2022 (3) TMI 242 - AT - Income Tax

Conversion of stock-in-trade to investments not taxable immediately; Surplus on share sale is capital gains

The ITAT allowed the assessee's appeals and dismissed the revenue's appeal. It held that the conversion of stock-in-trade into investments does not result ... Estimated income on conversion of stock in trade into investment - would it make any difference whether for its accounting purpose the assessee transferred such stocks at cost instead of prevailing market value? - HELD THAT:- Assessee has converted the stock in trade into investment but no doubt there is a gain to the assessee on the difference of conversion. But the assessee cannot make any profit on its own merely because it is converted certain shares from stock in trade to investment. As far as the Income-tax is concerned the taxable event occurs when the assessee actually transfers the shares to other persons, other than himself. Therefore, when the capital gain is calculated the assessee will consider actual sale consideration and deduct the actual cost of shares acquired. Therefore, on the date of such actual transfer the profit earned by the assessee at the time of transfer is relevant and any conversion taken place earlier by the assessee shall be ignored. It is clear from the decision of Sir Kikabhai Premchand [1953 (10) TMI 5 - SUPREME COURT] that mere conversion of stock in trade into investment will not generate any taxable profit to the assessee. Therefore, we are in agreement that one cannot make profit of its own by converting stock in trade into investment or investment into stock in trade - Decided in favour of the assessee. Issues Involved:1. Reopening of assessment.2. Taxability of conversion of stock-in-trade into investments.3. Tax treatment of surplus on sale of shares post-conversion.Detailed Analysis:Issue 1: Reopening of AssessmentThe assessee contested the legal validity of the reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961. However, during the hearing, no submissions were made by the assessee's representative on this ground, and thus, it was not adjudicated at this stage.Issue 2: Taxability of Conversion of Stock-in-Trade into InvestmentsThe primary issue was whether the conversion of stock-in-trade into investments resulted in taxable income. The Assessing Officer (AO) added the difference between the market value and book value of the stock at the time of conversion as business income. The AO argued that income accrued at two levels: at the time of conversion and at the time of sale of investments.The assessee relied on precedents, including the Hon'ble Bombay High Court’s judgment in Jannhavi Investments (P) Ltd., which stated that the cost of acquisition should be the original cost rather than the market value at the time of conversion.The CIT(A) upheld the AO's decision, referencing the Delhi High Court's judgment in CIT vs. Abhinandan Investment Ltd., which held that the difference between the stock-in-trade value and its market value at the time of conversion should be treated as business income.However, the ITAT referred to the Supreme Court's decision in Sir Kikabhai Premchand vs. CIT and the Gujarat High Court's decision in Aditya Medisales Ltd. v. DCIT, which held that mere conversion of stock-in-trade into investments does not result in taxable income. The ITAT concluded that the taxable event occurs only when the converted shares are sold, not at the time of conversion. Therefore, the addition made by the AO was deleted, and the ground was decided in favor of the assessee.Issue 3: Tax Treatment of Surplus on Sale of Shares Post-ConversionThe revenue contested the CIT(A)'s decision to treat the surplus on the sale of shares as capital gains instead of business income. The revenue argued that the original intention of purchasing shares as stock-in-trade should dictate the tax treatment, and mere accounting entries should not alter the nature of income.The ITAT, following its decision in the assessee's appeal, held that the surplus on the sale of shares post-conversion should be treated as capital gains, as the shares were held as investments at the time of sale. The ITAT dismissed the grounds raised by the revenue.Conclusion:The ITAT allowed the appeals filed by the assessee and dismissed the appeal filed by the revenue, concluding that the conversion of stock-in-trade into investments does not result in immediate taxable income and that the surplus on the sale of shares post-conversion should be treated as capital gains.