No Long Term Capital Gain Exemption if Asset is Converted to Stock in Trade – ITAT Delhi

Smt. Alka Agarwal Vs. ADIT (ITAT Delhi) - once the assessee has converted a capital asset into stock-in-trade, the capital gain arising on such transaction of transfer shall be deemed to be the income of the previous year in which transfer took effect. That was the ordinary position where the capital gain would have been liable to tax in the AY 2005-06 itself. Now, the provisions of Section 45(2) make an exception to the generality of provisions of Section 45(1). Where it is a case of conversion of stock -in-trade, the profit arising on transfer by way of conversion shall be chargeable to income tax as its income in the previous year in which such stock-in-trade is actually sold or otherwise transferred by him and for the purpose of computation of capital gain, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of such conversion, meaning thereby, the year of assessability of income to tax is postponed to date on which actual sale of this stock-in-trade takes place. There can be no confusion or a debate or two opinions as regards the aforesaid provisions. A cumulative reading of the aforesaid provisions, in our mind, makes it clear that as far as the benefit of Section 10(38) is concerned, the assessee shall not be eligible for this benefit at the first stage of chargeability of capital gains because the deemed sale is the point of conversion into stock-in-trade which had not suffered STT. Further, with regards to the second part of the transaction, the assessee is not eligible for benefit under Section 10(38) because the second part of the transaction is purely a business transaction and provisions of Section 10(38) are applicable only in terms of long term capital assets. In our view, these provisions should be read in this manner and there can be no confusion or two opinions about the scheme of the provisions of conversion of capital asset into stock-in-trade as also the liability towards the capital gains tax on sale of shares held as capital asset which has suffered STT. Nowhere on the date of actual sale, the assessee was holding the impugned securities as a part of capital asset. They have already become the stock-in-trade of the business. So, we do not agree with the assessee as regards the total exemption from capital gains tax in respect of the capital assets which were converted into stock-in-trade as on 1st April, 2005 merely because on the date of sale such stock-in-trade the assessee was required to pay STT on them. We agree with the departmental stand in respect of this issue as we do not find any merit in such contentions of the assessee.