I-T - Whether mere transfer of shares from stock-in-trade to investment leads to any taxing event & makes assessee liable to pay tax on such income - NO: HC
By TIOL News Service
AHMEDABAD, SEPT 27, 2016: THE issue before the Bench is - Whether mere transfer of shares from stock-in-trade to investment leads to any taxing event and that makes assessee liable to pay tax on such income. NO is the answer.
Facts of the case
The assessee, a limited company, filed the return declaring income. The return was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment determining assessee's income. Assessing officer issued impugned notice u/s 148 to reopen assessment. Assessing Officer held that the assessee was engaged in the business of trading in shares and securities apart from having other business activities and had purchased shares with borrowed funds and held them as stock-in-trade. The company would claim interest expenditure on the borrowed funds. This pattern continued till 31.3.2004. In the meanwhile, amendment was made in the Income Tax Act through which the sale of shares held as investment through recognized stock exchange would be free from tax with effect from assessment year 2005-2006. The assessee thereupon transferred the shares from stock-in-trade to investment which was done on 1.4.2004 as per old historical purchase cost. According to the Assessing Officer, any such change or transfer of shares had to be done on market price and not at cost price, since valuation of transferred stock-in-trade would have direct effect on the taxable income under the Income Tax Act. The profit arising on sales of share held as stock-in-trade is taxable as business income whereas profit earned on sales of shares held as investment is free from tax. Even the auditor in the auditor's report had not mentioned the correct fact. It was noted that the market value of shares of M/s S held by the assessee on 1.4.2004 was Rs.397.66 crores (rounded off) but shown by the assessee at Rs.157.01 crores (rounded off). It was further alleged that for the assessment year 2005-2006, the assessee purposedly did not disallow interest component on such shares, since any such disallowance would have attracted the attention of the Assessing Officer during scrutiny assessment. He therefore, formed a belief that difference between cost of acquisition of shares of M/s S and market price which was Rs.9.16 crores and Rs.397.66 crores respectively would be the profit to the company which escaped assessment. Likewise, he noted that the assessee had acquired equity shares of Z at the cost of Rs.43.20 lacs which had a market value of Rs.97.68 lacs as on 1.4.2004 and the difference between the two i.e. Rs.54.48 lacs was the profit escaping assessment. Thus, Assessing officer was of the view that income had escaped assessment. Assessee’s objections were rejected by the Assessing Officer.
Having heard the parties, the court held that,
++ in case of Kikabhai Premchand, the assessee had settled a part of his shares and silver bars held as stock into a trust of which he was prime beneficiary and was also in control of the trust. It was held that in the process, the assessee's business made no profit or gain nor did it sustain a loss. The appellant did not derive any income. He may have stored up a future advantage for himself but since transactions did not derive an immediate pecuniary gain, the State cannot tax it since under the Income Tax Act, the State had no power to tax a potential future advantage. In the present case, the Assessing Officer had referred to in detail the reasons recorded as a sequence of events under which the assessee converted its shares held as stock-in-trade to investment on 1.4.2004 which was done at the cost price and not market value. The Assessing Officer seems to be having two objections. First, he refers to the conversion of stock at cost price and not market price and second, he refers to profit to the business which would be the difference between the cost of acquisition of the shares and their market value on the date of transfer which should be taxed. In view of the judgement in case of Kikabhai Premchand, mere transfer of shares by the company from its stock-in-trade to investment account would result in no profit or gain to the business;
++ a close scrutiny of the reasons recorded would find a mention of the act of assessee not disallowing the interest component on such shares for the assessment year 2005-2006 which according to the Assessing Officer was done to avoid detection. If case of the Assessing Officer was that interest on borrowed funds would be a legitimate deduction, as long as the shares were held as stock, but upon the shares being converted into investment, such interest was not allowable deduction and in that sense income chargeable to tax had escaped assessment, he has not built on such case in his reasons. In the computation of income chargeable to tax escaping assessment, he has referred to a sum of Rs.389.03 crores which, as noted earlier, is the total of the profit computed by him upon transfer of shares of M/s. S and transfer of shares of Z. This computation of the profit was based on the original cost of acquisition in the market value on the date of transfer. This figure of income escaping assessment does not in any manner refer to the interest expenditure. In other words, a brief reference to the assessee claiming interest expenditure for the assessment year 2005-2006 was confined only to suggest that the same was done to avoid detection during the scrutiny assessment and the Assessing Officer did not built his case any further in the context of income chargeable to tax having escaped the assessment;
++ the impugned notice is quashed.
(See 2016-TIOL-2253-HC-AHM-IT)
