2020 (6) TMI 433 - HC - Income Tax

Income from shares sale as capital gains, not business income. Statutory interpretation principles applied.

The High Court ruled that income from the sale of shares held as capital assets after conversion from stock in trade should be treated as capital gains, ... Correct head of income - income arising on sale of shares held as capital asset after conversion from stock in trade - business income or capital gains - HELD THAT:- It is evident prior to introduction of Finance Bill, 2018 by which provisions of the Act have been amended to provide for taxability of in cases where stock in trade is converted into capital asset, there was no provision to tax the same. In the absence of any provision in the Act, the transaction in question could not have been subjected to tax. Prior to amendment of the Act, which came into force with effect from 01.04.2019, the income arising on sale of shares held as capital asset after their conversion from stock in trade was treated as capital gains as has been held by various high courts viz., in the cases of EXPRESS SECURITIES PVT. LTD.[2013 (10) TMI 1182 - DELHI HIGH COURT], DEEPLOK FINANCIAL SERVICES LTD.[2013 (10) TMI 1182 - DELHI HIGH COURT] and ADITYA MEDI SALES LTD. [2016 (8) TMI 565 - GUJARAT HIGH COURT] and JANNHAVI INVESTMENT PVT. LTD.[2008 (1) TMI 314 - BOMBAY HIGH COURT]. We agree with the view taken by various high courts on this issue. Tribunal erred in treating the income arising on sale of shares held as capital asset after conversion from stock in trade as business income. The substantial question of law framed in the appeals is answered in favour of the assessee and against the revenue. Issues:1. Whether the income arising from the sale of shares held as capital assets after conversion from stock in trade should be treated as business income or capital gainsRs.Analysis:Issue 1:The case involved appeals under Section 260A of the Income Tax Act, 1961, where the primary issue was the treatment of income from the sale of shares held as capital assets after conversion from stock in trade. The High Court heard the appeals analogously as they raised common questions of law.Detailed Analysis:The assessee, a non-banking financial corporation, converted its stock in trade worth a specific amount into investments and filed its return of income for the relevant assessment year. The assessing officer treated the transactions as business income, leading to an order of assessment. The Commissioner of Income Tax (Appeals) partly allowed the appeal, holding the shares as stocks in trade and the income from their sale as business income. The Income Tax Appellate Tribunal dismissed the appeal, considering the surplus from the conversion as business income.The assessee contended that the profits from the sale should be assessed as capital gains, not business profit, citing the absence of relevant provisions in the Act at the time. They argued that the tribunal should have recognized that no actual profit resulted from the conversion. The assessee also referred to relevant legal precedents supporting their position.On the other hand, the revenue argued that the difference between the sale value and stock in trade should be considered as business income post-conversion. They relied on specific provisions of the Act and previous decisions to support their stance.The High Court analyzed the case, considering the conversion of stock in trade into investments by the assessee. Referring to legal precedents, the Court emphasized that income from the sale of shares converted from stock in trade to investments should be treated as capital gains, not business income. The Court highlighted the statutory interpretation principles, emphasizing that a taxing statute must be strictly construed.The Court noted that prior to the amendment of the Act in 2019, there was no provision to tax income from the sale of shares converted from stock in trade. Therefore, the Court agreed with the view taken by various high courts that such income should be treated as capital gains. Consequently, the High Court ruled in favor of the assessee, quashing the tribunal's order and allowing the appeal.In conclusion, the High Court held that the income from the sale of shares held as capital assets after conversion from stock in trade should be treated as capital gains, not business income, based on legal precedents and statutory interpretation principles.