2013 (2) TMI 376 - HC - Income Tax

Difference between purchase price of shares and market value of shares as on date of conversion of shares from stock-in-trade to investments - Tribunal treated it as business income and difference between sale price of share and market value of shares, as on date of conversion as capital gains ? - Held that - It is not in dispute that the conversion of its stock in trade into investment was accepted by the Department in assessment years 2003-04 and 2005-06. Also that the shares which were sold and gains from such sales were offered under the head capital gains from the date of conversion from stock in trade into investments and prior thereto as business profits. Further in its books of accounts the respondent-assessee showed the shares on which tax is levied under the head capital gain as investments. Further the fact that the assessee was trading in the shares would not estop the assessee from dealing in shares as investment and offer the gain for tax under the head capital gains. Thus, it is open to the trader to hold shares as stock in trade as well as investments. Once the finding of fact is recorded that the shares sold were held by assessee as investments, the gains arising out of the sale of investment were to be assessed under the head capital gains and not under the head business profits. No question of law arises for our consideration.

Summary

Issues:
1. Classification of income from the sale of shares originally held as stock-in-trade and later converted into investments.

Analysis:
The High Court of BOMBAY HIGH COURT addressed the issue of whether the difference between the purchase price and market value of shares, at the time of conversion from stock-in-trade to investments, should be treated as 'business income' and the difference between the sale price and market value of shares as 'capital gains'. The assessee, engaged in investments and dealing in shares, declared income under 'profits and gains of profession' and 'capital gains' for the assessment year 2006-07. The assessing officer considered gains from the sale of shares originally held as stock-in-trade but converted into investments as business income. However, the CIT(A) found the treatment of gains as business income until conversion and capital gains post-conversion reasonable. The Tribunal noted that the Department accepted the conversion in previous assessment years and that the assessee classified shares as investments in its accounts. It concluded that the gains from the sale of investments should be assessed as capital gains, not business profits, once the shares were held as investments. The court dismissed the appeal, stating no question of law arose for consideration, affirming the Tribunal's decision.

This judgment clarifies the distinction between business income and capital gains concerning shares initially held as stock-in-trade and later converted into investments. It emphasizes the significance of how shares are classified in the books of accounts and the acceptance of conversion by tax authorities. The decision underscores that once shares are treated as investments, gains from their sale should be assessed as capital gains, even if the assessee was previously trading in shares. The court's ruling provides clarity on the tax treatment of gains arising from the sale of shares in different holding capacities, ensuring consistency and adherence to legal principles in such scenarios.