2016 (10) TMI 987 - AT - Income Tax

Share transactions - nature of income - LTCG or business income - Held that - There might be various reasons for all of sudden increase in the price of the shares. One possible reason could be permission to construct a tower on the land owned by PMCB . Even a single transaction can be treated as a venture into a trade, but the AO failed to point out those peculiar circumstances. Reasons given by the ld.CIT(A) in the finding extracted supra would indicate that the assessee has not borrowed funds for making investment. She has not shown shares as stock-in-trade. She did not take help of experts; she did not incur any expenditure towards selling consultancy or maintaining of any office. She has not purchased shares of any other companies in this period. Thus, facts emerge out from the record, if we examine in the light of various tests propounded by the Hon ble jurisdictional High Court as well as by the ITAT in the case of Sarnath Infrastructure Pvt. Ltd. 2007 (12) TMI 261 - ITAT LUCKNOW-B then it would reveal that theld.CIT(A) has taken a correct view of treating the transaction as simplicitor investment. Mode of computation of capital gain - Sale value of the shares taken - Held that - The assessee has shown full value of the consideration as ₹ 12,500/- per share. The ld.AO intends to change this full value of the consideration. In his efforts, he made reference to the land holding owned by PMCB . He considered the value of such land holding, and divided that holding with total number of shares issued by the company. What is the basis of changing this pattern ? There is no evidence with the AO that the assessee has received more value than the one disclosed by her. Unless he possesses some evidences, demonstrating the fact that full value of the consideration disclosed by the assessee was incorrect, he cannot replace that value by estimation or on the basis of his own estimation. It is also pertinent to mention that his estimation is also not based on construction of facts in right perspective. The ld.CIT(A) has recorded that he failed to consider liabilities of PMCB . Had these liabilities been deducted against the total value of the land, and the value of the shares were worked out, that value would be lesser than the one shown by the assessee.he ld.CIT(A) has examined both these issues elaborately, and after going through the finding of the ld.CIT(A), we do not see any reason to interfere in it.

Summary

Issues Involved:

1. Whether the transaction of purchase and sale of shares by the assessee should be treated as a business transaction or as an investment.
2. Whether the valuation of shares by the Assessing Officer (AO) at ?25,896 per share is justified.

Issue-wise Detailed Analysis:

1. Nature of Transaction: Business or Investment

The primary issue was whether the solitary transaction of the assessee in purchasing and selling shares should be treated as a business transaction or as an investment. The AO had treated the transaction as a business activity, rejecting the assessee's claim of long-term capital gain. The AO's rationale was based on the absence of share certificates and share transfer forms, and the suspicion that the transaction was pre-arranged. However, the assessee contended that she was a salaried individual and had made the investment from her savings, not borrowed funds. She also pointed out that the shares were shown as investments in her balance sheet and not as stock-in-trade.

The Tribunal referred to various principles and tests laid out by judicial precedents to determine the nature of transactions. These included the intention at the time of purchase, the treatment of shares in the books of account, the frequency of transactions, and whether the purchase was for retention and appreciation of value or for realizing profit. The Tribunal noted that the assessee had not engaged in frequent transactions, had not borrowed funds for the purchase, and had treated the shares as investments in her balance sheet.

The Tribunal found that the AO's reasons were based on suspicion rather than concrete evidence. The inquiry conducted by the Additional Director of Income Tax (ADIT) also did not support the AO's conclusions. The Tribunal upheld the CIT(A)'s decision that the transaction should be treated as an investment, resulting in long-term capital gain.

2. Valuation of Shares

The second issue was whether the AO was justified in valuing the shares at ?25,896 per share, significantly higher than the sale price of ?12,500 per share shown by the assessee. The AO had estimated the value based on the land owned by the company, without considering the company's liabilities. The CIT(A) found that the AO had made an apparent error by not deducting the liabilities from the value of the land. The correct value per share, after accounting for liabilities, was calculated to be ?9,798, which was less than the sale price shown by the assessee.

The Tribunal agreed with the CIT(A), noting that the AO's estimation was not based on any concrete evidence that the assessee had received more than the disclosed sale price. The Tribunal emphasized that the AO could not replace the disclosed value with his own estimation without any supporting evidence. The Tribunal upheld the CIT(A)'s finding that the sale price of ?12,500 per share was reasonable and should be accepted for computing the capital gain.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to treat the transaction as an investment resulting in long-term capital gain and accepting the sale price of ?12,500 per share for computing the capital gain. The Tribunal found that the AO's conclusions were based on suspicion and incorrect valuation methods, lacking concrete evidence. The decision was pronounced in court on 1st September 2016 at Ahmedabad.