Commissioner of Income Tax-1 vs Yatish Trading Co. (P.) Ltd.

In this appeal by the revenue for the assessment year 2006-07, the following question of law arises for our consideration:-

Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the difference between the purchase price of shares and the market value of shares, as on date of conversion of shares from stock-in-trade to investments, as ''business income'' and difference between sale price of share and market value of shares, as on date of conversion as ''capital gains''?

The assessee is engaged in the business of investments and also dealing in shares and securities. In the assessment year 2006-07, the assessee declared income under the heads ''profits and gains of profession'' and also under the head ''capital gains''. The assessing officer noted that a part of the capital gains declared was in respect of transfer of shares/securities which were held by the assessee originally as stock-in-trade as a dealer in shares/securities. However, these share securities were converted into investment by the respondent-assessee on 1st April, 2002 and 1st October, 2004. Consequently, the Assessing Officer held that the short term and long term gains arising out of the sale of shares which were held originally as stock in trade and converted into investments was to be treated as business income. In first appeal before the CIT(A), it was pointed out that up to the date the shares were in its trading portfolio i.e. till the date of its conversion as investments the gain made was offered as business income and thereafter as capital gains till sale. This was held by the CIT(A) as reasonable and logical. Thus, CIT(A) has allowed the appeal of the assessee.

The Tribunal held that it is not in dispute that the conversion of its stock in trade into investment was accepted by the Department in assessment years 2003-04 and 2005-06. It is also not in dispute that the shares which were sold and gains from such sales were offered under the head capital gains from the date of conversion from stock in trade into investments and prior thereto as business profits. Further in its books of account the respondent-assessee showed the shares on which tax is levied under the head capital gain as investments. Further the fact that the assessee was trading in the shares would not estop the assessee from dealing in shares as investment and offer the gain for tax under the head capital gains. Thus, it is open to the trader to hold shares as stock in trade as well as investments. Once the finding of fact is recorded that the shares sold were held by respondent-assessee as investments, the gains arising out of the sale of investment were to be assessed under the head capital gains and not under the head business profits. In view of the above, we see no question of law arises for our consideration. Accordingly, the appeal is dismissed with no order as to costs.