2016 (7) TMI 1492 - AT - Income Tax

Treatment of profit arising out of the sale of shares - correct head of income - short term capital gains or business income - Held that - The intention of the assessee at the time of the purchase of shares is paramount. If the assessee has clear intention of being an investor and showing the shares as investment, we do not find any reason to disturb the intention of the assessee. The assessee under consideration is investor and, therefore, any gain arising out the transfer of shares should be treated as capital gains be it short term or long term. Addition made u/s. 68 on account of unexplained cash credit - Held that - We find that the assessee has successfully discharged the onus cast upon him by virtue of Section 68 of the Act. Documentary evidences on record show that the identity of the creditor, genuineness of the transaction and the capacity of the lender have been successfully established by the assessee. The First Appellate Authority have thoroughly examined the evidences on record and the ld. D.R. could not point out any fallacy/flaw/error in the findings of the First Appellate authority, therefore, no interference is called for. Surplus on sale of shares of IDFC - Held that - There is nothing on record brought by the revenue authorities which could suggest that the assessee was actually trading in the shares of IDFC. There is no evidence with the Revenue to establish the nexus. There is no evidence on record which can demonstrate that the assessee has colluded with Smt. Rupal Naresh Panchal in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observations of the revenue authorities are only inferential without any concrete material in the possession of the A.O. The activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The First Appellate Authority has erred in creating an artificial distinction only on the basis of mode of acquisition - no hesitation in setting aside the findings of the ld. CIT(A) and directing the A.O. to tax the surplus on sale of shares of IDFC under the head short term capital gains. - Assessee appeal allowed.

Summary

Issues Involved:
1. Treatment of profit from the sale of shares as short-term capital gains versus business income.
2. Deletion of addition made under Section 68 on account of unexplained cash credit.

Issue-wise Detailed Analysis:

1. Treatment of Profit from Sale of Shares:
The primary issue was whether the profit from the sale of shares should be treated as short-term capital gains or business income. The Assessing Officer (A.O.) treated the surplus from the sale of shares as business income based on several factors, including the volume of transactions, the period of holding, the frequency of transactions, and the utilization of borrowed funds for purchasing shares. The A.O. relied on CBDT Circular No. 4/2007 to support this treatment.

The assessee argued that the shares were shown as investments in the balance sheet and not as stock-in-trade, indicating an intention to invest rather than trade. The CIT(A) accepted this argument, noting that the assessee did not claim interest on borrowings for such investments and no motive for trading was established by the A.O. The CIT(A) concluded that the surplus should be treated as short-term capital gains.

The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of the assessee's intention at the time of purchasing the shares. The Tribunal noted that the shares were shown as investments and valued at cost, aligning with the Supreme Court's observation in CIT v. Associated Industrial Development Co Pvt. Ltd. and the CBDT Circular No. 6/2016. The Tribunal concluded that the assessee was an investor, and any gain from the transfer of shares should be treated as capital gains.

2. Deletion of Addition Made Under Section 68:
The second issue involved the deletion of an addition of ?20 lakhs made under Section 68 on account of unexplained cash credit. The A.O. questioned the genuineness of a loan received from Right Finstock Pvt. Ltd., as there was no corresponding debit entry in the creditor's balance sheet. The assessee provided necessary details and confirmations, but the A.O. proceeded with the addition, doubting the transaction's genuineness.

The CIT(A) found that the creditor was an existing assessee and had not denied the transaction. The CIT(A) noted that the figures in the balance sheet were taken at net, considering the differential amount of debits and credits under sundry debtors. The CIT(A) was convinced of the loan's genuineness and deleted the addition.

The Tribunal agreed with the CIT(A), stating that the assessee had successfully discharged the onus under Section 68 by establishing the identity of the creditor, the genuineness of the transaction, and the lender's capacity. The Tribunal found no error in the CIT(A)'s findings and dismissed the revenue's ground.

Additional Judgments:
For the appeals concerning the same issues for different assessment years (A.Y. 2006-07), the Tribunal followed the same reasoning and conclusions as discussed above. The Tribunal dismissed the revenue's appeals and upheld the treatment of surplus from the sale of shares as short-term capital gains and the deletion of additions made under Section 68.

Appeal Dismissed Due to Monetary Limits:
In one of the appeals (IT(SS)A No. 578/Ahd/2010 for A.Y. 2006-07), the Tribunal dismissed the appeal based on the CBDT Circular No. 21/2015, which prescribes monetary limits for filing appeals by the Department. Since the tax effect was below the prescribed limit of ?10 lakhs, the appeal was dismissed.

Conclusion:
The Tribunal consistently upheld the treatment of surplus from the sale of shares as short-term capital gains and supported the deletion of additions made under Section 68, based on the assessee's intention and the genuineness of transactions. The decisions were grounded in legal principles and CBDT guidelines, aiming to reduce litigation and maintain consistency in tax treatment.