2012 (10) TMI 1037 - AT - Income Tax

Transfer of shares - long term capital gain - exemption u/s. 10(38) - date of acquisition of the shares - interest under section 234B - Held that - Purchase and sale of shares outside the floor of stock exchange is not an unlawful activity. Off-market transactions are not illegal - book entries reflects the purchase and sale of shares and support the money received on sale of shares and finally investing the same in the purchase of flat. The chain of transactions entered into by the assessee have been properly accounted, documented and supported by evidences - allowing the benefit of the exemption u/s. 10(38) - Decided in the favor of assessee.

Issues Involved:
1. Whether the gain received on the transfer of shares should be treated as long-term capital gain and thus eligible for exemption under section 10(38) of the I.T. Act, 1961.
2. Determination of the date of acquisition of shares.
3. Deletion of interest under section 234B.
4. Classification of income from undisclosed sources as capital gains.
5. Acceptance of the cost of purchase/acquisition of shares.
6. Validity of the transaction and the genuineness of the purchase contract notes.

Issue-wise Detailed Analysis:

1. Long-term Capital Gain and Exemption under Section 10(38):
The assessee claimed exemption under section 10(38) for the gain received on the transfer of shares, which the Commissioner of Income Tax (Appeals) [CIT(A)] denied. The Tribunal observed that the assessee had shown the sale of shares of Prime Capital Market Ltd. and claimed long-term capital gain. The Assessing Officer (A.O.) doubted the genuineness of the transaction, noting that the shares were credited to the demat account after 14 months and the purchase price was paid in cash. However, the CIT(A) accepted the transaction as genuine but did not accept the date of acquisition shown by the assessee, leading to the denial of long-term capital gain treatment. The Tribunal, referring to the case of Mukesh R. Marolia and other precedents, concluded that off-market transactions are not illegal and upheld the assessee's claim for exemption under section 10(38).

2. Date of Acquisition of Shares:
The CIT(A) held that the date of acquisition should be the date on which the shares were credited to the demat account, not the purchase date shown by the assessee. The Tribunal disagreed, stating that the physically held shares for 14 months cannot conclusively prove the purchase date was not genuine. The Tribunal directed the A.O. to consider the date of purchase as 17th May 2004, as shown by the assessee, and allow the benefit of long-term capital gain.

3. Deletion of Interest under Section 234B:
The third ground of the appeal concerned the deletion of interest under section 234B, which is consequential and mandatory. The Tribunal did not provide a detailed discussion on this issue, implying that the interest levy stands as per the statutory provisions.

4. Classification of Income from Undisclosed Sources as Capital Gains:
The Revenue challenged the CIT(A)'s decision to treat the income from the sale of shares as capital gains rather than income from undisclosed sources. The Tribunal upheld the CIT(A)'s decision, noting that the assessee maintained proper books of account and reflected the purchase transaction of shares. The A.O.'s reservations about the conversion of physical shares to demat form after 14 months were not sufficient to classify the income as undisclosed sources.

5. Acceptance of Cost of Purchase/Acquisition of Shares:
The CIT(A) accepted the cost of acquisition as shown by the assessee (Rs. 5.15 per share), despite initially questioning the genuineness of the purchase contract notes. The Tribunal supported this finding, emphasizing that the transaction was genuine and the purchase price recorded in the books of account should be accepted.

6. Validity of the Transaction and Genuineness of the Purchase Contract Notes:
The A.O. doubted the genuineness of the transaction, citing SEBI investigations and the broker's suspension. However, the CIT(A) and the Tribunal found no specific findings against the assessee's transactions. The Tribunal noted that the A.O. did not provide concrete evidence to prove the transactions were sham and relied on general observations about the broker. The Tribunal concluded that the transactions were genuine and supported by proper documentation and book entries.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the A.O. to treat the gain from the sale of shares as long-term capital gain and grant exemption under section 10(38). The Revenue's appeal was dismissed, affirming the CIT(A)'s findings on the genuineness of the transactions and the cost of acquisition. The Tribunal emphasized that suspicion alone cannot replace legal proof and upheld the principles of genuine off-market transactions.

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