2015 (10) TMI 526 - AT - Income Tax

Conversion of capital assets into stock in trade - colourable device - short term capital loss v/s business loss on sale transaction of gold - Why conversion of investment in shares into stock in trade should not be considered as colourable device so as to make it eligible for setting off against other income because if it would have been sold as an investment, then the assessee would have incurred capital loss and as per the provisions of Income-tax Act, capital loss can be set off against capital gains? Held that - The assessee is legally entitled to convert this capital asset into stock in trade and the taxability of the same is to be determined as per section 45(2) of the I.T. act. Section 45(2) clearly mandates that the chargeability will be determined in the year in which the converted stock in trade is sold and not in the year in which it is actually converted into stock in trade. Therefore, ld. CIT(A) has rightly observed that the issue is premature at this stage and, therefore, he should have dismissed the assessee s ground of appeal instead of allowing the same because in the year under consideration the assessee could not treat it as a short term capital loss to be carried forward to subsequent years. The short term capital loss/ gain will also be incurred in the year in which the transfer takes place and the computation will have to be made accordingly. The assessee could only keep this amount in the books of a/c under the head miscellaneous assets in the balance-sheet and, therefore, we partly modify the ld. CIT(A) s conclusion and hold that the ground raised before ld. CIT(A) by assessee had to be dismissed and the assessee will be entitled to determine the tax liability as per sec. 45(2) in respect of stock in trade in the year in which it is sold. - Decided partly in favour of revenue.

Summary

Issues:
1. Disallowance under section 40A(3) for purchase of gold in cash.
2. Treatment of short term capital loss as business loss on sale of gold.
3. Allowance of carry forward of short term capital loss on conversion of investment into stock in trade.

Analysis:
1. The appellant, a whole-time Director and Chairman of a company, derived income from various sources in the relevant assessment year. The assessment was completed with adjustments including disallowances under section 40A(3). The CIT(A) partly allowed the appeal, leading to the revenue's appeal before the tribunal.

2. The tribunal addressed the interlinked grounds of disallowance and treatment of short term capital loss on the sale of gold bars. The assessing officer treated the loss as a business loss due to cash purchase and invoked section 40A(3). The appellant contended that the purchase was a capital asset and relied on various legal precedents. The CIT(A) allowed the appeal, treating the loss as a short term capital loss and deleting the disallowance under section 40A(3).

3. The third ground concerned the conversion of investment into stock in trade and the denial of carry forward of short term capital loss by the assessing officer. The appellant argued that the conversion was as per section 45(2) and not a colorable device. The CIT(A) held the issue premature and allowed the appellant's ground. The tribunal noted the legal entitlement of the appellant to convert the asset and determined taxability under section 45(2). The tribunal partly modified the CIT(A)'s decision, dismissing the appellant's ground and allowing tax liability determination as per section 45(2) upon sale of stock in trade.

4. The tribunal partly allowed the revenue's appeal, emphasizing the determination of tax liability under section 45(2) upon the sale of stock in trade. The decision highlighted the legal provisions governing the treatment of capital losses and gains, ensuring adherence to the Income Tax Act's requirements.