Appel v. M/S Max India Limited

IN THE HIGH COURT OF PUNJAB AND HARYANA AT)CHANDIGARH. ITA No.187 of 2013 (O&M)Date of decision: 23.1.2019 Commissioner of Income Tax, Jalandhar I, Jalandhar ....-- Appel Vs. M/s Max India Limited| ... respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL.HON BLE MRS. JUSTICE MANJARI NEHRU KAUL Present: —Mr. Vivek Sethi, Senior Standing Counsel for the appellant. Mr. Ajay Vohra, Senior Advocate with Mr. Gaurav Jain, Advocate for the respondent. Ajay Kumar Mittalse| l.This order shall dispose of ITA Nos. 187, 189 and 191 of 2013 as)learned counsel for the parties are agreed that the issue involved in all these|appeals is identical. However, the facts are being extracted from ITA No.187 of2013. ) - |ITA No.187 of 2013 has been preferred by the revenue under|section 260A of the Income Tax Act, 1961 (in short, “the Act’) against the orderdated 8.3.2013 (Annexure-3) passed by the Income Tax Appellate Tribunal,|Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”) in ITA|No.151/(Asr)/2011, for the assessment year 2002-03 claiming following|substantial questions of law:- ‘‘a) Whether on the facts of the case, the ITAT was justified inlaw in holding that payment of compete fee 1s a revenueexpenditure and an allowable deduction?law in holding that payment of compete fee 1s a revenueexpenditure and an allowable deduction? b) Whether on the facts of the case, the ITAT was justified inlaw and in facts in allowing various expenses incurred forstarting entirely different line such as health care division,Maxxon etc. as revenue expenditure’?law and in facts in allowing various expenses incurred forstarting entirely different line such as health care division,Maxxon etc. as revenue expenditure’? c) Whether the ITAT was justified in law and in facts in holdingthat various expenses incurred for expansion of business arerevenue expenditure ignoring the fact that the same has beenincurred on projects that were subsequently either shelved orwere an entirely new line?that various expenses incurred for expansion of business arerevenue expenditure ignoring the fact that the same has beenincurred on projects that were subsequently either shelved orwere an entirely new line? d) Whether the ITAT was justified in law and in facts in holdingthat the assessee 1s at liberty to convert its stock intoinvestment ignoring the wholistic picture where in the endresult of the conversion 1s to escape provisions of explanationto section 73 of the Income Tax Act?that the assessee 1s at liberty to convert its stock intoinvestment ignoring the wholistic picture where in the endresult of the conversion 1s to escape provisions of explanationto section 73 of the Income Tax Act? e) Whether the ITAT was justified in law and in facts in notconsidering that the selective conversion of shares from stockin trade to investment has resulted in undue benefit to theassessee which falls within the purview of tax avoidancethrough colourable devices which has already been held to benot acceptable by the Hon’ble Supreme Court in theMcdowell case’?considering that the selective conversion of shares from stockin trade to investment has resulted in undue benefit to theassessee which falls within the purview of tax avoidancethrough colourable devices which has already been held to benot acceptable by the Hon’ble Supreme Court in theMcdowell case’? tf) Whether the ITAT was justified in law and 1n facts in allowingthe subsequent losses on the sale of investment as regularlosses, 1gnoring the issue that the conversions were merelycolourable devices to escape the provisions of explanation tosection 73 and avoid tax?the subsequent losses on the sale of investment as regularlosses, 1gnoring the issue that the conversions were merelycolourable devices to escape the provisions of explanation tosection 73 and avoid tax? tf) Whether the ITAT was justified in law and 1n facts in allowingthe subsequent losses on the sale of investment as regularlosses, 1gnoring the issue that the conversions were merelycolourable devices to escape the provisions of explanation tosection 73 and avoid tax?the subsequent losses on the sale of investment as regularlosses, 1gnoring the issue that the conversions were merelycolourable devices to escape the provisions of explanation tosection 73 and avoid tax? g) Whether the ITAT was justified in law and 1n facts holdingthat signing of negative covenant for not carrying out aspeciality business does not amount to transfer of right tocarry on business, the consideration of which 1s liable to betaxed as capital gain?”that signing of negative covenant for not carrying out aspeciality business does not amount to transfer of right tocarry on business, the consideration of which 1s liable to betaxed as capital gain?” 3. In ITANo.189 of 2013, for the assessment year 2003-04, the| following additional question has been claimed:-_GURBAX SINGH2019.04.06 16:50 “Whether on the facts of the case and in law, the Hon’ble|ITAT is right in holding that the legal and professionalexpenses are allowable ignoring the fact that the assessee hasfailed to discharge its onus with respect to rendering ofservices by the payee?”ITAT is right in holding that the legal and professionalexpenses are allowable ignoring the fact that the assessee hasfailed to discharge its onus with respect to rendering ofservices by the payee?” 4.In ITA No.191 of 2013, for the assessment year 2004-05, thefollowing additional question has been claimed:-_ “Whether on the facts of the case and in law, the Hon’ble|ITAT was justified in holding that no expense 1s attributableto the exempted income as the revenue had failed to establisha direct nexus between the expenses incurred and the incomeearned ignoring that even indirect expenses are attributableunder Section I4A as has been made clear by providing forRule 8D(2) in subsequent assessment years?”ITAT was justified in holding that no expense 1s attributableto the exempted income as the revenue had failed to establisha direct nexus between the expenses incurred and the incomeearned ignoring that even indirect expenses are attributableunder Section I4A as has been made clear by providing forRule 8D(2) in subsequent assessment years?” 5. 5.A few facts relevant for the decision of the controversy involved as|narrated in ITA No.187 of 2013 may be noticed. The respondent-assessee|company is 1n the business of manufacturing and sale of Pharmaceuticals, Healthcare services, leather finishing foils as also Treasury operation service to Joint|Venture and Film based on Polymers of Propylene etc. The assessee company|filed its return on 28.10.2002 declaring nil income and book profit of468,02,790/- under Section 115JB of the Act and revised return also declaring nilincome was filed on 27.11.2003. The same was processed under Section 143(1)of the Act. The case of the assessee was taken up for scrutiny. Notices under|section 143(2)/142(1) of the Act were issued and served on the assessee. Theassessment was completed under Section 143(3) of the Act by the Assessing|Officer on 30.3.2005 at assessed income under Section 115JB of the Act aftersetting off of brought forward losses. The Assessing Officer while making|assessment made the following additions/disallowances:-| 11)Disallowance of expenses on account of expansion ofbusiness of healthcare division;business of healthcare division; 111)Disallowance of expenditure on account of expansion ofMaxxon business, Max Foil Division;Maxxon business, Max Foil Division; Iv)Disallowance of speculation loss in trading of shares. | 11)Disallowance of expenses on account of expansion ofbusiness of healthcare division;business of healthcare division; 111)Disallowance of expenditure on account of expansion ofMaxxon business, Max Foil Division;Maxxon business, Max Foil Division; Iv)Disallowance of speculation loss in trading of shares. | Aggrieved by the assessment order, the assessee company filed an appeal beforethe Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated|12.1.2011, Annexure A.2, the CIT(A) allowed the appeal and deleted the|additional/disallowances made by the Assessing Officer. Not satisfied with the|order, the revenue filed appeal before the Tribunal. Vide order dated 8.3.2013,|Annexure A.3, the Tribunal dismissed the appeal. Hence the instant three|appeals by the revenue before this Court. 6. We have heard learned counsel for the parties. ‘|.Firstly, while taking up ITA No.187 of 2013, question (a) as to)whether payment of compete fee is a revenue expenditure and an allowable|deduction, the same has already been considered and concluded against the|revenue by this Court in ITA No. 193 of 2013, (Commission of Income Tax,Jalandhar 1, Jalandhar vs. M/s Max India Limited), decided on 06.08.2018.The payment of non-compete fee was held to be allowable as revenue|expenditure. Questions (b) & (c) are as to whether expenses incurred for startingentirely different line such as health care division and for expansion of businessare revenue expenditure. The said issues have already been examined and|concluded against the revenue by this Court in ITA No.426 of 2010|(Commission ofIncome Tax, Jalandhar vs. M/s Max India Limited), decidedon 8.9.2015. Answered Accordingly. 8.Adverting to Questions (d) to (f), relating to the provisions of|Explanation to Section 73 of the Act with regard to conversion of stock into|GURBAX SINGH2019.04.06 16:50 investment, it may be noticed that Max Corporation Limited (MCL)|incorporated on 12.9.1996 was merged with the assessee-company w.e.f|1.7.1999. Pursuant to the merger, all assets and liabilities of MCL including|various shares held by it as stock in trade and as investments, vested in the|assessee. AS per management decision dated 3.7.2000, the shares were convertedfrom stock in trade to investment. The assessee claimed a loss on account ofdifference in market value of such shares and cost price thereof, which was|claimed as business deduction. Out of the converted shares, certain shares were|sold by the assessee. The assessee computed loss from the aforesaid sale 1.e.|difference between the sale price and market price as on the date of conversion.The Assessing Officer did not accept the action of conversion of shares from|stock in trade to investment in the books of account on the ground that even aftermerger, the company was taking decisions on day to day basis on sale and|purchase of shares and therefore, the shares were continued to be held as stock in|trade. The Assessing Officer thus disallowed the entire loss arising from the saleof shares. The CIT(A) decided the issue in favour of the assessee by holding thatthe assessee was at liberty to classify shares received on amalgamation as stock|1n trade or investment. The Tribunal held the aforesaid conversion from stock 1ntrade to the investment as valid and upheld the order of the CIT(A) treating theloss on sale of investment arising in the assessment year 2001-02 as not!speculative business loss. Explanation to Section 73 of the Act invoked by the|Assessing Officer was held to be not applicable 1n relation to sale of investmentsin the appeal for the assessment year 2001-02. The relevant findings recorded bythe Tribunal read thus:- “14. First of all, we take up appeal of the Revenue in ITA No. 103 (Asr)/2006 for the assessment year 2001-02 as under: “14. First of all, we take up appeal of the Revenue in ITA No. 103 (Asr)/2006 for the assessment year 2001-02 as under: (1) The brief facts regarding first ground of Revenue, which are in|three parts are that Max Corporation Limited (MCL), a whollyowned subsidiary of the assessee was incorporated on|12.09.1996 was merged with the assessee w.e.f. 1.7.1999,|pursuant to a scheme of merger approved by the Hon’ble|Punjab & Haryana High Court. Pursuant to merger, all assets|and liabilities of Max Corporation Ltd; including various|shares held by Max Corporation Ltd, as stock 1n trade and as|investments, vested in the assessee. On 3.7.2000, as per the|decision of management, shares of 11 companies, which wereacquired by MCL and were held as “stock in trade’, prior to|merger and which vested with the assessee post merger, weredecided to be held as ‘investment’. Accordingly, the said|shares were converted from stock 1n trade to investment. On)the date of conversion, the assessee claimed a loss on account|of difference in market value of such shares and cost price|thereof. The said loss was claimed as business deduction. Outof the aforesaid converted shares, certain shares were also sold|by the assessee during the year. The assessee computed loss|from the aforesaid sale, 1.e. difference between the sale price|and market price as on the date of conversion (3.7.2000) at.42.12 crores, which was disclosed under the head ‘capital|gains’. Further, during the relevant previous year, the assesseesold shares of three companies, which were held as stock in|trade and acquired from erstwhile MCL, which resulted in|business loss oTL3.72 crores.three parts are that Max Corporation Limited (MCL), a whollyowned subsidiary of the assessee was incorporated on|12.09.1996 was merged with the assessee w.e.f. 1.7.1999,|pursuant to a scheme of merger approved by the Hon’ble|Punjab & Haryana High Court. Pursuant to merger, all assets|and liabilities of Max Corporation Ltd; including various|shares held by Max Corporation Ltd, as stock 1n trade and as|investments, vested in the assessee. On 3.7.2000, as per the|decision of management, shares of 11 companies, which wereacquired by MCL and were held as “stock in trade’, prior to|merger and which vested with the assessee post merger, weredecided to be held as ‘investment’. Accordingly, the said|shares were converted from stock 1n trade to investment. On)the date of conversion, the assessee claimed a loss on account|of difference in market value of such shares and cost price|thereof. The said loss was claimed as business deduction. Outof the aforesaid converted shares, certain shares were also sold|by the assessee during the year. The assessee computed loss|from the aforesaid sale, 1.e. difference between the sale price|and market price as on the date of conversion (3.7.2000) at.42.12 crores, which was disclosed under the head ‘capital|gains’. Further, during the relevant previous year, the assesseesold shares of three companies, which were held as stock in|trade and acquired from erstwhile MCL, which resulted in|business loss oTL3.72 crores. 11) The AO did not accept the action of conversion of shares from|stock in trade to investment in the books of account on the)eround that even after merger, the company was taking|decisions on day to day basis on sale and purchase of shares|and therefore, the shares were continued to be held as stock 1n trade and conversion thereof into investment was a colorable|device adopted to go out of Explanation to Section 73 of the|Act. The AO further mentioned that the assessee company|stock in trade to investment in the books of account on the)eround that even after merger, the company was taking|decisions on day to day basis on sale and purchase of shares|and therefore, the shares were continued to be held as stock 1n trade and conversion thereof into investment was a colorable|device adopted to go out of Explanation to Section 73 of the|Act. The AO further mentioned that the assessee company| arbitrarily picked up certain shares only for conversion from|stock in trade to investment. 11) The AO therefore disallowed the entire loss arising from sale|of shares (which were held as stock 1n trade and converted intoinvestment), by treating the same as speculative in nature, by|applying the deeming fiction contained in Explanation to|Section 73 of the I.T. Act, 1961.of shares (which were held as stock 1n trade and converted intoinvestment), by treating the same as speculative in nature, by|applying the deeming fiction contained in Explanation to|Section 73 of the I.T. Act, 1961. 1v) On appeal, the Ld. CIT (A) decided the issue in favour of the|assessee by holding that:assessee by holding that: the assessee was at liberty to classify shares received on|amalgamation as stock in trade or investment, as per page 8 ofLd. CIT(A)’s order. sale of shares held as investments were not covered by the|provisions of Explanation to Section 73. The Ld. CIT (A), however, held the loss arising on conversion|of shares held as stock jn trade into investment as notional loss and directed the AO to allow loss arising on sale of converted|Shares, as capital loss, by reducing the actual cost price from|sale consideration, which amounted to.46.52 crores, aS perpara 3 of Ld. CIT (A)’s order. Explanation to Section 73 was not applicable to loss arising|from sale of shares (held as stock in trade), claimed by the|assessee as business loss. The AO was directed to allow loss of|43.72 crores arising on sale of shares as normal business loss|(Refer page 15 of Ld. CIT (A)’s order). 15. We may point out that the assessee has accepted the order of|the Ld. CIT (A) disallowing notional loss arising on|conversion of stock in trade into the investments on 3.7.2000|and no appeal has been filed by the assessee against the|aforesaid decision of Ld. CIT (A). the Ld. CIT (A) disallowing notional loss arising on|conversion of stock in trade into the investments on 3.7.2000|and no appeal has been filed by the assessee against the|aforesaid decision of Ld. CIT (A). 16. The Revenue has challenged the aforesaid order of the Ld. CIT|(A) accepting conversion of stock in trade into investments and(A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on saleof part shares so converted and other shares held as stock in|trade.”’of part shares so converted and other shares held as stock in|trade.”’ KRAAAAANAAANAAAAAAA 16. The Revenue has challenged the aforesaid order of the Ld. CIT|(A) accepting conversion of stock in trade into investments and(A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on saleof part shares so converted and other shares held as stock in|trade.”’of part shares so converted and other shares held as stock in|trade.”’ KRAAAAANAAANAAAAAAA 22. We have heard the rival contentions and perused the facts ofthe case. We are of the view that conversion of part of sharesacquired from Max Corporation Ltd; as stock in trade into|investments cannot be said to be a device for evading the tax|and such conversion cannot be rejected. It is the prerogative ofthe assessee as to whether it wants to hold the shares as stock|in trade or as an investment or partly as stock in trade or partlyas an investment. Reference 1s made in this regard to the|decision of Hon’ble Bombay High Court in the case ofCIT Vs.Yatish Trading Co. Pvt. Ltd.(supra), wherein conversion ofshares from stock tn trade into investments 1n case of dealer of|Shares was upheld. Such decision of the assessee cannot be|disregarded on hypothetical assumption that the same 1s.motivated by the consideration of tax evasion. Reference 1s made in this regard to the decision of the Hon’ble Supreme|Court of India in the case of.Union ofIndia vs. Azad BachaoAndolan and Another‘reported in 263 ITR 706. The bonafidesof the assessee are demonstrated by the fact that only 1/3[rd]otthe shares converted into investments only part of the shares soconverted were sold during the previous year and even in|respect of shares held as stock 1n trade, there was a loss on saleof such shares during the relevant previous year also. At the|time of conversion of shares, the assessee could not have|known that the prices would fall subsequently. the case. We are of the view that conversion of part of sharesacquired from Max Corporation Ltd; as stock in trade into|investments cannot be said to be a device for evading the tax|and such conversion cannot be rejected. It is the prerogative ofthe assessee as to whether it wants to hold the shares as stock|in trade or as an investment or partly as stock in trade or partlyas an investment. Reference 1s made in this regard to the|decision of Hon’ble Bombay High Court in the case ofCIT Vs.Yatish Trading Co. Pvt. Ltd.(supra), wherein conversion ofshares from stock tn trade into investments 1n case of dealer of|Shares was upheld. Such decision of the assessee cannot be|disregarded on hypothetical assumption that the same 1s.motivated by the consideration of tax evasion. Reference 1s made in this regard to the decision of the Hon’ble Supreme|Court of India in the case of.Union ofIndia vs. Azad BachaoAndolan and Another‘reported in 263 ITR 706. The bonafidesof the assessee are demonstrated by the fact that only 1/3[rd]otthe shares converted into investments only part of the shares soconverted were sold during the previous year and even in|respect of shares held as stock 1n trade, there was a loss on saleof such shares during the relevant previous year also. At the|time of conversion of shares, the assessee could not have|known that the prices would fall subsequently. 22.2 The loss arising on the sale of shares held as investment 1s not)only in any manner effected by the Explanation to Section 73of the Act, which deals in relation to shares sold in the courseof business. The various case laws cited by the assessee are 1n|support of the above proposition. Accordingly, the loss ofS|only in any manner effected by the Explanation to Section 73of the Act, which deals in relation to shares sold in the courseof business. The various case laws cited by the assessee are 1n|support of the above proposition. Accordingly, the loss ofS| 6.52crores arising on sale of investment has rightly been|allowed as capital loss by the Id. CIT (A).| 22.2 The loss arising on the sale of shares held as investment 1s not)only in any manner effected by the Explanation to Section 73of the Act, which deals in relation to shares sold in the courseof business. The various case laws cited by the assessee are 1n|support of the above proposition. Accordingly, the loss ofS|only in any manner effected by the Explanation to Section 73of the Act, which deals in relation to shares sold in the courseof business. The various case laws cited by the assessee are 1n|support of the above proposition. Accordingly, the loss ofS| 6.52crores arising on sale of investment has rightly been|allowed as capital loss by the Id. CIT (A).| 79. As regardseround No. 5of the revenue, where the revenuehas challenged the order of the Id. CIT (A) 1n not treating theloss arising on sale of investment as speculative loss.has challenged the order of the Id. CIT (A) 1n not treating theloss arising on sale of investment as speculative loss. 80. We find that this issue has come up for our consideration inassessee’s Own appeal for the assessment year 2001-02 in ITANo. 103 (Asr)/2006 hereinabove. The loss 1n question relates|to sale of shares held as investments including those shares|which were received from MCL in the year 1999-2000 and_were converted into investment by the assessee in the financialyear 2000-01. We have held the aforesaid conversion from|stock in trade to the investment as valid and upheld the order|of Ld. CIT (A) treating the loss on sale of investment arising 1nthe assessment year 2001-02 as not speculative business loss.The Explanation to Section 73 of the Act invoked by the AO|was held to be not applicable in relation to sale of investmentsin the appeal for the A.Y. 2001-02. Therefore, being no changein the facts and position in law in the relevant previous year ascompared to assessment year 2001-02 and in the absence ofany new arguments having been raised by the parties, we|dismiss this ground of appeal of the Revenue following our|own order for the assessment year 2001-02 hereinabove.”assessee’s Own appeal for the assessment year 2001-02 in ITANo. 103 (Asr)/2006 hereinabove. The loss 1n question relates|to sale of shares held as investments including those shares|which were received from MCL in the year 1999-2000 and_were converted into investment by the assessee in the financialyear 2000-01. We have held the aforesaid conversion from|stock in trade to the investment as valid and upheld the order|of Ld. CIT (A) treating the loss on sale of investment arising 1nthe assessment year 2001-02 as not speculative business loss.The Explanation to Section 73 of the Act invoked by the AO|was held to be not applicable in relation to sale of investmentsin the appeal for the A.Y. 2001-02. Therefore, being no changein the facts and position in law in the relevant previous year ascompared to assessment year 2001-02 and in the absence ofany new arguments having been raised by the parties, we|dismiss this ground of appeal of the Revenue following our|own order for the assessment year 2001-02 hereinabove.” QFurther 1nCommissioner of Income Tax Vs. Yatish Trading Co.Private Limited, [2013] 359 ITR 320 (Bom), it was held that the shares sold|were held by the assessee as investments and the gains arising out of the sale ofthe investments were to be assessed under the head “Capital gains” and not|under the head “Business profits’. The relevant paras of the judgment read thus:- | “The assessee 1s engaged in the business of investments and also)dealing in shares and securities. In the assessment year 2006-07, the|assessee declared income under the heads ‘profits and gains of) QFurther 1nCommissioner of Income Tax Vs. Yatish Trading Co.Private Limited, [2013] 359 ITR 320 (Bom), it was held that the shares sold|were held by the assessee as investments and the gains arising out of the sale ofthe investments were to be assessed under the head “Capital gains” and not|under the head “Business profits’. The relevant paras of the judgment read thus:- | “The assessee 1s engaged in the business of investments and also)dealing in shares and securities. In the assessment year 2006-07, the|assessee declared income under the heads ‘profits and gains of) profession’ and also under the head capital gains. The assessing|officer noted that a part of the capital gains declared was in respectof transfer of shares / securities which were held by the assessee|originally as stock in trade as a dealer in shares/securities.|However, these share securities were converted into investment bythe respondent-assessee on Ist April, 2002 and Ist October, 2004. Consequently, the assessing officer held that the short term andlong term gains arising out of the sale of shares which were heldoriginally as stock in trade and converted into investments was to)be treated as business income. In first appeal before the CIT(A), it)was pointed out that upto the date the shares were in its trading|portfolio 1.e. till the date of its conversion as investments the gain|made was offered as business income and thereafter as capital gains|till sale. This was held by the CIT(A) as reasonable and logical.|Thus, CIT(A) has allowed the appeal of the assessee. The Tribunal held that it is not in dispute that the conversionof its stock in trade into investment was accepted by the)Department in assessment years 2003-04 and 2005-06. It is also not)in dispute that the shares which were sold and gains from such sales|were offered under the head capital gains from the date of|conversion from stock in trade into investments and prior thereto as|business profits. Further in its books of accounts the respondent-assessee showed the shares on which tax is levied under the head|capital gain as investments. Further the fact that the assessee was|trading in the shares would not estop the assessee from dealing in|shares as investment and offer the gain for tax under the head)capital gains. Thus, it is open to the trader to hold shares as stock in|trade as well as investments. Once the finding of fact is recorded|that the shares sold were held by respondent-assessee as_investments, the gains arising out of the sale of investment were to)be assessed under the head capital gains and not under the head|business profits.” 10.)In|Commissioner ofIncome Tax (Central) Vs. Express Securities’ ITA No.187 of 2013(O&M) conversion of stock 1n trade into investment was done with an intention of not to|pay taxes as Section 10(38) of the Act was introduced by Finance Act, 2004|with effect from 01.04.2005. It was held by the Assessing Officer that the entireamount was taxable as a ‘trading receipt’ and not under the head ‘capital gains’.The Tribunal, however, allowed assessee’s claim. It was noted from records that)shares 1n question were sold nearly two years after conversion of stock in tradeinto investment with a specific declaration. Therefore, the Tribunal rightly set|aside impugned assessment order. The Delhi High Court upheld the order passedby the Tribunal. The relevant paras of the judgment read thus:- 10.)In|Commissioner ofIncome Tax (Central) Vs. Express Securities’ ITA No.187 of 2013(O&M) conversion of stock 1n trade into investment was done with an intention of not to|pay taxes as Section 10(38) of the Act was introduced by Finance Act, 2004|with effect from 01.04.2005. It was held by the Assessing Officer that the entireamount was taxable as a ‘trading receipt’ and not under the head ‘capital gains’.The Tribunal, however, allowed assessee’s claim. It was noted from records that)shares 1n question were sold nearly two years after conversion of stock in tradeinto investment with a specific declaration. Therefore, the Tribunal rightly set|aside impugned assessment order. The Delhi High Court upheld the order passedby the Tribunal. The relevant paras of the judgment read thus:- "3. The Assessing Officer has recorded that as per the business|activities under taken by the assessee, they were dealing and trading|in shares and financial securities in Bombay Stock Exchange, Delhi|Stock Exchange and Calcutta Stock Exchange. The respondent-assessee was a registered broker with the said exchanges. The)Assessing Officer held that the business of the assessee was not toinvest in shares but to deal with the shares as a stock broker and|trader. He observed that conversion of stock in trade intoinvestment was done with the intention not to pay taxes as Section|10(38) was introduced by Finance Act, 2004 with effect from |[St]April, 2005. Accordingly, he held that the entire amount was)taxable as a “trading receipt” and not under the head “capital|gains’. 4 The assessment order does not mention the date on which the|shares 1n question were purchased. We also note that the assessment|order records that the assessee had converted and transferred the|shares 1n question under the head “investment” on I[St|]April, 2004. This factual position was not disputed or questioned. The shares 1n|question were sold during the period ending 31[St]March 2006,nearly 2 years after the date of conversion of stock 1n trade into|investment with a specific declaration. Mere fact that Section|10(38) was introduced in the statute by Finance Act, 2004 with)effect from I[St|]April, 2005, does not mean that the said conversion was improper or illegal. After the said Section was inserted, the)assessee on noticing the tax benefit, was entitled to convert andchange his holding from stock in trade into investment. Such)conversion cannot be dealt with and rejected on the ground that)Section 10(38) of the Act was introduced with effect from the said|date. Conversion may be rejected for other reasons and grounds like|the intention was not to convert and the assessee still continued to treat and regard the shares as stock in trade and not investment. Butthere is hardly any discussion in the assessment order in this regard. Justification and reasons have not been elucidated and brought onrecord to uphold the contention of the revenue that the shares were|continued to be held as stock tn trade and not as an investment. — 5. The Commissioner (Appeals) noticed that the shares 1n question|as held on 31[St]March, 2004 and their book value was as under:- 5. The Commissioner (Appeals) noticed that the shares 1n question|as held on 31[St]March, 2004 and their book value was as under:- 6. The Commissioner (Appeals) has observed that in the balance|sheet as on 3][St]March, 2005 the shares were shown under the head“inventories” and in the subsequent balance sheet as on 31 March,2006, shares were again shown under the head “investment at)book/fair value on [[St]April, 2004”. Thus, the assessee converted theaforesaid stock 1n trade of.43,18,38,850/- to the head “investmentat book/fair value on I[St]April, 2004” and the said disclosure was_made in the balance sheets as on 31[St]March, 2005 and 31[St]March,2006. In the first year, the Assessing Officer did not disturb the)aforesaid conversion and accepted the same. The Commissioner|(Appeals) noticed that for the Assessment Year 2005-06 assessment|was concluded under Section 143(3) vide order dated 27[th]November, 2007 but the Assessing Officer did not object to the said|conversion. These shares were subsequently sold as detailed in)paragraph 2.9 of the order of the Commissioner (Appeals) in)August, 2005, September, 2005 and substantial portion was sold in| March, 2006 and long term capital gains was declared. He observed|that statute did not reyect or frown upon conversion of stock 1n tradeinto investment and the said conversion was_ permissible.Commissioner (Appeals) referred to the Circular No.4/2007 dated|"7[th]June, 2007 issued by the Central Board of Direct Taxes, which|stipulates that two portfolios one for stock in trade and one in)respect of investments could be maintained by the same assessee.He took into account the period of holding by the assessee and thefact that the conversion into investment was made on I[St]April, 2004and outlay was disclosed in the audited accounts for the AssessmentYear 2005-06. The sales made, as noticed above, were afterconsiderable delay of approximately two years thereafter.that statute did not reyect or frown upon conversion of stock 1n tradeinto investment and the said conversion was_ permissible.Commissioner (Appeals) referred to the Circular No.4/2007 dated|"7[th]June, 2007 issued by the Central Board of Direct Taxes, which|stipulates that two portfolios one for stock in trade and one in)respect of investments could be maintained by the same assessee.He took into account the period of holding by the assessee and thefact that the conversion into investment was made on I[St]April, 2004and outlay was disclosed in the audited accounts for the AssessmentYear 2005-06. The sales made, as noticed above, were afterconsiderable delay of approximately two years thereafter. 11.) 7. In view of the aforesaid factual findings recorded by the)Commissioner (Appeals) and the tribunal, we do not see any reason|to interfere and issue notice on the main appeal.”Commissioner (Appeals) and the tribunal, we do not see any reason|to interfere and issue notice on the main appeal.” Tn|Deeplok Financial of Calcutta Vs. Commissioner of Income Tax-ll, Kolkata, [2017] 80 taxman.com 51 (Calcutta), the issue was as to.whether where assessee converted its shares held as stock in trade into)investment and sold them at later stages, profit arising from sale of shares wouldbe deemed to be long term capital gains and not as business income. The answer|was given in the affirmative. The relevant para of the judgment reads thus:- 11.) 7. In view of the aforesaid factual findings recorded by the)Commissioner (Appeals) and the tribunal, we do not see any reason|to interfere and issue notice on the main appeal.”Commissioner (Appeals) and the tribunal, we do not see any reason|to interfere and issue notice on the main appeal.” Tn|Deeplok Financial of Calcutta Vs. Commissioner of Income Tax-ll, Kolkata, [2017] 80 taxman.com 51 (Calcutta), the issue was as to.whether where assessee converted its shares held as stock in trade into)investment and sold them at later stages, profit arising from sale of shares wouldbe deemed to be long term capital gains and not as business income. The answer|was given in the affirmative. The relevant para of the judgment reads thus:- “11. That apart, this assessee lost its right of appeal to this Court)on the question arising in the previous assessment year onaccount of delay in preferring the same. There was noadjudication on merits, of its claim of conversion, on appealto the High Court. The only reason given by the Tribunal inrejecting the claim of the assessee for the previousassessment year, aS would appear from its order dated 13[th]May, 2011 (copy handed up), is that to the Tribunal itappeared there is no provision in the Act in respect ofconversion of stock-in-trade into investment and itstreatment. Hence, it held that the lower authorities rightlyon the question arising in the previous assessment year onaccount of delay in preferring the same. There was noadjudication on merits, of its claim of conversion, on appealto the High Court. The only reason given by the Tribunal inrejecting the claim of the assessee for the previousassessment year, aS would appear from its order dated 13[th]May, 2011 (copy handed up), is that to the Tribunal itappeared there is no provision in the Act in respect ofconversion of stock-in-trade into investment and itstreatment. Hence, it held that the lower authorities rightly made the addition as there was understatement of income byanalyzing the assessee’s trading and investment account inshares. Thus, before us there 1s no impediment for theassessee to seek adjudication on the point. The questionformulated 1s answered accordingly and in favour of theassessee.”” 12.|Learned counsel for the appellant-revenue has not been able to)show that the findings recorded by the Tribunal are illegal, erroneous or perversewarranting interference by this Court. Accordingly, questions (d) to (f) are|answered in favour of the assessee and against the revenue. | 13.As regards question (g), as to whether signing of negative covenantfor not carrying out a speciality business does not amount to transfer of right tocarry on business, the consideration of which 1s liable to be taxed as capital gain,it needs to be noticed that the assessee company divested its shareholding in|Max Atotech Limited. The shares were sold on 29.6.2001 to M/s Atotech BV,|Netherlands torL13.58 crores. Alongwith the signing of the agreement for sale|of shares, the assessee had undertaken negative covenants of not entering into|market of plating chemicals and processes for General Metal Finishing and|Electronics Plating during the period 29.6.2001 to 28.6.2004 in lieu of receipt ofconsideration of41.43 crores which was claimed as capital receipt not liable totax. The Assessing Officer held that since the assessee extinguished its right to re-enter the market of plating chemicals and process for general metal finishingand electronics plating for consideration, the same amounted to transfer of right|to carry on business and therefore the amount of consideration received was|lable to be taxed under the head capital gains. The CIT(A) held that undertakinga restrictive convenant not to carry on business without transfer of any business was not in the nature of right to carry on business to be regarded as transfer of was not in the nature of right to carry on business to be regarded as transfer of exigible to tax under the provisions of the Act. Identical issue was considered bythe Tribunal 1n assessee’s own case for the assessment year 1998-99 and the|Tribunal held that taking over a restrictive obligation did not amount to transfer|of right in any business and therefore non compete fee could not be considered|as resulting in capital gains. Even Section 55(2)(a) of the Act which was|prospective in nature was not held to be applicable to the facts of the present|case in the absence of any capital asset being transferred by the assessee in lieu|of which the assessee had received the impugned amount of non compete fee.The relevant findings recorded by the Tribunal read thus:- “Sl. As regards groundNo.6 of the revenue,|where the revenue haschallenged the order of the Id. CIT (A) 1n holding that theamount received towards non-compete fee is not liable to taxunder the head of capital gains.challenged the order of the Id. CIT (A) 1n holding that theamount received towards non-compete fee is not liable to taxunder the head of capital gains. 81.1 The facts in relation to said ground of appeal are that during the|relevant previous year, the assessee company divested itsshareholding in Max Atotech Limited. The shares were sold on29.6.2001 to M/s. Atotech BV, Netherlands for|zy13.58 crores. Alongwith the signing of the agreement for sale of shares, theassessee had undertaken negative covenants of not entering into”market of plating chemicals and processes for General MetalFinishing & Electronics Plating during the period 29.6.2001 to28.6.2004 in lieu of receipt of consideration ofS|1.43 crores.The same was claimed as capital receipt not liable to tax.relevant previous year, the assessee company divested itsshareholding in Max Atotech Limited. The shares were sold on29.6.2001 to M/s. Atotech BV, Netherlands for|zy13.58 crores. Alongwith the signing of the agreement for sale of shares, theassessee had undertaken negative covenants of not entering into”market of plating chemicals and processes for General MetalFinishing & Electronics Plating during the period 29.6.2001 to28.6.2004 in lieu of receipt of consideration ofS|1.43 crores.The same was claimed as capital receipt not liable to tax. XXXXXXxxX 82. We have heard the rival contentions and persued the facts of the|case. We find that the identical issued was considered by thisBench of the Tribunal in assessee’s own case for the assessmentyear 1998-99 and the Tribunal in that case categorically heldthat taking over a restrictive obligation does not amount totransfer of right in any business and therefore, non-compete feecannot be considered as resulting in capital gains. There arecase. We find that the identical issued was considered by thisBench of the Tribunal in assessee’s own case for the assessmentyear 1998-99 and the Tribunal in that case categorically heldthat taking over a restrictive obligation does not amount totransfer of right in any business and therefore, non-compete feecannot be considered as resulting in capital gains. There are 82. We have heard the rival contentions and persued the facts of the|case. We find that the identical issued was considered by thisBench of the Tribunal in assessee’s own case for the assessmentyear 1998-99 and the Tribunal in that case categorically heldthat taking over a restrictive obligation does not amount totransfer of right in any business and therefore, non-compete feecannot be considered as resulting in capital gains. There arecase. We find that the identical issued was considered by thisBench of the Tribunal in assessee’s own case for the assessmentyear 1998-99 and the Tribunal in that case categorically heldthat taking over a restrictive obligation does not amount totransfer of right in any business and therefore, non-compete feecannot be considered as resulting in capital gains. There are several other decisions of the Courts/ Tribunal on the issue jn!question which have been referred to by the Id. counsel for theassessee also support the contentions of the assessee. Thecontention of the Ld. DR that non-compete fee has to beconsidered as income under the head capital gains from thetransfer of right in a business is without any factual or legalbasis. We find that Section 55(2)(a), which 1s prospective innature, 1s not applicable to the facts of the present case, in theabsence of any capital asset being transferred by the assessee inlieu of which the assessee has received the impugned amount ofnon-compete fee. Our views are supported by the decision of theSpecial Bench of [TAT Hyderabad in the case of ACIT vs. B.V.Raju(supra).”question which have been referred to by the Id. counsel for theassessee also support the contentions of the assessee. Thecontention of the Ld. DR that non-compete fee has to beconsidered as income under the head capital gains from thetransfer of right in a business is without any factual or legalbasis. We find that Section 55(2)(a), which 1s prospective innature, 1s not applicable to the facts of the present case, in theabsence of any capital asset being transferred by the assessee inlieu of which the assessee has received the impugned amount ofnon-compete fee. Our views are supported by the decision of theSpecial Bench of [TAT Hyderabad in the case of ACIT vs. B.V.Raju(supra).” 14.|In|Guffic Chem. P. Ltd Vs. Commissioner of Income Tax and another,[2011] 332 ITR 602 (SC), the assessee was carrying on the business ofmanufacturing, selling and distribution of pharmaceutical and medical|preparations. It received|450 lakhs from Ranbaxy as non competition fee. It|agreed to transfer its trade marks to Ranbaxy and in consideration for such|transfer the assessee agreed that it shall not carry on directly or indirectly the|business hitherto carried on by it. The agreement was for 20 years. The Tribunalheld that the amount was a capital receipt, but the High Court reversed the|decision. The Apex Court reversed the decision taken by the High Court holdingthat prior to April 1, 2003, when Parliament stepped in to specifically tax such|receipts, the payment was in the nature of a capital receipt. The relevant para ofthe judgment reads thus:- ‘7. Two questions arose for determination, namely, whether theamounts received by the appellant for loss of agency were innormal course of business and therefore whether theyconstituted revenue receipt? The second question which arosebefore this court was whether the amount received by theasses