2012 (7) TMI 577 - AT - Income Tax

Sale of shares - long term capital gains or short term - Whether purchase of the shares can be considered only on the date of dematerialization Held that - In view of the CBDT Circular No. 704 dtd. 28.4.1995 in case of securities the date of purchase has to be taken from the broker s note/contract note and the period of holding is also to be reckoned from the date of purchase and not from the date of dematerialization - Since the holding period of the shares as per the broker s note and its subsequent sale after dematerialization is more than 12 months, therefore, the shares become long term capital asset and the assessee s claim of long term capital gain is correct - order of CIT set aside and direct the A.O. to accept the long term capital gain declared by the assessee - appeal filed by the assessee is allowed.

Issues Involved:
1. Classification of gains on the sale of shares as long-term capital gains and the consequent denial of exemption under section 10(38) of the Income-tax Act, 1961.
2. Determination of the holding period of shares based on the date of dematerialization.
3. Calculation of the purchase value of shares and its treatment as unexplained investment.
4. Validity of the addition of unexplained investment in shares.
5. Acceptance of the genuineness of the transactions in shares and the exemption claimed under section 10(38).

Detailed Analysis:

Issue 1: Classification of Gains on Sale of Shares
The assessee contended that the gains on the sale of shares amounting to Rs. 4,94,51,910/- should be considered as long-term capital gains and thus be exempt under section 10(38) of the Income-tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, arguing that the shares were not held for more than 12 months, thus classifying the gains as short-term capital gains.

Issue 2: Determination of Holding Period
The AO determined that the purchase of shares should be considered only on the date of dematerialization, making the holding period less than 12 months. This was based on the observation that the shares were dematerialized immediately before the date of sale. The assessee argued that the shares were purchased more than 12 months before the sale, and the delay in dematerialization was due to reliance on portfolio management advisors.

Issue 3: Calculation of Purchase Value and Unexplained Investment
The AO calculated the purchase value of the shares at Rs. 4,41,10,775/- based on the average high and low prices of shares on the date of dematerialization. This amount was treated as unexplained investment since it was not accounted for in the books of the assessee. The CIT(A) upheld this view, treating the difference between the sale price and the purchase price as short-term capital gain.

Issue 4: Addition of Unexplained Investment
The AO added Rs. 5,09,25,802/- as unexplained cash credit under section 68 of the Income-tax Act, treating the entire sale proceeds as unaccounted income. The CIT(A) disagreed with this approach, noting that the AO could not simultaneously treat the entire sale proceeds as unaccounted income and also tax the short-term capital gains and unexplained investment. The CIT(A) concluded that the sale proceeds were genuine but upheld the addition of unexplained investment and short-term capital gains.

Issue 5: Genuineness of Transactions and Exemption under Section 10(38)
The assessee provided various documents, including contract notes, purchase bills, bank statements, and confirmation letters, to substantiate the purchase of shares. The AO and CIT(A) relied heavily on the statement of Mr. Mukesh Choksi, who denied any transactions with the assessee. However, during cross-examination, Mr. Choksi confirmed receiving cheques from the assessee, leading to questions about the reliability of his statements.

Tribunal's Findings:
1. The Tribunal noted that the AO's reliance on Mr. Choksi's inconsistent statements was not sufficient to dismiss the genuineness of the transactions, especially when other supporting evidence was provided by the assessee.
2. The Tribunal referenced CBDT Circulars No. 704 and 768, which clarify that the date of the broker's note should be treated as the date of purchase, and the holding period should be reckoned from this date, not the date of dematerialization.
3. The Tribunal concluded that the shares were held for more than 12 months based on the broker's notes and subsequent dematerialization before the sale, qualifying the gains as long-term capital gains.
4. The Tribunal directed the AO to accept the long-term capital gain declared by the assessee and allowed the appeal.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, recognizing the gains on the sale of shares as long-term capital gains and directing the AO to accept the exemption under section 10(38) of the Income-tax Act, 1961. The Tribunal's decision was based on the substantial evidence provided by the assessee and the inconsistencies in Mr. Choksi's statements.

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