Conversion of stock-in-trade to investment- How to reckon holding period?
There are occasion when the taxpayer converts their stock in trade in to the capital assets.
The main reason is that the tax rate for long term capital gain is more beneficial as compared to the tax rate for business profit.
One of the important question arises is, how the holding period will be reckoned on conversion of stock in trade to capital assets. Whether the holding period will be recknoned from the date of conversion or from the date of acquisition of stock in trade?
The issue came before ITAT CHENNAI BENCH ‘A’ in case of
DeensonsTrading Co. (P.) Ltd
vs
ITO Co. Circle – I(4),
Chennai 81 taxmann.com 71 (Chennai – Trib.)
wherein it was held that holding period be counted from date of conversion and not from date of acquisition
Facts of the Case:
- The assessee was in real estate business. It has purchased two properties during Financial Years 1989-90 and 1991-92 for the purpose of business as stock.
- During the financial year 1994-95 it started another business and converted its stock-in-trade into investment.
- These properties were sold in financial year 1996-97.
- Assessee treated said assets as capital assets from the date of acquisition and, hence, declared the resultant gain under long-term capital gain.
- Assessing Officer rejected the claim of the Assessee & assessed the entire income as business income.
- On appeal, the Commissioner (Appeals) treated it as short term capital gains on the ground that the period of holding for the purpose of capital gains should be reckoned from the date of conversion and as a result, the period of holding was less than 36 months and, thus, held that the resultant capital gain would be short-term capital gain.
ITAT confirmed the order of CIT(A) by making following observation:
The Ld. CIT (A) held the asset as short term capital asset placing reliance on coordinate bench decision in the case of Lohia Metals (P.) Ltd. v. Asstt. CIT [2010] 131 TTJ (Chennai) 472.
The coordinate bench in the case cited (supra) held that the holding period prescribed in s. 2(42A) of the Act has to be reckoned when the asset i.e., shares became capital asset.
In the case of decisions of ITAT Lohia Metals (P.) Ltd.v.ACIT [2010] 131 TTJ 472 (Chennai) as referred above, AO noticed that the assessee had shown long-term capital gain of Rs. 63,16,406 which was claimed as exempt. Upon enquiry, it was informed that stocks were converted into investments by the assessee on 1st April, 2004.
The AO held that holding period before sale of shares from date of conversion was less than 12 months and, therefore, exemption of long-term capital gain cannot be allowed. On appeal, action of the AO was re-confirmed by the CIT(A). Agrrieved by the order, assessee approached ITAT which confirmed action of CIT(a) by making following observation:
- In the case before us, no doubt the assessee has transferred the capital asset which is not in dispute. But such capital asset came into existence only from 1st April, 2004 before which it was merely a stock-in- trade and the same cannot be treated as capital asset as per the definition of capital asset. Therefore, the holding period prescribed in s. 2(42A) of the Act has also to be reckoned when the asset i.e., shares became capital asset w.e.f. 1st April, 2004. As pointed out by the Hon’ble Supreme Court in the case of Orissa State Warehousing Corporation v. CIT (supra), only the language used in the statute is required to be considered while interpreting the fiscal statute which means that no words can be added to find out the intention, but at the same time no word can be ignored while interpreting taxation laws.
Similar conclusion was drawn by Gujarat High Court in case of Cambay Investment Corporation Ltd vs DCIT [2016] 388 ITR 366 (Gujarat). The case before HC was that the assessee sold some shares which were till 31-3-1993 held as stock-in-trade and were converted into investments by a Board Resolution dated 31-3-1993. It was claimed that the shares were investments during the assessment year 1994-95 and the sale thereof was liable to capital gain.
The Assessing Officer, allowed the indexation benefit not from the date of alleged conversion but from the date of purchase, which resulted in long-term capital loss.
The Commissioner revised the order under its power u/s 263 against which the assessee filed appeal in ITAT which held the order CIT correct. Assessee moved High Court which also held in favor of the Assessee by making following observation:
Similar issue was there before ITAT Delhi Bench in the case of Splendor Constructions (P.) Ltd. v. ITO [2009] 27 SOT 39 wherein also it was held that the date of conversion of stock in trade is the date to be considered for reckoning the holding period of Long term capital asset. In this case, assessee company was engaged in business of developing and selling freehold immovable properties.
In financial year 1998-99, assessee company acquired a property i.e. land for a certain consideration and same was subjected to development in financial years 2000-01 and 2001-02 incurring certain expenditure.
As on 1-4-2002 said property was converted by assessee company into investment and same was sold on 12-12-2002 –
Authorities below, taxed profits arising from said sale as short-term capital gain. The Tribunal also confirmed it as short term by making the following observation:
Where the property in question, i.e., land, was held by the assessee-company upto 31-3-2002 as the stock-in-trade for the purpose of its business and the same had been converted by the assessee-company into investment, i.e., with effect from 1-4-2002, the period for which the said property was held by the assessee-company as stock-in-trade of its business could not be reckoned for ascertaining as to whether it was a long-term capital asset or a short-term capital asset within the meaning given in section 2(29A ) and 2(42A) and thus on its sale on 12-12-2002, the profit arising from the sale of the said property was short-term capital gain.
9.1 In the present case, the shares and securities were acquired much earlier and all throughout they were treated as stock-in-trade. It was only on 31.03.1993, viz. when Resolution was passed by the Board of Directors of the assessee company, that they were converted into investment. Therefore, for the purpose of the Act, the relevant date shall be the date on which the asset was acquired, which is 31.03.1993. The Assessing Officer completely lost sight of the aforesaid relevant aspect while passing the assessment order, which was corrected by the CIT(A) in proceedings u/s.263 of the Act and rightly affirmed by the Tribunal.
- In view of the aforesaid discussion, both the questions are answered in favour of the Revenue and against the assessee. The appeal stands disposed of accordingly.
In short, the date for counting the period of holding of capital asset on conversion of stock-in-trade is the date of conversion and not the date of original purchase as stock.
