2011 (2) TMI 1455 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of capital gains on the sale of shares of Bolton Properties Limited and Fast Track Limited.
2. Treatment of surplus from the sale of shares as capital gains versus business income.
3. Denial of exemption under section 54EC and section 10(38) of the Income Tax Act.
4. Levy of interest under section 234B of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Legitimacy of Capital Gains on Sale of Shares:
The primary issue revolved around whether the capital gains declared by the assessee from the sale of shares of Bolton Properties Limited and Fast Track Limited were genuine. The Assessing Officer (AO) noted an abnormal rise in the share prices of Bolton Properties Limited from Rs. 8.27 per share to Rs. 175.70 per share within a year, suspecting artificial manipulation. The AO's investigation revealed that Bolton Properties Limited had minimal business activities and its financial strength did not justify such a drastic price increase. Further, the AO linked the transactions to dubious practices involving a Kolkata-based broker, Shri Prakash Nahata, and directors of Bolton Properties Limited, who were involved in providing accommodation entries for long-term capital gains. The AO concluded that the transactions were not genuine and treated the income as unexplained cash credit under section 68 of the Act, adding back Rs. 41,85,500/- and denying the exemption under section 54EC.

2. Treatment of Surplus from Sale of Shares:
The AO alternatively argued that even if the transactions were genuine, the profits should be assessed as business income rather than long-term capital gains, considering the frequency and nature of the transactions. The CIT(A) upheld this view, noting that the assessee engaged in frequent trading of shares, indicating a business motive rather than an investment intent. The Tribunal confirmed this assessment, emphasizing that the assessee's activities resembled those of a trader in shares, given the volume and frequency of transactions.

3. Denial of Exemption under Section 54EC and Section 10(38):
The denial of exemption under section 54EC was consequential to the finding that the capital gains were not genuine. Similarly, for the assessment year 2005-06, the exemption under section 10(38) was denied on the grounds that the surplus from the sale of shares was assessed as business income, not capital gains. The Tribunal upheld these decisions, reiterating that the exemptions were not applicable as the transactions did not qualify as genuine capital gains.

4. Levy of Interest under Section 234B:
The levy of interest under section 234B was contested by the assessee. The Tribunal noted that any consequential relief would be granted based on the final assessment of the income. As the primary issues were decided against the assessee, the interest levied under section 234B was upheld, subject to any adjustments arising from the final computation of income.

Conclusion:
The Tribunal dismissed all three appeals filed by the assessee, confirming the additions made by the AO under section 68, the treatment of surplus as business income, and the denial of exemptions under sections 54EC and 10(38). The levy of interest under section 234B was also upheld, with a provision for consequential relief if applicable. The Tribunal emphasized the importance of the surrounding circumstances and the application of human probabilities in assessing the genuineness of the transactions.