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TMI Blog2022 (3) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... lear from the decision of Sir Kikabhai Premchand [ 1953 (10) TMI 5 - SUPREME COURT] that mere conversion of stock in trade into investment will not generate any taxable profit to the assessee. Therefore, we are in agreement that one cannot make profit of its own by converting stock in trade into investment or investment into stock in trade - Decided in favour of the assessee. - ITA NO. 7501/MUM/2016 And ITA.No. 3113/MUM/2015 And ITA.No. 3355/MUM/2015 - - - Dated:- 21-2-2022 - Shri Laliet Kumar, Hon'ble Judicial Member And Shri S. Rifaur Rahman, Hon'ble Accountant Member For the Assessee : Shri V.G. Ginde And Shri Kumar Kale For the Department : Shri Hoshang Boman Irani ORDER PER S. RIFAUR RAHMAN (AM) 1. These appeals are filed by the assessee against different orders of the Learned Commissioner of Income Tax (Appeals) 3, Mumbai [hereinafter in short Ld.CIT(A) ] dated 24.10.2016 and 20.03.2015 for the A.Y. 2003-04 and 2006-07 respectively. 2. Brief facts of the case are that, return of income was filed by the assessee on 01.12.2003 declaring total income at ₹.55,96,570/- the same was processed u/s. 143(1) of the Act thereafter the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the cost of acquisition as provided in section 43(1)(ii) of the Act. This treatment is in accordance with the Hon ble Bombay High Court s judgment in CT vs. Jaanhavi Investments (P) Ltd. [2008] 304 ITR 276 (Bom). which is based on the earlier judgment in Keshavji Karsondas vs. CIT [1994] 207 ITR 737 (Bom). In Jannhavi Investments case (supra), the facts were as follows. The assessee bought shares of some companies in 1977. On the original holding the assessee received bonus shares in the financial year 1981-82 and additional bonus shares in the financial year 1989-90. All the shares were held as stock-in-trade until 6.11.1987, when the same were converted into investments. On sale of the shares, while computing capital gain, the assessee computed fair market price as on 1.4.1981. The AO held that since the assessee was holding the shares as stock-in-trade up to 6.11.1987, and as the said shores were not capital asset as on 1.4.1981, the option adopted as the fair market price as on 1.4.1981 was not available to the assessee. The Tribunal, however, placing reliance on the judgment in Keshavji Karsondas vs. CIT (supra), upheld the assessee s stand. On appeal by the Revenue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple of tax jurisprudence that income-tax is a tax levied on income actually earned or arisen to an assessee; notional income does not attract any income-tax When the assesses passes an accounting entry in his books of account essentially a unilateral act there is no transaction that could give rise to any income as such. In this context, reliance is placed on the following judgments: (a) In CIT vs. Hind Construction Ltd. [1972] 83 ITR 211 (SC), it was held that no one can sell his goods to himself. A sale contemplates a sale and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom, (b) In Sir Kikabhai Premchand vs. CIT [1954] 24 ITR 506 (SC), the principle that a man cannot trade with himself has been considered favourably. The Hon'ble Supreme Court held that the assessee was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the assessee derived no income from it. He may have stored up a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtain the amount from himself on passing book entry. Therefore, Ss 41(1) has no application to the appellant s case merely because on conversion of stock into investment some notional credit arose while passing an accounting entry recording the conversion. (iii) Assuming without admitting the amount can, at the best, be said to be obtained by a person only on sale of investment - when actual amount will be received. Therefore, without conceding our stand that s. 41(1) will not be applicable even in that case, as explained below, one may, if at all, consider the applicability of s. 41(1) at the point of time when the converted shares are sold and until then there is no question of invoking that section as it would tantamount to assessing notional/potential future gain which may or may not arise until the shares are actually sold. The possibility of incurring a loss also cannot be ruled out. iv) We submit that for the following reason s. 41(1) will not apply even at the stage of actual sale of the converted shares subsequent to the conversion. This can be better illustrated by an example. Suppose the share which has been purchased at a cost of ₹ 100/as stock-intrade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of the capital asset (here share), two items are deductible, namely = (i) expenditure incurred wholly and exclusively in connection with such transfer (here nil}; and (ii) the cost of acquisition of the asset there ₹ 100/- in view of the Bombay High Court's judgment in Jannhavi investments s case (supra). Therefore, the chargeable capital gain is ₹ 20/-. Your Honour will, therefore, appreciate that the amount of ₹ 120/- that has been received has been fully considered in computation of capital gains; no Separate sum is paid to the assessee apart form this sum towards recoupment of loss earlier allowed to him. Therefore, having considered the full value of consideration (as per s.48), it will not be permissible to attribute a part of it (₹ 10/-) as an amount obtained in respect of such loss. Any attempt to tax the sum of ₹ 10/u/s. 41 (1), in our respectful submission, will amount to assessing the same income twice under two different heads of income in the hands of the same assessee for the same assessment year. This is clearly not permissible in law. in view of above discussion, we respectfully submit that even at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the computation of the cost of acquisition of an asset which was earlier held as stock-in-trade and subsequently converted as an investment. The conversion of stock-in-trade into investments would not immediately yield-any business income/loss as an assessee cannot be held to trade with itself [see: Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC)]. However, it is possible to contend that once the asset is sold, the income or loss resulting therefore would subsume within it the business income/loss at the time of conversion from stock-in-trade to capital asset. Thus, in the year in which the asset is sold, the income/loss attributable to the period for which the asset was held as stock-in-trade may have to be ascertained and taxed as such. In other words, the difference between the value at which the asset was held as stock-in-trade and the market value on the date of its conversion as investment would have to be treated as business income/loss and the difference between the market value of the asset as on date of conversion and the value at which it is sold would be in the nature of capital gains. However, we must add that none of the counsel addressed any arguments on this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o add one or more new ground(s), at or before the hearing of the appeal, as may be necessary. 6. With regard to ground raised by the assessee on reopening of assessment, at the time of hearing Ld. AR has not made any submissions, accordingly the ground relating to reopening is not adjudicated at this stage. 7. With regard to Ground No. 2 on estimated income on conversion of stock in trade into investment, Ld. AR of the assessee submitted that merely because assessee has converted stock in trade into investment as such there is no taxable event occurred and there is no income earned by the assessee and there is no escapement of income during this assessment year. He submitted that the issue is covered and relied in the Hon'ble Gujarat High Court in the case of Aditya Medisales Ltd., v. DCIT in SCA No. 10217 of 2011 dated 10.08.2016, he brought to our notice the facts of the case i.e., Fundamental question is in the process of converting the shares held by the company as stock in trade into investment, was the assessee liable to pay tax on cost of acquisition of shares at its market value on the date of transfer. He Submitted that another question was also arouse in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on record, we observe that assessee has converted the shares held as stock in trade into investment and recorded the difference as capital reserves in its balance sheet by increasing the value of investment in its Books of Accounts and the difference was shown as capital reserves in the balance sheet. By observing the difference between market value of the shares on the date of conversion and the book value Assessing Officer is of the opinion that assessee has earned profit on the conversion of shares from the stock in trade to investment. He is of the opinion that the taxable event is occurred on the date of conversion of shares from stock in trade to investment thereby the difference amount is chargeable to tax. Ld.CIT(A) also sustained the above view of the Assessing Officer. Before us, Ld. AR brought to our notice the decision of the Hon'ble Supreme Court in the case of Sir Kikabhai Premchand v. CIT (supra). After careful consideration of the above decision, it is fact on record that assessee has converted the stock in trade into investment but no doubt there is a gain to the assessee on the difference of conversion. But the assessee cannot make any profit on its own mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT (A) was justified in holding that surplus on sale of shares was taxable as Capital Gain, without looking into the entirety of the transaction from purchase as stock-in-trade to conversion of shares from stock-in-trade to investment, and subsequent sale, and thereby ignoring the original intention of the assessee at the time of purchase of earning business profits. 2. Whether on the facts and in the circumstances of the case and in Law, mere passing of accounting entries of transferring shares from stock-in-trade account to investment account can alter the nature of income on sale of these assets from the original intended business profits to capital gains. 3. Whether on the facts and in the circumstances of the case and in Law, the CIT (A) has not given a perverse finding of taxing surplus on sale of shares as Capital Gain in the background fact that the shares were purchased as stock-in-trade with obvious intention of _ earning business profits which ought to have been taxed as business profits in consonance with the principle enumerated in the decision of Supreme Court in the case of H. Holck Larsen reported in 160 ITR 67? 4. Without prejudice to above, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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