2015 (11) TMI 1716 - AT - Income Tax

Claim of long term capital gain on shares rejected - addition of income from undisclosed sources - sale of demated shares - Held that - We find that assessee has purchased the shares through off market deal and therefore such transaction for purchase of shares by the assessee ought not to have been registered with the Calcutta Stock Exchange. Secondly, the Voucher for shares sold to the assessee issued by M/s Badri Prasad & Sons, broker of the Calcutta Stock Exchange has not been found as bogus or fabricated documents. The observation of the Assessing Officer that the transaction is not genuine and is engineered with a sole intention to show long term capital gain which is liable to a lower rate or income tax is because of (i) off market transaction, (ii) the payment for transaction is through cash (iii) physical delivery of shares has been given (iv) Kolkata Stock Exchange has denied having executed any transaction in the script i.e. Emerald Commercial Ltd. (v) shares were dematted in the month of August 2005 i.e. after more than one year of date of purchase (vi) shares were bought and sold in Kolkata has been duly rebutted and refuted by tendering sufficient evidence and therefore Assessing Officer Assessing Officer can only provoke a suspicion, much less a belief about the transaction. The suspicion of Assessing Officer cannot clinch the transaction against assessee. In view of the above CIT(A) was justified in holding that long term capital gain earned by assessee of ₹ 47,60,462/- should be treated as such and not taxed as income from undisclosed sources - Decided against revenue

Summary

Issues Involved:
1. Whether the long-term capital gain (LTCG) received by the assessee from the scrip Emerald Commercial Ltd. is a genuine transaction.
2. Whether the Assessing Officer (AO) was justified in treating the sale proceeds as unexplained cash credits under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Genuine Transaction of LTCG:
The Revenue contended that the CIT(A) erred in holding the LTCG received by the assessee as a genuine transaction. The AO raised several points against the genuineness of the transaction:
- The assessee could not prove the source of funds for purchasing the shares.
- No return was filed during the year of purchase, and the shares were purchased in cash.
- Physical delivery of shares took place, and the Calcutta Stock Exchange denied executing the purchase transaction.
- The broker involved, M/s Badri Prasad & Sons, was penalized by SEBI for indulging in penny stock transactions.

The assessee argued that the purchase of shares was an off-market deal, and therefore, not recorded on the Calcutta Stock Exchange. The assessee provided various documents, including the purchase bill, transfer letter from the company, demat account details, and sale bills, to substantiate the transaction. The CIT(A) accepted these submissions and granted relief.

2. Treatment of Sale Proceeds as Unexplained Cash Credits:
The AO treated the sale proceeds of Rs. 47,60,462/- as unexplained cash credits under Section 68 of the Act. The AO's reasons included:
- The payment for shares was made in cash.
- The assessee was not registered as a client with the broker, as required by SEBI rules.
- The transaction was off-market and not reflected in the stock exchange.
- The assessee had no previous records of returns filed or balance sheets available.
- The sudden increase in share value was deemed suspicious.
- The Calcutta Stock Exchange refuted the transaction.

The assessee countered these points by providing evidence of the source of funds, including gifts from relatives, and documents proving the purchase and sale of shares. The CIT(A) found the assessee's explanations satisfactory and ruled in favor of the assessee.

Judgment:
The Tribunal upheld the CIT(A)'s decision, stating that the assessee had provided adequate and reliable evidence to support the transaction. The Tribunal noted that the AO's observations were based on suspicion rather than concrete evidence. The Tribunal concluded that the LTCG should be treated as such and not taxed as income from undisclosed sources. The appeal of the Revenue was dismissed.

Conclusion:
The Tribunal confirmed the CIT(A)'s decision, ruling that the LTCG earned by the assessee was genuine and supported by sufficient evidence. The AO's treatment of the sale proceeds as unexplained cash credits was not justified. The Revenue's appeal was dismissed.