2016 (5) TMI 1325 - AT - Income Tax

Assessments made u/s. 153A - documents found at the time of search which were considered as incriminating for making the impugned assessments - involvement in IPO shares - Held that - IPO transactions relate to 2005 and, therefore, cannot be considered as incriminating material in the assessments prior to that date because in our considered opinion, the incriminating material should be for each assessment year in the block of six assessment years. Since the impugned/alleged incriminating material did not pertain to conclude assessment years namely A.Y. 2000-01 to 2004-05. Thus we direct the A.O to delete the impugned additions made u/s. 153A of the Act for assessment years 2000-01 to 2004-05. The first issue is decided in favour of the assessee and against the revenue. Several gift deeds found at the time of search - Held that - AO had proceeded on the basis of gift deeds and copies of return of income of the donors and the post search inquiries to conclude that the gifts received by the assessee are bogus gifts. Before us, Revenue has not placed any material on record to demonstrate that the gifts deeds and copies of return of income of the donors found at the time of search were different documents from those that were considered by the Assessee while claiming the amounts to be the gifts. As decided in the case of CIT vs. Ashok Dua 2008 (8) TMI 897 - DELHI HIGH COURT all that was found were the gift deeds and the affidavits and there was no incriminating material found in the course of search to suggest that the gifts were bogus. - Decided in favour of the assessee. Treatment of capital gains as business income - Held that - The intention of the assessee at the time of the purchase of shares is paramount. If the assessee has clear intention of being an investor and showing the shares as investment, we do not find any reason to disturb the intention of the assessee. The assessee s under consideration are investors and, therefore, any gain arising out the transfer of shares should be treated as capital gains be it short term or long term. Thus we direct the A.O to treat the gains arising out of the sale of shares under the head capital gains be it short terms or long term as the case may be.- Decided in favour of the assessee. Denial of the set off of losses on sale of shares - transactions have been done through a related party and the transactions are off market transactions and, therefore, not verifiable - Held that - We do not find force in the allegations made by the A.O. Firstly, merely because the transactions were with related party would not make the transaction sham or bogus. We find that the accounts of M/s. Grace Investment are audited and even if the transactions are off market transactions, the purchase and sale price are easily verifiable from the stock market. Since the assessee is having a running account with Grace Investment, it is not necessary to make payments for every purchases and receive consideration for every sale. It is customary of such type of transaction to have a running account with the principal broker/intermediary and settle the accounts, debit or credit, at the end of a certain period.Most importantly in similar transactions wherever there was gains, the A.O has accepted such gains as it is, therefore, we do not find any logic/reason in discarding the losses made by the assessee on sale of shares. The revenue cannot blow hot and cold in the same breath for similar transactions. Thus the losses on sale of shares deserve to be set off and we direct the A.O accordingly.- Decided in favour of the assessee. Levy of penalty u/s. 271(1)(c) - Held that - Since, we have directed the A.O to treat the surplus on sale of shares under the head capital gains and since, we have directed the A.O to allow the set off of losses against the gains, there remains nothing for the levy of penalty u/s. 271(1)(c) of the Act.- Decided in favour of the assessee.

Summary

Issues Involved:
1. Assessments for the assessment years 2000-01 to 2004-05 under Section 153A of the Act.
2. Classification of gains from the sale of shares for the assessment years 2005-06 and 2006-07.
3. Allowance of losses arising from the sale of shares as set off against gains.

Issue-wise Detailed Analysis:

1. Assessments for Assessment Year 2000-01 to 2004-05:
The primary contention was whether assessments for these years could be reopened under Section 153A of the Act without any incriminating material found during the search. The Tribunal concluded that since no incriminating material was found during the search, the completed assessments could not be reopened. This conclusion was supported by the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (374 ITR 645), which stated that the Assessing Officer (AO) could not disturb finalized assessments unless new incriminating material was found during the search. The Tribunal also referred to the case of Kabul Chawla (380 ITR 573) by the Hon'ble Delhi High Court, which reinforced that completed assessments could only be interfered with if incriminating material was found during the search.

2. Classification of Gains from Sale of Shares:
For the assessment years 2005-06 and 2006-07, the issue was whether gains from the sale of shares should be classified as capital gains or business income. The Tribunal emphasized that the intention of the assessee at the time of purchasing shares is crucial. The Tribunal noted that the assessee had shown shares as investments in their balance sheets, valued at cost, and had maintained separate accounts for derivative profits and capital gains. The Tribunal referred to the CBDT Circular No. 6/2016, which provides guidelines for determining whether income from the sale of shares should be treated as capital gains or business income. The Tribunal concluded that the assessees were investors, not traders, and thus gains from the sale of shares should be treated as capital gains. The Tribunal also addressed the AO's contention regarding the IPO scam, stating that the mode of acquisition of shares does not change the nature of the transaction from investment to trading.

3. Allowance of Losses Arising from Sale of Shares:
The Tribunal addressed the AO's denial of set off of losses on the grounds that the transactions were with related parties and were off-market transactions. The Tribunal found no merit in the AO's allegations, stating that transactions with related parties do not automatically make them sham or bogus. The Tribunal noted that the accounts of M/s. Grace Investment were audited and that the purchase and sale prices were verifiable from the stock market. The Tribunal also pointed out that the AO had accepted gains from similar transactions, which undermined the AO's position. The Tribunal directed the AO to allow the set off of losses against gains.

Penalty under Section 271(1)(c):
Since the Tribunal directed the AO to treat the gains as capital gains and allowed the set off of losses, there was no basis for the levy of penalty under Section 271(1)(c) of the Act. The Tribunal cited the principle "Sublato Fundamento Credit Opus," meaning if the foundation is removed, the superstructure falls. The Tribunal also referred to the case of Amit Jain (33 Taxmann.com 178), where the Hon'ble Delhi High Court held that penalty cannot be levied if the head of income is changed.

Conclusion:
The Tribunal allowed the appeals of the assessees for the assessment years 2000-01 to 2004-05, directed the AO to treat gains from the sale of shares as capital gains for the years 2005-06 and 2006-07, and allowed the set off of losses. Consequently, the Tribunal directed the deletion of penalties levied under Section 271(1)(c) of the Act.