2014 (10) TMI 428 - AT - Income Tax

Sale proceeds of shares treated as income from other sources Genuineness of transaction - Held that - Assessee has filed necessary documents evidencing the purchase of shares as well as getting them transferred in its name and later on dematerialized form through HDFC Bank and subsequent sale - AO did not doubt sale of shares through stock exchange - transaction of sale of shares results in capital gain only As decided in The Income Tax Officer Versus Smt. Aarti Mittal And Others 2013 (11) TMI 968 - ITAT HYDERABAD wherein Arun Kumar Agarwal (HUF) & Others 2012 (8) TMI 398 - JHARKHAND HIGH COURT was followed - Where the share broker was found involved in unfair trade practice and was involved in lowering and rising of the share price, and any person, who himself is not involved in that type of transaction, if purchased the share from that broker innocently and bonafidely and if he show his bonafide in transaction by showing relevant material, facts and circumstances and documents, then merely on the basis of the reason that share broker was involved in dealing in the share of a particular company in collusion with others or in the manner of unfair trade practices against the norms of S.E.B.I and Stock Exchange, then merely because of that fact a person who bonafidely entered into share transaction of that company through such broker then only by mere assumption such transactions cannot be held to be a shame transaction. No suspicion can be raised when the shares were purchased years before the unusual fluctuation in the share price - The shares of some of the companies were purchased by the assessees even five years ago from the time of sale and those purchasers were already disclosed in the Balance Sheet of the assessee the assessee s transactions are genuine transactions - In the absence of any evidence on record that assessee has indulged in making adjustment entries the contentions of the AO which is based on presumptions and conjectures cannot be accepted - capital gains earned by the assessee is to be taxed as such and AO erred in considering the entire sale proceeds as income from other sources - AO is directed to accept the gain as long term capital gain Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of Sale Proceeds as 'Income from Other Sources'
2. Genuineness of Share Transactions
3. Validity of SEBI's Suspension Impact on Transactions
4. Assessment of Long-Term Capital Gains

Detailed Analysis:

1. Classification of Sale Proceeds as 'Income from Other Sources'
The primary issue in this case was whether the sale proceeds amounting to Rs. 25,87,400 should be classified as 'income from other sources' or as long-term capital gains. The Assessing Officer (A.O.) treated the sale proceeds as 'income from other sources' due to doubts about the genuineness of the share transactions, citing irregularities such as cash payments and lack of proper documentation.

2. Genuineness of Share Transactions
The assessee purchased 20,000 shares of M/s. Amluckie Investment Co. (AIC) and later sold them, claiming exemption on long-term capital gains. The A.O. doubted the genuineness of the transactions, noting that the shares were purchased through unknown brokers and payments were made in cash. The A.O. also pointed out that the assessee had no prior investment history in shares and failed to provide sufficient details about the brokers and the rationale behind the investment.

However, the tribunal found that the assessee had provided necessary documents evidencing the purchase, transfer, and dematerialization of shares. The shares were dematerialized through HDFC Bank and the transactions were recorded in the balance sheet. The tribunal concluded that the evidence on record indicated a genuine transaction, as the shares were properly transferred and sold through the stock exchange.

3. Validity of SEBI's Suspension Impact on Transactions
The A.O. and the CIT(A) relied on SEBI's suspension of trading in the shares of AIC due to unfair trade practices by brokers, including M/s. Ahilya Commercials P. Ltd., through whom the shares were sold. However, the tribunal noted that the SEBI's orders pertained to a period after the assessee's transactions. The tribunal emphasized that the genuineness of the transactions should be assessed based on the evidence available at the time of the transactions, not on subsequent events.

4. Assessment of Long-Term Capital Gains
The tribunal referred to various case laws, including decisions by the Coordinate Bench and the Hon'ble High Court of Jharkhand, which supported the assessee's claim. The tribunal noted that the shares were recorded in the balance sheet at their cost price and the market value at the end of the financial year was less than the investment value, indicating no intention of dubious gains. The tribunal concluded that the transactions resulted in long-term capital gains and should be taxed as such.

Conclusion:
The tribunal found that the assessee had provided sufficient evidence to prove the genuineness of the share transactions. The doubts raised by the A.O. were based on presumptions and conjectures without concrete evidence. The tribunal directed the A.O. to accept the gains as long-term capital gains and delete the addition made under 'income from other sources'. The appeal of the assessee was allowed.