Holding period on conversion to investment excludes stock-in-trade period for capital gains classification.

On conversion of shares from stock in trade into investment, the holding period for capital gains purposes must be computed only from the date they assumed the character of investment. The period during which the shares were held as stock in trade is excluded because the Act expressly deals with conversion of capital asset into stock in trade, but does not provide an equivalent rule for the reverse conversion; the Tribunal therefore applied the principle that only the post-conversion holding as investment determines whether the subsequent gain is short-term or long-term. The matter was remitted to the Assessing Officer to recompute the holding period on that basis.

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Issues: Whether, on conversion of shares from stock in trade into investment, the period during which the shares were held as stock in trade is to be excluded while determining whether the gain on subsequent sale is short-term or long-term capital gain.

Analysis: The conversion of a capital asset into stock in trade is expressly dealt with by section 45(2) of the Income-tax Act, 1961 and section 2(47) treats such conversion as transfer, but the Act does not contain an express provision governing the reverse situation of stock in trade being converted into investment. The relevant enquiry, therefore, is the period for which the asset was held as a capital asset after conversion, because the character of the gain on sale depends on the holding period as investment and not on the period during which the asset was carried as stock in trade. The Tribunal relied on the principle that the stock-in-trade period cannot be counted for deciding whether the asset is long-term or short-term capital asset after conversion into investment.

Conclusion: The period during which the shares were held as stock in trade has to be excluded for determining the holding period as capital asset, and the matter was remitted to the Assessing Officer to compute the period accordingly.

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