Case Law Details
Briefly stated, the assessee, a private limited company, engaged in the business of borrowing and lending funds reflected stock-in-trade of Rs.8,30,95,223.15 in its P&L account as on 31.03.2002 and converted its stock-in trade of shares to investment with effect from 1.4.2002. Accordingly, the assessee reflected its stock of shares in its balance sheet as ‘investment’ as on 31.03.2003. During the year under consideration (A.Y 2004-05) the assessee sold shares out of the shares converted into investment and has claimed long term capital gain on sale of such shares amounting to Rs.7,13,29,191/-. In the assessment framed u/s 143(3) of the Income Tax Act (‘Act’) , the AO assessed the same as business income on the reason that the act of the assessee shifting the value of stock-in-trade to the head investment clearly indicated the colourable mind of the assessee and thus intentionally avoided the payment of tax @ 35%.
On appeal, the Ld.CIT(A) allowed the claim of the assessee holding that there was no specific ban on conversion of stock-in-trade into capital asset or vice versa and observed that the assessee had later on discontinued the activity of trading in shares and converted its stocks in investment. The Ld.CIT(A) also relied on the decision of the Hon’ble Supreme Court in the case of Sir Kilabhani Premchand (24 ITR 506 SC). Aggrieved by the impugned order, the revenue is in appeal before us.
Ld. DR has vehemently argued that it is a case of rarest of rare cases in which the assessee has adopted reverse engineering of converting the stock in trade to investment as a device formulated with the sole intention of avoiding tax liability. In support of this argument the Ld.DR relied on the decision of the decision of the jurisdictional High Court in the case of Twin star Holdings Ltd Vs Anand Kedia (260 ITR 6 Bom). In the written submission filed by the then Ld.DR, it has been stated that stock-in trade cannot be converted into capital asset as long as such stock remains in the business of the assessee. The definition of capital asset provided u/s 2(14) of the Act clearly shows that any stock-in trade is excluded from capital asset. Section 45 (2) of the Act gives legal sanctity only for the conversion of the capital asset into stock-in-trade and there is no provision in the Act which allows conversion of stock-in-trade to capital asset. In support of the proposition that stock-in trade cannot be converted into capital asset as long as such stock remains in the business of the assessee, several decisions are quoted in the written submission.
Ld.AR has argued that the conversion is necessitated due to shift in the business model of the assessee from share trading to financing business. The assessee in the earlier years has shown business income on account of trading in shares, both delivery based and speculative i.e non-delivery based. However, on 01.04.2002 it has discontinued the trading activity i.e delivery based trading and consequently converted its entire share held as stock-in-trade into investments. Due to market scenario, the assessee has taken such a conscious business decision to discontinue delivery based trading in shares. Accordingly, the assessee has passed entries in its books on 01.04.2002 and the same has been consistently shown as investments in its books and also the profits on sale thereof is shown in accounts as capital.
While preparing the balance sheet as on 31.03.2003 relevant to the AY 2003- 04, the unsold shares so converted has been shown under the head ‘investments’ with suitable clarificatory note given in the Notes to Accounts for that year and when the return of income submitted on the basis of such change and profits on sale of investment declaring as capital gains, the said written has been accepted u/s 143(1) of the Act without calling for scrutiny.
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