2013 (11) TMI 968 - AT - Income Tax

Long term capital gain - Purchase and sale of shares Genuine transaction or not Held that - Following Arun Kumar Agarwal (HUF) Others 2012 (8) TMI 398 - JHARKHAND HIGH COURT - 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 assessees had held the shares much prior to 12 months of the sale of the shares Decided against Revenue.

Issues Involved:
1. Genuineness of Share Transactions.
2. Treatment of Sale Proceeds as Income from Other Sources.
3. Validity of Off-Market Transactions.
4. Role of SEBI and Brokers in Alleged Manipulation.
5. Evidence and Documentation Provided by the Assessee.
6. Presumption and Proof in Tax Assessments.
7. Judicial Precedents and Reliance on Case Law.

Detailed Analysis:

1. Genuineness of Share Transactions:
The primary issue was whether the share transactions conducted by the assessee were genuine. The Assessing Officer (AO) doubted the genuineness based on several observations, including the nature of the shares (penny stocks), the financial standing of the companies involved, and the lack of previous experience of the assessee in share transactions.

2. Treatment of Sale Proceeds as Income from Other Sources:
The AO treated the entire sale proceeds from the share transactions as 'Income from Other Sources' instead of Long Term Capital Gains (LTCG). This was based on the suspicion that the transactions were not genuine and were pre-arranged to legitimize undisclosed income.

3. Validity of Off-Market Transactions:
The AO questioned the validity of the off-market transactions, as the purchases were not found in the records of the Calcutta Stock Exchange (CSE). The assessee argued that the transactions were physical and off-market, which did not require routing through a recognized stock exchange.

4. Role of SEBI and Brokers in Alleged Manipulation:
The AO relied on reports from SEBI indicating that the brokers involved in the transactions were penalized for unethical practices. The assessee contended that the SEBI's actions against brokers should not impact the genuineness of their transactions, especially since no direct evidence linked the assessee to any fraudulent activity.

5. Evidence and Documentation Provided by the Assessee:
The assessee provided comprehensive documentation, including purchase and sale records, D-MAT account statements, and bank statements showing receipt of sale proceeds through account payee cheques/drafts. The CIT(A) found this evidence sufficient to support the genuineness of the transactions.

6. Presumption and Proof in Tax Assessments:
The CIT(A) emphasized that mere suspicion cannot replace concrete proof in tax assessments. The AO's conclusions were based on surmises and conjectures without any positive corroborative evidence. The CIT(A) relied on judicial precedents to support this view.

7. Judicial Precedents and Reliance on Case Law:
The CIT(A) and the Tribunal referred to several judicial precedents, including decisions from the Supreme Court and various High Courts, which established that suspicion, however strong, cannot take the place of proof. The CIT(A) cited cases like Dhakeswari Cotton Mills Ltd. v. CIT and Umacharan Shaw & Bros. v. CIT to support the assessee's position.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the AO failed to provide cogent evidence to prove that the share transactions were not genuine. The Tribunal emphasized that the prescribed procedure for share transactions was followed, and the AO's reliance on suspicion and reports from SEBI without concrete evidence was insufficient to discredit the transactions. The appeals of the Revenue were dismissed, affirming the genuineness of the share transactions and the treatment of sale proceeds as LTCG.

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