Conversion of shares as stock-in-trade into investment-no prohibition in law. Res-judicata no bar in like questions in subsequent years-Kolkata High Court
ABCAUS Case Law Citation:
ABCAUS 1205 (2017) (04) HC
The assessee was aggrieved by order passed by the Income Tax Appellate Tribunal (‘ITAT’)
The Substantial Question of Law involved:
Whether on the facts and circumstances of the case the Tribunal erred in affirming the order of the AO disregarding the conversion of the trading shares into investment shares and treating the long term capital gain of Rs.22,27,819/- arising from the sale of those shares as profit of trading in shares and bringing the same to tax?
Assessment Year : 2006-07
Date/Month/Year of Pronouncement: 2017
Important Case Laws Cited/relied upon:
Sir Kikabhai Premchand vs. CIT
CIT vs. Dhanuka & Sons
Snow White Food Products Co. Ltd. vs. CIT
Maniruddin Bepari vs. The Chairman of the Municipal Commissioners, DACCA
Amalgamated Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara
Brief Facts of the Case:
The assessee was a company which was engaged in the business of leasing, finance and investment. On 1st April, 2004 it transferred 1,11,310 number of shares of different companies from its trading stock into investments.
Out of the above shares, 15,370 shares were sold by the assessee in the previous year relevant to assessment year 2005-06. Subsequently 47,580 shares were sold by the assessee during the year under consideration and the profits arising from the sales were claimed to be exempted from tax as long term capital gains.
In the assessment completed under section 143(3) for the previous assessment year, the claim of the assessee for conversion of shares from stock-in-trade into investment was not accepted by the Assessing Officer. That decision was appealed against and carried up to the Tribunal which confirmed the same. The assessee preferred a delayed appeal to the High Court but was unsuccessful in having the delay condoned and thereby lost that right of appeal.
For the assessment year under consideration, the Assessing Officer (‘AO’) again following the assessment order of the previous year disallowed the claim for exemption. The CIT(A) allowed the assessee’s appeal but on further appeal, the ITAT following its earlier decision in the case of the assessee allowed the appeal of the Revenue and set aside the order of the CIT(A).
Contentions of the Appellant:
It was submitted that the conversion of shares as stock-in-trade into investment, had been shown in the books to be a conversion at the fair market value of the shares as on the date of conversion.
Referring to the judgment of the Supreme Court and Calcutta High Court, it was submitted that the assessee could convert its stock-in-trade into investment. There being no provision in the law for the same could not be interpreted to be a bar.
Also the assessee referred to the CBDT Circular no.6/2016 dated 29th February, 2016 which provided that In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years.
It was further submitted that it is well settled that the principles of res judicata do not apply in revenue matters and findings of fact in an earlier year are not binding in the assessments in subsequent years and can be resisted on new evidence.
Contention of the Respondent Revenue:
It was submitted that neither the questions raised were substantial questions of law nor were they involved in this case because when in the previous assessment year the claim of conversion by the assessee was turned down by the Tribunal, the assessee’s delayed appeal was dismissed by the High Court on the reason of choice made by the assessee.
It was submitted that the High Court had held that the petitioner had made a conscious choice of not preferring an appeal and accepting the order. The High Court had observed that it was not a case where the petitioner was prevented from presenting an appeal within the period of limitation but it was a case where the petitioner chose not to challenge the order within the prescribed period of limitation.
Observations made by the High Court:
It was observed by the Hon’ble High Court that section 45(2) of the Act provides for 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 as chargeable to income-tax as income of his previous year in which such stock-in-trade is sold or otherwise transferred by him and 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 the transfer of a capital asset. The Act however does not provide for the conversion of stock-in-trade into capital asset.
The Hon’ble High Court observed that whether or not such omission would operate as a bar on an assessee is a question that can be answered on the basis of a view taken in the case of Maniruddin Bepari where it was held that it is a fundamental principle of law that a natural person has the capacity to do all lawful things unless his capacity has been curtailed by some rule of law. It is equally a fundamental principle that in the case of a statutory corporation it is just the other way. The corporation has no power to do anything unless those powers are conferred on it by the statute which creates it.
The Hon’ble High Court observed that similar view was expressed in the case of Kikabhai Premchand.
It was observed that in the case of Dhanuka & Sons, the same situation was contemplated where on stock transferred in investment account, the question of capital loss or capital gain, was held, would arise if such shares be disposed of at a value other than the value at which it was transferred from the business stock.
The Hon’ble High Court observed that the Tribunal did not hold otherwise but had held against the assessee on the point of resjudicata. The Hon’ble High Court answered the question of Law in the affirmative and in favour of the assessee. The Hon’ble High Court clarified that the circular dated 29th February, 2016 had no application because the assessee’s stand was not accepted by the Revenue.
On the question relating to resjudicata, The Hon’ble High Court drew reference from the decision in Amalgamated Coalfields Ltd. in which the Supreme Court had held as under:
“……..Where the liability of a tax for a particular year is considered and decided does the decision for that particular year operate as res judicata in respect of the liability for a subsequent year? In a sense, the liability to pay tax from year to year is a separate and distinct liability; it is based on a different cause of action from year to year, and if any points of fact or law are considered in determining the liability for a given year, they can generally be deemed to have been considered and decided in a collateral and incidental way. The trend of the recent English decisions on the whole appears to be, in the words of Lord Radcliffe, “that it is more in the public interest that tax and rate assessments should not be artificially encumbered with estoppels (I am not speaking, of course, of the effect of legal decisions establishing the law, which is quite a different matter), even though in the result, some expectations may be frustrated and some time wasted.”(vide Society of Medical Officers of Health v. Hope Valuation Officer[ 2 W.L.R. 404, 563.]. The basis for this view is that generally, questions of liability to pay tax are determined by Tribunals with limited jurisdiction and so, it would not be inappropriate to assume that if they decide any other questions incidental to the determination of the liability for the specific period, the decisions of those incidental questions need not create a bar of res judicata while similar questions of liability for subsequent years are being examined…….”
The Hon’ble High Court also observed that the assessee had lost its right of appeal to the High Court on the question arising in the previous assessment year on account of delay in preferring the same. There was no adjudication on merits, of its claim of conversion, on appeal to the High Court. The only reason given by the Tribunal in rejecting the claim of the assessee for the previous assessment year was that there was no provision in the Act in respect of conversion of stock-in-trade into investment and its treatment. The ITAT only for this reason held that the lower authorities rightly made the addition as there was understatement of income by analyzing the assessee’s trading and investment account in shares.
The Hon’ble High Court however opined that there was no impediment for the assessee to seek adjudication on this point.
The question formulated was answered in favour of the assessee. The appeal was allowed.