TaxTMI 
TaxTMI 
2008 (4) TMI 539
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....(ii)Ignoring that as per section 45(2) of the Income-tax Act the conversion of investment into stock-in-trade is allowable only if such business is carried on by the assessee before the conversion of investment into stock-in-trade and that the assessee was not engaged in the trading of shares before 1-4-2000. (iii)Ignoring that the conversion entries in the books of account of the assessee have not been passed as on 1-4-2000. (iv)Failing to appreciate the Assessing Officer's finding that the assessee's treatment of short-term capital loss as business loss is a tax avoidance plan and nothing else." ITA No. 3927/MUM./2005 - in the case of Mr. Jehangir T. Nagree "On the facts and in the circumstances of the case and in law, the learned counsel for the assessee CIT(A) erred in :- (i )Directing the Assessing Officer to treat the loss on sale of shares amounting to Rs. 8,57,564 as business loss as against the short-term capital gains treated by the Assessing Officer. (ii )Ignoring that as per section 45(2) of the Income-tax Act the conversion of investment into stock-in-trade is allowable only if such business is carried on by the assessee before the conversion of inves....
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....ing Officer that on 1-4-2000 he had converted some investment in shares of securities held as capital asset into stock in trade of business of shares and securities and to this effect note is given in the tax audit report. The assessee further contended that in view of the provisions of section 45(2) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') the gain on account of transfer by way of conversion of capital asset into the stock in trade, was subjected to tax under the head 'capital gain' in respect of conversion of shares which were sold during the year. Since the loss arose on sale of shares held as stock in trade, the said loss was claimed as loss on business account. The Assessing Officer did not accept the explanation of the assessee, and he held that the consequent loss claimed as business loss is not allowable to it as the provision of section 45(2) of the Act contained the words 'of a business carried on by him' and since as on the date of conversion the assessee had no business of share transaction the conversion was not valid. The Assessing Officer accordingly held that by this arrangement, the assessee had gained immensely by setting of income in var....
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....er would have been in a position to know whether the appellant would have ultimately made profit or loss in share business during the assessment year especially when the appellant had in fact made gains on sale of shares in the immediately preceding assessment year. The appellant has further pointed out to the fact that besides the trading in shares and securities which were converted, the appellant had made further purchases of shares and securities of the value of Rs. 10,24,316 and during the accounting year the appellant had engaged himself in speculation of shares of a very high volume. The authorized representative pointed out that during the accounting year the appellant had by way of speculation purchased shares worth Rs. 12,90,40,857 and sold speculation transaction shares at Rs. 12,33,51,592 which had resulted in a speculation loss of Rs. 65,89,265 which itself showed the enormous volume of transactions done by the appellant giving further credence to his claim of business activity. 6. As regards the words 'of a business carried on by him' in section 45(2). the authorized representative submitted that reading the section as a whole, it was clear that on conversion of ca....
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....he Assessing Officer as business carried on in the past was incorrect and inappropriate and that no business could be carried on unless and until the conversion had taken place and that the true meaning of the said phrase is that the business should have been carried on by the appellant in the accounting year in which the conversion has taken place. He has further relied upon the decision of the Supreme Court in Azadi Bachao Andolan reported in 263 ITR 706 to the effect that the conversion of investment into stock in trade for the purpose of carrying on business in shares and securities was not a device but an act permissible under law and that such an act which together with the evidence of trading in shares, purchase of new shares and speculation to the extent of more than Rs. 13 crores cannot be treated as a device for tax evasion and as such it was pleaded that the claim of business loss was more than justified and ought to be allowed. I have perused the above arguments and submissions of the appellant and I am of the opinion that the conversion by the appellant of capital assets being investments into stock in trade as on 1-4-2000 which is duly supported by an affidavit ....
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....investment in stock in trade, the assessee was not carrying on any sort of business of share transactions and the question of conversion of investment in stock in trade does not arise. He further invited our attention to the provisions of section 45(2) of the Act with a submission that the investments in shares and securities can only be converted into stock in trade in a running business or a business carried on by the assessee in earlier years. But in the instant case, after converting the investment in stock in trade, the assessee made purchase and sales and claimed the loss suffered therein as a business loss in order to get the benefit of set-off of this loss against the income under different heads. Hence, the assessee is not entitled for a claim of set off of loss against the other income and CIT(A) has wrongly allowed the claim to the assessee. 8. The learned counsel for the assessee on the other hand, besides placing heavy reliance on the order of the CIT(A), has emphatically argued that the claim of the assessee cannot be disallowed only for a simple reason that in the immediately preceding year loss suffered on sale of shares was offered to short-term capital loss. It....
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.... in stock in trade was done when the assessee was not in business of sales-purchase in share and securities. From a careful perusal of the relevant provisions of section 45(2) of the Act, we find that there should be the conversion of investment or capital asset by the owner as stock in trade of a business carried on by him. The words 'business carried on by the assessee' does not mean that before conversion of investment or capital asset in stock in trade the business must be in existence. If the assessee starts the business by converting the investment into stock in trade instead of purchasing it from the market can it not be called that the assessee is in the business of trading in shares enabling the assessee to avail the benefit of section 45(2) of the Act. To our mind the restrictive meaning as suggested by the revenue should not be given to the words 'business carried on by him' in the light of the use of the words in other sections of the Act like section 28(i). Moreover, in the instant case, the assessee was already in the business of manufacture and sale of furniture and section 45(2) does not state that the investment can only be converted in a stock in trade of the busi....