2008 (10) TMI 647 - AT - Income Tax

Summary

Issues Involved:
1. Nature of gain from the sale of equity shares.
2. Validity of evidence for purchase and sale of shares.
3. Period of holding of shares for capital gain classification.

Issue-wise Detailed Analysis:

1. Nature of Gain from the Sale of Equity Shares:
The primary issue in both appeals was the classification of the gain from the sale of equity shares of M/s Ind Swift Ltd. (ISL) amounting to Rs. 3,60,55,777. The assessee claimed this as long-term capital gain, while the Assessing Officer (AO) assessed it as income from undisclosed sources. The CIT(A) concluded the gain was short-term capital gain due to the holding period being less than a year.

2. Validity of Evidence for Purchase and Sale of Shares:
The AO doubted the genuineness of the transactions for several reasons:
- The status of the remaining 63,000 shares was unclear.
- Shares of M/s Mukul Pharmaceutical Co. (P) Ltd. (MPL) and M/s Swift Formulations (P) Ltd. (SFL) were not transferred in the assessee's name until after the merger.
- Brokers involved in the transactions were untraceable.
- Substantial sums were advanced to M/s ISL without a written agreement.

The CIT(A) found the purchase and sale of shares genuine based on documentary evidence, including contract notes, bank statements, d-mat accounts, and STT certificates. The Tribunal agreed, stating the AO failed to provide evidence disproving the transactions. The Tribunal emphasized that the mere non-traceability of brokers does not invalidate the transactions, especially since the payments were made via account payee cheques, and the shares were d-mated and sold through the stock exchange.

3. Period of Holding of Shares for Capital Gain Classification:
The Tribunal disagreed with the CIT(A)'s conclusion that the shares were purchased on the date they were credited to the d-mat account (18th Oct., 2004). Instead, it held that the purchase date was 1st Sept., 2003, based on the contract notes and payment dates. This conclusion was supported by CBDT Circular No. 704, which states that the date of purchase is the date of contract notes or payment, not the transfer date. Thus, the Tribunal determined that the gain was correctly classified as long-term capital gain, as the shares were held for more than 12 months.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, recognizing the gain as long-term capital gain, and dismissed the appeal filed by the Revenue. The Tribunal's decision was based on the substantial documentary evidence provided by the assessee and the failure of the AO to disprove the genuineness of the transactions.