2013 (11) TMI 1318 - AT - Income Tax

Sale and Purchase of shares, not a bogus transactions Income arising from purchase and sale of shares chargeable under head Long term capital gains and not an undisclosed income - Shares were purchased as penny stocks at low price of 55 paise per share and the same were claimed to have been sold at Rs.40 per share and thereby the assessee has shown Long term capital gains of Rs.29,09,675 Held that - Examination has been done of the stock broker though which the assessee has purchased shares as well as from the stock broker to whom the assessee has sold the shares - Both the stock brokers have confirmed the transaction of purchase as well as sale - The assessee has also produced relevant documentary evidence in support of the transaction of purchase and sale - There is no finding or dispute on the point of prevailing price at the time of purchase or at the time of sale of shares - Shares of Blue Chip India Ltd. were duly shown in the balance sheet filed with the return of income for the A.Y. 2003-04 and, therefore, the assessee has discharged his onus to prove the holding of the shares and in the absence of any contrary evidence brought by the Assessing Officer on record, it cannot be said that the transaction of purchase shown by the assessee is not genuine Reliance has been placed upon the case of CIT Vs. Jamnadevi Agarwal 2010 (9) TMI 81 - Bombay High Court . From the documents produced, which were also in the possession of the Assessing Officer, shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as sham transactions Decided against the Revenue.

Issues Involved:
1. Treatment of Long Term Capital Gains (LTCG) as undisclosed cash credit.
2. Legitimacy of the purchase and sale transactions of shares.
3. Evidence supporting the transactions.
4. Findings and conclusions of the Assessing Officer (AO) versus those of the Commissioner of Income Tax (Appeals) [CIT(A)].

Detailed Analysis:

1. Treatment of Long Term Capital Gains (LTCG) as undisclosed cash credit:
The primary issue raised by the revenue was whether the LTCG amounting to Rs. 29,09,675 should be treated as undisclosed cash credit. The AO had treated the LTCG as unexplained cash credit, suspecting the transaction to be bogus and artificially engineered to convert unexplained cash into LTCG. The CIT(A), however, deleted the addition made by the AO and held that the LTCG should be taxed as such and not as income from undisclosed sources.

2. Legitimacy of the purchase and sale transactions of shares:
The AO doubted the legitimacy of the transactions, citing various anomalies such as the extremely low purchase price of the shares, the off-market nature of the transactions, and the delayed dematerialization of shares. The AO argued that these factors indicated a modus operandi to manipulate accommodation entries of LTCG against undisclosed income. The CIT(A) and the Tribunal, however, found that the transactions were genuine, supported by documentary evidence, and conducted at prevailing market prices.

3. Evidence supporting the transactions:
The assessee provided substantial documentary evidence to support the purchase and sale of shares, including:
- Bills and confirmation memos from Prince Securities for the purchase of shares.
- Ledger accounts showing the adjustment of purchase costs against speculation profits.
- Physical delivery and subsequent dematerialization of shares.
- Sales bills and confirmations from Prakash Nahata & Co., a broker on the Kolkata Stock Exchange.
- Transfer letters from Blue Chip India Ltd. confirming the transfer of shares.
- Bank statements showing receipt of sale consideration through banking channels.

The CIT(A) and the Tribunal found this evidence credible and consistent, thereby refuting the AO's suspicion of the transactions being bogus.

4. Findings and conclusions of the Assessing Officer (AO) versus those of the Commissioner of Income Tax (Appeals) [CIT(A)]:
The AO's findings were primarily based on suspicion and the perceived improbability of the transactions. The AO pointed out several factors, such as the off-market nature of the transactions, the involvement of cash payments, and the delayed dematerialization of shares, to argue that the transactions were not genuine.

The CIT(A), however, after a thorough examination of the evidence, concluded that the transactions were genuine. The CIT(A) emphasized that:
- The shares were duly reflected in the balance sheet for the relevant assessment year.
- The transactions were supported by documentary evidence and confirmations from the brokers involved.
- The prices at which the shares were bought and sold were in line with market rates.
- The dematerialization and subsequent sale of shares were properly documented and executed through recognized channels.

The Tribunal upheld the CIT(A)'s findings, noting that the AO's suspicions were not substantiated by concrete evidence. The Tribunal also referenced the jurisdictional High Court's decision in the case of CIT Vs. Jamnadevi Agarwal, which supported the assessee's position that genuine transactions, supported by documentary evidence, should not be disregarded based on mere suspicion.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue and upheld the CIT(A)'s decision to treat the LTCG as such, rather than as undisclosed cash credit. The cross-objections filed by the assessee were deemed infructuous in light of the Tribunal's findings. The judgment emphasized the importance of concrete evidence over suspicion in determining the legitimacy of financial transactions.

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