1. This appeal by the assessee arises out of the order of the Commissioner of Income-tax (Appeals) dated 10th September, 1985, pertaining to the assessment year 1973-74.
2. The assessee is an individual. The assessment was originally completed on 24th December, 1975. During the assessment proceedings, it was stated that the assessee by his own action and by a deed dated 3-12-1971 put forth an investment along with others as stock-in-trade with the sole object of converting the said partnership into a private limited company at a later date. On 3rd December, 1971 the shares which were contributed between the partners were transferred to a Limited Company known as SJS Investment Pvt. Ltd. and consideration in respect of shares was credited by the said company to the account of the respective partners. The assessee had filed a copy of its account in the books of the said company which showed that the assessee's account was credited by Rs. 4,88,016 which represented the market value of the various shares contributed by the assessee. It was contended for the assessee that there cannot be any profit out of this transaction which may be taxed as capital gains. In that connection, reliance was placed on the case of CIT v. Bai Shirinbai K. Kooka  46 ITR 86 (SC). The ITO did not accept the assessee's claim. He had observed that the shares were transferred to a firm which was converted into a private limited company. He further observed that subsequently neither the assessee nor the firm has done any trading in the shares. He was of the view that the assessee had clearly sold his shares to a limited company through a firm and this is nothing but pure and simple sale of shares to a limited company and provisions of Section 45 of the IT Act, are clearly attracted. Accordingly, he brought to tax the capital gains, which were computed at Rs. 88,588.
3. The aforesaid order of the ITO was challenged in appeal before the CIT (Appeals). That appeal was disposed of by order dated 26-6-1980. In that order the CIT(A) did not agree with the assessee' s contention that there was conversion of the capital assets into stock-in-Trade.
He. however, observed that the ITO had proceeded on the basis of assumption. He, therefore, set aside the assessment with the direction to the ITO to record specifically a finding whether or not the assessee had changed the character of his holding. It was, however, held by the CIT(A) in that order that even if there is a conversion, the difference between the market price on the date of conversion and the 1-1-1954 value has to be brought to tax as capital gains.
4. The assessment order dated 26th March, 1983 which has given rise to the present appeal was passed consequent to the aforesaid order of the CIT (Appeals). In the present assessment order, the ITO has mentioed that the learned representative for the assessee has stated that the shares were converted into stock-in-trade on 3rd December, 1971, and the same were handed over to M/s. SJS Investment Pvt. Ltd. by blank transfer after 2-3 days. No exact date of transfer was, however, given.
It was observed by the ITO that the assessee is not trading in shares, the mere act of the assessee converting the shares into stock-in-trade is not sufficient to say that the shares are the stock-in-trade of the assessee. He also observed that the assessee has not done any trading activity either before or after. He opined that the assessee clearly sold his shares to a Limited Company which are credited to his account in the books of the Limited Company. In the circumstances, the amount of Rs. 88,588 was brought to tax as capital gains as was done in the original assessment. The order of the ITO was confirmed in appeal by the CIT (Appeals). As such, the assessee is in further appeal before the Tribunal.
5. Before dealing with the rival submissions, we may state that the agreement dated 3rd December, 1971 or a copy thereof has not been produced before us. On a query by the Bench, Shri J.D. Mistri, the learned counsel for the assessee has stated that the said agreement has been destroyed and now it is not possible to produce a copy thereof.
Shri Mistry, appearing for the assessee has reiterated the submissions that the shares held by the assessee were converted into stock-in-trade and as such, there can be no question of any capital gains, inasmuch as, the assessee's action does not amount to a transfer. In that connection, reliance was placed on the case of Bai Shirinbai K. Kooka (supra). On the other hand, the learned Departmental Representative has supported the orders of the authorities below. He was pointed out that the assessee was not a dealer in shares and no trading activity was done by him either before or after the alleged conversion. Thus, according to him it is a case of simple sale of the shares to a limited company and, in fact, there is no conversion as claimed by the assessee.
6. After giving careful consideration to the rival submission, we find ample force in what has been contended on behalf of the revenue. The term 'stock-in-trade' presupposes the existence or coming into being of some business activity. In trade and business there is a continuity of operations to regard an activity as business, there must be course of dealings continuously or contemplated to be continued with a profit motive. In the instant case, except for the alleged conversion of shares into the stock-in-trade of the assessee, there was no trading activity either before such conversion or thereafter. There is no supporting evidence to support the assessee's version except a bald assertion by himself. In the given circumstances, it is hard to believe this version of the assessee. We accordingly, find no merit in the assessee's plea on the point.
7. It was next argued on behalf of the assessee that the shares could not be transferred to the limited company during the assessment year in question and even if there had been no conversion of the shares as claimed by the assessee, the amount of capital gains cannot be brought to tax during the assessment year in question. It has been submitted that on the date of contract, i.e., 3rd December, 1971, the limited company was not in existence and the same was still to be born. Shri Mistri has submitted that the original company bearing the name of M/s.
Lawyer Investment (P.) Ltd., was incorporated on 3rd February, 1972.
But there was some hitch about this name and the same was subsequently changed into as M/s. SJS Investment Pvt. Ltd. and this company was incorporated on 13th September, 1972.
It was also contended that neither equitable ownership nor the legal ownership in the shares was transferred during the year under consideration, inasmuch as, the blank transfer forms along with the share scrips were not handed over to the limited company. The contention of the assessee has been resisted by the learned Departmental Representative with the submission that the dates, 3rd February, 1972 as also 13th September, 1972, fall during the assessment year in question and as such, the amount of capital gains has been rightly assessed during this assessment year. It was also submitted by the learned Departmental Representative that sale of shares is governed by the provisions contained in the Sale of Goods Act, and the sale becomes complete as soon as the shares are delivered to the purchaser.
He has pointed out that in the instant case the share scrips were delivered along with blank transfer forms and the purchaser company had credited the assessee's account with the sale price. As such, he urged that the sale became complete during the assessment year in question and even if the purchaser's name was registered at a later date in the register of the company, it can be of no assistance to the assessee.
8. We have given careful consideration to the rival submissions. It is not in dispute that the accounting period of the assessee relevant to the assessment year in question was samvat year 2028, which corresponds to the period 20th October, 1971 to 5th November, 1972. It is thus obvious that M/s. SJS Investment Pvt. Ltd. had been incorporated during this period. It is undisputed that M/s. SJS Investment (P.) Ltd. had credited the assessee's account by Rs. 4,88,016, which represents the market value of the shares transferred by the assessee. These facts go to indicate that the said company had accepted the transaction of sale.
That being so, the mere fact that the said company was not in existence on 3rd December, 1971 looses all importance.
9. although no evidence has been brought on record to show as to on which date the transfer of shares was registered with the company, whose shares were the subject of transfer, but even if the transfer of shares as per the Indian Companies Act were registered on a date subsequent to the assessment year in question, that fact in our opinion, will have no bearing on the present case, inasmuch as, the beneficial ownership of the shares stood transferred as soon as the blank transfer forms were handed over to the transferee company and the transferee company had accepted the transfer. It is worthy of note that before the CIT(A), the assessee had admitted that whatever dividend was received after 3rd December, 1971 was passed on to the private limited company, in terms of Clause 10 of the agreement dated 3rd December, 1971, which reads as follows : ... Effective from 3rd day of December, 1971 the said shares and securities treated as stock-in-trade by the parties hereto shall be deemed to belong to the new company and consequently all the benefits accruing thereto shall belong to the new company.
In view of the foregoing discussions, we find no force in the aforesaid plea of the assessee and reject the same.
10. It was next argued that no valid transfer of the shares was made and as such, no capital gains can be said to have legally accrued to the assresee. In that action reference has been made to Section 108 and Sub-sections (1 A) and (lB) of the Indian Companies Act. It was argued for the assessee that every instrument of transfer of shares has to be in the prescribed form and any other form of transfer would be invalid.
It has been pointed out that in the instant case blank transfer forms were issued by the assessee and as such, the transfer was not in accordance with the provisions as contained in the aforesaid section.
We are unable to accept the assessee's plea on this score. Section 108 of the Indian Companies Act relates to the registration of the transferred shares with the company, whose shares are the subject of transfer. It is true that unless the transfer of shares is registered in accordance with the provisions contained in the Indian Companies Act, the concerned company would not recognize the transferee as the owner of the shares. This provision does not mean that sale of the shares, become complete only when the shares are registered by the concerned company. In the case of Dalmia v. CIT 1971 ILR 1 (Delhi) 30, it has been held that equitable ownership in shares can be transferred by the owner by signing a blank transfer form and handing over the transfer form along with the share scrips to the re-transfer. The facts already stated above go to show that the sale had become complete and as such there is a transfer of capital asset within the meaning of Section 45 of the Income-tax Act.
11. The learned counsel for the assessee has also argued that the assessee, his wife and his son had transferred the shares in favour of the Private Limited company and, they were the only shareholders of that company and therefore, the shares held by them as individuals were held by those very persons in the limited company. This, according to him, does not amount to a physical transfer or a transfer in the commercial sense of the term and, therefore, the amount is not chargeable as capital gains. In support of this contention, he referred to the case of CIT v. Sir Homi Mehta' s Executors  28 ITR 928 (Bom.).
In that case a group of individuals, who were carrying on business in shares, transferred their holding of shares in several joint stock companies to a private limited company formed by them and entered in the books of the company the price of the shares ruling in the market on the date of the commencement of its business. The market value of the shares was in excess of the cost to the transferors. When the matter came up before the High Court, it was held by it that although legally the transaction is a sale, but substantially and really it is only a readjustment made by certain persons so as to carry on business in one form rather than in another.
12. The contention based on the aforesaid decision cannot be accepted for the simple reason that the view expounded by the Bombay High Court in the said case has been disapproved by the Apex Court of the Country in the case of CIT v. B.M. Kharwar  72 ITR 603.
13. In view of the above discussions, we find the appeal to be devoid of any force and the same is consequently dismissed.