Impact of capital gain - sale of investment

[Ashutosh Chhawchharia]

The company has purchased 10000 shares of another listed company in the year 2002 - 2003 held it as stock in trade. On 01.04.2005, such stock in trade was converted to Investments. I want to know impact of capital gain if I sell whole of such investment on 31.03.2010. What will i consider the holding period and which year i should take the base year for calculating index cost. Whether such conversion will be treated as business income or capital gain at the time of sale of such shares.?

[CA UMA KOTHARI]

Sorry Mr. Ashutosh Chhawchharia, as usual you have not given complete facts. why you want to go in all these details when sale of long-term listed shares through S/E with STT paid will be exempt from capital gains. In case you want to claim long-term capital loss by not selling share through broker and S/E, and sell them privately, then you can claim date of acquisition and cost of acquistion as those applicable when purchased as stock, as per Bombay HIgh Court. However, long ago Calcutta Tribunal had decided that in case of conversion of stock to investment the date of conversion and price of conversion will be considerd while computing capital gains. The income will be entirely under head 'capital gains'. Becasue your case is conversion of stock to investment (capital asset) to this S. 45(2) is not applicable.

[DEV KUMAR KOTHARI]

I agree with views of CA Uma Kothari

[Surender Gupta]

Your issue is pertinent in view of exemption under section 10(38). There is a special provision under section 45(2) in respect to conversion of capital asset into stock in trade. But there is no corresponding provision for conversion of stock in trade (business asset) into capital asset. Now the question arises that whether AO can read the section 45(2) by reversing the provisions of section 45(2)? As per my view AO can not read the provision of section 45(2) in reverse. If the intention of the legislators would have been so than they would have incorporated the similar provision under section 28 or so. Therefore, in the absence of any specific provision and as per the scheme of computation of capital gains, you have to compute the period of holding from the date of initial purchase or acquisition of shares treating the same as capital asset from the beginning and claim the exemption as per the provisions. Moreover, if the AO wish to computer the gain under the head business and profession, what would be the sales consideration? It would cost only and therefore there is no income under business and profession.

AI Summary

Conversion of stock-in-trade to investment: holding period generally runs from original acquisition; exchange sale with STT may be exempt. Where stock in trade is converted into investments, sale on a recognised exchange with transaction tax may attract the exchange sale exemption and be treated as capital gains. Authorities conflict on whether the holding period and indexed cost are measured from original acquisition or from the conversion date; absent a specific reverse conversion provision, holding period commonly runs from original purchase and indexed cost is based on that acquisition date.