Business income from share transactions upheld, while section 45(2) relief applied on deemed conversion date for computation.

Sale proceeds from shares and units were treated as business income because an earlier coordinate bench decision in the assessee's own case had already upheld the Revenue's view that the transactions amounted to business activity, and no contrary binding order existed for the year under appeal. Section 45(2) relief was also examined in relation to deemed conversion of investments into stock-in-trade. The Tribunal held that the statutory benefit could not be denied merely because the assessee had not itself recorded the conversion in its books when the conversion was treated as having been brought about by the tax authorities, and the fair market value had to be taken as on 1.4.2005 for computation. Limited recomputation was directed on that basis.

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Issues: (i) Whether the income from sale of shares and units was taxable as business income instead of capital gains; (ii) Whether the assessee was entitled to the benefit of section 45(2) of the Income-tax Act, 1961 on the deemed conversion of investments into stock-in-trade, and on what date such conversion should be taken.

Issue (i): Whether the income from sale of shares and units was taxable as business income instead of capital gains.

Analysis: The earlier coordinate bench decision in the assessee's own case had already upheld the Revenue's view that the assessee's share and unit transactions constituted business activity. In the absence of any contrary binding order, that view was followed for the year under appeal. The Tribunal therefore treated the gains from sale of shares and units as business income.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the assessee was entitled to the benefit of section 45(2) of the Income-tax Act, 1961 on the deemed conversion of investments into stock-in-trade, and on what date such conversion should be taken.

Analysis: Section 45(2) applies where a capital asset is converted into stock-in-trade or treated as such, and the computation requires the fair market value on the date of conversion. The Tribunal held that the Revenue could not deny the statutory benefit merely because the assessee had not voluntarily recorded the conversion in its books, when the conversion was thrust upon it by the tax authorities. The possibility of reopening proceedings for an earlier year did not justify depriving the assessee of relief for the year in question. The Tribunal therefore held that the conversion date for the assets sold in the relevant previous year was 1.4.2005, and directed computation accordingly.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded only on the alternative claim under section 45(2), with the matter restored to the Assessing Officer for limited computation, while the treatment of the sale proceeds as business income was sustained.

Ratio Decidendi: Where a capital asset is treated as stock-in-trade by the Revenue, section 45(2) cannot be denied on the sole ground that the assessee did not itself record a conversion in the books, and the fair market value on the relevant conversion date must be used for computation.

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