2014 (2) TMI 837 - AT - Income Tax

Conversion of stock in trade into capital asset - Computation of period of holding - AO held that trading in shares is not incidental activity but main business activity of the assessee Held that - It is the prerogative of the assessee to manage the affairs of his business - the assessee has to follow consistent method in accounting policies and treatment of his assets Relying upon CIT Vs. N.S.S. Investments P. Ltd. 2005 (4) TMI 45 - MADRAS High Court - the profit on sale of shares held as investment is to be treated as capital gains instead of Business Income and that the assessee can hold some shares as capital for the purpose of earning dividend and some shares as stock in trade for the purpose of doing business of buying and selling - when shares were sold by the assessee, they were converted into capital asset the gain arising there from on sale would be assessable as capital gain - where the property-in-question is held by the assessee as stock in trade for the purpose of its business and the same had been converted by the assessee into investment, the period for which the said property was held as stock in trade cannot be reckoned for ascertaining as to whether it was a Long Term Capital Asset or a Short Term Capital Asset within the meaning given in Section 2(29A) and 2(42A) of the Act. The period for which the shares were held as stock in trade by the assessee is to be excluded from the total period for which the shares were held by the assessee - Since, the date of acquisition of shares is not forth coming from the records the matter is remitted back to the AO for determination of total period of holding of shares as capital asset Decided in favour fo Assessee.

Summary

Issues:
Assessment of income from sale of shares as 'Business Income' or 'Capital Gains'; Conversion of shares from stock in trade to investment; Holding period determination for classification as Short Term or Long Term Capital Asset.

Assessment of Income:
The assessee converted shares from stock in trade to investment, leading to a dispute on the treatment of income from sale of shares as 'Business Income' or 'Capital Gains'. The Assessing Officer viewed the conversion as tax evasion, treating the profit as 'Business Income'. The CIT(Appeals) upheld this decision. The assessee argued that the conversion was a policy decision approved by the Board of Directors and relied on legal precedents to support treating the income as 'Capital Gains'. The Tribunal analyzed the consistent method in accounting policies and asset treatment, emphasizing the prerogative of the assessee in managing business affairs. It referred to relevant case laws to determine the treatment of income from sale of shares.

Conversion of Shares:
The Tribunal noted the conversion of shares from investment to stock in trade and back to investment over different assessment years. It highlighted that the assessee claimed interest on borrowings as expenditure when shares were held as stock in trade. The Tribunal discussed legal provisions related to the treatment of assets converted from stock in trade to investment, emphasizing the need for consistent accounting policies. It differentiated the present case from previous judgments where shares were consistently held as investments.

Holding Period Determination:
The Tribunal addressed the issue of determining the holding period for shares classified as Short Term or Long Term Capital Assets. It referred to a previous Tribunal decision and concluded that the period during which shares were held as stock in trade should be excluded when calculating the total holding period. Due to missing acquisition dates, the Tribunal remitted the issue back to the Assessing Officer for proper determination. The Tribunal allowed the appeal of the assessee for statistical purposes.

This detailed analysis of the legal judgment highlights the key issues involved, the arguments presented by both parties, the legal principles applied, and the final decision rendered by the Tribunal.