TaxTMI 
TaxTMI 
2022 (3) TMI 242
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.... duly served on the assessee. During the assessment proceedings the Assessing Officer observed from the notes to the account in auditor's report that assessee has converted its stock in trade held as on 01.04.22002 into investments. Assessing Officer observed that the cost of investment is arrived by valuing the erstwhile stock at the market price on the date of conversion on 01.04.2002. The resultant difference amounting to Rs..76,81,284/- is credited to "reserves" arising from conversion of stock into investment under the head "capital reserves". This credit has not been offered to tax. Assessing Officer observed that mere conversion of stock in trade into investments and accounting for the income at the time of sale of investment is not correct. This is the issue because the income has accrued at two levels. First, at the time of conversion of stock-in-trade into investments and second, at the time of selling those investments. Thus, the income has accrued for the erstwhile stock-in-trade at the time of its conversion into investment. When the investment is sold, assessee will get capital gain being the difference between sale value and the value adopted at the time of conversio....
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.... Keshavji Karsondas vs. CIT (supra), holding that the cost of acquisition on the date of the actual acquisition and the date of conversion is not relevant for this purpose. Therefore, 1 computing capital gains on sale of shares (converted from stock-in-trade), what was deductible is the cost of their acquisition on the date of actual acquisition, ie, the date on which those shares were originally acquired (purchased); the market value or book value of those shares as on the date of conversion was not relevant for this purpose. 3. Copy of the Assessment Order dated 21.11.2006 u/s. 143(3) and the CIT(A)'s order dated 83.2007 for the AY 2004-05 are enclosed and marked as Annexure "B" and Annexure C respectively. 4. A copy of the Journal Entry passed for conversion of Stock-in-trade into Investments as at 1.42002 is enclosed herewith and marked as Annexure "D". 5. The converted shares were purchased on various dates prior to 1.4.2002 and it is difficult to ascertain the exact dates of the purchases. However, we confirm that for the purpose of determining short-term or long term capital gain, the period of holding is reckoned from the date of conv....
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.... ones and as he derived no immediate pecuniary gain the State cannot tax them, for under the IT Act the State has no power to tax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year. (c) In Sanjeev Woollen Mills Ltd. vs. CIT [2005] 279 ITR 434 (SC), it was held as under: "........... anotional imaginary profit cannot be taxed. It is well settled principle as held in Kikabhai Premchand vs. CIT (supra) Constitution Bench judgment that the firm cannot make profit out of itself, The transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the present case by showing the market value of the closing stock the assessee has earned potential profit out of itself in as much as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value does not and cannot bring in any real profit which is necessary for taxing the income under the Act as fs held in Chainrup Sampatram vs. CIT (supra) and CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157 : (1972) 83 ITR 211 (SC). Thirdly, it is settled p....
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....nt just before the date of conversion (at the original cost of Rs. 100/-). In this case, on valuation of stock-in-trade at the cost or market price, whichever is lower, the assessee got a deduction of Rs. 10/by way of valuation loss in computing his business income. On conversion of those shares into investment at the original cost, the following accounting entry is effected in the books of account; investments Rs. 100/ ........................Dr. Rs.. 100/- (at original cost) Stock in trade ................................Cr. Rs..90/- (book value) Capital Reserve ................................Cr. Rs..10/- (difference between the cost and book vaue) At the stage of conversion, as explained above, there is no obtaining of any "amount"; the credit of Rs. 10/- is only an adjusting entry to balance the accounts and it represents a notional gain. Assuming the share (now as investment) is later sold for Rs,120/-, then in the books of account there will be a profit on sale of investment of Rs. 20/[Rs. 120/- Rs. 100/], in the tax return, the same amount will be offered to tax as capital gain (here the indexed cost....
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....llustration which is the subject matter of s. 41(1)] is the result of the assessee claiming deduction of Rs. 100/- [cost of acquisition] and not Rs. 90/-[book value}. But this tax treatment is perfectly in accordance with the provisions of law, Le. 3.48 as has been held by the Hon'ble jurisdictional High Court in Jannhavi Investments' case (supra). At this place, it would be apt to refer to the classic passage from Cape Brandy Syndicate' vs. IRC [1921] 1 KB 64, wherein Rowlatt, J. had said: "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used." in view of above, we respectfully submit that the sum of Rs. 76,81,824/- being the amount credited to Capital Reserve on conversion of stock-in-trade into investments cannot be assessed u/s.41(1)." 4. After considering the detailed submissions filed by the assessee Ld.CIT(A) dismissed the grounds raised by the assessee on reopening of the assessment and also sustained the addition with the following observatio....
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....imb of the question as dealt with by the Hon'ble Delhi High Court in the above mentioned case that the difference between the market value of the asset as on date of conversion and value at which it is sold would be in nature of capital gains, which he has followed in the subsequent year, However the appellant has wrongly claimed that there is no income/loss when conversion of stock-in-trade into investments will take place and it is only a capital asset, which he has shown in the balance sheet as capital reserve. However, this issue has been clarified by the Hon'ble Delhi High Court that the difference in the value of stock-in-trade as on 01.04.2012 and the market value of the stock-in-trade to the amount to business income /loss as the case may be, the AO has rightly taxed the difference of Rs. 76,81,824/-, in respect of income that has accrued to the appellant on conversion of stock-in-trade into investments as on 01.04.2012. In view of the same, the addition of Rs. 76,81,824/is confirmed. Hence, Ground No. 2 is dismissed." 5. Aggrieved assessee is in appeal before us raising following grounds in its appeal: - "1. On the facts and in the circumstances of the case....
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.... in this appeal is exactly same to the facts of the present case and the Hon'ble Gujarat High Court by relying on Sir Kikabhai Premchand v. CIT [(1953) 24 ITR 506] held as below: - "12. It can thus be seen that the situation in the present case finds a direct answer in the judgement of the Constitution Bench in case of Kikabhai Premchand (supra) in which, as noted, the assessee had settled a part of his shares and silver bars held as stock into a trust of which he was prime beneficiary and was also in control of the trust. It was held that in the process, the assessee's business made no profit or gain nor did it sustain a loss. The appellant did not derive any income. He may have stored up a future advantage for himself but since transactions did not derive an immediate pecuniary gain, the State cannot tax it since under the Income Tax Act, the State had no power to tax a potential future advantage. Facts of the present case are quite similar. The Assessing Officer had referred to in detail the reasons recorded as a sequence of events under which the assessee converted its shares held as stock-in-trade to investment on 1.4.2004 which was done at the cost price and ....
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....ther 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 the Hon'ble Gujarat High 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. We observe from the case referred by Ld.CIT(A) in CIT v. Abhinandan Investment Ltd., (supra) that Hon'ble High Court held that "whether in the case of conversion of stock in-trade into investments, value at which asset was held as stock-in-trade and market value on date of its conversion as investment would have be treated as business income/loss and difference between market value of the asset as on date of conversion and value at which it is sold would be in nature of capital asset". In this....