TMI Blog2014 (5) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... d into stock-in-trade last year, the gain arising was partly long term capital gain and partly short term capital gain in view of the period of holding of such shares – thus, the AO was not justified in treating the short term capital gain as income from business or profession – Decided in favvour of Assessee. - ITA Nos. 3588/Del/2010 & 3589/Del/2010 - - - Dated:- 2-5-2014 - Shri G. D. Agrawal And Smt. Diva Singh,JJ. For the Appellant : Shri Ajay Vohra, Shri Rohit Jain, Advocates and Shri Shaily Gupta, CA. For the Respondent : Shri Gagan Sood, Sr. DR. ORDER Per G. D. Agrawal, VP : ITA No.3588/Del/2010 - (Assessee s appeal for AY 2006-07) :- This appeal by the assessee is directed against the order of learned CIT(A)-XII, New Delhi dated 30th March, 2010 for the AY 2006- 07. 2. Ground Nos.1 2 of the assessee s appeal read as under:- 1. That the Commissioner of Income-tax (A) erred on facts and in law in confirming the disallowance of Rs.5,90,029 under section 14A of the Act, 1961 ( the Act ). 1.1 That the Commissioner of Income-tax (A) erred on facts and in law in not appreciating that the provisions of section 14A of the Act were not at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company turned into investor of shares and securities by converting the closing stock of the immediately previous year into investment and paid short term capital gains thereon. That the conversion of stock-in-trade into investment in the preceding year, i.e., AY 2005-06 was not disputed by the Revenue. That during the year under consideration, the assessee realized the investment and offered capital gains tax thereon. The assessee showed long term capital gain where the holding of the shares was more than 12 months and short term capital gain where the holding was less than 12 months. That the Assessing Officer accepted the long term capital gain but with regard to short term capital gain, he observed that in the immediately preceding year, the conversion of closing stock of the shares into investment was to take the advantage of differential rate of tax on short term capital gain and business income. It is submitted by the learned counsel that first of all, if the Department had any objection to the conversion of stock-in-trade to the capital gain, it should have been taken in assessment year 2005-06 in which the conversion took place and not in the year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany converted the stock-in-trade into investment and also paid short term capital gain on such conversion. The same has been accepted by the Revenue, of course under Section 143(1). During the year under consideration, the Assessing Officer objected to such conversion on the ground that the conversion was done to take advantage of differential rate of tax on short term capital gain and business income. The relevant observation of the Assessing Officer in paragraph 6 of the assessment order reads as under:- The assessee was a trader of shares and securities in the past and it was so in the immediately previous year also. But to gain the advantage of differential rate of tax on STCG and business income the assessee has turned into an investor of shares securities by converting the closing stock of immediately previous year into investments. In this context the authorized representative was asked as to why capital gains should not be treated as business income. 8. We find that identical issue has been considered by Hon'ble Jurisdictional High Court in the case of M/s Express Securities Pvt.Ltd. (supra). The facts in that case were that the assessee was a company. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is improper or illegal. The assessee was entitled to convert the holding from stock-in-trade to investment on noticing the tax benefit. No other reason is given by the Assessing Officer for rejecting the conversion of stock-in-trade into investment. In view of the above, we hold that the above decision of Hon'ble Jurisdictional High Court in the case of M/s Express Securities Pvt.Ltd. would be squarely applicable to the case of the assessee. We also find that on the sale of shares during the year under consideration which were converted into stock-in-trade last year, the gain arising was partly long term capital gain and partly short term capital gain in view of the period of holding of such shares. The Revenue accepted the long term capital gain, meaning thereby, conversion of shares from stock-in-trade to investment was accepted in respect of shares which were held for more than 12 months but not accepted in respect of shares which were held for less than 12 months. The Revenue cannot take this double stand. All the shares which were earlier held as stock-in-trade were converted into investment as on 30th September, 2004. Merely because some shares were sold before 12 mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details are annexed for ready reference to this order as Annexure A . From such details, it is evident that in the case of most of the shares, there is only one or two instances of purchase and sale. It is only in respect of one share, i.e., Maha Seamless in which there are nine instances of purchase and sale. Therefore, the observation of the Assessing Officer that there is high frequency of purchase and sale cannot be accepted. Considering the high value of the shares nowadays, the total sale consideration of Rs.2.62 crores cannot be said to be huge volume and, moreover, the volume itself cannot be determinative of the fact whether the assessee is trading in shares or made an investment in shares. In the case of Gopal Purohit, the short term capital gain was Rs.57.31 crores and long term capital gain claimed exempt was Rs.102.68 crores and long term capital gain taxable at the rate of 10% was Rs.60 crores. Even with such quantum of the capital gain, the ITAT Mumbai Bench in the case of Gopal Purohit - 29 SOT 117 held that the Assessing Officer was not justified in treating profit arising from such transaction as income from business or profession. The above order of the ITAT wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. The assessee has also earned huge dividend income from such shares. The Assessing Officer merely because of the total volume of transaction is substantial, is guided to hold the income as business income. However, he failed to recognize that the volume of transaction includes the appreciation in shares also and such appreciation has been offered for tax. If volume of transaction is the criteria, what is to be examined is how frequently the transaction is done, whether the transaction is settled in the course of the day of trading itself or in the settlement period itself so as to avoid payment of full purchase price. Here the assessee has been holding the shares by taking delivery and making full payment for such investment. In such circumstances, the transactions are to be treated as giving rise to the capital gain and cannot be branded as trading of making investment so as to determine whether the transaction was for dealing in shares or making investment for earning dividend and appreciation from such investment. The total number of shares dealt in respect of long term portfolio is only 5. This cannot be considered as volume transaction. Therefore, this transaction in sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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