2017 (2) TMI 1193 - AT - Income Tax

Disallowance of capital gains - additions u/s 68 - Held that - To bring any sum to tax u/s 68, a sum has to be credited, for such sum it is well settled law that in order to discharge the onus, the assessee must prove the identity of the creditor, capacity of the creditor and genuineness of the transaction. In the given case, the AO has brought to tax the capital gain, which is not the sum credited in the books of the assessee, secondly, the assessee has already brought on record the identity of the parties and capacities of the parties. With regard to genuineness of the transaction, assessee has brought on record the transactions as investment in another company i.e. M/s SRGEPL. All these shares were recorded in the books of account as investment. AO has not brought on record anything to suggest any suspicion on the commercial transaction in this case. The payments were made through banking channel and received sale proceeds were also through bank. When the bench asked the AR to submit the receipt of sale proceeds in the bank, the AR had submitted a copy of the bank statement and ledger copy of transactions by letter dated 29/12/2016 and it proves the genuineness of the transactions. Thus on both counts, i.e. commercial decision of the assessee as well as genuineness of the transaction, we hold that the AO was wrong in treating this transaction as income from other sources and making disallowance u/s 68 of the Act, instead of capital gains as offered by the assessee. We have no hesitation to uphold the findings of the CIT(A) on this issue and accordingly dismiss the ground raised by the revenue. - Decided in favour of assessee Disallowance of salaries and recruitment expenditure - non setup of business - Held that - The assessee has set up its business the moment it had acquired the property on lease to run the business with effect from 01/04/2007 and started recruiting the people for the suitable positions, in our view, the assessee has already set up its business and any expenditure in the nature of establishment, administrative, etc. are admissible business expenditure. Considering the nature of expenditure incurred by the assessee during the year we are inclined to agree with the findings of the CIT(A) and accordingly we uphold the order of the CIT(A) in deleting the disallowance made by the AO and dismiss the ground raised by the revenue. Treatment to interest received - as capital receipt or revenue receipt - Held that - We are in agreement with the findings of the CIT(A). the case laws relied upon by the assessee are prior to set up of the business and are earned during construction period. Whereas in the given case, assessee had already set up the business and on one hand claiming expenditure as revenue and on the other another hand claiming the income as capital in nature cannot be accepted. Therefore, the CO raised by the assessee is hereby rejected.

Summary

Issues Involved:
1. Treatment of income from the sale of shares as long-term capital gains versus income from other sources.
2. Disallowance of salaries and recruitment expenses as capital expenditure.
3. Classification of interest received during the preconstruction period as capital receipt versus revenue receipt.

Detailed Analysis:

1. Treatment of Income from Sale of Shares:
The revenue contested the CIT(A)'s decision to treat the income from the sale of shares as long-term capital gains rather than income from other sources. The Assessing Officer (AO) had disbelieved the transaction due to the abnormal increase in share value within a short span, treating the amount as unexplained credit under section 68 of the Act. The CIT(A), however, noted that the financial position of the company (M/s SRGEPL) remained the same during the purchase and sale periods, and the share value fluctuations were market-driven. The CIT(A) found no reason to disbelieve the transaction as the purchasers confirmed the transaction and the gains were offered to tax. The Tribunal upheld the CIT(A)'s decision, noting that the transaction was genuine and commercially driven, dismissing the revenue's appeal.

2. Disallowance of Salaries and Recruitment Expenses:
The AO had treated the salaries and recruitment expenses as capital expenditure, allowing only a portion as revenue expenditure, since the assessee had not commenced its business operations. The CIT(A) observed that the business was set up when the property was acquired on lease, and the expenses were necessary for setting up the business. The Tribunal agreed with the CIT(A), noting that the business setup included recruiting staff and incurring administrative expenses, thus treating these as allowable revenue expenditures. The revenue's appeal on this ground was dismissed.

3. Classification of Interest Received During Preconstruction Period:
The assessee contended that the interest received on fixed deposits during the preconstruction period should be treated as capital receipt, not revenue receipt. The CIT(A) rejected this contention, stating that the business was set up from 01/04/2007, and therefore, the interest earned was revenue in nature. The Tribunal upheld the CIT(A)'s decision, agreeing that once the business was set up, the interest earned could not be treated as capital receipt. The cross-objection filed by the assessee was dismissed.

Conclusion:
The Tribunal dismissed both the revenue's appeal and the cross-objection filed by the assessee, upholding the CIT(A)'s decisions on all issues. The income from the sale of shares was treated as long-term capital gains, salaries and recruitment expenses were considered allowable revenue expenditures, and the interest received during the preconstruction period was classified as revenue receipt.