ASHOK APPARELS P.LTD,MUMBAI vs. DCIT CEN CIR 47, MUMBAI

आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM: The aforesaid appeals have been filed against separate impugned orders dated 29.02.2012, for the quantum of assessment passed under section 143(3) r.w.s. 153A for the assessment years 2006-07, 2007-08, 2008-09 and order dated 28.09.2012 for the assessment year 2009-10, for the

Ground No. 3: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Ld. A.O. of considering the 1,06,000 bonus shares of Praj Industries as Trading stock. The appellant prays that the said action of the learned AO may please be held as bad-in- law and ordered to be deleted. Ground No. 4: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of Ld. A.O. of not allowing the loss of Rs.2,01,32,141 on the shares of Astramicro Limited as claimed by the appellant, and calculating the eligible loss at Rs.26,74,225. The appellant prays that the loss on account of share trading be considered at Rs2,01,32,141 as claimed by the appellant. The appellant prays that the aforesaid action of the learned AO may please be held as bad-in-law and ordered to be deleted. Ground No. 5: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the decision of the Ld. A.O. of considering the 71,480 bonus shares of Astramicro Limited as Trading stock. The appellant prays that the said action of the learned AO may please be held as bad-in-law and ordered to be deleted. The Appellant craves leave to add, alter, amend or withdraw any of the Grounds of Appeal herein above and to submit such further arguments, statements, documents and papers as may be considered necessary either at or before the hearing of the appeal.

6 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. AY 2008-09 Addition/disallowance of Rs.5,53,66,132/-, the break- up of which is as under:- - Amount of expenditure directly related:-Rs.77,433/- (being demat charges) - Interest allocated - Rs.5,40,30,553/- (Out of total interest expenditure of Rs.10,33,38,955) - Administrative expenditure allocated: Rs.12,58,146/ (which is the sum total of all the expenditure claimed being less than 0.5% of average investments) - AY 2009-10 - Addition/disallowance of Rs.3,23,97,720/-, the break- up of which is as under:- - Interest allocated - Rs.3,13,60,908/- (Out of total interest expenditure of Rs.3,68,83,344/-) - Administrative expenditure allocated:-Rs.10,36,812/ (which is the sum total of all the expenditure claimed being less than 0.5% of average investments)

The Ld. CIT (A), on similar reasons has confirmed the disallowance and further held that from AY 2008-09; Rule 8D is applicable which is mandatory and accordingly administrative expenses were also confirmed.

7 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. loans from the directors and group companies and other interest free funds as evident from the balance sheets. If the overall availability of interest free funds are taken into consideration vis-a-vis. the investment made right from AY 2006-07 to AY 2009-10, then it can be seen that the assessee had surplus/interest free funds which will take care of the investments made. He submitted that the proposition that, if the assessee has both interest free funds and interest bearing, then presumption is in the favour of the assessee that investments were made from the coffers of interest free funds only, is squarely covered by the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (supra) which also reiterated in the case of CIT v HDFC Bank Ltd, 366 ITR 505. However, he submitted that it was only in 2007-08, there would be deficiency, because investment have exceeded the interest free funds and, therefore, any interest if at all should be disallowed then the same should be on account of the excess investment made over and above the interest free funds. He further pointed out that, in any case, if at all any disallowance is called for, then same should not be more than the exempt income, which in AY 2007-08 was only Rs.25,23,123/- therefore, the disallowance for AY 2007-08 should be restricted to Rs.25,27,123/-.

8 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Chart showing position of funds Particulars AYs 2006-07 2007-08 2008-09 2009-10 Share capital 11,12,200 11,12,200 11,12,200 11,651,800 Reserve and Surplus 20,14,96,599 20,13,46,531 2,11,19,16,309 2,37,23,75,327 Interest Free Unsecured Loan from directors and Group companies - 2,38,15,59,243 1,50,49,08,038 1,35,10,62,089 Interest Free ICD 2,74,00,000 10,67,79,500 92,75,000 92,75,000 Security Deposit and advance Received for premises 1,75,09,300 1,75,09,300 29,83,50,900 - Total (A) 24,75,18,099 2,70,83,06,774 3,92,55,62,447 3,73,38,74,216

Chart Showing Investment Particulars AYs 2006-07 2007-08 2008-09 2009-10 Total Investment 231118150 2853800187 3744088130 3660760374 Less: Share Application Money, Advance for Flat and Investment in Venture Capital Fund 9316975 28705185 75825786 66522090 Total Exempt Income Bearing Investment(B) 221801175 2825095002 3668262344 3594238284 Excess/(deficiency) of Own Fund (A-B) 2,57,16,924 (11,67,88,228) 25,73,00,103 13,96,35,932 As regards, the disallowance of indirect expenditure for the assessment years 2008-09 and 2009-10, which has been worked out in accordance with the Rule 8D(2)(iii), i.e. 0.5% of the average value of investment, Mr. Mehta submitted that, same is not being pressed and therefore, disallowance made under rule 8D(2)(iii) can be confirmed.

9 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. available with the assessee which was more than the investments made during the year, which is quite apparent from the chart reproduced herein above. Once the surplus / interest free funds are excess of investment made, then in view of the ratio and principle laid down by the Hon’ble Bombay High Court in above two cases (Reliance Utilities and HDFC Bank) as relied upon by the ld. counsel, no disallowance under section 14A on account of interest expenditure should be made. Their Lordships have clearly opined that, once in the Balance sheet the assessee has reflected surplus/ own funds and also interest bearing funds, then presumption is that, investments must have been made out of interest free funds only and once that is so, then no disallowance of interest should be made. As can be seen from the chart incorporated above, for the AYs 2006-07, 2008-09 and 2009-10, there are excess of interest free/ surplus funds over the investments, therefore, no interest disallowance should be made under section 14A for the assessment years 2006-07, 2008-09 and 2009-10 should be made. We order accordingly.

 Treatment of sale of shares of Praj Industries:- During the AY 2006-07, the assessee company had acquired 21,200 shares of Praj Industries ('Praj') which were treated as "trading stock". On 12.08.2006 there was a stock split in the ratio 5:1 for the said shares as a result of which the company has held 1,06,000 shares of Praj. The stock split was followed by a bonus issue in the ratio if 1:1. After giving the effect to the same, the number of share available with the company became 2,12,000. The assessee converted such bonus shares from trading portfolio to investment portfolio as on the 11 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. same date on which the bonus shares were allotted to it. Further the company had also purchased 10,000 shares of the Praj. During the same assessment year the assessee had sold 1,16,000 share of Praj from share trading portfolio. The assessee claimed entire cost of Rs.1,71,37,979/- in respect of said sale and accordingly, calculated the business loss of Rs.66,68,788.  In AY 2008-09, the assessee sold bonus shares of Praj from investment portfolio in the AY 2008-09 and claimed exempt LTCG of Rs.4,98,57,944/- under section 10(38) of the Act.  The assessee had acquired 14,296 shares of Astramicro Limited ('Astramicro') during the AY 2006-07. There was a split in the ratio of 5:1 in the same AY after which the company has held 71,480 shares of Astramicro. The stock split was followed by a bonus issue in the ratio of 1:1 on 15.10.2005. After giving effect to the bonus issue the number of shares with the company became 1,42,960. The assessee company then converted its bonus shares from the trading portfolio to investment portfolio as on same date on which it was received. During the same AY the company sold 71,480 shares of Astramicro from share trading portfolio and claimed entire cost of Rs.3,49,15,835/- in respect of said sale and accordingly calculated the business loss of Rs.2,01,32,141.  Subsequently, the assessee company sold Astramicro shares from investment portfolio in AY 2007-08 and 12 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. claimed exempt LTCG of Rs. 1,14,00,115/- u/s 10(38) of the Act.  The assessee-company in the AY 2007-08 had acquired 1,12,400 shares of India bulls Co. in AY 2007-08 which were held as "trading shares" and sold 1,12,400 in the same year. The assessee claimed the entire cost of Rs.4,59,76,487/- in respect of said sale and accordingly calculated the business income of Rs.1,42,75,415/-. During the year there was a scheme of demerger in the said scrip. Under the said scheme, due to the company's holding of 46,000 shares of India bulls the company was awarded with 46,000 shares of the resulting company i.e. India bulls Real Estate Limited ('IBREL'). The assessee company accounted the receipts of 46,000 shares of resulting company - IBREL as investment portfolio; and  Subsequently, the assessee sold shares of IBRE from investment portfolio in the AY 2008-09 and claimed LTCG of Rs.2,89,48,329/- which was exempt under section 10(38) of the Act.

13 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Sr.No. Particulars Qty. Cost Sales Rs. LTCG Rs. Rs. 1 Praj Industries 1,06,000 NIL 4.98,57,944 4.98,57,944 2 India Bulls Real Estate 46,000 NIL 2,89,48,329 2,89,48,329

1.2 The AR was required to explain as to why the cost of acquisition was taken at NIL? The AR explained that these shares of the two scrips were the BONUS SHARES received by the company and therefore as per the provisions under section 55(2)(aa)(iiia), the cost of acquisition is taken at NIL.

1.3 The ORIGINAL HOLDING in respect of these shares was traced to the AY 2006-07 and 2007-08. It was observed that in the AY 2006-07 and 2007-08, the shares were actually part of TRADING stock. The status of the two Scrips in the AY 2007-08 is as under: Sr. AY Particulars Qty. Cost Sales Trading No. Rs. Rs. Loss Rs. 1 2006-07 Praj Industries 1,16,000 1,71,37,979 1,04,69,192 66,68,788 2 2007-08 India Bulls Real Estate 1,12,400 4,59,76,487 3,17,01,073 1,42,75,415

In response to the show cause notice by the AO in this regard, assessee had made detailed submissions as to how the law permeates conversion of stock-in-trade into capital asset and vis-à-vis. The relevant submissions of the assessee for the sake of ready reference are reproduced hereunder:- It is pertinent to note herein that whereas conversion of capital assets into stock-in-trade and taxability of resultant profit or loss is specifically dealt under Section 45(2) of the Income Tax Act, there is no specific provision to deal with reverse situation involving conversion of stock-in-trade into capital asset or investment. Thus, to determine the tax effects of the said

14 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. transaction, one has to rely squarely on the legal precedents available on the subject. It is well settled legal position that stock in trade can be converted into capital assets. However, two moot issues in respect of taxation aspect which arises are as under - 1) Value to be recorded in the books of the business and for purpose of computing cost in case of future sale or transfer 2) The point of time from which indexation should be applied, whether on the date of conversion or the date of purchase as stock in trade. Both the above issues have been deliberated by various courts over the years. The guiding principle has been laid out by the cases of Sir Kikabhai Premchand v. CIT (24 ITR 256) (SC) & CIT v. Dhanuka & Sons (124 ITR 24) (Cal), where it has been stated that even if the stock in trade to be valued at cost at for the purpose of calculation of cost of acquisition of capital asset. Relying on the Another leading case on the point is Keshavaji Karsondas Vs. CIT (207 ITR 737) where it was categorically held that what is relevant is the "cost of acquisition" and not the date on which the asset became a capital asset of the purpose of levy of capital gains tax. The property which was transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as a non- capital asset at one point of time and as a capital asset at another point of time. Hence for the purpose of determining "capital gains, the "cost of acquisition of the capital asset belonging to the assessee has to be taken as on date it becomes the capital asset of the assessee. Relying on the methodology adopted by the above case, the assessee valued its investment at Rs. Nil which was the cost of its bonus shares. The methodology adopted by the 15 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. assessee has also been recently validated by Bombay High Court in the case of CIT vs. Jannhavi Investments (P) Ltd where in the facts of the case were completely similar to the facts of the assessee's case. Herein the assessee had been allotted bonus shares on the shares originally held as stock in trade. The Hon'ble court had stated that the assessee was entitled to value the said bonus shares at cost which is applicable on the date of conversion into capital asset. Applying the ratio of the above decision, it is submitted that the methodology adopted by the assessee is completely in sync with the applicable law. Further, during the course of assessment proceedings, your goodself had asked to explain why the sale of bonus shares shouldn't be treated as income from business and profession. In reply to the same it is once again stated various judicial; precedents have held the conversion of stock in trade into capital asset as valid and as per law. Applying the analogy of the said above cited decisions; the assessee submits that in the particular year, it was intention of that assessee to transfer its stock in trade to 'investment' and accordingly the same were accounted under the head "investments". The only motive and intention of the assessee behind making such a switch was to reap the benefits of appreciation in price of shares in the long run, which every investor in shares always does. The same were also accounted at cost applying the conservative approach of accounting. Further, it is pertinent to note that assessee-company has limited its investment into few scripts with the intention of long term growth. After a long holding period of more than a year, the assessee sold the scrips out of the investment portfolio and earned long term capital gain arising out of steady market appreciation. There was no panic selling or frequent transactions of sale involved. The shares in the investment portfolio were sold only after the 16 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. due considerations that the same were fully priced in and the share price has reached their logical full valuation. This clearly signifies that the assessee had been a pure investor and not involved into any trading activities for its investment portfolio. It is pertinent to note that the holding period for the shares sold during the year is more than 12 months which is a considerable period of time in case of volatile asset like shares. Further to negate the contention of your goodself that an assessee cannot treat a single scrip as stock in trade in one year and investment in another, we draw your goodself's attention to the above cited case of Jaanhavi Investments. As stated in the above paras, the facts of the above case were similar to the assessee's case wherein a single scrip was treated as stock in trade in one year and as investment in another. However, no adverse inference on the same was drawn by the court on this and the capital gain as calculated by the assessee was accepted”.

17 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. only when it is investment stock. The cost of purchase of trading stock for the bonus shares is to be taken as the original cost as apportioned on the bonus shares and original shares. During the assessment year of purchases of shares, the cost should have been apportioned on the shares equally by the assessee and should have worked out the trading profit or loss. The assessee, instead, worked out the trading loss in the year of purchases, taking the total cost into consideration. The plea of the assessee that the cost of acquisition of bonus shares is NIL is applicable only for the investment stock and not for the trading stock.

Accordingly, the trading and profit and loss account of these shares were worked out by the AO in the following manner:- For AY 2006-07 and AY 2007-08 Sr. AY Particulars Original Bonus Cost Rate Qty. Sold N Qty. Issued Rs. Per Share 1 2 3 4 5 6 7 8 1 2006 Praj -07 Industries 116,000 106,000 17,137,979 77.20 116,000 2 2007 India Bulls -08 Real Estate 112,400 46,00 45,976,487 290.26 112,400

Cost Rs. Sales Rs. Trading Profit/ Loss Rs. 9 10 11 8,954,980 10,469,192 1,514,212 32,624,729 31,701,073 (923,656)

For AY 2008-09 Sr. Particulars Bonus Rate per Cost of Qty Sale conside- Trading No. Issued share shares Sold ration for Profit or Balance Loss Shares during AY 2008-09 1 Praj Industries 106,000 77.20 8,183,200 106,000 49,857,944 41,674,744 2 India Bulls Real Estate 46,000 290.26 13,351,960 46,000 28,948,329 15,596,369 TOTAL 57,271,113

18 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Thus, in view of the aforesaid working, the adjustments done by the AO in the respective assessment years were as under: A.Y. Head of Income Particulars Amount Rs. 2006-07 Business Income Add: Disallowance of Loss 66,68,788 Add: Income 15,14,212 2007-08 Business Income Add: Disallowance of Loss 1,42,75,415 Less: Loss Incurred 9,23,656 2008-09 Business Income Add: Income 5,72,71,113 LTCG (Exempt) Less: LTCG treated Trading 7,88,06,273

19 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd.

20 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. 1. Atlas Corporation v. ITO –Mumbai ITAT (57 ITD 139); 2. CIT v. Madan Gopal Radheyal –Supreme Court (73 ITR 652)

Mr. Mehta further pointed out that, the department has also accepted identical treatment of shares which are under consideration, i.e. conversion of bonus stock into investment in the case of shares of Sesa Goa, wherein the income from different portfolios was offered to tax under the head 'Income from business or profession' and 'Capital gains' in AY 2005- 06 and 2006-07 for which orders u/s 143(3) and 153A r.w.s 143(3) respectively have been passed. He, further relied upon the judgment of Delhi High Court in the case of CIT vs. Express Securities Pvt. Ltd. (364 ITR 488) wherein it was concluded that once the shares are held as investment by the assessee, then resultant gain / loss should be assessed as capital gain although the scrip has been held as stock in trade prior to such conversion. He also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Yatish Trading Co. Pvt. Ltd, reported in [2013] 359 ITR 320. Thus he submitted that the provisions of capital gain would be applicable once the share was converted into investment. Lastly, in support of the consistent practice followed by the assessee and accepted by the department, he filed the details of certain shares which were held as stock-in-trade and the bonus shares were treated as investment and also filed a separate sheet with regard to various shares when purchased were taken into trading account and later on converted into investments at the yearend.

21 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd.

22 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. cost has to be allocated to the bonus shares also for determination of business profit / loss.

23 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. for the respective years as profits of these shares dealing in business? The Hon’ble High Court by majority answered this question in favour of the assessee. Before the Hon’ble Supreme Court various decisions were relied upon by the revenue including that of the Hon’ble Bombay High Court in the case of CIT vs Maniklal Chunnilal and Sons Ltd. (ITR 16 of 1948), however, the Hon’ble apex court decided the issue after observing and holding as under:- “We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in Commissioner of Income-tax V. Maniklal Chunnilal and Sons Ltd. (I.T. Reference No. 16 of 1948) that bonus shares received by a shareholder who carries on business in shares and securities "ipso facto become accretion to his stock-in-trade." Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in particular commodity is acquisition the purpose of his business in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.

Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessee, in to their stock-in- trade or retained as their capital asset”.

Thus, the Hon’ble Supreme Court clearly opined that, the bonus shares having received by the assessee in respect of stock-in-trade will not become the part of stock-in-trade automatically; they can be converted by the assessee either into stock-in-trade or can be retained as capital asset, that is,

24 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. as investment. This decision of the Hon’ble apex court clearly clinches the issue in favour of the assessee and there is no support for the proposition canvassed by the Department that the bonus shares issued on the shares held as stock-in-trade has to be reckoned as stock-in-trade only and cannot be treated as part of capital asset. At least, no judicial authority has been brought to our notice by the Department. The ITAT Mumbai Bench in the case of Atlas Corporation v ITO (supra) on the issue of bonus shares has also observed and held as under:- “As far as the bonus shares were concerned, acquisition of bonus shares is always on capital account, irrespective of the nature of holding of shares on the basis of which the bonus shares were issued. Even if shares are held by an assessee as stock-in-trade and bonus shares are to be treated on capital account and, therefore, profit on sale of such shares acquired on the basis such holding, the bonus shares are to be treated on capital account and, therefore, profit on sale of such shares is to be assessed as capital gain and not as business income, unless it is shown that the assessee has converted them into stock-in-trade. In the instant case, there was no material to hold the assessee ever converted any of such shares into stock-in-trade. Therefore, the income arising in respect of the bonus shares would not be assessed as business income but has to be assessed as capital gains”.

Thus, we hold that the bonus shares held by the assessee are to be treated as ‘capital asset’ that is, investment.

25 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. once the assessee is maintaining two portfolios; one for ‘stock-in-trade’ and one in respect of ‘investment’ and has been as a matter of practice converting the shares held as stock-in-trade to capital account and transferring the shares in investment portfolio, the then same has to be accepted here in these years also. Once the shares held as ‘investment’ in the books are sold, that is, out of investment portfolio, then same is assessable under the head Long-term-capital-gain. This precise issue had come up for consideration before the Hon’ble Delhi High Court in the case of CIT v. M/s Express Securities Pvt Ltd, reported in [2014] 364 ITR 488, wherein the Hon’ble High Court held that, such a conversion of stock- in-trade into investment/capital account is permissible in law and the fact that the long-term-capital-gain on sale of shares held as investments have been treated as exempt under section 10(38) brought under statute from 1st April, 2005, that does not mean that conversion was colourable or illegal. Their Lordships thus rejected the contention of the revenue in this regard that such a conversion was only to avail the benefit of exemption on sale. In view of the decision of the Hon’ble Delhi High Court, the observation of the Ld. CIT(A) that the shares have been converted to capital asset only to fetch exemption under section 10(38) cannot be accepted. We find that in the case of CIT vs, Yatish Trading Co (supra), the Hon’ble Bombay High Court held that, the assessee’s trading in shares would not estop the assessee from dealing in shares as investments and gain offered on sale of such shares has to be taxed under the head “capital gains”. Thus, it is open to for a trader to hold the shares as stock-in-trade as well as investments and can be converted in either way. Once the 26 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. shares sold were held by the assessee as investments, then the gains arising out of sale of investments has to be assessed under the head “capital gains” and not under the head ‘business profits’. From the above proposition of law, as culled out from the various binding precedence of judicial authorities of Hon’ble apex court and Hon’ble jurisdictional High courts, we hold that, the assessee is entitled to hold shares both as stock-in-trade as well as under the investment portfolio even on those shares which were though purchased for the purposes of trading but have been converted into capital asset or investment at the yearend and have to be treated as ‘capital asset’ only and any gain arising there from in the subsequent years has to be treated as income assessable under the head “capital gain”.

(2) For the purposes of sections 48 and 49, “cost of acquisition” (a) xxx (aa) In case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee – (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then subject to the provisions of sub-clause (i) and (ii) of clause (b) (i) xxx (ii) xxx (iii) xxx

28 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee”.

From the above provisions which has been brought in to the statute w.e.f. 01.04.1996, it is clear that, once the assessee had not incurred any cost at the time of acquisition of bonus shares then it has to be taken as “Nil” and no cost should be assigned. This deeming provision will apply in the present case also with regard to bonus shares. As submitted by the Ld. Counsel, the decisions of the Hon’ble Supreme Court in the case of Escorts Farms (Ramgarh) (supra) will not apply in wake of this newly amended section brought by the Finance Act, 1995 w.e.f. 01.04.1996. Thus, we hold that, firstly, the cost of shares sold on trading account has to be taken at original cost and average cost, that is, the cost incurred for purchase of shares and not the proportionate allocated cost to bonus shares and secondly, the cost of bonus shares has to be taken at “Nil”. The AO is directed to give effect to our aforesaid finding while dealing with the determination of business income as well as capital gain in respect of the shares for all the assessment years impugned before us.

24.. The AO is directed to verify the contention of the assessee and if the MAT credit of AY 2008-09 is available then benefit should be given in AY 2009-10 if found permissible in law and on facts. Thus, the additional ground is treated as allowed for statistical purposes.

Order pronounced in the open court on 29th July, 2016.

Sd/- Sd/- (अशवनी तनेजा) (अिमत शु�ला) लेखा सद�य �याईक सद�य (ASHWANI TANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 29th July, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT –38, Mumbai. 4) The CIT -4, Mumbai 5) िवभागीय �ितिनिध “ए”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “A” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /