2022 (5) TMI 948 - AT - Income Tax

Allowability of exemption on long term capital gains u/s 10(38) - characterization of the securities sold i.e. investments converted into stock-in-trade - difference between the market value of the investments as on date of conversion - HELD THAT - There is no dispute with regard to the computation of capital gains under the provisions of section 45(2) - The dispute is only with regard to the characterization of the securities sold i.e. investments converted into stock-in-trade. The fact that the securities are held as investments prior to conversion as on 30.11.2007 subsequent to the conversion of such investments into stock-in-trade as on 30.11.2007 is also undisputed. From reading of the assessment order, it appears that the AO was under-impression that the Commissioner of Income Tax-II, Nashik in the order of revision held that the assessee was not eligible for exemption u/s 10(38), as mere reading of the order of revision, it would clearly indicate that it is open remained before the Assessing Officer as free to examine of the issue de-novo on merits. Therefore, the ld. CIT(A) rightly held that the respondent-assessee is entitled to the exemption on capital gains u/s 10(38) as claimed by the respondent-assessee. Thus, we do not find any illegality in the order of the ld. CIT(A). Therefore, we do not find merits in the grounds of appeal raised by the Revenue. Accordingly, the grounds of appeal raised by the Revenue stand dismissed.

Summary

Issues:
Allowability of exemption on long term capital gains u/s 10(38) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-2, Nashik for the assessment year 2008-09. The Tribunal had initially dismissed the appeal based on low tax effect but later recalled it for hearing on merits due to amended exceptions in a CBDT Circular. The Revenue contended that the exemption u/s 10(38) is not applicable when shares held as investments are converted into stock-in-trade. The Revenue challenged the CIT(A)'s decision to allow the exemption under section 10(38) of the Act.

The respondent-assessee, engaged in the manufacturing business, had claimed exemption u/s 10(38) for long term capital gains on the sale of shares. The Commissioner of Income Tax-II, Nashik set aside the assessment order passed by the Assessing Officer, directing a fresh assessment due to erroneous allowance of the exemption. The Assessing Officer subsequently denied the exemption, but the CIT(A) ruled in favor of the assessee, allowing the exemption amounting to Rs.1,20,34,601. The Revenue appealed this decision.

During the appeal, the Senior DR argued that the exemption under section 10(38) applies only to shares held as investments and sold in a recognized stock exchange. Conversely, the AR for the assessee contended that the long term capital gains were correctly calculated and that the shares were converted into stock-in-trade, making the assessee eligible for the exemption. The Tribunal examined the evidence and facts, concluding that the respondent was entitled to the exemption under section 10(38) based on the conversion of investments into stock-in-trade and the subsequent sale of shares.

The Tribunal found that the respondent had held shares as investments, some of which were sold, resulting in capital gains. The remaining shares were converted into stock-in-trade, leading to long term capital gains upon sale. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Assessing Officer had the opportunity to re-examine the issue and that the conversion of investments into stock-in-trade did not disqualify the assessee from claiming the exemption under section 10(38). Consequently, the Tribunal dismissed the Revenue's appeal, affirming the allowance of the exemption on long term capital gains.