TMI Blog2008 (7) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onverted into investment and the market value of the said shares on the date of conversion i.e., 1st Apri1, 1998 and computed the long-term capital gain at Rs. 4,57,62,262 being the difference between the market value and the actual sale value of the shares. 2.3 Aggrieved the assessee preferred an appeal before the CIT(A) and made detailed submissions along with the details of shares which are reproduced by the CIT(A) in his order. For the sake of reference, we extract the same as under: "1. The return of income for the assessment year in question was filed on 30th Nov., 2000 declaring the total income of Rs. 13,14,91,388 which was computed under the head 'Business income' as well as capital gains. The return of income was accompanied by audited accounts as well as tax audit report under s. 44AB of the IT Act. 2. The total income consists of long-term capital gain on sale of shares at Rs. 4,88,30,780. We enclose statement of working of the said long-term capital gain. The said statement includes long-term capital gain at Rs. 59,01,52,440 on sale of shares which were converted into investment from stock-in-trade on 1st April, 1998 (asst. yr. 1999-2000) and a note to that effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 9,991 42,27,691.65 ------------------------------------------------------------- 3,20,866 5,50,78,590.90 ------------------------------------------------------------- (b) During the assessment year under consideration assessee company sold following scrips which resulted into long-term capital gain. ---------------------------------------------------------- Name of Scrip Qty. Cost Sale price Capital gain/loss ---------------------------------------------------------- Infosys Technology Ltd. 6000 - 5,77,62,440 5,77,62,440 ---------------------------------------------------------- Nestle India 350 1,23,079 1,54,682 31,603 ---------------------------------------------------------- Novartis India Ltd. 150 52,837 1,73,620 1,20,783 ---------------------------------------------------------- Wyeth Lederle Ltd. 9991 42,27,692 29,66,828 12,60,864 ---------------------------------------------------------- International Best Food 41950 46,79,191 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------- Infosys Tech. March, 6,000 NIL 1,16,10,000 Ltd. 2000 ---------------------------------------------------------- Nestle India April, 350 1,23,079 1,59,775 1999 ---------------------------------------------------------- Novarties Sept., 150 52,837 47,126 India Ltd. 1999 ---------------------------------------------------------- Wyeth Lederle March, 9,991 42,27,692 48,55,626 Ltd. 2000 ---------------------------------------------------------- International March, 41,950 46,79,191 56,63,250 Best Foods Ltd. 2000 Ltd. ---------------------------------------------------------- 58,441 90,82,799 2,23,35,777 ---------------------------------------------------------- Table Continues... ---------------------------------------- Business Sale Long-term Profit/loss proceeds capital gain/loss ---------------------------------------- 1,16,10,000 5,77,62,440 4,61,52,440 ---------------------------------------- 36,696 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he return of income, into business income and capital gain in the manner as discussed in the assessment order is totally arbitrary and unjustified. The provisions laid down under s. 45(2) of the Act are absolutely clear and applicable only in the case when investment is converted iI1to stock-in-trade and not vice versa. In the absence of specific provisions under the Act in this regard. The presumption of AO to recompute the income other way round is not justified. The cases relied upon by the learned Authorised Representative also support the action of the appellant in totality. In the case of CIT vs. Dhanuka Sons (1980) 124 ITR 24 (Cal.) it has been categorically held that profit and gains on shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because a person cannot have a transaction with himself and in turn such profit cannot be taxed. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. In view of all above, I hold that the action of the AO is not justified. In other words, the long-term capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nverted into stock-in-trade. According to this section the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock-in-trade of a business carried on by him, shall be chargeable to tax as the income from the previous year in which such stock-in-trade is sold or otherwise transferred by him, and for the purpose of s. 48, fair market value of the asset on the date of such conversion or treatment, shall be deemed to be the full value of the consideration received or accruing as a result of transfer of the capital asset. While incorporating the sub s. (2) to s. 45, the legislature has not visualized the situations in other way round, where, the stock-in-trade is to be converted into the investments and later on the investment was 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. We are also conscious about the judgments in the cases of Sir Kikabhai Premchand and Dhanuka Sons in which it has been held that there cannot be an actual profit or loss of such transfer when ..... X X X X Extracts X X X X X X X X Extracts X X X X
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