2012 (11) TMI 713 - AT - Income Tax

Conversion of investments into stock in trade - Capital gain v/s Business income - reopening of assessment - Held that - The provisions of section 45(2) cannot be made inapplicable to the instant case merely for the reason that the assessee, the owner of the capital asset, has neither converted into nor treated the impugned investment as the stock in trade voluntarily. In denial of the same to the assessee, the Revenue authorities have adopted the principle of literal interpretation which must not have been done by the revenue in order to avoid the absurdity of interpretation as in view of the ratio of the Apex Court in the case of K P Verghese 1981 (9) TMI 1 - SUPREME COURT . Therefore, AO is duty bound to make the assessment in accordance with the provisions of the Act including the provisions of section 45(2). Date of conversion for the shares sold in AY 2006-07 - Held that - It is trite law that every assessment year is an unit of an assessment. Any transaction can be accounted by applying accounting entries, arriving at the cost of acquisition of shares or market price or their fair market value is not impossible considering the availability of material on record. So far as the capital gain relatable to the capital asset so converted for the assessment year 2006-07, 1.4.2005 has to be taken as the date of conversion, which cannot be altered in respect of the capital assets sold in the relevant previous year. If any other assets are sold in the preceding assessment year 2005-06, assessment for which is allegedly reopened, about which there is no clarity before us, the date of conversion would be 1.4.2004. As there is need for data for determining the assessable capital gains upto the date of conversion and the business income upto the date of sale of the impugned capital asset for arriving at proper taxable capital gains and the business income within the meaning of the said provisions restore the matter to the file of the AO for computation - partly in favour of assessee.

Summary

Issues Involved:
1. Correctness of the claim of earnings on sale of shares/units under the head of income 'capital gains'.
2. Applicability of the provisions of Section 45(2) of the Income Tax Act when the AO thrust the conversion of shares from investment into stock-in-trade.

Detailed Analysis:

1. Correctness of the Claim of Earnings on Sale of Shares/Units under the Head of Income 'Capital Gains':
The assessee filed the return of income for AY 2006-07 declaring a loss, which was initially assessed under Section 143(3). The CIT issued a show cause notice proposing to review the order, holding it as 'erroneous and prejudicial to the interests of the Revenue'. The Tribunal held that the assessee's activity of purchases and sale of shares constitutes business activity and not capital gains as claimed by the assessee. The Tribunal's order dated 5th August 2011 confirmed the findings of the CIT. The AO, in fresh assessment proceedings, withdrew the exemption claimed under Section 10 of the Act in respect of long-term capital gains (LTCG) and treated the income as 'business income'.

The CIT(A) followed the order of the ITAT and upheld the AO's view, concluding that the claims made by the assessee regarding long-term and short-term capital gains could not be accepted. The Tribunal, respecting the coordinate bench decision, upheld the order of the CIT(A) and dismissed the ground of the assessee, confirming the treatment of the gains as business income.

2. Applicability of the Provisions of Section 45(2) of the Income Tax Act:
The CIT(A) remanded the issue of applicability of Section 45(2) to the AO, who failed to provide a trading account of shares and units sold during the financial year relevant to AY 2005-06. The CIT(A) acknowledged that the provisions of Section 45(2) are applicable in principle but denied the benefits due to the lack of clarity on the actual date of conversion of investments into stock-in-trade.

The Tribunal noted that the assessee consistently treated the transactions as investments and contested the Revenue's view that they constituted business income. The Tribunal emphasized that the AO should have applied Section 45(2) when thrusting the conversion on the assessee. The Tribunal criticized the Revenue's literal interpretation of the law and held that the AO is duty-bound to apply the provisions of Section 45(2) fairly.

The Tribunal concluded that the date of conversion for the shares sold in AY 2006-07 should be 1.4.2005, and the AO must grant the benefits of Section 45(2). The matter was remanded to the AO for computation of income in accordance with the law, requiring the assessee to provide relevant details for determining the assessable capital gains and business income.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to apply the provisions of Section 45(2) and compute the income accordingly, while upholding the treatment of gains as business income.