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TMI Blog2011 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 2005. (ii) There has been a transfer of shares as per Section 45(2) of the Income-tax Act, 1961. (iii) The assessee has earned capital gains on such transfer/conversion into stock in trade. (iv) The capital gains are long term capital gains. 5. The assessee has claimed the capital gains earned during the year as exempt from tax under Section 10(38) of the Act. The AO was of the opinion that the transfer has taken place when the assessee has converted personal investment into stock in trade of the business on 1st April, 2005. These shares were actually sold during the Financial Year 2005-06 through a stock exchange and Securities Transaction Tax (STT) was paid at the time of actual sale of shares. On this basis, the assessee invoked the provisions of Section 10(38) to claim the benefit of exemption. According to the Assessing Officer, the transfer has taken place when the assessee converted personal investments in shares into stock in trade of the business. He has reproduced the provisions of Section 10(38) and concluded that conversion of shares investment of individual into stock in trade of business is a transaction. He quoted Circular No.397 dated 16.10.1984 and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has converted shares purchased in the earlier years which were held as investment into stock in trade as on 1.4.2005 and out of such shares had sold some shares during the year under consideration itself through the recognized stock exchange on which Securities Transaction Tax (STT) had duly been paid, therefore, long term capital gain on sale of such shares was exempt from tax in terms of Section 10(38)(a) and 10(38)(b) read with Section 45(2) of the Act because all these provisions talk of only sale of shares. A specific reliance was placed on Circular No.791 dated 2.6.2000 which is annexed as Annexure-A in which also, CBDT had clarified that Section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee. In other words, CBDT had clarified that the date of sale/transfer as per Section 45(2) is to be taken for invoking other provisions/sections of the Act. Such interpretation of the CBDT equally applies to the case of the assessee as STT had duly been paid on the date of sale of shares which had earlier been converted from investment into stock-in-trade. In other words, Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence between the ultimate selling price and the price at which capital asset was converted into stock in trade. As far as benefit under Section 10(38) is concerned, the assessee shall not be eligible for this benefit at the first stage of chargeability of capital gains because the deemed sale at the point of conversion into stock did not suffer securities transaction tax. Further, with regard to the second part of the transaction, the assessee is not eligible for any benefit under Section 10(38) because the second part of the transaction is purely a business transaction and Section 10(38) is applicable only to long term capital assets. Considering the aforesaid facts, the assessee's claim for capital gains not being chargeable to tax which, according to him, is clearly untenable in law, the learned DR vehemently argued in the light of the provisions in this regard as also the various Circulars issued by the CBDT explaining the amended provisions. He drew our attention to the discussions made in the assessment order with regard to these details. 10. We have carefully considered the rival contentions and gone through the records. The provisions of Section 10(38) read as under:- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter. (ii) A new section 111A has been inserted so as to provide that short term capital gains arising out of transfer of an equity share in a company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter, shall be charged at the rate of 10%. (v) A new section 88E has been inserted providing that where the total income of the assessee in a previous year includes any income chargeable under the head "Profits and gains of business or profession" arising from transactions chargeable to securities transaction tax, he shall be allowed a deduction of an amount equal to the securities transaction tax paid by him in respect of transactions chargeable to securities transaction tax, entered into in the course of his business during that previous year, fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) make an exception to the generality of provisions of Section 45(1). Where it is a case of conversion of stock-in-trade, the profit arising on transfer by way of conversion shall be chargeable to income tax as its income in the previous year in which such stock-in-trade is actually sold or otherwise transferred by him and for the purpose of computation of capital gain, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of such conversion, meaning thereby, the year of assessability of income to tax is postponed to date on which actual sale of this stock-in-trade takes place. There can be no confusion or a debate or two opinions as regards the aforesaid provisions. 16. A cumulative reading of the aforesaid provisions, in our mind, makes it clear that as far as the benefit of Section 10(38) is concerned, the assessee shall not be eligible for this benefit at the first stage of chargeability of capital gains because the deemed sale is the point of conversion into stock-in-trade which had not suffered STT. Further, with regards to the second part of the transaction, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of [twenty] per cent. [Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit] [or zero coupon bond], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee." 19. We may mention that this proviso is under Section 112(1)(d) which is applicable to the case of the residents. The assessee being a non-resident, this proviso is not applicable, meaning thereby, the Department is justified in computing the income tax on such long term capital gain at the rate of 20% in terms of Section 112(1)(c) which are the provisions of the Act applicable to the case of the assessee, the assessee being a non-resident. We, therefore, do not find any scope for any relief even on this alternative contention. 20. The other comm ..... 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