2010 (10) TMI 1205 - AT - Income Tax

Summary

Issues involved: Assessment year 2005-06, treatment of surplus arising from conversion of stock-in-trade into investments as business income or capital gains.

Summary:
The appellant, a non-banking financial corporation engaged in investment activities, treated shares as capital assets and offered profit/loss as capital gains. However, shares held under portfolio management were designated as stock-in-trade for assessment years 2003-04 and 2004-05. In the relevant year, the appellant decided to terminate business activities under portfolio management, converting stock-in-trade shares into investments. The Assessing Officer treated the surplus from this conversion as business income, not capital gains, as done in previous years. The appellant argued that the decision to convert was valid and the surplus should be treated as capital gains, not business income. The Revenue contended that the appellant's actions were for tax advantage and not genuine business reasons.

Upon review, it was found that the appellant had indeed changed the character of the asset from stock-in-trade to investments, resulting in a surplus. The income arose from the stock-in-trade conversion, making it business income, not capital gains. The surplus was generated when the stock-in-trade ceased to exist, linking the income to the original source. The Tribunal upheld the Assessing Officer's decision to tax the surplus as business income, dismissing the appeal.