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2018 (5) TMI 1977 - AT - Income TaxProfit from sale of shares - assessee had shown long term and short term capital gains on sale of shares, which were earlier, held as stock-in-trade - HELD THAT - Issue is squarely covered by the decision of the Tribunal in assessee s own case for the A.Y.2004-05 thus we do not find any infirmity in the order of CIT(A) for directing the AO to treat the profit arising out of sale on shares as capital gains. Business income u/s.41(l) - difference between the book value of shares held as stock-in-trade as on 31.03.2002 and the cost thereof at which the same were converted into investments on 1.4.2002 - CIT(A) bringing to tax net the benefit taken by the assessee in earlier years at the time of conversion of stock in trade into investment - HELD THAT - As on 31/03/2002, assessee had shown stock in shares at market or cost, whichever is lower, thereafter, assessee converted the stock of shares into investment. As and when assessee has treated the shares as stock in trade, the benefit of lower of cost or market price was taken, accordingly, profit of that year was reduced. During the year under consideration when the assessee had sold those shares, the excess over the cost price is liable to be taxed as capital gain / loss. However, the benefit already taken by the assessee by valuing these shares at cost or market whichever is lower in the earlier years when shares were treated as stock in trade is liable to be assessed as business income and CIT(A) had correctly brought the difference to tax net u/s.41(1) of the IT Act. The case law relied on by learned AR is distinguishable on facts, accordingly, we confirm the action of CIT(A).
Issues:
1. Conversion of stock-in-trade into investments for tax purposes. 2. Tax treatment of profit on sale of shares as capital gains. 3. Addition of the difference between book value and cost of shares as business income. Issue 1: Conversion of stock-in-trade into investments for tax purposes The Assessing Officer (AO) noted that the assessee had converted stock-in-trade into investments to claim tax deductions and lower rates of taxation. The AO held that this conversion was solely for tax avoidance purposes, leading to the income from the sale of shares being treated as business income. However, the CIT(A) and the Tribunal in the assessee's own case for A.Y. 2004-05 held that there was no legal bar on such conversion and that the conversion was not motivated by tax avoidance. The Tribunal cited relevant case law to support that the conversion was transparent and not a sham transaction for tax avoidance purposes. Issue 2: Tax treatment of profit on sale of shares as capital gains The CIT(A) directed the Assessing Officer to treat the profit arising from the sale of shares as capital gains instead of business income. The Tribunal upheld this decision based on the precedent set in the assessee's own case for A.Y. 2004-05. The Tribunal found that the CIT(A) had correctly analyzed the legality of the conversion and the absence of tax avoidance motives, leading to the profit being taxed under the head of capital gains. Issue 3: Addition of the difference between book value and cost of shares as business income The CIT(A) brought to tax the benefits already taken by the assessee when converting stock-in-trade into investments, amounting to a specific sum, treating it as business income under section 41(1) of the Income-tax Act, 1961. The Tribunal confirmed this decision, stating that the benefit already taken by the assessee in earlier years when the shares were treated as stock-in-trade should be assessed as business income. The Tribunal distinguished the case law cited by the assessee's representative, confirming the addition of the difference to the tax net as directed by the CIT(A). In conclusion, the Tribunal dismissed both the appeal of the revenue and the appeal of the assessee, upholding the decisions made by the CIT(A) regarding the tax treatment of the conversion of stock-in-trade into investments and the addition of the difference between book value and cost of shares as business income.
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