2017 (12) TMI 1174 - AT - Income Tax

Transaction of conversion of shares from stock-in-trade to investment and its subsequent sales - LTCG OR business income - Held that - As relying on case of Deeplok Financial Services Ltd. Versus CIT-A 2017 (4) TMI 300 - CALCUTTA HIGH COURT wherein held 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. - Decided against revenue

Issues Involved:

1. Whether the transaction of conversion of shares from stock-in-trade to investment and its subsequent sales should be treated as long-term capital gains or business income.

Detailed Analysis:

1. Conversion of Shares from Stock-in-Trade to Investment:

The primary issue in this appeal is whether the conversion of shares from stock-in-trade to investment and their subsequent sale should be classified as long-term capital gains (LTCG) or business income. The assessee, an individual deriving income from the sale of shares, maintained two sets of books of accounts: one for trading in shares under the trade name 'Kamal Kumar Dugar & Co.' and another for investment in shares under his personal name 'Kamal Kumar Dugar.' The assessee purchased 50,000 shares of HFCL Infotel Ltd on 2.6.2005, which were initially recorded in the trading account. On 1.4.2008, these shares were transferred from the trading account to the investment account at cost price, as the market price was below the cost price. The shares were subsequently sold, and the gains were reported as LTCG.

2. Assessee's Argument:

The assessee argued that the Income Tax Act does not prohibit the conversion of shares from trading to investment. The assessee relied on the decision of the Hon'ble Calcutta High Court in CIT vs Dhanuka and Sons, which held that profit and gains on shares transferred from trading account to investment at prevailing market rate is not a transaction at all and cannot be taxed. The assessee maintained that the gains should be treated as LTCG and not business income, as the shares were held for a longer period after conversion.

3. Assessing Officer's (AO) Stand:

The AO treated the gains as business income, arguing that the conversion was done with the intention to evade taxes and benefit from favorable tax laws. The AO referenced the decision of the Hon'ble Apex Court in CIT vs H. Holck Larsen, which inferred that repeated and regular buying and selling of shares should be considered as business activity.

4. Commissioner of Income Tax (Appeals) [CIT(A)] Decision:

The CIT(A) ruled in favor of the assessee, treating the gains as LTCG. The CIT(A) observed that two separate books of accounts were maintained for trading and investment. At the time of conversion, the market price was below the cost price, and the shares were sold after more than a year, indicating an intention to hold for a longer period. The CIT(A) also relied on the decision in CIT vs Dhanuka and Sons, which supported the assessee's position.

5. Revenue's Appeal:

The revenue appealed, arguing that the CIT(A) erred in treating the transaction as LTCG and not business income, and that the real intention behind the conversion was to evade tax.

6. Tribunal's Decision:

The Tribunal dismissed the revenue's appeal, finding that the issue was covered by the decision of the Hon'ble Jurisdictional High Court in Deeplok Financial Services Ltd vs CIT. The Tribunal noted that Section 45(2) of the Income Tax Act provides for conversion of a capital asset into stock-in-trade but does not explicitly prohibit the reverse. The Tribunal also referenced the decision in Maniruddin Bepari vs. The Chairman of the Municipal Commissioners, DACCA, supporting the principle that a natural person has the capacity to do all lawful things unless curtailed by law. The Tribunal concluded that there was no justifiable reason to interfere with the CIT(A)'s order and upheld the treatment of the gains as LTCG.

Conclusion:

The appeal of the revenue was dismissed, and the gains from the conversion of shares from stock-in-trade to investment were upheld as long-term capital gains. The Tribunal's decision was based on judicial precedents and the principle that lawful actions not explicitly prohibited by the law should be allowed.

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