By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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16 (2008) 24 SOT 288 (Mum.)
ACIT v. Bright Star Investment (P.) Ltd.
ITA Nos. 6374 & 9543 (Mum.) of 2004
A.Ys. : 2000-01 and 2001-02. Dated : 2-7-2008
S. 45 r.w. S. 28(i) of the Income-tax Act, 1961 — In absence
of specific provision in S. 45(2) to deal with a situation where stock-in-trade
is converted into investment and later on investment is sold for profit, formula
which is favourable to an assessee should be accepted.
The assessee had converted some shares from stock-in-trade to
investment as on 1-4-1998 at its book value. Thereafter, the assessee sold some
of the shares out of the above shares and offered profit earned as long-term
capital gain. The Assessing Officer opined that in view of the provisions laid
down u/s.45(2), 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. The AO, therefore, took
the highest market rate of the said shares on the date of conversion and
computed the business income, 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, further computed
the long-term capital gain at Rs.457.62 lacs being the difference between the
market value and the actual sale value of the shares.
The CIT(A) held 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 was totally arbitrary and
unjustified.
The Tribunal held in favour of the assessee. The Tribunal
relied on the decisions in the following cases :
(a) Sir Kikabhai Premchand v. CIT, (1953) 24 ITR 506
(SC)
(b) CIT v. Dhanuka & Sons, (1980) 124 ITR 24; (1979)
1 Taxman 417 (Cal.)
The Tribunal noted as under :
(a) The provisions of S. 45(2) deal with the issue of
capital gain where the investment is converted into stock-in-trade.
(b) While incorporating Ss.(2) to S. 45, the Legislature
has not visualised the situation in other way round, where the stock-in-trade
is to be converted into investment and later on the investment is sold on
profit. In the absence of a specific provision to deal with this type of
situation, a rational formula should be worked out to determine the profits
and gains on transfer of the asset.
(c) In the absence of a specific provision to deal with the
present situation, two formulas can be evolved to work out the profits and
gains on transfer of the assets.
(d) One formula which had been adopted by the Assessing
Officer, i.e., difference between the book value of the shares and the
market value of the shares on the date of conversion should be taken as a
business income and the difference between the sale price of the shares, and
the market value of the shares on the date of conversion, be taken as a
capital gain.
(e) The other formula which was adopted by the assessee,
i.e., the difference between the sale price
of the shares and the cost of acquisition of shares, which was the book value
on the date of conversion with indexation from the date of conversion, should
be computed as a capital gain.
(f) In the absence of a specific provision, out of these
two formulae, the formula which was favourable to the assessee should be
accepted.
