Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income-Tax vs Smt. Shantidevi Saraf on 31 May, 1994
Equivalent citations: [1994]51ITD83(MUM)
ORDER
R.N. Singhal, Accountant Member
1. Department has taken the following 3 substantive grounds :
(1) The learned CIT (Appeals) erred in deleting the addition of capital gains of Rs. 23,370 on sale of 485 shares of TISCO which were converted into stock-in-trade before their sale.
(2) The learned CIT (Appeals) failed to appreciate the fact that conversion of shares into stock-in-trade and their subsequent sale was with a view to avoid capital gains tax. He ought to have applied the ratio of the Supreme Court decision in McDowell's case (154 ITR 148) and confirmed the addition.
(3) Without prejudice to the above, the learned CIT (Appeals) ought to have enhanced the income under the head 'Capital gains' representing the difference between the cost price and the conversion price as he himself has considered the amendment to Section 34 w.e.f. 1-4-1985 in the appellate order.
Thus, the dispute is about the taxability and quantification of capital gains.
2. The assessee is an individual and the relevant previous year ended on 31-3-1985. The assessee had sold 485 equity shares of TISCO for a total sum of Rs. 1,59,615 out of 507 shares held by her at the beginning of the previous year relevant to this year. In the Profit & Loss a/c for the year ended 31-3-1985, the entries relevant to this item were as follows :-
To Opening stock of Sale of 485 shares
507 shares of TISCO of TISCO Rs. 1,59,615
@ Rs. 241 Rs. 1,22,187 Closing stock of
22 shares ofTISCO
@ Rs. 241
Rs. 5,302
____________
Rs. 1,64,917
Thus, these items left a profit of Rs. 42,730, viz. (1,64,917 -1,22,187). This profit of Rs. 42,730 came to he returned for taxation along with other items, as business profit.
3. The Assessing Officer noted, inter alia, that the assessee had purchased 555 TISCO shares for a sum of Rs. 55,155 in 1977-78 and she received 22 TISCO shares as Bonus shares in the year 1981. By spreading out the original cost to the total number of shares (namely, 777 being 555 + 222) he computed the average cost at Rs. 71 per share. He noted that assessee had converted the said TISCO shares from investment to stock-in-trade on 17-3-1983 at the then prevailing market price of Rs. 241 per share. He, however, rejected the assessee's claim that only a sum of Rs. 42,730would be the taxable income in respect of this transaction in the previous year relevant for the assessment year 1985-86. He computed the capital gains on pg. 4 of the assessment order as follows :-
Capital gains : Rs.
Sale price 1,59,615
Cost. (71 x 485) 34,435
_________
1,25,180
Less: 5,000
_________
1,20,180
Less : 45% 54,080
__________
66,100
Less : Profit on sale of
485 TISCO shares 42,730
___________
shown. Rs. 23,370
__________
Thus, he brought to tax additional sum of Rs. 23,370.
4. The CIT (Appeals) deleted the addition of Rs. 23,370 and held that profit of Rs. 42,730 only was taxable.
5. Before us, the learned Departmental Representative referred to the changes in law brought about from 1-4-1985 and submitted that the CIT (Appeals) went wrong in deleting the addition of Rs. 23,370 to the total income. The learned authorised representative for the assessee placed very heavy reliance on the Tribunal's S.M.C. Bombay Bench 'A' viz. Madhoprasad Shanti Devi Saraf (HUF) [IT Appeal No. 5487 (Bom.) of 1987, dated 15-1-1990]. He pleaded that the corresponding addition in that case had been deleted by the Tribunal with disapproval of even the act of filing of Departmental appeal in that case.
6. In the course of hearing, the statutory changes brought about w.e.f. 1 -4-1985 were noted and analysed. In particular, Sub-section (2) of Section 45 inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985 was taken note of. It was also noted in the course of hearing itself that even in the Tribunal's decision dated 15-1 -1990 which was relied upon by the assessee, an argument had been advanced on behalf of the assessee that there was some amendment made in the relevant provisions of the Act vide para 4, towards the end of bottom of para 2 of that order of the Tribunal. It was also noted that the CIT (Appeals) in his Impugned order had also taken note of the amendment inter alia applicable to and from assessment year 1985-86.
7. We have very carefully considered the rival submissions and the material on record. At the outset, it may be noted that Section 45(2) is applicable to this assessment year and it was not applicable to assessment year 1984-85. Since it was a case of conversion of shares held earlier as investment into stock-in-trade, capital gains were required to be computed and taxed on the basis of sales effected in the previous year relevant to this year. In her P & L a/c, the assessee showed as business profit only the excess of sale price over the conversion price. In accordance with Section 45(2) in respect of 485 shares actually sold in the previous year relevant to this appeal, capital gains are to be computed and taxed in respect of the excess of conversion price over the cost price; meaning thereby, that gross capital gains on long term assets are to be computed in view of Section 45(2) at Rs. 170, that is (241 - 71) per share for a total of 485 shares actually sold. Thereafter, in accordance with Section 80T, read the Twelfth Schedule deductions are to be allowed first for a sum of Rs. 5,000 and then 45 per cent of the balance. The amount to be added to the total income on this basis would turnout to be more than Rs. 23,370 actually added by the ITO and the difference would be 45 per cent of Rs. 42,730. This is so because in the computation made by the ITO he has started with the sale price which is inconclusive of the business profit of Rs. 42,730 and the deductions under Section 80T have been allowed on the whole difference which has resulted in excess deduction of 45% of Rs. 42,730. In this view of the matter, even as per the Assessing Officer's working, the assessee has got some extra deduction. There is no scope for deleting the addition of Rs. 23,370. We would, therefore, restore that addition to the total income and allow departmental appeal to this extent. In other words, the order of the CIT (Appeals) on this point is reversed and that of the Assessing Officer restored.
8. Before parting, it would be beneficial to highlight the mistake which crept into the decision making of deletion of the impugned sum of Rs. 23,370 in the appellate order of the CIT (Appeals). On pg. 2, the CIT (Appeals) has rightly analysed the existence of amendment in law up to a point as follows :
... It has to be noted that even under the amended provision, the entire difference between the sale price and the cost price is not to be treated as capital gains. It is only the difference between the conversion price and the cost price that will be treated as capital gains. The difference between the sale price and the conversion price will however be treated as only business income....
9. In the appellate order, the inference flowing from the above analysis is wrongly drawn as immediately after the above extracted portion when it says : "... In these circumstances, there is no justification for adopting the capital gain at Rs. 23,370...". Actually, the addition required was more than Rs. 23,370 by 45 per cent of Rs. 42,730.
10. We may also refer to and deal with the assessee's reliance on the Tribunal's order dated 15-1-1990 in ITA No. 5487/B/87. The decision rendered in that case does not help the assessee for the simple reason that though in the impugned assessment order, reference is made to the reasoning given in the assessment order of Sri Madhoprasad Shanti Devi Saraf (HUF) for assessment year 1984-85, but computation made in those two assessment years as materially different. In the case of Madhoprasad Shanti Devi Saraf (HUF), for assessment year 1984-85, the whole of the difference between the sale price and the original cost was sought to be added as business profits and therein the Department tried to invoke the observations of the Hon'ble Supreme Court in McDowell & Co. Ltd. v. CTO 11985] 154 ITR 148. In the instant case before us, attempt is made merely to compute capital gains for the difference between the conversion price and the cost price as the difference between the sale price and the conversion price stood already returned for taxation as business income. Second difference is, that for assessment year 1984-85, the provisions of Section 45(2) were not applicable while they are for assessment year 1985-86. In other words, the computation in the assessment order in the context of which this appeal has arisen, capital gains were sought to be computed in accordance with Section 45(2) and as business income was not sought to be taxed as it was done in the assessment order of Madhoprasad Shanti Devi Saraf. For all these reasons, in regard to the addition of Rs. 23,370 relatable to the long-term capital gains, the order of the CIT(A) is reversed and that of the Assessing Officer restored. In effect, the addition of Rs. 23,370 is restored.
11. Departmental appeal is allowed.