2017 (3) TMI 184 - AT - Income Tax

Income from transactions in shares - capital gain OR business income - Held that - From the plain reading of clause (a) of the said Notification No.6/2016 dated 29.02.2016, we find that it has been instructed that if the assessee is irrespective of the period of holding treat the transaction for sale-purchase of the share as stock-in-trade then the Department shall not dispute on this matter. Accordingly, in this case, assessee has been treating the income arising from the sale-purchase of the share as STCG/LTCG, therefore, AO cannot dispute the same as business income . Magnitude of the transactions do not alter the nature of the transactions. Therefore, magnitude of transactions carried out by the assessee in our view should not be very material in coming to the conclusion that income in question is income from business . Though the res judicata is not applicable but the principal of consistency will definitely apply and on that basis the claim of the assessee should be held proper. - Decided in favour of assessee Addition as unexplained cash credit u/s 68 - addition on the basis of a witness who examined at the back of the assessee - genuineness of the purchases - Held that - The absence of proof regarding the existence of the parties cannot, in our opinion, be confused with the question of genuineness of the purchases. If the goods purchased had been accepted by the Department, it would not, in our opinion, be possible for the Department to turn round and say that the debits appearing on account of these purchases in the name of parties were cash credits. But the lower authorities do not challenge the correctness of the trading profit, and in doing so, they impliedly accept the genuineness of the purchases. As purchases were on credit, corresponding debits for them should appear in some accounts. Such credits in those accounts would not be for cash but for goods and it would be wrong to call them cash credits. The names of the suppliers may be wrong, but the supplies of the goods were reality. For wrong names of suppliers, the reality of purchases cannot be negative. It is a case of purchases having been made by the assessee without properly disclosing the identity of the suppliers. Such a situation is not covered by s. 68 of the Act. We, therefore, delete the addition made on account of such credits. We also find that the statement of SPK recorded during assessment proceedings was not cross examined by the AO though the assessee made very specific request. While holding so we rely in the judgment in the case of CIT v. Eastern Commercial Enterprises (1993 (12) TMI 26 - CALCUTTA High Court ) wherein it was held that the Revenue cannot make any addition on the basis of a witness who examined at the back of the assessee. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of income from share transactions as capital gains or business income.
2. Addition of unexplained cash credits under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
- Revenue's Appeal: The Revenue contested the CIT(A)'s decision to classify income from share transactions as capital gains, arguing that the assessee was engaged in share trading as a business.
- Assessee's Income Sources: The assessee reported income from long-term capital gains, short-term capital gains, dividend income, and a ready-made garments business.
- Assessing Officer's (AO) Observations: The AO noted that the assessee's primary activity involved frequent and substantial transactions in shares, indicating a business activity rather than investment. The AO cited the nature of the business, the proportion of funds allocated to share transactions, and the regularity and volume of transactions.
- CIT(A)'s Decision: The CIT(A) referenced previous assessments where similar transactions were treated as investments. The CIT(A) found no reason to deviate from earlier findings and allowed the appeal in favor of the assessee.
- Tribunal's Analysis: The Tribunal acknowledged the ongoing disputes regarding the classification of share transactions. It referred to CBDT Notification No. 6/2016, which provides guidelines for classifying such income. The Tribunal concluded that since the assessee consistently treated the transactions as investments and the Revenue had accepted this in previous years, the AO could not reclassify the income as business income. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

2. Addition of Unexplained Cash Credits under Section 68:
- Assessee's Appeal: The assessee challenged the addition of ?89,02,420 as unexplained cash credits, arguing that the AO did not properly consider the evidence provided.
- AO's Observations: The AO noted discrepancies in the addresses of sundry creditors and the inability to produce them for verification. The AO relied on an Inspector's report and a statement from Shri Pawan Kejriwal (SPK), who denied having any transactions with the assessee and claimed to have returned the money after deducting brokerage.
- CIT(A)'s Decision: The CIT(A) upheld the AO's addition, emphasizing the importance of the Inspector's findings and the lack of complete postal addresses for verification.
- Tribunal's Analysis: The Tribunal found that the AO did not disallow the corresponding purchases, which were necessary for the sales accepted by the AO. The Tribunal emphasized that the burden of proof shifted to the AO once the assessee provided initial evidence. The Tribunal noted that the AO did not conduct further inquiries to disprove the assessee's claims. Additionally, the Tribunal highlighted the failure to allow cross-examination of SPK, which violated principles of natural justice. The Tribunal concluded that the addition under Section 68 was not justified and reversed the lower authorities' decisions, allowing the assessee's appeal.

Conclusion:
- Revenue's Appeal: Dismissed.
- Assessee's Appeal: Partly allowed, with the addition under Section 68 deleted.