2008 (4) TMI 539 - AT - Income Tax

Conversion of capital assets u/s 45(2) - Loss on sale of shares deemed to be short-term capital gains or business loss - converted the investment in shares brought forward from the assessment year 2000-01 into the stock-in-trade - the assessee was not carrying on any sort of business of share transactions and the question of conversion of investment in stock in trade does not arise - HELD THAT - It is evident from the record that the assessee had suffered a loss in the speculation of shares. Having seen the volume of transactions undertaken by the assessee in the impugned assessment year, it is very difficult to hold that the assessee still holds the investment in shares and securities. It is the sweet Will of the assessee to decide as to when he intends to convert his investment in stock in trade. The assessee has also filed an affidavit to this effect besides the corresponding entries in the books of account on 1-4-2000 and the revenue has not brought anything on record to dispute these facts. The revenue has denied the claim of the assessee on the ground that conversion of investment in stock in trade was done when the assessee was not in business of sales-purchase in share and securities. From a careful perusal of the relevant provisions of section 45(2) of the Act, we find that there should be the conversion of investment or capital asset by the owner as stock in trade of a business carried on by him. The words business carried on by the assessee does not mean that before conversion of investment or capital asset in stock in trade the business must be in existence. Moreover, in the instant case, the assessee was already in the business of manufacture and sale of furniture and section 45(2) does not state that the investment can only be converted in a stock in trade of the business of trading in shares. The assessee can undertake multiple business activities under his proprietary concern. Besides, the manufacturing and sale of furniture, the assessee can also deal in trading in shares in the name of same proprietary concern keeping the stock in trade of shares separate. From any angle, if the facts of the case are viewed, we would find that the conversion of investment in shares and securities in stock in trade is valid and the assessee is entitled to benefit of section 45(2) of the Act in the light of huge volume of transactions in shares. We accordingly do not find any infirmity in the order of the CIT(A) as he has dealt with each and every aspect raised by the parties. We accordingly confirm the same. Accordingly, appeals in both the cases are dismissed - In the result, the appeals of the revenue stand dismissed.

Issues Involved:
1. Treatment of loss on sale of shares as business loss versus short-term capital gains.
2. Validity of conversion of investment into stock-in-trade under section 45(2) of the Income-tax Act.
3. Allegation of tax avoidance through conversion entries.
4. Interpretation of the phrase "business carried on by him" in section 45(2).

Issue-wise Detailed Analysis:

1. Treatment of Loss on Sale of Shares:
The primary issue was whether the loss on the sale of shares should be treated as a business loss or short-term capital gains. The CIT(A) directed the Assessing Officer to treat the loss on sale of shares as a business loss, contrary to the Assessing Officer's treatment of it as short-term capital gains. The CIT(A) noted that the assessee had converted investment in shares into stock-in-trade and engaged in share trading during the year, resulting in a loss. The CIT(A) concluded that this loss should be treated as a business loss due to the large volume of transactions and fresh purchases made by the assessee.

2. Validity of Conversion Under Section 45(2):
The Assessing Officer argued that the conversion of investment into stock-in-trade was not valid since the assessee was not engaged in the trading of shares before the conversion date (1-4-2000). However, the CIT(A) and subsequently the Tribunal found that section 45(2) does not require the business to be carried on before the conversion. The Tribunal emphasized that the conversion was supported by an affidavit and corresponding entries in the books of account, and the assessee had indeed engaged in significant share transactions during the year, justifying the conversion.

3. Allegation of Tax Avoidance:
The Assessing Officer alleged that the conversion was a tax avoidance scheme to set off the loss against other income heads. The CIT(A) rejected this argument, noting that the conversion was made on the first day of the accounting year, and it was not possible to predict the outcome of share trading for the year. The Tribunal agreed, stating that the volume of transactions indicated genuine business activity rather than a tax avoidance scheme.

4. Interpretation of "Business Carried on by Him":
The phrase "business carried on by him" in section 45(2) was a point of contention. The Assessing Officer interpreted it to mean that the business should have been carried on before the conversion. However, the CIT(A) and the Tribunal interpreted it to mean that the business should be carried on during the accounting year of conversion. The Tribunal highlighted that section 45(2) does not specify that the business must be pre-existing before conversion and that the assessee's actions were consistent with starting a new business by converting investments into stock-in-trade.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the loss on the sale of shares should be treated as a business loss. The conversion of investment into stock-in-trade was deemed valid, and the allegation of tax avoidance was dismissed. The interpretation of "business carried on by him" was clarified to mean business carried on during the accounting year, not necessarily before the conversion. Consequently, the appeals by the revenue were dismissed.

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