Sunil Kumar Yadav, Judicial Member -
(1.) THESE appeals are preferred by the Revenue on common ground that the CIT (A) has erred in directing the Assessing Officer to treat the profit on sale of shares under the head long term capital gain, where as the Assessing Officer had segregated the capital gain income as shown by the assessee in the return of income into business income and capital gain for the detailed reasons given by him in the assessment order.
(2.) Since, these appeals were heard together, we prefer to adjudicate them by this consolidated order. Since the facts of both the appeals are on common, we take up the facts of the case in ITA. No. 6374/Mum/2004 in order to understand the issue involved and also to adjudicate it.
2.1. The facts in brief borne out from the Orders of the lower authorities in ITA. No. 6374/Mum/2004 are that the assessee in the return of income had shown long term capital gain on sale of shares of Rs. 4,85,30,780/- for which statement of working of long term capital gain was attached with the return of income. The said statement included capital gains on sale of shares at Rs. 5,90,15,240/-, which were converted into investment from stock in trade on 1-4-1998 (relevant for the assessment year 1999-2000). During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish details in respect of said shares and also to clarify whether any of these converted shares were sold during the year under consideration. In reply thereto, it was stated through letter dated 12th March, 2003 that there are only long term capital gain arise on sale of said shares and not the business income. The entire details are furnished before the Assessing Officer.
2.2. Being not convinced with the explanation of the assessee, the Assessing Officer held that in view of principles of laid down under Section 45(2) of the Act, the income of the assessee would be computed separately as business income till the date of conversion of the shares from the stock to investment and thereafter as long term capital gain. Accordingly, he has taken the highest market rate of the said shares as on 1-4-1998 (date of conversion) and computed the business income at Rs. 1,32,52,978/-, being the difference in the value at which the said shares were converted into investment and the market value of the said shares on the date of conversion i.e., 1-4-1998 and computed the long term capital gain at Rs.4,57,62,262/- being the difference between the market value and the actual sale value of the shares.
2.3. Aggrieved the assessee preferred an appeal before the CIT (A) and made detailed submissions along with the details of shares which are reproduced by the CIT (A) in his order. For the sake of reference, we extract the same as under:
1. The return of income for the assessment year in question was filed on 30-11-2000 declaring the total income of Rs. 13,14,91,388/- which was computed under the head business income as well as capital gains. The return of income was accompanied by audited accounts as well as tax audit report Under Section 44AB of the I.T, Act. (Refer page No. 1 to 11 of the paper book).
2. The total income consist of long term capital gain on sale of shares at Rs. 4,88,30,780/-. We enclose statement of working of the said long term capital gain (Refer page No. 2 of paper book). The said statement includes long term capital gain at Rs. 5,90,15,2440/- on sale of shares which were coverted into investment from stock in trade on 01-04-1998 (A.Y. 1999-2000) and a note to that effect was also given in the notes of accounts of the schedule of the balance sheet and profit and loss account for the said assessment year, (refer page No. 12 to 18 of the paper book). The learned Assessing Officer assessed the said capital gain into two parts one as a business income and another as capital gain as per the details given in the subsequent paras.
3. During the course of assessment proceedings the teamed Assessing Officer asked appellant to furnish the details in respect of the shares which were converted into investment and also asked to clarify as to why the capital gain on sale of such shares should not be recomputed by segregating it into business income and long term capital gain in term of the principles laid down Under Section 45(2) of the I.T. Act In reply thereto, appellant's representative vide letter dated 12/03/2003 submitted the complete details and also strongly objected to re-compute the long term capital gain in the above manner. A copy of the said letter is enclosed in the paper book, (refer page No. 19 to 28 of the paper book). We herein below give the summarized contents of the said letter.
a) Assessee company converted following scrips of stock in trade of shares as on 01-04-1998 into investment at its book value by passing necessary Board Resolution and entries in the books of accounts, since the same were intended to be hold for longer period and in the balance sheet it has been shown under investment account being capital asset of the company.
b) During the assessment year under consideration assessee company sold following scrips which resulted into long term capital gain.
The above scrips were sold after the period nearly 23 months and certain scrips were still held under investment portfolio even after completion of 5 years from the conversion of the said shares.
c) Inspite of rise in the price of the scrips of these shares assessee did not sale the same and book the profit on the very first opportunity rather continued to hold the said shares under investment portfolio of rise and fall in the price for which necessary details also submitted.
d) No trader would have hold his stock in trade of shares for such a long period which clearly give the indication that the shares were held for investment portfolio.
e) The circumstances under which the assessee company decided to sale some of the converted shares were satisfactorily explained.
f) The conversion of shares from stock in trade to investment does not give any profit,. which arised only in the fixture when the said investment is sold.
g) Provisions of Section 45(2) cannot be applied in case of assessee since it applies to the cases of other way round i.e. conversion of investment into stock in trade.
h) Reliance in support of the same was placed on the following decisions:
i. Sir Kikabhai Premchand v. CIT (1952) 24 ITR 506 (SC).
ii. CIT v. Dhanuka and Sons 24 ITR 24 (Cal.)
4. The learned A.O. however summarily rejected the contention raised by the appellant and segregated the long term capital gain on sale of converted share at Rs. 5,90,15,240/- into business income at Rs. 1,32,52,978/- being the difference in the market value and the book value of the said shares on the date of conversion and balance Rs. 4,57,62,262/- as long term capital gain by applying the principles laid down under Section 45 (2) of the Income Tax Act The working of the said segregation is given herein below which is also given at para No. 10 of the assessment order.
5. In this context at the outset it is submitted that the Learned Assessing Officer totally misconceived the provisions of Section 45(2) of the Income Tax Act and therefore wrongly applied the principles laid down in the said section in appellant's case and recomputed the income in the above manner.
The CIT (A) re-examined the issue in the light of relevant provisions of the Act and various judgments referred to by him and has observed that assessee has converted some scrips from stock in trade to investment as on 1st April, 1998 at its book value. Thereafter, some of the scrips were sold out of the above (nearly after 23 months) and the gain was declared by the assessee as a long term capital gain and tax was paid accordingly. With regard to applicability of Section 45(2), the CIT (A) has observed that this section has a specific provision for computation of income when a person converts investment into stock in trade and subsequently sells such stock in trade. Whereas, the assessee's case is other way round i.e., it has converted its stock in trade to investment and as such, apparently Section 45(2) of the Act does not have any applicability in the instant case. After having examined various Judgments in the case of Sir Kikabhai Premchand v. CIT (1952) 24 ITR 506 (S.C.), CIT v. Dhanuka and Sons 124 ITR 24 (Cal.) the CIT (A) has observed that the action of the Assessing Officer to segregate "the long term capital gain as shown by the assessee in the return of income, into business- income and capital gain in the manner as discussed in the assessment order, is totally arbitrary and unjustified. He, accordingly, dirccted the Assessing Officer that long term capital gain declared by the assessee, be. accepted. The relevant observation of the CIT (A) is extracted hereunder in this regard:
4.6. After careful consideration of the entire facts an record and in view of detailed discussion held above, I am of the opinion that the action of the Ld. Assessing Officer to segregate the long term capital gain as shown by the appellant in the return of income, into business income and capital gain in the manner as discussed in the assessment order is totally arbitrary and unjustified. The provisions laid down under Section 45(2) of the Act are absolutely clear and applicable only in the case when investment is converted into stock in trade and not vice-versa. In the absence of specific provisions under the Act in this regard. The presumption of Assessing Officer to recompute the income other way round is not justified. The cases relied upon by the Ld. A.R. also support the action of the appellant in totality. In the case of CIT v. Dhanuka and Sons 124 ITR (Cal.) it has been categorically held that profit and gains on shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because a person cannot have a transaction with himself and in turn such profit cannot be taxed. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise.
In view of all above, I hold that the action of the Assessing Officer is not justified. In other words, the long term capital gain declared by the appellant in the return of income on conversion of shares is restored back. As such, the appellant succeeds on this ground of appeal.
(3.) NOW the Revenue has preferred an appeal before the Tribunal with the submissions that the analogy drawn from Section 45 (2) of the Act should be applied in the instant case in which the stock in trade was converted into the investment, in the light of the fact that there is no specific provision in the Act which deal with this type of situation. The learned Departmental Representative has also placed a heavy reliance upon the assessment order.;