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 Income Tax Addition Made Towards Unsubstantiated Share Capital Is Eligible For Section 80-IC Deduction: Delhi High Court

November, 01st 2013
+ INCOME TAX APPEAL NO. 406/2013 & CM NO. 12622/2013

                                   Date of decision: 22nd October, 2013

                                                         ..... Appellant
                          Through Mr. Sanjeev Sabharwal, Sr.
                          Standing Counsel & Mr. Puneet Gupta,


                                                       ..... Respondent
                          Through Nemo.



        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appeal before the Allahabad High Court, which was withdrawn for lack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


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


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


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


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

ITA No. 406/2013                                                  Page 5 of 5
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