9. Capital gain or business income- A. Y. 2006-07 – Where assessee converted the stock-in-trade of shares into investments and sold the same at a later stage, profit arising from sale of shares shall be deemed to be capital gains and not business income -Since shares were held as long-term capital asset, profit arising from sale of share shall be exempt from tax u/s. 10(38)

Deeplok Financial
Services Ltd. vs. CIT; [2017] 80 taxmann.com 51 (Cal):

The assessee was a company
which was engaged in the business of leasing, finance and investment. On 1^st
April, 2004, i.e. during the previous assessment year 2005-06 the
assessee transferred certain shares from its trading stock into investments. In
the A. Y. 2005-06, the assessee sold some of those shares and some more shares
were sold in the A. Y. 2006-07, the relevant year. The assessee claimed the
profit as capital gain and for the A. Y. 2006-07 claimed exemption u/s. 10(38)
of the Act, 1961 as long term capital gain. In the assessment u/s. 143(3) of
the Act, for the A. Y. 2005-06, the Assessing Officer did not accept the
assessee’s claim for conversion of shares from stock-in-trade into investment.
That decision was appealed against and carried up to the Tribunal which
confirmed the same. The assessee though preferred a delayed appeal to the High
Court but was unsuccessful in having the delay condoned and thereby lost that
right of appeal. For the assessment year under consideration i.e. A. Y.
2006-07, the Assessing Officer following the assessment order of the previous
year held accordingly on this claim of conversion by the assessee. The CIT(A)
allowed the assessee’s appeal but the Tribunal upheld the decision of the
Assessing Officer following its order for the A. Y. 2005-06.

The assessee filed appeal
before the Calcutta High Court and raised the following substantial question of
law:

     “Whether
on the facts and circumstances of the case the Tribunal erred in affirming the
order of the AO disregarding the conversion of the trading shares into
investment shares and treating the long term capital gain of Rs.22,27,819/-
arising from the sale of those shares as profit of trading in shares and
bringing the same to tax?”

The High Court formulated
another substantial question of law as under:

     “Whether
the Tribunal was correct in holding that the profit arising from the sale of
the said shares is chargeable to tax in the hands of the assessee as its
business income and not long term capital gain since in the assessee’s own case
in the previous assessment year the conversion of the shares was not accepted
by the Tribunal?”

The High Court decided to
answer both the questions. The High Court held as under:

“i)  A person
cannot transact with himself. It is only after the asset is dealt with to a
third party can a profit or loss be ascertained on the basis thereon. There was
no bar imposed by the Income Tax Act, 1961 on an assessee from converting its
stock-in-trade into investment. That conversion could not be deemed to be a
transaction but when the asset is dealt with, the profit or loss is to be
ascertained and in the case of capital asset, if there is profit then to be
assessed as capital gain. That if 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.

ii)  In
Dhanuka & Sons(1980) 124 ITR 24 (Cal), the same situation was contemplated
where on stock transferred in investment account, the question of capital loss
or capital gain, was held, would arise if such shares be disposed of at a value
other than the value at which it was transferred from the business stock. We,
on noticing that the Tribunal did not really hold otherwise but had held
against the assessee on the point of res judicata, had formulated the
above question. Nevertheless for the reasons aforesaid we answer the question
suggested by the assessee in the affirmative and in its favour. In that regard
the said circular dated 29^th February, 2016 has no application
because the assessee’s stand was not accepted by the Revenue.

iii)  So far
as the formulated question relating to res judicata is concerned, in
answering the same reference may be had to the decision in Amalgamated
Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara; AIR (1964) SC 1013
in which the Supreme Court, inter alia, held that generally, questions
of liability to pay tax are determined by Tribunals with limited jurisdiction
and so, it would not be inappropriate to assume that if they decide any other
questions incidental to the determination of the liability for the specific
period, the decisions of those incidental questions need not create a bar of res
judicata while similar questions of liability for subsequent years are
being examined.

iv) This
assessee lost its right of appeal to this Court on the question arising in the
previous assessment year on account of delay in preferring the same. There was
no adjudication on merits, of its claim of conversion, on appeal to the High
Court. The only reason given by the Tribunal in rejecting the claim of the
assessee for the previous assessment year, as would appear from its order dated
13^th May, 2011, is that to the Tribunal it appeared there is no
provision in the Act in respect of conversion of stock-in-trade into investment
and its treatment. Hence, it held that the lower authorities rightly made the
addition as there was understatement of income by analysing the assessee’s
trading and investment account in shares. Thus, before us there is no
impediment for the assessee to seek adjudication on the point. The question
formulated is answered accordingly and in favour of the assessee.”