2016 (5) TMI 1305 - AT - Income Tax

Unexplained cash credit - addition u/s 68 - Sale proceeds from sale of shares - Held that - The undisputed fact which emanates from the assessment order is that the purchases were made in the month of April, 2004 i.e. financial year 2004-05 relevant to assessment year 2005-06. A perusal of the record shows that assessment of A.Y. 2005-06 was made u/s. 143(3) r.w.s. 147 of the Act vide order dated 08.10.2012 and the reasons for the reopening of the assessment shows that the assessment was reopened to verify the deposits made in the bank account which were used for the investment in shares. After thorough scrutiny the investment in shares was accepted. It is pertinent to note that the impugned order of the First Appellate Authority is dated 25.03.2010 and the reassessment order is dated 08.10.2012 which means that when the officer made the reassessment order, the order of the First Appellate Authority was on record before him. In spite of the adverse findings given by the First Appellate Authority, the A.O accepted the investment in shares. The revenue cannot blow hot and cold in the same breath since in the scrutiny reassessment the purchases have been accepted. We do not find any reason/logic in not accepting the subsequent sales of the shares and since the credit in the books pertained to the sale consideration received, in our considered opinion, the same cannot be treated as unexplained cash credit. Therefore, we do not find any merit in the impugned additions made u/s. 68 by treating the sale proceeds as unexplained cash credit. The additions on this account are directed to be deleted. - Decided in favour of assessee Sale proceeds from sale of shares - Treatment of short term capital gain OR business income - Held that - A prudent investor always keep a watch on the volatility of the market and makes sound investment decision in accordance with such market fluctuation and has the liberty to liquidate its investments in shares as and when necessary. The law itself has recognized this fact by treating the same as short term capital gains for shares held less than 12 months and long term capital gains where the shares are held for more than 12 months. Had this been not the case, all the gains on shares would have been considered as business income only. The fact that the law recognizes such volatility and has specifically provided a separate holding period in respect of such shares makes it very clear those gains on such shares having a holding period of less than 12 months and held as investment would be considered as short terms capital gains only. Thus the assessee s claim cannot be negated on the basis of frequency of transaction. Considering the entire facts in totality, we find that the assessee has shown shares as investment right from the year of purchase and that was shown as such in the balance sheet of the assessee which was filed before the A.O. Thus the shares have to be treated as investments and, therefore any profit earned on the sale thereof is to be treated as capital gains. Capital gains be it short terms or long term shall be assessed as such and not as business income.- Decided in favour of assessee Disallowance of interest expenses - Held that - Ld. counsel could not adduce any evidence to show that there is no nexus between the borrowings and the lending of money. Since no evidence has been brought on record, neither before the lower authorities nor before us. Disallowance of interest expenses is confirmed.

Summary

Issues Involved:
1. Treatment of gross sales proceeds of shares as income from other sources as unexplained cash credit under Section 68 of the Act.
2. Treatment of short-term capital gain as business income.
3. Treatment of long-term capital gain as business income.
4. Disallowance of interest expenses.

Detailed Analysis:

1. Treatment of Gross Sales Proceeds of Shares:
The primary issue was whether the gross sales proceeds from shares should be treated as income from other sources, specifically as unexplained cash credit under Section 68 of the Income Tax Act. The Assessing Officer (A.O) doubted the genuineness of the purchases, holding that it is not permissible to purchase shares off-market. The A.O found that the shares were allegedly supported by bogus bills and treated the sale consideration as unexplained cash credit. However, the Tribunal noted that the purchases were made in April 2004 and had been accepted in the relevant assessment year 2005-06 after thorough scrutiny. The Tribunal held that since the investment in shares was accepted in the reassessment, the subsequent sales should also be accepted. Therefore, the sale proceeds cannot be treated as unexplained cash credit under Section 68 of the Act. The Tribunal directed the deletion of additions made under this section.

2. Treatment of Short-Term Capital Gain:
The second issue was whether the short-term capital gain should be treated as business income. The A.O argued that due to the nature of transactions, quantum, volume, and the assessee's involvement in derivative transactions, the short-term capital gains should be treated as business income. The CIT(A) confirmed this view. However, the Tribunal observed that the shares were shown as investments in the balance sheet and valued at cost. The Tribunal referred to the Supreme Court's decision in CIT Associated Industrial Development Co Pvt. Ltd. and the CBDT Circular No. 4/2007, which recognized the distinction between stock-in-trade and investments. The Tribunal concluded that the frequency of transactions alone does not determine the nature of income. Thus, the Tribunal directed the A.O to treat the short-term capital gains as such and not as business income.

3. Treatment of Long-Term Capital Gain:
The third issue was the treatment of long-term capital gains. The CIT(A) had decided in favor of the assessee, treating long-term capital gains as such and not as business income. The Tribunal upheld this decision, reiterating that the shares were shown as investments and any profit earned on their sale should be treated as capital gains. The Tribunal confirmed the findings of the CIT(A) regarding long-term capital gains.

4. Disallowance of Interest Expenses:
The final issue in ITA No. 3098/Ahd/2010 was the disallowance of interest expenses amounting to ?38,461/-. The A.O noticed that the assessee had claimed interest expenses on unsecured loans at 15% while charging only 9% interest on loans advanced to a family member. The A.O made a proportionate disallowance due to the lack of a plausible explanation from the assessee. The CIT(A) upheld this disallowance. The Tribunal also confirmed the disallowance, noting that no evidence was provided to show a nexus between the borrowings and the lending of money.

Conclusion:
- The Tribunal allowed the appeals of the assessee concerning the treatment of gross sales proceeds and capital gains.
- The appeal of the revenue was dismissed.
- The disallowance of interest expenses in the case of Ramnivas Kasat (HUF) for A.Y. 2007-08 was confirmed, leading to a partial allowance of the assessee's appeal in this specific case.

Order Pronounced:
The order was pronounced in Open Court on 31-05-2016.