1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 11TH DAY OF JUNE 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.149 OF 2011 C/W I.T.A.NO.70 OF 2011 ITA NO.149/2011 BETWEEN: M/S KEMFIN SERVICES PVT. LTD. KEMWELL HOUSE, 11, TUMKUR ROAD BANGALORE 560022. APPELLANT (BY SRI.CHYTHANYA K.K., ADV.,) AND: ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 11 (5) BANGALORE ... RESPONDENT (By Sri.K.V.ARAVIND, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 30.03.2011 PASSED IN ITA NO.1040/BANG/2010 FOR ASSESSMENT YEAR 2006-07, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTION OF LAW STATED THEREIN. 2 (II) TO ALLOW APPEAL AND SET ASIDE ORDER PASSED BY ITAT, BENCH, BANGALORE IN ITA NO.1040/BANG/2010 DATED 30.03.2011 IN INTEREST OF JUSTICE AND EQUITY. ITA NO.70/2011 BETWEEN: M/S KEMFIN SERVICES PVT. LTD. KEMWELL HOUSE, 11, TUMKUR ROAD BANGALORE 560 022. ... APPELLANT (BY SRI.CHYTHANYA K.K., ADV.,) AND: ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 11 (5) BANGALORE ... RESPONDENT (By Sri.K.V.ARAVIND, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 30.03.2011 PASSED IN ITA NO.1040/BANG/2010 FOR ASSESSMENT YEAR 2006-07, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (i) FORMULATE SUBSTANTIAL QUESTION OF LAW STATED THEREIN. (ii) TO ALLOW APPEAL AND SET ASIDE ORDER PASSED BY ITAT, BENCH, BANGALORE IN ITA NO.1040/BANG/2010 DATED 30.03.2011 IN INTEREST OF JUSTICE AND EQUITY. THESE ITAs COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for 3 short) has been preferred by assessee. subject matter of ITA No.149/2011 pertains to Assessment year 2004-05, whereas, subject matter of I.T.A.No.70/2011 relates to Assessment year 2005-06. Since, common question of law arise for consideration in these appeals, they were heard analogously and are being decided by this common judgment. appeals were admitted by bench of this Court vide order dated 03.08.2011 on following substantial question of law: (i) Whether on facts and in circumstances of case, Hon ble ITAT was right in law in holding that income arising on sale of shares held as capital asset after conversion from stock in trade as business income and not as capital gains? 2. For facility of reference, facts from I.T.A.No.70/2011 are being referred to. assessee is non banking financial corporation engaged in 4 activity of investment in shares. Board of assessee passed resolution to stop its trading activities in shares and securities under portfolio management scheme and to convert stock in trade worth Rs.1,30,98,529/- into investment on 01.04.2004. financial statements were adopted and signed by Board of Directors and statutory auditors for Assessment year 2005-06. assessee filed its return of income for Assessment year 2005-06 on 26.10.2005 declaring total income of Rs.38,03,595/-. case of appellant was selected for scrutiny and notice under Section 143(2) of Act was issued. assessee furnished details asked for by assessing officer. order of assessment was passed on 31.12.2007 and it was inter alia held that mere interchange of heads in books of accounts as investment or stock in trade does not alter nature of transaction and transactions of assessee fall within ambit of business income and not short term capital gain. Thus, transactions, 5 were treated as business income and order of assessment was passed. Being aggrieved, assessee filed appeal. Commissioner of Income Tax (Appeals) vide order dated 18.12.2009 inter alia held that shares had to be considered as stocks in trade and income from sale of shares has to be treated as income under head business. It was further held that assessee is entitled to relief of Rs.16,215/- towards securities transaction tax under Section 88E of Act and assessing officer was directed to grant relief after verification. Accordingly, appeal was partly allowed. 3. Being aggrieved, assessee filed appeal before Income Tax Appellate Tribunal. tribunal vide order dated 07.10.2010 inter alia held that assessee had acquired certain shares under portfolio management scheme and those shares were treated by assessee and accepted by department as stock in trade for Assessment years 2003-04 and 2004- 6 05. It was further held that assessee had changed character of its asset from stock in trade to investments. It was further held that surplus had arisen in course of conversion of aforesaid shares and therefore, stock in trade is business asset and any income arising on account of stock in trade is obviously business income. It was also held that income always arises from existing source and not from potential source. In result, appeal preferred by assessee was dismissed. Being aggrieved, assessee is in appeal before us. 4. Learned counsel for assessee submitted that assessee converted stock in trade to shares and sold same and therefore, profits arising therefrom have to be assessed as capital gain and not as business profit in absence of any provision in Act at relevant time. It is further submitted that tribunal ought to have appreciated that surplus did not arise due to conversion. It is also submitted that 7 Section 2(14) of Act, which defines expression capital asset excludes stock in trade. Attention of this court has also been invited to memorandum to Finance Bill, 2018 in support of submission that Section 45 of Act provides for capital gains arising from conversion of capital asset into stock in trade. However, it does not provide for levy of tax in cases where stock in trade is converted into or treated as capital asset. It is pointed out that provisions of Act were amended. It is further submitted that tribunal ought to have appreciated that from conversion of stock in trade to capital asset, no income has resulted as person cannot be said to have transaction with ones own self and there cannot be any actual profit or loss where no third party is involved. It is also submitted that assessee had converted stock in trade of shares into investment during Assessment year 2005-06. tribunal by order dated 07.06.2016 passed in ITA Nos.1450 and 1451 (B)/2015 decided on 07.06.2016 8 held that shares held by appellant as investments is liable to be taxed as capital gain and not as business income. aforesaid order was not assailed by revenue in appeal before this court and therefore, aforesaid issue has attained finality. It is also submitted that sale of shares held in stock in trade converted into investments being capital gains is not business income and determination whether property is capital asset or not has to be made only at time of transfer and not at any other point of time and therefore, cost on date of actual acquisition must be taken as cost of acquisition. In support of aforesaid submissions, reliance has been placed on decisions in CIT VS. DHANUKA & SONS , (1980) 124 ITR 24 (CAL), SIR KIKABHAI PREMCHAND VS. CIT , (1953) 24 ITR 506 (SC), KEMFIN SERVICES PVT. LTD. VS. ACIT , ITA NOS.1450 & 1451(B)/2015, CIT VS. BANGALORE DEVELOPERS PVT. LTD., , (2017) 392 ITR 379 (KAR), PR.CIT VS. PAVITRA COMMERCIAL 9 LTD. , (2018) 402 ITR 66 (DEL), CIT VS. YATISH TRADING CO. PVT LTD., , 2013-TIOL-117-HC-MUM- IT, CIT VS. EXPRESS SECURITIES PVT. LTD., , 2013-TIOL-862-HC-DEL-IT, DEEPLOK FINANCIAL SERVICES LTD VS. CIT , (2017) 393 ITR 395 (CAL), ADITYA MEDISALES LTD. VS. DCIT , (2016) 242 TAXMAN 228 (GUJ), CIT VS. JANNHAVI INVESTMENT (P,) LTD. , (2008) 304 ITR 276 (BOM), RANCHOD BHAI BHAIJIBHAI PATEL VS. CIT , (1971) ITR 446 (GUJ), M.VENKATESAN VS. CIT , (1983) 144 ITR 886 (MAD), CIT VS. SMT.M.SUIBAIDA BEEVI , (1986) 60 ITR 557 (KERALA), CIT VS. VISHWANATH , (1993) 201 ITR 920 (ALL). 5. On other hand, learned counsel for revenue submitted that when stock in trade is converted into shares and is sold, capital gains have to be completed up to date of conversion into stock in trade and for period thereafter difference 10 between value of sale and stock in trade has to be considered as business income and therefore, order of tribunal needs modification to aforesaid extent. It is urged that provisions of Section 45(2) of Act have to be taken into account. In support of aforesaid submissions, reliance has been placed on decisions in COMMISSIONER OF INCOME-TAX, CHENNAI VS. ESSORPE HOLDINGS (P.) LTD. , (2017) 83 TAXMANN.COM 280 (MADRAS) and COMMISSIONER OF INCOME-TAX, DELHI VS. ABHINANDAN INVESTMENT LTD. , (2015) 63 TAXMANN.COM 263 (DELHI). It is also submitted that in PAVITHRA COMMERCIAL LTD., supra and YATISH TRADING CO. LTD., it was found that no questions of law arise for consideration. Therefore, aforesaid decisions have no value as precedents. 6. We have considered submissions made on both sides and have perused record. Admittedly, in instant case, assessee had 11 converted stock in trade into investments. Supreme Court in case of SIR KIKABHAI PREMCHAND supra has held that it is wholly unreal and artificial to separate business from its owner and treat them as they were separate entities trading with each other and then by means of fictional sale introduce fictional profit which include and in fact, is non existent. It has further been held that person cannot be supposed to sell some thing to himself and making profit out of transaction, which on face of it is not only absurd but against all canons of mercantile and income tax law. aforesaid decision has been followed by various high courts till provisions of Act were amended with effect from 01.04.2019. It is equally well settled legal proposition that income from sale of shares held as investment converted from stock in trade is to be treated as capital gain and not as business income. 7. It is well settled principle of statutory interpretation that taxing statute has to be strictly 12 construed. It has been held that subject is not to be taxed without clear words for that purpose and also that every Act of parliament must be read according to natural construction of its words. [SEE: SARASWATI SUGAR MILLS VS. HARYANA STATE BOARD , (1992) 1 SCC 418]. It has further been held that if person sought to be taxed comes within letter of law he must be taxed, however, great hardship may appear to judicial mind to be. [SEE: PRINCIPLES OF STATUTORY INTERPRETATION BY JUSTICE G.P.SINGH, PAGE 879, 14TH EDITION]. 8. In instant case, relevant extract of memorandum to Finance Bill, 2018 reads as under: Section 45 of Act, inter alia provides that capital gains arising from conversion of capital asset into stock in trade shall be chargeable to tax. However, in cases where stock in trade is converted into, or treated as capital asset, 13 existing law does not provide for its taxability. In order to provide symmetrical treatment and discourage practice of deferring tax payment by converting investory into capital asset, it is proposed to amend provisions of 9. Thus, it is evident prior to introduction of Finance Bill, 2018 by which provisions of Act have been amended to provide for taxability of in cases where stock in trade is converted into capital asset, there was no provision to tax same. In absence of any provision in Act, transaction in question could not have been subjected to tax. Prior to amendment of Act, which came into force with effect from 01.04.2019, income arising on sale of shares held as capital asset after their conversion from stock in trade was treated as capital gains as has been held by various high courts viz., in cases of PAVITRA COMMERICAL LTD., YATISH CO. PVT. LTD., 14 EXPRESS SECURITIES PVT. LTD., DEEPLOK FINANCIAL SERVICES LTD., ADITYA MEDI SALES LTD. and JANNHAVI INVESTMENT PVT. LTD., supra. We agree with view taken by various high courts on this issue. 10. In view of preceding analysis, tribunal erred in treating income arising on sale of shares held as capital asset after conversion from stock in trade as business income. substantial question of law framed in appeals is answered in favour of assessee and against revenue. order of tribunal is quashed. In result, appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss Kemfin Services Pvt. Ltd. v. Assistant Commissioner of Income-tax Circle 11(5), Bangalore