The assessee is engaged in the business of manufacture of Gas mantle and stove. Besides the assessee was also engaged in trading of shares and it has show the shares on hand as its “stock in trade” in the earlier years. As on the beginning of the current year, i.e., on 1.4.2005, the assessee transferred the Shares from “Stock in trade” to “Investment” account. Immediately thereafter, the assessee sold shares, the details of which are furnished at page 83 of the paper book.
From the said statement, we notice that the assessee sold shares on 05.04.2005, 19-04-2005, 20-04-2005 and 26-04-2005. Since the assessee had classified the shares as “Investments” as on 01.04.2005, the assessee computed Long term Capital gain of Rs.28,33,476/- and Short term Capital gain of Rs.79,094/- for income tax purposes. The assessee claimed the long term capital gain as exempt u/s 10(38) of the Act and paid tax on Short term Capital gains at concessional rate u/s 111A of the Act. In the assessment proceedings, the AO did not recognize the conversion of Stock in trade into Investments by holding that the change of method of accounting was effected with a view to reduce the tax liability and also to claim exemption u/s 10(38) of the Act. Accordingly, the assessing officer assessed the gains arising on sale of shares as business income of the assessee. The Ld CIT(A) also confirmed the same.
The Ld Counsel appearing on behalf of the assessee submitted that the assessee has been holding the shares for quiet a long period of time. Referring to the statement placed in page 83 of the paper book, the Ld A.R submitted that some of the shares are held prior to 1.1.2000 also. Accordingly he contended that the intention of the assessee should be inferred from the period of holding the shares. He submitted that though the assessee had classified these shares as ‘stock in trade’ in its books of account, the same is not decisive. In this regard, he placed reliance on the decision of Hon’ble Supreme Court rendered in the case of Investment Ltd Vs. CIT (77 ITR 533). He submitted that the intention of the assessee should be gathered from the facts surrounding the issue. He further submitted that the assessee has converted the shares as its “investments” in the books of account so as to reflect its intentions. The Ld A.R placed reliance on the order dated 22-10-2013 passed by Hon’ble Delhi High Court in the case of CIT Vs. M/s Express Securities Pvt Ltd and submitted that the Hon’ble Delhi High Court, in the above cited case, has held that the assessee is entitled to convert the stock in trade into investments on noticing the benefit of exemption provided u/s 10(38) of the Act. He further submitted that the assessee sold the shares, since they were fetching good prices. Accordingly, he contended that the tax authorities are not justified in rejecting the explanations of the assessee. The Ld A.R further submitted that the CBDT has prescribed various criterian to be examined to ascertain the nature of transaction. He submitted that the assessee is satisfying most of the tests prescribed by the CBDT. However, the Ld CIT(A) has confirmed the order of the AO without examining all the test criterias. Accordingly he prayed that the matter may be set aside to the file of the Ld CIT(A) for considering the matter afresh.
On the contrary, the Ld D.R submitted that the assessee was indulging in trading of shares in the earlier years also and the assessee had offered the gains realized on sale of shares as business income only. Inviting our attention to the financial statements relating to the earlier years, the Ld D.R submitted that the assessee has been consistently declaring the Shares as its Stock-in-trade only. He further submitted that the assessee has converted the stock in trade into investments only in the current year and immediately sold the shares after such conversion. Accordingly, the Ld D.R submitted that the assessee has entertained the idea of conversion, only to avail the exemption u/s 10(38) of the Act and also to avail concessional rate of tax in respect of short term capital gains.
Accordingly he contended that the order of Ld CIT(A) passed on this issue should be sustained.
We have heard the rival contentions on this issue and perused the record. As submitted by Ld D.R, the assessee has been consistently declaring the Shares as its Stock in trade. Only on the opening date of this year, i.e., on 1-04-2005, the assessee seems to have converted the stock in trade into Investments in its books of account and thereafter sold most of the shares within a period of about 20 days. When questioned about the compliance of the provisions of the Companies Act, if any, in this regard, the Ld A.R submitted that the decision taken by the assessee is reflected in the books of account. Thus, it is seen that the entry passed in the books of account to convert stock in trade into investments is not substantiated with any document. The Ld A.R contended that the Ld CIT(A) did not examine the applicability of various tests prescribed by the CBDT in its Circular to determine the nature of transactions. In our view, the examination of the applicability of various tests is not required in the instant case, since the assessee has clearly brought out its intention by classifying the shares as its “Stock in Trade” in all the earlier years. Further the assessee is a legal person and its intention can be ascertained only through the documents, resolutions passed in Board meetings etc. The question of conduct of the assessee may be more relevant in the case of human beings. Further, the question of application of various test criterias prescribed by the CBDT would arise only when there is confusion about the intention of the assessee. In the instant case, there appears to be no confusion at all. On the contrary, it is clear that the assessee has decided to convert the stock in trade into Investments on 1.4.2005 only when it took the decision to sell the shares immediately thereafter and the purpose is very clear, i.e., to avail the benefit of exemption and concessional rate of tax. Hence, in our view, the assessee cannot take support of the decision rendered by the Hon’ble Supreme Court in the case of Investment Ltd (supra), since the assessee has, all along, shown the shares as its stock in trade and further it has also declared the gains arising on sale of shares as its business profit only. In the case of M/s Express Securities Pvt Ltd (supra), the Hon’ble Delhi High Court has noticed that the assessee has held the shares as investments for a period of two years after the date of conversion from “Stock in trade”. On the contrary, in the instant case, the assessee has immediately sold the shares after the alleged conversion. Hence, under these set of facts, in our view, the Ld CIT(A) was justified in confirming the gains arising on sale of shares as the business income of the assessee by disregarding the claim of Long term Capital gain and Short term Capital gain.