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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri S.S. Viswanethra Ravi
Per Shri P.M. Jagtap:- This appeal is preferred by the Revenue against the order of ld. Commissioner of Income Tax (Appeals)-VI, Kolkata dated 30.03.2010 for the assessment year 2006-07 and the same is being disposed of along with Cross Objection filed by the assessee being C.O. No. 120/KOL/2010.
In the solitary ground in its appeal, the Revenue has challenged the action of the ld. CIT(Appeals) in treating the profit of Rs.22,27,819/- arising to the assesese from sale of certain shares as long-term capital gain as claimed by the assessee and not business income as held by the Assessing Officer. 3. The assessee in the present case is a Company, which is engaged in the business of leasing, finance and investment. The return of income for the year under consideration was filed by the assessee on 30.11.2006 declaring total income of Rs.40,23,001/-. On 01.04.2004, i.e. during the previous assessment year 2005-06, the following shares were transferred by the assessee from its trading stock into investment:- 1. Hind Lever Chem Limited 10,370 shares 2. Chambal Fertilisers Chem 38,000 shares Limited 3. 14,580 shares Eveready Industries Limited 4. Shrachi Securities Limited 48,000 shares 4. Out of the above shares claimed to be converted into investment, entire shares of Hind Lever Chem Limited and Shrachi Securities Limited and 5,000 shares of Chambal Fertilisers Chem Limited were sold by the assessee in the previous year relevant to A.Y. 2005-06. The balance 33,000 shares of Chambal Fertilisers Chem Limited and 14,580 shares of Eveready Industries Limited were sold by the asseessee during the year under consideration and the profit arising from the said sale was claimed
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to be exempt from tax being long-term capital gain. In the assessment completed under section 143(3) for A.Y. 2005-06, the claim of the assessee for conversion of shares from stock in trade into investment was not accepted by the Assessing Officer and relying on the said decision, the Assessing Officer in the year under consideration did not accept the claim of the assessee for exemption on account of long-term capital gain arising from 33,000 shares of Chambal Fertilisers Chem Limited and 14,580 shares of Eveready Industries Limited and brought to tax profit arising from the said shares amounting to Rs.22,27,819/- to tax in the hands of the assessee as business profit.
The action of the Assessing Officer in treating the profit arising from the sale of shares of Chambal Fertilisers Chem Limited and Eveready Industries Limited as business profit thereby denying its claim for exemption on account of long term capital gain was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) accepted the claim of the assessee that the said profit representing long-term capital gain was exempt from tax for the following reasons given in his impugned order:- “I have also gone through the order of the CIT (A) on the Assessment Order for A.Y. 2005-06. This order was passed on 21.5.2008. The CIT (A) has relied on the CBDT circular/instruction No.1827 dt. 31.8.1989 and held that huge number of shares was acquired and also sold on different occasions, so main motive was to earn profit by dealing in shares. The CIT(A) has not specifically discussed in the order regarding the validity of conversion of shares from Trading A/c to investment account. The CIT (A) order concluded that the profit earned by the assessee company in share transaction constitute business income and accordingly, assessed under the head business and the claim of the assessee company to treat the same as capital gain denied. As seen from Income Tax Act, the IT Act does not contain any provisions prohibiting the conversion of shares from Trading Account to Investment Account. The ITAT Mumbai ‘H’ Bench in the case of ACIT vs. Bright Star Investments Pvt. Ltd. [2/07/2008] in their order
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held that assessee converted same shares from stock in trade to investment on 1s t April 1998 at Book Value, thereafter sold them and claimed the receipts as long term capital gains A.O. applying Section 45(2), treated the receipts as business income upto the date of conversion and thereafter long term capital gains. The Hon'ble ITAT further observed "While incorporating the subsection (2) to section '45, the legislature has not visualized the situations in the other way round, where, the stock in trade is to be converted into the investments and later on the investment was sold on profit. In the absence of a specific provision to deal with this type of situations, a rational formula should be worked out to determine the profits and gains on transfer of the asset. We are also conscious about the judgement in cases of Sir Kakabhi Premchand vs. CIT (1952) 24 ITR 506 (SC), CIT V. Dhanuka and Sons ITR 24 (Cal) which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in a different account of the assessee by himself. The acquisition of gain or loss would arise only in future when, the stock transferred to the investment account might be dealt with by the assessee. If such shares be disposed off at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In the absence of a specific provision to deal with the present situation, two formulas can be evolved to work out the profits and gains on transfer of the assets. One formula which has been adopted by the assessing officer i.e., difference between the book value of the shares and the market value of the shares on the date of conversion should be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as a capital gain. The other formula which is adopted by the assessee i.e., the difference between the sale price of the shares and this cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. In the absence of specific provision, out of these two formulae, the formula which is favourable to the assessee, should be accepted”. In case of CIT v. Dhanuka and Sons 124 ITR (Cal) it has been categorically held that profit and gains on shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because a person cannot have transaction with himself and in turn such profit cannot be taxed. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In the present case the conversion of shares from trading account to investment account was done at stock
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exchange quoted rates as on 1.4.2004. The shares of Chambal Fertilizers were sold in the month of February, 2006 and the shares of Eveready Industries limited in the month of December, 2005. The claim of the appellant for capital gain in respect of shares of these two companies is acceptable. In view of the above discussion, in my opinion the conversion of shares of the two companies from Trading account to Investment account is legitimate and the A.O. is directed to treat the income on-sale of these 2 shares as income from long term capital gains. This ground of appeal is allowed”. Aggrieved by the order of the ld. CIT(Appeals), the Revenue has preferred this appeal before the Tribunal.
We have heard the arguments of both the sides and also perused the relevant material available on record. As submitted by the ld. D.R., the order of the Assessing Officer passed in assessee’s own case for assessment year 2005-06 rejecting the claim of the assessee for conversion of the relevant shares from stock in trade into investment has been upheld by the Tribunal vide its order dated 13.05.2011 passed in assessee’s own case in ITA No. 1475/KOL/2008. He has contended that the shares sold by the assessee during the year under consideration thus are held to be stock in trade of the assessee by the Tribunal in the immediately preceding year, i.e. A.Y. 2005-06 and consequently the profit arising from the sale of the said shares in the year under consideration is liable to be assessed to tax in the hands of the assessee as business income as rightly held by the Assessing Officer. The ld. Counsel for the assesese, on the other hand, has relied upon various judicial pronouncements, wherein a similar conversion of sales by the assessee from stock in trade into investment has been accepted. He has contended that the issue involved in this appeal of the Revenue thus is squarely covered in favour of the assessee in principle by these various judicial pronouncements and the impugned order of the ld. CIT(Appeals) giving relief to the assessee deserves to be upheld irrespective of the decision of the Tribunal in assessee’s own case for A.Y. 2005-06 rejecting the claim
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of the assessee for conversion of shares from stock in trade into investment. We are unable to accept this contention of the ld. Counsel for the assesese. It is true that in the various judicial pronouncements cited by the ld. Counsel for the assesese, the conversion of shares from stock in trade into investment has been accepted despite there being no specific provision to recognize such conversion. However, in assessee’s own case, the Tribunal has not accepted such conversion in the immediately preceding year, i.e. A.Y. 2005-06 and it, therefore, follows that the shares sold by the assessee during the year under consideration continued to constitute its stock in trade and not investment. Consequently the profit arising from the sale of the said shares, in our opinion, is chargeable to tax in the hands of the assessee as its business income as rightly held by the Assessing Officer and not long-term capital gain as held by the ld. CIT(Appeals). We, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore that of the Assessing Officer. The appeal of the Revenue is accordingly allowed.
As regards the Cross Objection filed by the assessee, it is observed that there is a delay of 21 days on the part of the assesese in filing this Cross Objection. In this regard, the ld. Counsel for the assesese has filed an application seeking condonation of the said delay and keeping in view the reason giving therein, which are duly supported by an affidavit filed by the assessee, we are satisfied that there was a sufficient cause for the delay on the part of the assessee in filing this C.O. before the Tribunal. We, therefore, condone the same and proceed to decide the Cross Objection filed by the assessee on merit.
At the time of hearing before us, ld. Representatives of both the sides have agreed that the solitary issue involved in the C.O. of the assessee relating to the disallowance made by the Assessing Officer under section 14A and sustained by the ld. CIT(Appeals) is squarely covered by
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the decision of the Tribunal in assessee’s own case for assessment year 2005-06 (supra), wherein a similar issue has been restored by the Tribunal to the file of the Assessing Officer vide paragraph no. 6 of its order, which reads as under:- “6. At the time of hearing, Ld. Counsel appearing on behalf of the assessee submitted that there was some arithmetical mistake by the Assessing Officer in his assessment order wherein he has treated the long term capital gain as Rs.77,13,674/- whereas actual long term capital gain is Rs.60,17,764/- only. Hence, it is submitted that the issue may be restored to the file of the Assessing Officer for recomputation. For which Ld. Departmental Representative has not made any serious objection to restore this issue to the file of the Assessing Officer for considering the matter afresh. Under this circumstances and in the interest of justice, we restore the matter to the file of the Assessing Officer for fresh consideration in accordance with law and as per ratio of judgment in the case of Godrej Boycee Manufacturing Co. Ltd. -vs. DCIT [2010] 328 ITR 81 (Bombay) after giving proper opportunity of being heard to the assessee. Hence, ground Nos. 4 & 5 raised by the assessee on this issue is treated as allowed for statistical purposes”.
As the issue involved in the year under consideration as well as the material facts relevant thereto are similar to that A.Y. 2005-06, we set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh as per the same direction, as given by the Tribunal for assessment year 2005-06. The Cross Objection of the assesese is accordingly treated as allowed for statistical purposes.
In the result, the appeal of the Revenue is allowed, while the C.O. of the assessee is treated as allowed for statistical purposes. Order pronounced in the open Court on November 27, 2015. Sd/- Sd/-
(S.S. Viswanethra Ravi) (P.M. Jagtap) Judicial Member Accountant Member Kolkata, the 27th day of November, 2015
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Copies to : (1) Income Tax Officer, Ward-6(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, 6 th Floor, Kolkata-700 069
(2) M/s. Deeplok Financial Services Limited, 11/1, Sarat Bose Road, 2n d Floor, Kolkata-700 020
(3) Commissioner of Income-tax (Appeals)-VI, Kolkata (4) Commissioner of Income Tax, Kolkata (5) The Departmental Representative
(6) Guard File
By order
Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.