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2008 (7) TMI 442 - AT - Income TaxProfit on sale of shares - conversion of the stock-in-trade into investments - difference between the sale price of the shares and the cost of acquisition of share - CIT(A) directed the AO to treat the profit on sale of shares under the head 'Long-term capital gain' - HELD THAT:- We find that the shares held in stock-in-trade were converted into investment at the book value shown in the books of account. Later on, the shares held in investment were sold and the assessee offered the capital gain accrued on the sale of shares. Admittedly, the provisions of s. 45(2) of the IT Act, deals with the issue of capital gain where the investment is converted into stock-in-trade. We are also conscious about the judgments in the cases of Sir Kikabhai Premchand [1953 (10) TMI 5 - SUPREME COURT] and Dhanuka & Sons [1978 (7) TMI 22 - CALCUTTA HIGH COURT] in which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in a different account of the assessee himself. In the absence of a specific provision to deal with the present situation, two formulae can be evolved to work out the profits and gains on transfer of the assets. One formula which has been adopted by the AO 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. The other formula which is adopted by the assessees i.e., the difference between the sale price of the shares and the cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain. In the absence of a specific provision, out of these two formulae, the formula which is favourable to the assessee, should be accepted. We, therefore, of the view that CIT(A) has properly examined this issue in the present situation and directed the AO to accept the capital gain offered by the assessee. We, accordingly, confirm his order. In the result appeals of the Revenue are dismissed.
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