2009 (9) TMI 972 - AT - Income Tax

Bogus share transactions - transaction is off-market - AO has doubted the purchase of shares by the assessee mainly because of the report received from the ADIT (Inv.) Kolkotta that the transaction of purchase of shares by the assessee is an off-market transaction as no evidence could be found from the Calcutta Stock Exchange - CIT(A) deleted the addition - HELD THAT - As regards the purchase of shares from off market the assessee has placed reliance upon the decision of Mukesh R. Marolia 2005 (12) TMI 457 - ITAT MUMBAI wherein it has been held that the purchase and sale of shares outside floor of stock exchange is not an unlawful activity and the off-market transactions are not illegal. As regards the AO s observation that there is exorbitant rise in the sale price of the shares which created a doubt about the genuineness of the transaction the assessee has placed reliance upon the decision of Smt. Memo Devi 2008 (3) TMI 689 - ITAT AGRA wherein it has been held that increase in share price by more than 25 times cannot be the basis to assume that the transaction was bogus as abnormal increase in the share price is a normal phenomena. As decided in the case of ITO vs. Smt. Kusumlata 2006 (8) TMI 266 - ITAT JODHPUR wherein it has been held that for making an addition u/s 69 the Department is required to prove to the hilt that the impugned transactions are bogus. Transactions of sale being accepted as genuine in the AY 2003-04 but the same being disallowed by the AO in the year 2004-05 the learned counsel for the assessee placed reliance upon the decision of F Bench of the Delhi Tribunal in the case of ITO vs. Smt. Neelam Chawla 2007 (12) TMI 477 - ITAT DELHI wherein it has been held that after the assessee furnished proof for purchase sale registration of shares in her name duly supported by market quotations etc. and AO ignored the same on the basis of the statement of the share broker through whom the assessee has sold the shares the purchase of shares made in earlier years cannot be doubted. We find that the CIT(A) has considered the factual matrix of the case in detail and the propositions of the assessee are supported by the legal precedents cited supra. Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Assessment of long-term capital gains.
2. Genuineness of transactions involving shares of a specific company.
3. Treatment of income from other sources.
4. Verification of transactions by tax authorities.
5. Admissibility of evidence in assessing the genuineness of transactions.
6. Legal implications of off-market share transactions.

Analysis:

1. Assessment of long-term capital gains:
The appeal pertains to the assessment of long-term capital gains for the assessment year 2004-05. The Revenue challenged the CIT(A)'s order, raising concerns about the finalization of the assessment based on correspondence with the Additional Director of IT (Investigation) in Kolkata regarding transactions involving a specific broker and company.

2. Genuineness of transactions involving shares of a specific company:
The Revenue contended that the assessee earned capital gains through transactions in shares of a particular company. The AO raised doubts about the genuineness of these transactions due to discrepancies in the cost price and sale price of the shares, as well as the involvement of interest-free loans from the company.

3. Treatment of income from other sources:
The AO treated the capital gains as income from other sources, alleging that the transactions were not genuine. However, the CIT(A) disagreed and directed the AO to assess the income from the sale of shares as long-term capital gains instead of income from other sources, based on the genuineness of the transactions.

4. Verification of transactions by tax authorities:
The tax authorities attempted to verify the transactions by issuing letters and conducting inquiries with the broker and the company involved. However, non-compliance from the broker and the company hindered the verification process, leading to doubts about the authenticity of the transactions.

5. Admissibility of evidence in assessing the genuineness of transactions:
The assessee provided details of the transactions, including confirmation from the broker and bank statements. Despite submitting authenticated evidence, the AO considered the transactions as bogus, leading to a dispute over the genuineness of the share transactions.

6. Legal implications of off-market share transactions:
The genuineness of off-market share transactions was a key point of contention. The assessee relied on legal precedents to support the legitimacy of off-market transactions, citing cases where such transactions were deemed lawful. The CIT(A) considered these legal arguments and upheld the genuineness of the transactions, leading to the dismissal of the Revenue's appeal.

In conclusion, the judgment delves into the complexities of assessing capital gains, verifying transaction genuineness, and interpreting legal precedents related to off-market share transactions, ultimately upholding the CIT(A)'s decision in favor of the assessee.