$~9.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 406/2013 & CM NO. 12622/2013
Date of decision: 22nd October, 2013
COMMISSIONER OF INCOME TAX (CENTRAL)
..... Appellant
Through Mr. Sanjeev Sabharwal, Sr.
Standing Counsel & Mr. Puneet Gupta,
Advocate.
versus
M/S EXPRESS SECURITIES PVT LTD.
..... Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J. (ORAL):
This appeal by the Revenue, which pertains to Assessment Year
2006-07, is delayed by 156 days. The appellant had earlier filed an
appeal before the Allahabad High Court, which was withdrawn for lack
of jurisdiction and now this appeal has been preferred before the Delhi
High Court. Before issuing notice on the application for condonation
of delay, we deem it appropriate to examine and consider the appeal on
merits.
ITA No. 406/2013 Page 1 of 5
2. The assessee is a company. In the return for the year in
question, it had declared long-term capital gain of Rs.3,34,65,931/- and
the said gain was claimed as exempt under Section 10(38) of the
Income Tax Act, 1961 (Act, for short). The respondent-assessee had
claimed before the Assessing Officer that they were maintaining two
sets of portfolio, i.e., investment and trading portfolio and the shares,
which were sold and subject matter of long-term capital gains, were
held in the investment portfolio. This factual position was not
disputed.
3. The Assessing Officer has recorded that as per the business
activities undertaken by the assessee, they were dealing and trading in
shares and financial securities in Bombay Stock Exchange, Delhi Stock
Exchange and Calcutta Stock Exchange. The respondent-assessee was
a registered broker with the said exchanges. The Assessing Officer
held that the business of the assessee was not to invest in shares but to
deal with the shares as a stock broker and trader. He observed that
conversion of stock in trade into investment was done with the
intention not to pay taxes as Section 10(38) was introduced by Finance
Act, 2004 with effect from 1st April, 2005. Accordingly, he held that
the entire amount was taxable as a "trading receipt" and not under the
head "capital gains".
4. The assessment order does not mention the date on which the
ITA No. 406/2013 Page 2 of 5
shares in question were purchased. We also note that the assessment
order records that the assessee had converted and transferred the shares
in question under the head "investment" on 1 st April, 2004. This
factual position was not disputed or questioned. The shares in question
were sold during the period ending 31st March, 2006, nearly 2 years
after the date of conversion of stock in trade into investment with a
specific declaration. Mere fact that Section 10(38) was introduced in
the statute by Finance Act 2004 with effect from 1st April, 2005, does
not mean that the said conversion was improper or illegal. After the
said Section was inserted, the assessee on noticing the tax benefit, was
entitled to convert and change his holding from stock in trade into
investment. Such conversion cannot be dealt with and rejected on the
ground that Section 10(38) of the Act was introduced with effect from
the said date. Conversion may be rejected for other reasons and
grounds like the intention was not to convert and the assessee still
continued to treat and regard the shares as stock in trade and not
investment. But there is hardly any discussion in the assessment order
in this regard. Justification and reasons have not been elucidated and
brought on record to uphold the contention of the Revenue that the
shares were continued to be held as stock in trade and not as an
investment.
5. The Commissioner (Appeals) noticed that the shares in question
ITA No. 406/2013 Page 3 of 5
as held on 31st March, 2004 and their book value was as under:-
Scrip Name Quantity Book Value as on
31/03/2004
Global Tele 3,35,000 2,09,14,050/-
Himachal Futuristic 6,15,000 75,27,600/-
NIIT 20,000 33,97,200/-
6. The Commissioner (Appeals) has observed that in the balance
sheet as on 31st March, 2005 the shares were shown under the head
"inventories" and in the subsequent balance sheet as on 31st March,
2006 shares were again shown under the head "investment at book/fair
value on 1st April, 2004". Thus, the assessee converted the aforesaid
stock in trade of Rs.3,18,38,850/- to the head "investment at book/fair
value on 1st April, 2004" and the said disclosure was made in the
balance sheets as on 31st March, 2005 and 31st March, 2006. In the
first year, the Assessing Officer did not disturb the aforesaid
conversion and accepted the same. The Commissioner (Appeals)
noticed that for the Assessment Year 2005-06 assessment was
concluded under Section 143(3) vide order dated 27th November, 2007
but the Assessing Officer did not object to the said conversion. These
shares were subsequently sold as detailed in paragraph 2.9 of the order
of the Commissioner (Appeals) in August, 2005, September, 2005 and
ITA No. 406/2013 Page 4 of 5
substantial portion was sold in March, 2006 and long-term capital
gains was declared. He observed that statute did not reject or frown
upon conversion of stock in trade into investment and the said
conversion was permissible. Commissioner (Appeals) referred to the
Circular No. 4/2007 dated 15th June, 2007 issued by the Central Board
of Direct Taxes, which stipulates that two portfolios one for stock in
trade and one in respect of investments could be maintained by the
same assessee. He took into account the period of holding by the
assessee and the fact that the conversion into investment was made on
1st April, 2004 and outlay was disclosed in the audited accounts for the
Assessment Year 2005-06. The sales made, as noticed above, were
after considerable delay of approximately two years thereafter.
7. In view of the aforesaid factual findings recorded by the
Commissioner (Appeals) and the tribunal, we do not see any reason to
interfere and issue notice on the main appeal. Accordingly, we are not
inclined to issue notice on the application for the condonation of delay
and the same and consequentially the appeal are dismissed.
SANJIV KHANNA, J.
SANJEEV SACHDEVA, J.
OCTOBER 22, 2013
VKR/NA
ITA No. 406/2013 Page 5 of 5
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