Case Law Details
DCIT Vs Avinash Kantilal Jain (ITAT Pune)
That where the investments are converted into stock-in-trade, the difference between the market value of the investments as on date of conversion and the cost of investments is assessable under the head long term capital gains and taxable in the year in which such securities were sold as a part of the stock-in-trade.
Facts-
The respondent-assessee is engaged in the business of manufacturing of Solvent Cement. The ROI for AY 2008-09 was filed declaring a loss of Rs.32,50,240/-. Commissioner of Income Tax passed order u/s 143(3) at a total loss of Rs.30,68,070/-. Consequent to the order passed u/s 263, AO denied the exemption claimed u/s 10(38) of Rs.1,20,34,601/.
The ld. CIT(A), on considering the evidence and facts of the case held that the respondent-assessee is entitled for exemption u/s 10(38) to the extent of Rs.1,20,34,601/-. Being aggrieved by the above decision of the ld. CIT(A), the Revenue is in appeal before us.
Conclusion-
Held that the difference between the market value of the investments as on date of conversion i.e. on 30.11.2007 and the cost of investments resulted in long term capital gains of Rs.1,20,34,601/-, which are claimed to be exempt from the tax under the provisions of section 10(38) by the respondent-assessee read with provisions of section 45(2) of the Act providing that where the investments are converted into stock-in-trade, the difference between the market value of the investments as on date of conversion and the cost of investments is assessable under the head “long term capital gains” and taxable in the year in which such securities were sold as a part of the stock-in-trade. There is no dispute with regard to the computation of capital gains under the provisions of section 45(2) of the Act. The dispute is only with regard to the characterization of the securities sold i.e. investments converted into stock-in-trade. The fact that the securities are held as investments prior to conversion as on 30.11.2007 subsequent to the conversion of such investments into stock-in-trade as on 30.11.2007 is also undisputed. From reading of the assessment order, it appears that the Assessing Officer was under-impression that the Commissioner of Income Tax-II, Nashik in the order of revision held that the assessee was not eligible for exemption u/s 10(38), as mere reading of the order of revision, it would clearly indicate that it is open remained before the Assessing Officer as free to examine of the issue de-novo on merits. Therefore, the ld. CIT(A) rightly held that the respondent-assessee is entitled to the exemption on capital gains u/s 10(38) as claimed by the respondent-assessee.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)- 2, Nashik [‘the CIT(A)’] dated 18.07.2016 for the assessment year 2008-09.
2. This is a recalled matter. Originally, this Tribunal had dismissed the appeal filed by the Revenue on the ground of low tax effect. However, on Miscellaneous Application moved by the Revenue that it is covered by amended exceptions referred to in the CBDT Circular No.03/2018 dated 11.07.2018 and later amended on 20.08.2018. Therefore, this appeal was recalled for hearing on merits. Hence, the Revenue is in the present appeal before us.
3. The Revenue raised the following grounds of appeal :-
“1. On facts and in Law, the Ld. CIT(A) has erred in allowing the claim of exemption u/s 10(38) of the Income Tax Act, 1961 when shares held as investment are converted into stock in trade is chargeable to tax u/s 45(2) of the Income Tax Act, 1961.
2. On facts, the Ld. CIT-A has erred in not appreciating the fact that the exemption u/s 10(38) is available to the assessee only when the investment is sold in the recognized stock exchange on payment of Securities Transaction Tax and not the stock in trade. The sale of stock in trade is taxable as business receipts after allowing the expenses relating to Securities Transaction Taxes.
3. On the facts and circumstances of the case and in law, the order of the Ld. CIT(A)-II, Nashik be cancelled on the above issue and that of the A.O. be restored.
4. The appellant craves leave to add, alter, modify, delete, amend any of the grounds with prior permission of the Ld. Pr. CIT, as per the circumstances of the case.
5. The appellant prays to file any of the additional evidence, with the permission of Ld. Pr. CIT, appropriate to the grounds taken in appeal.”
4. Briefly, the facts of the case are as under :
The respondent-assessee is an individual carrying on business in proprietary concern in the name and style “Jain Solar Agency”. The respondent-assessee is engaged in the business of manufacturing of Solvent Cement. The return of income for the assessment year 2008-09 was filed on 08.10.2008 declaring loss of Rs.32,50,240/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-1, Jalgaon vide order dated 15.10.2020 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total loss of Rs.30,68,070/-.
Subsequently, the Commissioner of Income Tax-II, Nashik on examination of the assessment record had formed an opinion that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue as the exemption under the provisions of section 10(38) in respect of long term capital gains on sale of shares was allowed by the Assessing Officer without due enquiry. Accordingly, the Commissioner of Income Tax-II, Nashik in exercise the power of revision vested under the provisions of section 263 of the Act with him, had set-aside the assessment order passed u/s 143(3) and directed the Assessing Officer to pass afresh assessment order after examination of the documentary evidence in support of the exemption claimed u/s 10(38) vide order dated 26.03.2013 passed u/s 263 of the Act.
5. Consequent to the order passed u/s 263, the Assessing Officer after considering the details filed before him, had denied the exemption claimed u/s 10(38) of Rs.1,20,34,601/- by citing that the Commissioner of Income Tax-II, Nashik in the revision order u/s 263 held that the assessee is not eligible for exemption u/s 10(38) of the Act.
On appeal before the ld. CIT(A), it held that in the order of revision, the ld. CIT had merely set-aside the assessment order with direction to re-do assessment after giving due opportunity of being heard to the respondent-assessee, which means that it is open remained before the Assessing Officer for de-novo adjudication before the Assessing Officer. The ld. CIT(A), on considering the evidence and facts of the case held that the respondent-assessee is entitled for exemption u/s 10(38) to the extent of Rs.1,20,34,601/-.
6. Being aggrieved by the above decision of the ld. CIT(A), the Revenue is in appeal before us with the above extracted grounds of appeal.
7. Before us, the ld. Sr. DR submits that the exemption u/s 10(38) is available only when the shares are held as investments and sold in recognized stock-in-trade. Thus, he submitted that the order of the ld. CIT(A) cannot be sustained in the eyes of law. He also placed reliance on the CBDT Circular No.6/2016 dated 29.02.2016.
8. On the other hand, ld. AR for the assessee submits that the working of capital gains of Rs.1,20,34,601/- was filed before the Assessing Officer as well as the ld. CIT(A). She submitted that the investments were converted into stock-in-trade as on 30.11.2007. He further submitted that the assessee had shares value of Rs.95,29,192/- as on 01.04.2007. Out of which, shares costing to Rs.60,12,515/- were sold for Rs.1,06,78,267/- before 30.11.2007 on which there is long term capital gains of Rs.46,65,552/- which clearly indicates that the assessee is eligible for exemption u/s 10(38) of the Act. This fact is accepted by the ld. CIT as well in the revision proceedings.
As regards to the balance of shares, the same were valued at Rs.1,86,84,272/- as on date of conversion i.e. 30.11.2007 as against the cost of investments of Rs.66,49,658/-. Thus, the long term capital gains of Rs.1,20,34,614/- which are taxable in the year of sale of shares by virtue of provisions of section 45(2) of the Act. Thus, it was submitted that the ld. CIT(A) on thorough examination of the details and evidences filed before him, had allowed the claim of the assessee. Hence, no interference is called for.
9. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the allowability of exemption on long term capital gains u/s 10(38) of the Act. The undisputed fact of the case is that the respondent-assessee was holding shares costing to Rs.95,29,192/- as on 31.03.2007. Out of which, shares costing to Rs.60,12,515/- were sold for a consideration of Rs.1,06,78,267/- thereby resulting in capital gains of Rs.46,65,552/- which is not under-dispute, the balance of shares held as on 30.11.2007 costing Rs.66,49,658/- whose market value was Rs.1,86,84,272/-, were converted into stock-in-trade as on 30.11.2007. Thus, the difference between the market value of the investments as on date of conversion i.e. on 30.11.2007 and the cost of investments resulted in long term capital gains of Rs.1,20,34,601/-, which are claimed to be exempt from the tax under the provisions of section 10(38) by the respondent-assessee read with provisions of section 45(2) of the Act providing that where the investments are converted into stock-in-trade, the difference between the market value of the investments as on date of conversion and the cost of investments is assessable under the head “long term capital gains” and taxable in the year in which such securities were sold as a part of the stock-in-trade. There is no dispute with regard to the computation of capital gains under the provisions of section 45(2) of the Act. The dispute is only with regard to the characterization of the securities sold i.e. investments converted into stock-in-trade. The fact that the securities are held as investments prior to conversion as on 30.11.2007 subsequent to the conversion of such investments into stock-in-trade as on 30.11.2007 is also undisputed. From reading of the assessment order, it appears that the Assessing Officer was under-impression that the Commissioner of Income Tax-II, Nashik in the order of revision held that the assessee was not eligible for exemption u/s 10(38), as mere reading of the order of revision, it would clearly indicate that it is open remained before the Assessing Officer as free to examine of the issue de-novo on merits. Therefore, the ld. CIT(A) rightly held that the respondent-assessee is entitled to the exemption on capital gains u/s 10(38) as claimed by the respondent-assessee. Thus, we do not find any illegality in the order of the ld. CIT(A). Therefore, we do not find merits in the grounds of appeal raised by the Revenue. Accordingly, the grounds of appeal raised by the Revenue stand dismissed.
10. In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced on this 17th day of May, 2022.
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