2017 (4) TMI 300 - HC - Income Tax

Conversion of the trading shares into investment shares - treating the long term capital gain arising from the sale of those shares as profit of trading in shares and bringing the same to tax - Held that - Section 45(2) of the Act provides for conversion by the owner of a capital asset into or its treatment by him as stock-in-trade of a business carried on by him as chargeable to income-tax as income of his previous year in which such stock-in-trade is sold or otherwise transferred by him and fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of a capital asset. The Act however does not provide for the conversion of stock-in-trade into capital asset. In Dhanuka & Sons (1978 (7) TMI 22 - CALCUTTA High Court) the same situation was contemplated where on stock transferred in investment account, the question of capital loss or capital gain, was held, would arise if such shares be disposed of at a value other than the value at which it was transferred from the business stock. We, on noticing that the Tribunal did not really hold otherwise but had held against the assessee on the point of resjudicata, had formulated the above question. Nevertheless for the reasons aforesaid we answer the question suggested by the assessee in the affirmative and in its favour. In that regard the said circular dated 29th February, 2016 has no application because the assessee s stand was not accepted by the Revenue - Decided in favour of the assessee.

Issues:
1. Conversion of trading shares into investment shares and tax treatment.
2. Applicability of res judicata in revenue matters.

Issue 1: Conversion of trading shares into investment shares and tax treatment

The case involved an appeal by the assessee against the Income Tax Appellate Tribunal's order regarding the treatment of long-term capital gains arising from the sale of shares. The assessee claimed to have converted trading shares into investment shares, seeking exemption from tax on the profits. The Tribunal, however, upheld the Assessing Officer's decision, considering the shares as part of the stock-in-trade and not investments, thereby subjecting the profits to tax as business income.

The assessee argued that there was no legal bar on converting stock-in-trade into investments and cited relevant case laws to support the claim. The Circular no.6/2016 dated 29th February, 2016, was also referred to, emphasizing the assessee's right to treat income from listed shares held for over 12 months as capital gains. The issue of res judicata was raised, but the Tribunal maintained its decision based on the rejection of the conversion claim in the previous assessment year.

The Court analyzed the relevant provisions of the Income Tax Act, highlighting the absence of a specific provision for converting stock-in-trade into capital assets. The Court referred to previous judgments and legal principles to support the assessee's position that such conversion was permissible. The Court also addressed the issue of res judicata in revenue matters, citing relevant case law to explain that decisions on tax liabilities for specific years do not automatically apply to subsequent years.

Ultimately, the Court ruled in favor of the assessee, allowing the conversion of shares from stock-in-trade to investments and treating the profits as long-term capital gains. The Court emphasized that the rejection of the claim in the previous year did not preclude the assessee from seeking adjudication on the matter in the present appeal.

Issue 2: Applicability of res judicata in revenue matters

The second issue revolved around the applicability of res judicata in revenue matters, specifically regarding the rejection of the conversion claim in the previous assessment year. The Revenue argued that the Tribunal's decision in the previous year, coupled with the dismissal of the delayed appeal by the High Court, barred the assessee from challenging the tax treatment of shares in the current assessment year.

The Court examined the principles of res judicata in revenue cases, citing a Supreme Court decision to explain that decisions on tax liabilities for one year do not automatically bind assessments for subsequent years. The Court noted that the assessee's loss of the right to appeal in the previous year was due to a delay and not a substantive adjudication on the conversion claim.

In its ruling, the Court held that the rejection of the conversion claim in the previous year did not prevent the assessee from seeking a review of the tax treatment in the current assessment year. The Court emphasized that the rejection in the previous year was not a bar to adjudicating the claim on its merits in the present appeal.

In conclusion, the High Court of Calcutta ruled in favor of the assessee, allowing the conversion of trading shares into investment shares and treating the profits as long-term capital gains. The Court clarified the legal principles regarding such conversions and the applicability of res judicata in revenue matters, emphasizing the right of the assessee to challenge the tax treatment in the current assessment year despite the rejection in the previous year.

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