Facts of the case
During the AY 1995-96, the assessee has shifted the property from the schedule of inventories (Stock in trade) to the schedule of investments. The submitted that the assessee has closed the real estate business and entered into the textile business and converted the stock in trade into investments.
The said properties were sold in the FY 1996-97 and declared the resultant gains under long term capital gains and submitted the return of income.
Held by CIT (A)
Ld. CIT (A) held that since the assessee was converted the stock in trade to investment during the FY 1994-95 relevant to the AY 1995-96. The period of holding for the purpose of capital gains should be reckoned from the AY 1995-96 and as a result, the period of holding was less than 36 months since the asset was sold during the FY 1996-97 relevant to the AY 1997-98 and the Ld. CIT (A) held that the resultant capital gains should be short term capital gains.
Held by ITAT
we hold that the CIT (A) rightly held the asset as short term capital asset and the gains should be taxed as short term capital gains since the holding period was less than 36 months from the date of conversion of stock in trade in to the capital asset. Accordingly, we uphold the order of the Ld. CIT (A) and dismiss the assessee’s appeal.
IN THE ITAT CHENNAI BENCH ‘A’
Deensons Trading Co. (P.) Ltd.
Income Tax Officer, Co. Circle – I(4), Chennai
AND D.S. SUNDER SINGH, ACCOUNTANT MEMBER
IT APPEAL NO. 2774 (MDS.) OF 2016
[ASSESSMENT YEARS 1997-98]
FEBRUARY 22, 2017
A.S. Sriraman, Adv. for the Appellant. V. Nanda Kumar, JCIT for the Respondent.
D.S. Sunder Singh, Accountant Member – This is an appeal filed by the assessee against an Order dated 04.07.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in ITA No. 220/07-08/A.III for the AY 1997-98.
2. All the grounds of the appeal are related to date of reckoning of acquisition of the property for the purpose of computation of capital gains. The assessee is dealing in real estate business. During the AY 1995-96, the assessee has shifted the property from the schedule of inventories (Stock in trade) to the schedule of investments. The submitted that the assessee has closed the real estate business and entered into the textile business and converted the stock in trade into investments. However, the Assessing Officer (hereinafter referred to as ‘AO’) found that the assessee has paid MMD plan submission charges of Rs. 15,300/- in the same assessment year and hence the AO was of the view that the assessee was continuing the real estate business in the AY 1995-96 also and the character of the asset continued to be stock in trade despite the book entries passed. Accordingly the AO assessed the entire income as business income against the long term capital gains claimed by the assessee amounting to Rs. 1,88,171/-. The matter travelled up to ITAT and the Co-ordinate Bench of ITAT ‘A’ Bench, Chennai, in ITA No. 2317/Mds/03 dated 20.10.2006 set aside the Order of the AO with a direction to decide the issue de novo. In the second round, the AO has passed Order u/s. 143(3) r/w Sec.254 of Income Tax Act on a total income of Rs. 6,17,353/-. In the second round, the AO held that the assets is continued to be stock in trade till FY 1996-97, therefore, rejected the indexation benefit to the assessee.
3. The assessee went on appeal before the Ld. CIT (A) and the Ld. CIT (A) rejected the assessee’s contentions regarding long term capital loss and held that the sale transaction represents short term capital gains.
4. Aggrieved by the Order of the Ld. CIT (A), the assessee filed appeal before this Tribunal. Appearing for the assessee, the Ld.AR submitted that the assessee was in real estate business and acquired the properties for the purpose of carrying on real estate business and declared them as stock in trade. Subsequently, the assessee was unable to continue the business in real estate and shifted its business to textiles and in the FY 1994-95, he converted the stock in trade as investments by book entry in the books of accounts. The said properties were sold in the FY 1996-97 and declared the resultant gains under long term capital gains and submitted the return of income. However, the AO found that the company has changed the business from real estate to trading company by virtue of special resolution dated 09.08.1997 u/s. 21 of Company’s Act and the amendment of object clause III(A) was made by including clause III(A) 5 of section 17 of Companies Act and resolved to carry on various other business activities including the textile business which the assessee is carrying on at present. Therefore, the AO is of the view that the company can treat the stock in trade as investment only from the FY 1997-98 but not for the earlier years. Accordingly, the AO rejected the claim of the assessee. The Ld. CIT (A) held that since the assessee was converted the stock in trade to investment during the FY 1994-95 relevant to the AY 1995-96. The period of holding for the purpose of capital gains should be reckoned from the AY 1995-96 and as a result, the period of holding was less than 36 months since the asset was sold during the FY 1996-97 relevant to the AY 1997-98 and the Ld. CIT (A) held that the resultant capital gains should be short term capital gains.
5. Appearing for the assessee, Mr. Sriraman, Advocate, argued that the company was incorporated for carrying out the real estate business and purchased two properties at No. 107, G.A. Road on 31.01.1990 for Rs. 8,47,976/-, on 09.03.1992 and it purchased adjacent property at No. 36, Kappal Polu Street for the cost of Rs. 2,18,248/- during the FY 1989-90 & 1991-92. Since, the company was unable to continue the real estate business, it has changed its business to textile and converted the stock in trade to investments during the FY 1994-95 and sold the property in FY 1996-97 relevant to the AY 1996-97. Since the property was acquired in 1989-90 & 1991-92, though held as stock in trade and sold in the FY 1997-98 the holding period was more than 36 months and the Ld.AR contended that the assets should be treated as capital assets and indexation required to be allowed from the date of acquiring the assets since there was no change in the character of the property. The Ld.AR also relied on the decision of this Bench in the case of Vinay Sawhney v. ITO [IT Appeal No. 993 (Mds.) of 2015, dated 19-2-2016], wherein the Co-ordinate Bench came to conclusion that the first date of acquisition has to be adopted as date of acquisition of the asset. The Co-ordinate Bench in the case cited supra placed reliance on the decision of the Pune Bench of this Tribunal in Kalyani Exports & Investments (P.) Ltd./Jannhavi Investments (P.) Ltd./Rajgad Trading (P.) Ltd. v. Dy. CIT  78 ITD 95 (Pune) (TM).
6. We have considered the rival submissions and perused the material on record. The question which arises and needs an answer is “what would be the period of holding of the asset-whether it would relate back to the date when (personal) capital asset was converted in to business asset a few years back or the date of conversion now from business asset back to capital asset?”. We have carefully gone through the relevant provisions of Income tax act and reproduce the same hereunder:
‘(1) Section 2(14)- “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-
|(i)||any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;|
|(ii)||personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes-|
|(a) jewellery ;|
|(b) archaeological collections ;|
|(c) drawings ;|
|(d) paintings ;|
|(e) sculptures ; or|
|(f) any work of art.|
|Explanation:- For the purposes of this sub-clause, “jewellery” includes-|
|(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel ;|
|(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel ;|
|(iii)||agricultural land in India, not being land situate-|
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item
(a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ;
(iv) 6½ per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government ;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, notified by the Central Government ;
2. Section 2 (29A)- “long-term capital asset” means a capital asset which is not a short-term capital asset ;
3. Section 2 (42A)- (42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :
Provided that in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or a unit of a Mutual Fund specified under clause (23D) of section 10 65or a zero coupon bond, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted :
Explanation 1.- (i) In determining the period for which any capital asset is held by the assessee-
|(a)||in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation ;|
|(b)||in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ;|
|(c)||in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee;|
|(d)||in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset ;|
|(e)||in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer ;|
|(f)||in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset ;|
|(g)||in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee ;|
|(h)||in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ;|
|(ha)||in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause|
|(xiii)||of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ;|
|(hb)||in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares ;|
|(ii)||in respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf :|
Explanation 2.- For the purposes of this clause, the expression “security” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ;
Explanation 3.- For the purposes of this clause, the expressions “specified security” and “sweat equity shares” shall have the meaning respectively assigned to them in the Explanation to clause (d) of sub-section (1) of section 115WB;
4. Section 45(2)- Notwithstanding anything contained in sub-section (1), 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 income-tax as his income of the previous year in which such stock-in-trade is sold or other wise transferred by him and, for the purposes of section 48, the 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 the capital asset.’
7. ITAT Delhi Bench in the case of Splendor Constructions (P.) Ltd. v. ITO  27 SOT 39 considered the identical issue and held that the date of conversion of stock in trade is the date for reckoning the holding period for determining the Long term capital asset.
“7.1 Catchwords from that decision-Section 45, read with sections 2(29A) and 2(42A) of the Income-tax Act, 1961 – Capital gains – chargeable as – Assessment year 2003-04 – Whether for ascertaining as to whether a capital asset is a ‘short-term capital asset’ or a ‘long-term capital asset’, period for which said asset is held by assessee as capital asset alone has to be reckoned – Held, yes – 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 – Cost of acquisition of said property along with development expenditure incurred in respect thereof was shown by assessee company as its stock in trade in balance sheet up to 31-3-2002 – 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 – Whether since assessee sold property in question within 36 months from date it was converted into capital asset, i.e., investment, authorities below rightly brought to tax profit arising from sale of said property as short term capital gain – Held, yes”
Reasoning adopted in this case was that the definition of capital asset as given in section 2(14) of the Act does not include stock-in-trade held by the assessee for the purpose of his business or profession. The property in question which was held by the assessee as stock-in-trade could not be regarded as a capital asset up to 31-03-2002 and it became a capital asset only on 01-04-2002 when the same was converted from stock-in-trade into investment. The assessing officer relied on the decision of the Bombay High Court in the case of CIT v. Santosh L. Chowgule  234 ITR 787 wherein it was held that it is only “the life of the converted asset (being share in this case) have to be (re)considered in reckoning whether it is a short-term or long term capital asset. Reliance was also placed by the assessing officer on CIT v. Chunilal Khushaldas  93 ITR 369 (Guj.) and Executive of the Will of Late Shri Manecklal Premchand v. CIT  186 ITR 554 (Bom.) wherein it was held that bonus shares are acquired by a shareholder when they are issued and they must be taken to be held by the shareholder from the date of their issue and not from the date when the original shares in respect of which they are issued were acquired by the assessee The Tribunal endorsed the views of the assessing officer. In the case before the Gujarat High Court in Chunilal Khushaldas (supra) bonus shares which were issued on 5th September, 1961 were sold on 12th September, 1961 and it was held by the High Court that the bonus shares were short-term capital assets within the meaning of section 2(42A) as they were not held by the assessee for more than twelve months.
8. In the instant case, the appellant has acquired the property in 1988-89 and 1991-92, the property remained in the hands of the assessee company as stock in trade and the property was transferred as investment in the books of accounts during the FY 1994-95 and sold in 1996-97. The Assessing Officer also observed that the assessee was dealing in real estate and all the expenses have been claimed regularly as business expenses and have been allowed too. During the A.Y 1997-98 also the assessee has also paid MMDA plan submission charges of Rs,15300/- and claimed as deduction. The above finding of the AO shows that though the assessee claimed to have converted the asset in to investment in books of accounts, it continued to claim the maintenance expenses as business expenditure. Even otherwise also from the date of conversion of the asset it was held as capital asset in the hands of the assessee for less than 36 months. 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  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. The Ld. A.R relied on the decision of ITAT, Chennai ‘D” Bench decision in the case of Vinay Sawhany (supra). The coordinate bench delivered the ruling placing reliance on ITAT, Pune Third Member decision in the case of Kalyani Exports & Investment (P.) Ltd. (supra). The issue before the Hon’ble third member was when shares were purchased prior to 01-04-1981 the assessee had to be allowed the option of substitution, should be confined to the facts of the case and is also distinguishable.. In that case the shares which were acquired in 1977 were converted into capital asset on 01-07-1988 at original purchase price of Rs. 17 per share and the Tribunal held that the assessee should be permitted to substitute the market value as on 01-04-1981 in lieu of purchase cost as on 01-07-1988 as per provisions of 55(2)(b)(ii).The Tribunal in that case was dealing only with cost of acquisition and not period of holding. Therefore the ruling of Hon’ble third member in the case cited is not applicable in the assessee’s case. The coordinate bench in the case of Vinay Sawhany (supra) has not considered the decisions of Lohia metals and the Delhi tribunal decision cited (supra). Even otherwise the facts of the assessee’s case are distinguishable from the decision of Vinay Sawhany’s case as discussed earlier. In the case of the assessee the assessing officer has given clear finding that the assessee was claiming the expenses regularly by debiting to the profit and loss account. In the assessee’s case the facts are similar to that of Lohia Metals and Splendor Constructions and therefore squarely applicable. Accordingly we hold that the CIT (A) rightly held the asset as short term capital asset and the gains should be taxed as short term capital gains since the holding period was less than 36 months from the date of conversion of stock in trade in to the capital asset. Accordingly, we uphold the order of the Ld. CIT (A) and dismiss the assessee’s appeal.
9. In the result, the appeal of the assessee is dismissed.