2018 (11) TMI 131 - AT - Income Tax

Bogus Short Term Capital Gain and Long Term Capital Gain from purchase/sale of shares - unexplained credit u/s 68 - Held that - The genuineness of the sale transactions has not been doubted by the revenue authorities. Equity shares of the IFCI Ltd have been purchased by making payment through disclosed sources in the form of account payee cheque. Equity shares have been duly transferred in and transferred out of the demat account of the assessee at the time of purchase and sale respectively. The alleged addition made u/s 68 for unexplained cash credit do not apply in the given facts when the sale consideration has itself been found to be genuine. If the purchase and sale are not doubted as the payments made for purchase and sale consideration received are also genuine, demat account has been used for the alleged transactions of purchase and sale, then mere delay in payment itself cannot prove that the transactions are sham and bogus. We therefore set aside the order of the lower authorities and allow the ground raised by the assessee and direct AO to treat the alleged profit from sale and purchase of equity shares of IFCI Ltd as short term capital gain and tax accordingly. In the result appeal of the assessee is allowed. Profit earned by the assessee wherein the delivery of shares have not been taken through demat account because the shares were sold in short span of time i.e. within 7 to 8 days of the purchase and for this reason the gain has been treated as business profit - Held that - We find that the assessee is not a regular trader of shares as it earned income from salary and house property. This is not the case of an intra day trading nor of the forward market trading for derivatives. It is simply a case that share have been purchased and they were held in the demat account of the broker and as the assessee has sold them in a very short period they were not transferred to her demat account. It is not the case of revenue that the broker i.e. HDIL Financial Ltd has not received the delivery of shares purchased and has not delivered the shares at the time of sale. In such situation treating of income of ₹ 2,49,045/- as business income will not be justified. We therefore set aside the finding of lower authorities and direct the Assessing Officer to tax the income of ₹ 2,49,045/- treating it as Short Term Capital Gain from sale of shares. Capital gain as claimed as exempt income by virtue of provision of Section 10(38) - Capital Gain from sale of listed equity shares as per the provisions of Section 111A - Held that - Similar issue in the case of ITO V Deepchand Shah 2010 (10) TMI 687 - ITAT, MUMBAI wherein it was held that it is necessary to trace corresponding purchase of shares from the demat account maintained by the broker in order to verify whether such purchases of respective shares were actually made by broker on behalf of the assessee and shares so purchased were credited to its demat account and were lying there till same were transferred to demat account of the assessee after a period of more than one year . Examining the facts of the instant appeal and our discussions in the preceding paragraphs on this issue we are of the considered view that the alleged transaction claimed by the assessee to have resulted into Long Term Capital Gain is not sustainable and the alleged transaction of earning income of ₹ 17,23,052/- should be taxed by the Assessing authority treating it as Short Term Capital Gain because the equity shares sold in these transactions were held for less than 12 months and therefore they were in the category of Short Term Capital Assets.

Summary

Issues Involved:
1. Treatment of Short Term Capital Gain (STCG) as income from other sources.
2. Treatment of Long Term Capital Gain (LTCG) as unexplained credits under Section 68.
3. Denial of exemption under Section 10(38) for LTCG.
4. Classification of trading profit as business income versus capital gains.

Detailed Analysis:

1. Treatment of Short Term Capital Gain (STCG) as income from other sources:

The primary issue in the appeals was the treatment of STCG arising from the purchase and sale of equity shares as income from other sources. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] treated these transactions as sham and bogus, and consequently, taxed them as unexplained credits under Section 68 of the Income Tax Act. The AO observed significant delays between the date of purchase and the payment for shares, raising suspicions about the genuineness of the transactions. Despite the assessee providing necessary documents such as contract notes, payment proofs, and demat account details, the AO and CIT(A) held that the transactions were not genuine.

The Tribunal, however, found that the transactions were genuine, supported by contract notes, demat account entries, and payments made through banking channels. The Tribunal relied on the precedent set by the Co-ordinate Bench in the case of Shri Omprakash Phatandas Phajwani, where similar facts led to the conclusion that the transactions were genuine and the STCG should not be treated as income from other sources.

2. Treatment of Long Term Capital Gain (LTCG) as unexplained credits under Section 68:

In the case of Shri Pradeep Maheshwari HUF, the AO treated LTCG claimed as exempt under Section 10(38) as unexplained credits under Section 68, alleging the transactions were sham and bogus. The CIT(A) upheld this view. The Tribunal, however, found that the transactions were genuine, supported by contract notes, demat account entries, and payments made through banking channels. The Tribunal applied the same reasoning as in the STCG cases, holding that the transactions were genuine and should not be treated as unexplained credits under Section 68.

3. Denial of exemption under Section 10(38) for LTCG:

The Tribunal examined whether the shares were held for more than 12 months to qualify for exemption under Section 10(38). It was found that the shares were transferred to the demat account of the assessee after the payment for the purchase was made, and the shares were held for less than 12 months. The Tribunal held that the transactions did not qualify for the exemption under Section 10(38) and should be treated as STCG.

4. Classification of trading profit as business income versus capital gains:

For the assessment year 2010-11, the AO treated a portion of the STCG as business profit, arguing that the shares were sold within a short period and were not transferred to the demat account. The Tribunal found that the assessee was not a regular trader of shares and the transactions were not intra-day or forward market trading. The shares were held in the demat account of the broker and sold within a short period. The Tribunal held that the profit should be treated as STCG and not as business income.

Conclusion:

The Tribunal allowed the appeals of Smt. Annapurna Maheshwari for the assessment years 2008-09 and 2010-11, directing the AO to treat the profits from the sale of shares as STCG. In the case of Shri Pradeep Maheshwari HUF, the Tribunal partly allowed the appeal, directing the AO to treat the income as STCG instead of LTCG, as the shares were held for less than 12 months. The Tribunal emphasized the importance of genuine documentation and adherence to legal provisions in determining the nature of income.