Delhi Tribunal denies exemption for gains on listed shares converted into stock in trade

Facts
 Ms Alka Agarwal (tax payer) was a non-resident for India tax purposes during the tax year 2005-06.
 On 1 April, 2005, she had converted (“transfer”) her long term capital assets (“investment in shares”) into stock trade of her business.
 These shares were sold during the tax year 2005-06 through a stock exchange after payment of Securities Transaction Tax (STT).
 The tax payer claimed that the long term capital gains on transfer to be exempt from tax in terms of section 10(38) as STT were paid at the time of sale.
 The Assessing Officer (AO) held that transfer took place when the tax payer converted personal investment in shares into stock in trade of business. The incidence of tax on transfer was deferred till the sale of shares due to the specific provisions of the Act.
 The AO discussed the legislative intent behind the introduction of STT and concluded that in the absence of payment of STT at the time of conversion into stock, the tax payer was liable for tax on the long term capital gains at 20%.
 The Commissioner of Income-tax (Appeals) agreed with the AO’s views and upheld his decision.
 Aggrieved by the order of the CIT(A), the tax payer approached the Tribunal.

Issues before the Tribunal
 Whether long term capital gains on conversion of shares to stock in trade can be exempted from tax given the fact that such shares suffered STT on sale?
 What is the rate at which such gains are to be taxed – 20% or 10%?
Observations and ruling of the Tribunal
 The exemption for long term capital gains is available only on sale of capital assets being equity shares or equity oriented fund subject to payment of STT.
 Conversion of investments into stock into trade is a taxable event attracting capital gains tax. However, such conversion is chargeable to tax as income of the tax year in which the stock in trade is sold.
 Investment in shares was not subject to STT at the point of conversion by the tax payer into stock in trade of her business. Subsequently, these shares were sold during tax year 2005-06 upon payment of STT.
 The tax payer cannot avail the benefit of section 10(38) of the Act though STT has been paid, as at the time of sale, the shares are not capital asset but stock in trade of her business generating business income or loss.
 The concessional rate of tax of 10%, as provided in the Act is applicable only to residents. The tax payer, being a non-resident, cannot take recourse to this beneficial tax rate.
 The AO is justified in computing the income tax on long term capital gains at the rate of 20% as is applicable to a non-resident tax payer.
Source : Smt. Alka Agarwal Vs. Assistant Director of Income Tax , ITA No. 80/Del/2011 and Shri Ashok Kumar Agarwal Vs. Assistant Director of Income Tax ITA No. 150 /Del /2011