Capital gain: Business profits vs. Capital gains: S/s. 45, r.w.s. 28(i): A. Y. 2006-07: Conversion of stock-in-trade (shares) into investment in 2002 and 2004: Sale of such shares in relevant year: Profit is capital gain and not business income:

218 Taxman 316 (Bom): The assessee was engaged in the business of investments and also dealing in shares and securities. In the A. Y. 2006-07, the assessee declared income under the heads ‘profits and gains of profession’ and also under the head ‘capital gains’. The Assessing Officer noted that a part of the capital gains declared was in respect of transfer of shares/securities which were held by the assessee originally as stock-intrade as a dealer in shares/securities which were converted into investment by the assessee on 1st April, 2002 and 1st October, 2004. He held that the short term and long term gains arising out of the sale of shares which were held originally as stock in trade and converted into investments was to be treated as business income. The CIT(A) and the Tribunal allowed the assessee’s claim. The Tribunal held that it is not in dispute that the conversion of its stock in trade into investment was accepted by the Department in A. Ys. 2003-04 and 2005-06. It is also not in dispute that the shares which were sold and gains from such sales were offered under the head capital gains from the date of conversion from stock in trade into investments and prior thereto as business profits. Further in its books of account the assessee showed the shares on which tax is levied under the head capital gain as investments. Further the fact that the assessee was trading in the shares would not estop the assessee from dealing in shares as investment and offer the gain for tax under the head capital gains. Thus, it is open to the trader to hold shares as stock in trade as well as investments.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) Once the finding of fact is recorded that the shares sold were held by assessee as investments, the gains arising out of the sale of investment were to be assessed under the head capital gains and not under the head business profits.

ii) In view of the above, we see no question of law arises for our consideration. Accordingly, the appeal is dismissed.”