By K. B. Bhujle
Advocate
10. Kemfin Services Pvt. Ltd. vs. ACIT [2020]
425 ITR 684 (Kar.) Date
of order: 11th June, 2020 A.Y.: 2005-06
Capital gains or business income – Sections
4 and 45 – Non-banking financial institution – Conversion of shares and
securities held as stock-in-trade into investment – Sale of shares – No
provision at time of transaction for treating income from sale of shares as
business income – Income could not be taxed as business income
The assessee was a
non-banking financial corporation engaged in the activity of investment in
shares. The board of the assessee passed a resolution to stop its trading
activities in shares and securities under the portfolio management scheme and
to convert the stock-in-trade into investment on 1st April, 2004.
For the A.Y. 2005-06, the A.O. passed an order u/s 143(3) wherein, inter alia, he held that mere interchange of heads in books of account as
investment or stock-in-trade did not alter the nature of transaction, that the
transactions of the assessee fell within the ambit of business income and not
short-term capital gains and treated the transactions as business income.
The Commissioner
(Appeals), inter
alia, held that the shares had to be considered as
stock-in-trade and the income from the sale of shares was to be treated as
business income. The Tribunal, inter alia, held that the
assessee acquired certain shares under the portfolio management scheme and
those shares were treated by the assessee and accepted by the Department as
stock-in-trade for the A.Ys. 2003-04 and 2004-05, that the assessee changed the
character of its asset from stock-in-trade to investments, that a surplus arose
in the course of conversion of those shares and therefore, stock-in-trade was a
business asset and any income that arose on account of stock-in-trade was
business income. It also held that income always arose from an existing source
and not from a potential source and dismissed the appeals filed by the
assessee.
The Karnataka High
Court allowed the appeal filed by the assessee and held as under:
‘i) The assessee had converted stock-in-trade into
investments. Prior to introduction of the Finance Bill, 2018 by which
provisions of the Act had been amended to provide for taxability in cases where
stock-in-trade was converted into capital asset, there was no provision to tax
the transaction. In the absence of any provision in the Act, the transaction in
question could not have been subjected to tax.
ii) That statutory
interpretation of a taxing statute has to be strictly construed. The assessee
was not to be taxed without clear words for that purpose and every Act of
Parliament must be read according to the natural construction of its words.
iii) In view of the preceding analysis, the
Tribunal erred in treating the income arising on sale of shares held as capital
asset after conversion from stock-in-trade as business income. The substantial
question of law framed in the appeals is answered in favour of the assessee and
against the Revenue.’
