2016 (7) TMI 1476 - AT - Income Tax

Gain on sale of shares - LTCG OR busniss income - genuineness of claim - Held that - Transactions of the assessee can by no stretch of imagination be considered as investment transactions. They are only make believe transaction. Hence no infirmity in the revenue taxing the receipt in this regard. The entire amount of the so called receipt of share sales could well also be treated as unexplained credit u/s 68 as it has all the ingredients of attracting the rigours of the said section. Section 68 of the I.T. Act provides that where any sum is found credited in the books of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income-tax as income of the assessee of that year. In the present case the assessee s explanation that the said receipt is on account of investment in shares whereby share of ₹ 5/- of unknown company has jumped to ₹ 485/- in no time has been totally rejected by the authorities below. The assessee has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for the sale price of these shares. The so called purchaser of these shares has not been identified despite efforts of the AO. The broker company through which shares were sold did not respond to queries in this regard. Hence the fantastic sale price realisation is not at all humanly probably, as there is no economic or financial basis, that a share of little known company would jump from ₹ 5/- to 485/- - Decided against assessee.

Issues Involved:

1. Whether the assessee was a trader in shares or an investor.
2. Whether the long-term capital gain on the sale of shares should be taxed as business income.
3. The validity of the transactions and the nature of the shares purchased and sold by the assessee.

Issue-wise Detailed Analysis:

1. Whether the assessee was a trader in shares or an investor:

The primary issue was whether the assessee's activities in purchasing and selling shares constituted trading or investment. The AO and CIT(A) concluded that the assessee acted as a trader rather than an investor. They emphasized that the intention at the time of purchase is critical in determining the nature of the transaction. The CIT(A) noted, "The intention of the assessee at the time of purchase of asset is the most important criteria to decide whether the same were purchases as trading assets or were bought as an investment." The CIT(A) further elaborated that the manner in which the assessee dealt with the shares indicated trading activity, as the shares were not held for capital appreciation but were sold for profit shortly after purchase.

2. Whether the long-term capital gain on the sale of shares should be taxed as business income:

The AO observed that the assessee claimed a long-term capital gain of ?13,99,648/- from the sale of shares and sought exemption under section 10(38) of the Income Tax Act. However, the AO held that the transactions were "an adventure in the nature of trade" and thus taxable as business income. The AO cited several reasons, including the fact that the shares were purchased on the advice of a friend, the companies involved were unknown and had dubious financial standing, and the transactions were executed through brokers who did not respond to verification queries. The CIT(A) upheld this view, stating that the profits should be assessed under "Profits & Gains of Business & Profession" and not as capital gains.

3. The validity of the transactions and the nature of the shares purchased and sold by the assessee:

The AO and CIT(A) questioned the legitimacy of the transactions. The shares were purchased from companies with the same address and authorized signatory, raising suspicions. The AO noted, "The purchase by the assessee of shares of two unknown companies whose details were not at all known by the assessee can by no stretch of imagination be said to be an investment transaction." The AO and CIT(A) found the rapid increase in share prices from ?5/- to ?485/- without any substantial reason to be implausible. The ITAT also referred to the decision of the Hon’ble jurisdictional High Court in Major Metals Ltd. vs. Union of India, which held that disproportionate share premiums could be considered undisclosed income. The ITAT concluded that the transactions were "make believe" and upheld the revenue's decision to tax the receipts.

Conclusion:

The ITAT affirmed the orders of the AO and CIT(A), holding that the assessee's transactions in shares were not genuine investments but were adventures in the nature of trade. Consequently, the long-term capital gain claimed by the assessee was taxable as business income. The appeal filed by the assessee was dismissed. The judgment emphasized that the intention at the time of purchase, the nature of the transactions, and the overall conduct of the assessee were crucial in determining the tax treatment of the income.

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