that disclosure of STCG by transferring shares from trading to investment is not bonafide but to reduce tax liability. Dividends from these shares are received from holding as stock in trade.

Dividend is less than 0.5 % of the profit on sale. Thus the test of profit/dividend ratio fails to prove investment in justifying STCG. Arguments are not supporting the facts of the case".

"The short point for discussion on this issue is whether stock­in­ trade can be converted into Capital asset or not. It is the contention of the A/R of the assessee that there is no baron conversion of stock­ in­trade into capital asset. The assessee has argued that as the conversion of stock­in­trade into capital asset has been dully authorised by the board the AD should have assessed the income arising therefrom as capital gains. The question now arises whether the income from the sale of those shares, which were earlier held as stock­ in­trade and now allegedly have been transferred to the investment account, would give rise to business income or capital gain. The assessee has argued that the act does not prohibit transfer of shares held as stock­in­trade to the investment account. The obvious interpretation that follows is that capital gain can only arise on sale of a capital asset. The question whether stock­in­trade can be converted into capital asset has to be answered with reference to the definition of a capital asset. The term capital asset has been defined in section 2 (14) of the Act as follows: Capital asset means ­ (a) Property of any kind held by an assessee, whether or not connected with his business or profession; But does not include­ Any stock­in­trade, consumable stores or raw materials held for the purposes of his business or profession; Therefore, it is observed that in the Act the definition of Capital asset specifically excludes stock­in­trade. Hence, stock­in­trade cannot be converted into a capital asset. Therefore, the sale of shares held as stock­in­trade has to be assessed as business income. The Hon 'ble Supreme Court in the case of Britannia Industries [2005J 148 TAXMAN 468 (SC) has observed that When the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. In this case by adopting a literal interpretation of the definition of capital asset the inevitable conclusion follows that shares held as stock­in­trade cannot be converted into a capital asset as the Act specifically excludes any such conversion. The appeal of the assessee on this ground is therefore dismissed". Aggrieved by the order of the Id. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.

"6. We have heard the parties and perused the material on record. It is relevant to state that the Ld. CIT(A), for the purpose of deciding the case has elaborately discussed three main issues, namely (i) whether the assessee can legally convert its stock-in trade into ./2016 Assessment year: 2007­2008 Page 7 of 8 investments, (ii) if yes, whether the conversion is motivated by tax avoidance and (iii) if not, whether the assessee can claim to be an investor in some shares while doing speculation in other shares. 6.1. As regards the legality of conversion of stock-in trade into investments, the Ld.CIT has correctly held that there is no specific bar for the said conversion and vice versa in view of the decision of the Hon 'bl e Supreme Court in the case of Sir Kikabhai Premchand (24 ITR 506) (SC) wherein it has been held that such conversion is not something not known to the commercial world and there is no legal bar on the same. 6.2. On the second issue as to whether the conversion is motivated by tax avoidance, shorn off extracting the entire discussion, reading of paras 14.3 to 14.7 of the order of the Ld. CIT(A) clearly establishes that the Ld.CIT(A) has well appreciated the facts and thereby arrived at a correct conclusion that it is not the case that the assessee has entered into any sham transactions for avoiding tax and the conversion of stock into investment is transparent from the audited accounts of the assessee with c1arificatory note appended in the No.tes to Accounts for the FY 2002-03. As regards the argument the Ld. DR that such conversion is to be treated as a sham transaction based on the decision of the jurisdictional High Court in the case of Twin star Holdings Ltd Vs Anand Kedia (260 ITR 6 Bom), we are of the view that the ratio of the said decision is not applicable to the facts in the present case as the former relates to such conversion by three investment companies and transmission of shares thereon. 6.3. Regarding the third issue whether the assessee can be an investor as well as a speculator in shares simultaneously, the Ld. CIT{A) has relied on the decision of the Tribunal in the case of Vesta Investments &Trading Co.{P) Ltd (70 ITD 200)(Chd) wherein it has been held that in the case of assessee holding both shares as well as investments for which separate accounts are kept and if the Department in the past has accepted the sale of shares held as investments would give rise to capital gains and not business. Since the said decision is squarely applicable in the case of the assessee in the present case, we are of the view that the Ld. CIT(A) has rightly answered this issue affirmatively. 6.4. In view of that matter, we do not find any justifiable reason to interfere with the order of the Ld. CIT{A) directing the AO to assess the profits on sale of share under the head 'Capital Gains' and not as business income. Thus, the order of the Ld. CIT is hereby upheld. Since all the sub-grounds in this appeal are pertaining to the same issue in relation to the assessment of long term capital gains, we do not adjudicate the sub-grounds separately".