2013 (3) TMI 799 - AT - Income Tax

Summary

Issues involved: Classification of stock-in-trade, Conversion of stock-in-trade to investment, Tax liability on conversion, Legality of conversion, Motive behind conversion, Treatment of profits on sale of shares.

Classification of stock-in-trade: The appellant, a private limited company, shifted its stock-in-trade of shares to investment, claiming long term capital gain on the sale of shares in the assessment year 2004-05. The AO assessed it as business income, alleging intentional tax avoidance due to the conversion. The Ld. CIT(A) allowed the claim, stating that there is no specific ban on such conversion and relied on the decision of the Hon'ble Supreme Court in Sir Kilabhani Premchand case.

Conversion of stock-in-trade to investment: The appellant discontinued share trading activity and converted its shares to investments due to a shift in business model. The Ld.AR argued that this was a conscious business decision, supported by entries in books and consistent treatment of profits as capital gains. The legality of such conversion was supported by the decision of the Hon'ble Supreme Court in Sir Kikabhai Premchand case.

Tax liability on conversion: The Revenue contended that the conversion was a device to avoid tax liability, citing the Twin star Holdings Ltd case. However, the Ld.CIT(A) found no evidence of sham transactions for tax avoidance and upheld the conversion based on audited accounts and clarificatory notes.

Legality of conversion: The Ld.CIT(A) held that there is no legal bar on converting stock-in-trade to investments, citing the Sir Kikabhai Premchand case. The Tribunal also affirmed that such conversion is permissible and transparent from the audited accounts.

Motive behind conversion: The Revenue argued that the conversion was motivated by tax avoidance, but the Ld.CIT(A) found no evidence of sham transactions and upheld the conversion based on audited accounts and clarificatory notes.

Treatment of profits on sale of shares: The Ld.CIT(A) directed the AO to assess the profits on the sale of shares under the head of 'Capital Gains' and not as business income. The Tribunal upheld this decision, citing past acceptance of similar transactions by the Department.

Conclusion: The appeal filed by the Revenue was dismissed, upholding the order of the Ld.CIT(A) to assess the profits on the sale of shares as 'Capital Gains' and not as business income. The Tribunal found no justifiable reason to interfere with the decision of the Ld.CIT(A) in this regard.