By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
fiogf49gjkf0d
New Page 1
20 (2008) 23 SOT 512 (Mum.)
ACIT v. Jehangir T. Nagree
ITA No. 7503 (Mum.) of 2004 and
3927 (Mum.) of 2005
A.Y. : 2001-02. Dated : 10-4-2008
S. 45 of the Income-tax Act, 1961 — Conversion of shares into
stock-in-trade would be valid u/s.45(2) even if the assessee was not carrying on
the business of shares and securities before such conversion.
On 1-4-2000 the assessee, a manufacturer and seller of
furniture, having short-term capital loss in earlier years, converted his
investment in shares brought forward from A.Y. 2000-01 into stock-in-trade.
Besides trading in shares and securities which were
converted, the assessee had made further purchases of shares and securities and
during the accounting year he had engaged himself in speculation of shares of
very high volume. The assessee incurred loss in share transaction activity and
also in speculation of shares and claimed deduction of the same as business
loss. The Assessing Officer rejected the assessee’s claim, holding that the
provision of S. 45(2) contained the words ‘of business carried by him’ and since
as on date of conversion the assessee had no business of share transaction, the
said conversion was not valid. The Assessing Officer, accordingly, held that by
this arrangement, the assessee had gained immensely by setting off income in
various other heads against the business loss, which benefit would not have been
available had this loss been treated as a short-term capital loss and disallowed
the assessee’s claim.
The CIT(A) held that the conversion made by the assessee was
valid and not a device, especially in view of the fact that the assessee had
done large volume of transactions during the year in speculation account and had
also made fresh purchases of shares for share business.
The Tribunal held that the assessee was entitled to benefit
u/s.45(2). The Tribunal noted as under :
(1) Having seen the volume of transactions undertaken by
the assessee in the impugned assessment year, it was very difficult to hold
that the assessee still held the investment in shares and securities. It was
the sweet will of the assessee to decide as to when he intended to convert his
investment in stock-in-trade.
(2) In S. 45(2), the words ‘business carried on by him’ do
not mean that before conversion of investment or capital assets into
stock-in-trade the assessee must carry on business of share transaction or
such a business must be in existence.
(3) The restrictive meaning as suggested by the Revenue
should not be given to the words ‘business carried on by him’ in the light of
the use of the words in other Sections like S. 28(i).
(4) The assessee could undertake multiple business
activities under his proprietary concern. Besides the manufacturing and sale
of furniture, the assessee could also deal in trading in shares in the name of
same proprietary concern keeping the stock-in-trade of shares separate.
(5) Thus, conversion of investment in shares and securities
into stock-in-trade would be valid u/s.45(2) even if business of trading of
shares is not carried on by the assessee before such conversion.
