2005 (9) TMI 543 - AT - Income Tax

Cash credits - Income from undisclosed sources u/s 68 - benefit of exemption u/s 54F - HELD THAT - After having perused the entire material that is available on record, there is no averment, much less any evidence, with the revenue in this regard. In our view, while there may be enough grounds with the Assessing Officer to carry out the impugned verification exercise to test the efficacy of the transactions resulting in long-term material gains in the hands of the assessee but there is no cogent material or evidence to indicate that the impugned sale proceeds reflected unaccounted income of the assessee. Therefore, we hereby affirm the conclusion drawn by the CIT(A) in this regard. Having sustained the long-term capital gain declared by the assessee, the exemption thereafter claimed by him under section 54F with regard to the investment made for acquisition of the house property is also allowable because the only ground to deny the said exemption was the treatment of the capital gain proceeds as unexplained, which we have already concluded otherwise. Thus, we affirm the decision of the CIT(A) and the revenue fails in this ground. We find that the first appellate authority has failed to address the issue in its proper perspective. The only reason considered by the CIT(A) in deleting the addition is to the effect that the addition as made by the Assessing Officer was on the basis that the sale proceeds of the shares sold were found to be unexplained. While the said ground may not be enough to justify the addition, yet the CIT(A) failed to appreciate that the onus still remained on the assessee to explain the sources for making the impugned investment towards acquisition of the property. We do not find any finding by the CIT(A) with regard to the explanation offered by the assessee on this issue. Although we notice that the assessee, by way of his written submissions before the CIT(A), a copy of which is placed at pages 1-5 of the paper book before us, had explained that the assessee withdrew a sum of Rs. 1,40,000 on 6-7-1996 from its bank account for utilization in the purchase of stamp duty, etc., but this aspect has not been considered by the CIT(A) and nor by the Assessing Officer. Certainly, the same requires verification. Therefore, for this limited purpose, we set aside the order of the CIT(A) and restore the issue to the Assessing Officer who shall consider and examine the plea of the assessee in this regard. If the Assessing Officer is satisfied that over and above the sale proceeds of the shares, the assessee had sufficient funds to meet the balance investment in the property, no addition shall be required to be made. If on the contrary, the Assessing Officer is not so satisfied, he shall be at liberty to pass such order as is in accordance with law. Of course, the Assessing Officer shall carry out the verification exercise after allowing the assessee due opportunity of being heard in the matter. In the result, the appeal of the revenue is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Whether the sale of shares should be treated as capital gain and the relief under section 54F of the Income-tax Act, 1961 should be allowed.
2. Whether the addition of Rs. 1,15,000 paid for stamp duty should be treated as income under section 68 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Sale of Shares as Capital Gain and Relief under Section 54F:

The assessee declared a long-term capital gain on the sale of 27,000 shares of Adam Finman Limited, claiming exemption under section 54F of the Income-tax Act, 1961, as the proceeds were invested in a residential property. The Assessing Officer (AO) questioned the genuineness of the transaction, citing undelivered letters to brokers and the investee company, and the non-listing of the brokers with the Delhi Stock Exchange. The AO treated the sale proceeds as income from undisclosed sources under section 68 and denied the exemption under section 54F.

In appeal, the assessee provided additional evidence, including confirmations from brokers and the investee company, stock exchange quotations, and contract notes. The CIT(A) upheld the assessee's plea, noting that the AO relied too much on suspicion and that the assessee had discharged the initial onus of proving the transaction's genuineness. The CIT(A) found no evidence of collusion or unaccounted income introduction by the assessee.

The Tribunal affirmed the CIT(A)'s decision, noting that the AO's verification exercise did not provide cogent material or evidence to indicate that the sale proceeds reflected unaccounted income. The Tribunal concluded that the assessee substantiated the transaction with sufficient evidence, including stock exchange quotations and confirmations from relevant parties. Therefore, the long-term capital gain declared by the assessee was sustained, and the exemption under section 54F was allowed.

2. Addition of Rs. 1,15,000 Paid for Stamp Duty as Income under Section 68:

The AO treated Rs. 1,15,000 paid for stamp duty on the purchase of property as unexplained income under section 68. The CIT(A) deleted the addition, reasoning that the amount was not a cash credit and that the assessee explained the source as partly from the sale proceeds of shares and partly from personal savings.

The Tribunal found that the CIT(A) failed to address the issue properly, noting that the onus remained on the assessee to explain the sources of the investment. The Tribunal observed that the assessee had explained the withdrawal of Rs. 1,40,000 from the bank account for stamp duty, but this aspect was not considered by the CIT(A) or the AO. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for verification, instructing the AO to examine the assessee's explanation and determine if sufficient funds were available over and above the sale proceeds of shares.

Conclusion:

The appeal of the revenue was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decision regarding the treatment of the sale of shares as capital gain and the relief under section 54F, while the issue of the addition of Rs. 1,15,000 for stamp duty was remanded to the AO for further verification.