2010 (10) TMI 762 - AT - Income Tax

Unexplained cash credit u/s 68 - Sham transaction - whether the transactions of purchase and sale of shares of M/s Shalimar Agro Product Ltd was a sham transaction and the sale consideration claimed by the assessee would be treated as unexplained cash credit u/s 68 of the Act - Prima facie it appears that the shares were transferred in the name of the assessee on 30.4.2002 and the transaction of purchase took place during the year 2002-03 relevant to the assessment year 2003-04 - However the relevant record was not made available before the AO to verify the veracity of the said letter dated 30.04.2002 of confirmation - Therefore even if it is presumed that the shares were purchased during the year 2002-03 the actual date of transaction has to be established specifically when the assessee has purchased the shares through the firm in which he is a partner and did not make any payment - The person from whom the shares were purchased was also not produced - Even no entry except showing the transaction in the Final Account has produced to establish the actual date of purchase of shares - Accordingly remit the issue of capital gain arising out of the purchase and sale of shares of M/s Shalimar Agro Ltd. to the record of AO - The issue of exemption u/s 54F is consequential one therefore the same is also requires to be decided as per the outcome of the issue of capital gain. Accordingly we set aside the order of the CIT(A) and restore this issue to the record of the AO for verification and examination - the appeal of the revenue is allowed for statistical purposes and cross-objection of the aseseee stands dismissed.

Summary

Issues Involved:
1. Deletion of addition of Rs.45,55,979/- as fictitious long-term capital gains.
2. Validity of the purchase of shares and the role of the sub-broker.
3. Application of Section 68 of the IT Act, 1961.
4. Alleged double addition of long-term capital gains.
5. Procedural compliance under Section 72A.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs.45,55,979/- as Fictitious Long-Term Capital Gains

The revenue contended that the CIT(A) erred in law and on facts by deleting the addition of Rs.45,55,979/- claimed as long-term capital gains by the assessee. The revenue argued that the purchase of shares itself was not proved, as the sub-broker from whom the assessee made off-market purchases was a firm in which the assessee was a partner. The CIT(A) allowed the claim of the assessee, citing judicial pronouncements and finding the arguments presented by the assessee's AR to be compelling. The Tribunal, however, remitted the issue back to the AO for proper verification and examination of the actual date of purchase to determine the nature of capital gain.

Issue 2: Validity of the Purchase of Shares and the Role of the Sub-Broker

The AO observed that M/s Shreenidhi Stock and Broking, a partnership firm of the assessee, issued the purchase note for 15,000 shares of M/s Shalimar Agro Products Limited. The AO issued summons to the main broker and the supposed seller of shares, but the responses received cast doubt on the genuineness of the transactions. The assessee claimed that the shares were purchased off-market and were adjusted against a credit balance with the sub-broker. The Tribunal noted that the transaction was off-market and required further verification regarding the actual date of purchase and the genuineness of the transaction.

Issue 3: Application of Section 68 of the IT Act, 1961

The revenue argued that the CIT(A) erred in holding that the additions were wrongly made under Section 68 of the IT Act, 1961. The AO treated the sale proceeds as unexplained cash credit under Section 68, as the assessee failed to prove the purchase of shares from Mr. Bhagwan Solanki. The Tribunal found that the AO's doubts about the transaction were justified due to the lack of evidence and remitted the issue back for further examination.

Issue 4: Alleged Double Addition of Long-Term Capital Gains

The revenue raised concerns about supposed double addition of long-term capital gains, arguing that the CIT(A) erred in holding that this issue was consequential to the ground relating to the addition under Section 68. The Tribunal did not specifically address this issue separately but remitted the entire matter back to the AO for re-examination, which would inherently cover this aspect as well.

Issue 5: Procedural Compliance under Section 72A

The revenue contended that the CIT(A) erred in directing the AO to proceed in accordance with law without appreciating the legal obligation under Section 72A(2)(ii) that the requisite certificate should be furnished along with the return of income. The Tribunal admitted the revised grounds raised by the revenue, finding them to be more clearly highlighting the issue involved. However, the Tribunal's decision to remit the case back to the AO for further verification inherently included the need to ensure procedural compliance.

Conclusion:

The Tribunal allowed the revenue's appeal for statistical purposes and dismissed the assessee's cross-objection. The matter was remitted back to the AO for proper verification and examination of the actual date of purchase, the genuineness of the transactions, and the consequent determination of the nature of capital gains and eligibility for exemption under Section 54F. The Tribunal emphasized the need for a thorough examination of the records and compliance with procedural requirements.