Recent decsion of ITAT

[PANKAJ JAIN]

INCOME TAX
Tribunal ruling to help cos save tax on share sale

Maharashtra : Corporates, brokerages and banks can take advantage of a recent ruling on taxation of gains from sale of shares. The income-tax tribunal has said that if a company sells stocks after moving the securities held as `stock-in-trade' (or trading portfolio basket) to capital assets (equivalent to an investment portfolio), then the gain from such transaction will be considered as `capital gain'. The case pertains to a small Mumbai-based investment company, Bright Star Investment. The firm had bought shares of a particular company and reported them as `stock-in-trade' in its books.

Source : The Economic Times-18/8/2008.

A copy of deciosn or citation will be of great help........

Thanks and Regards,

[admin]

IN THE ITAT, MUMBAI BENCH 'H', MUMBAI

ACIT

v.

Bright Star Investment Pvt. Ltd.

ITA NO. 6374/MUM/2004

July 2, 2008



RELEVANT EXTRACT:

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6. Having heard the rival submissions and from careful perusal of the record, we find that the shares held in stock in trade were converted into investment at the book value shown in the books of accounts.  Later on, the shares held in investment were sold and the assessee offered the capital gain accrued on the sale of shares.  Admittedly, the provisions of section 45(2) of the I.T. Act, deals with issue of capital gain where the investment is converted into stock-in-trade.  According to this section, the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock in trade of a business carried on by him, shall be chargeable to tax as the income from the previous year in which such stock in trade is sold or otherwise transferred by him, and for the purpose of section 48, fair market value of the asset on the date of such conversion or treatment, shall be deemed to be the full value of the consideration received or accruing as a result of transfer of the capital asset.  While incorporating the sub-section 2 to section 45, the legislature has not visualized the situations in other way round, where, the stock in trade is to be converted into the investments and later on the investment was sold on profit.  In the absence of a specific provision to deal with this type of situations, a rational formula should be worked out to determine the profits and gains on transfer of the asset.  We are also conscious about the judgments in the cases of Sir Kikabhai Premchand v. CIT (1952) 24 ITR 506 (S.C.), CIT v. Dhanuka & Sons 124 ITR 24 (Cal.) (supra) in which it has been held that there cannot be an actual profit or loss of such transfer when no third party is involved and the items are kept in the different account of the assessee himself.  The question of gain or loss would arise only in future when the stock transferred to the investment account might be dealt with by the assessee.  If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise.  In the absence of a specific provision to deal with the present situation, two formulas can be evolved to work out the profits and gains on transfer of the assets.  One formula which has been adopted by the Assessing Officer i.e.,difference between the book value of the shares and the market value of the shares on the date of conversion should be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as a capital gain.  The other formula which is adopted by the assessee's i.e., the difference between the sale price of the shares and this cost of acquisition of share, which is the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain.  In the absence of a specific provision, out of these two formulas, the formula which is favourable to the assessee, should be accepted.  We, therefore, of the view that Commissioner (Appeals) has properly examined this issue in the present situation and directed the Assessing Officer to accept the capital gain offered by the assessee.  We, accordingly, confirm his order.

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[PANKAJ JAIN]

Thanks alot,

can this decision be uploaded at our ITAT online. It will be of great help for every one.

Best Regards,

[sai prasad]

i feel the issue is squarely covered  by sec.49(1) and explanation thereunder.The said provision envisages in the case of property received by way of will or other modes,the cost of acquisition shall be the cost to the previous owner.The explanation to the sec.2(42A)  provideds that in reckoning the period of holding of capital asset,the period held by the previous owner in respect of the transactions covered under sec.49(1) shall also be added to the peirod held by the transferor i.e.assessee. I think the matter is covered in the statute itself.
c.sai prasad.