2016 (5) TMI 1325 - AT - Income Tax

Tax Tribunal: Capital Gains Ruling Favors Assessees, Penalties Deleted

Devangi Alias Rupa Dipak Panchal, Dipak J. Panchal Versus Dy. Commissioner of Income-tax Central Circle1 (3), Ahmedabad And Jt. CIT (OSD), Central Circle 1 (3), Ahmedabad Versus Dipak J. Panchal

Devangi Alias Rupa Dipak Panchal, Dipak J. Panchal Versus Dy. Commissioner of Income-tax Central Circle1 (3), Ahmedabad And Jt. CIT (OSD), Central Circle ... Issues Involved:1. Assessments for the assessment years 2000-01 to 2004-05 under Section 153A of the Act.2. Classification of gains from the sale of shares for the assessment years 2005-06 and 2006-07.3. Allowance of losses arising from the sale of shares as set off against gains.Issue-wise Detailed Analysis:1. Assessments for Assessment Year 2000-01 to 2004-05:The primary contention was whether assessments for these years could be reopened under Section 153A of the Act without any incriminating material found during the search. The Tribunal concluded that since no incriminating material was found during the search, the completed assessments could not be reopened. This conclusion was supported by the judgment of the Hon'ble Bombay High Court in the case of Continental Warehousing Corporation (374 ITR 645), which stated that the Assessing Officer (AO) could not disturb finalized assessments unless new incriminating material was found during the search. The Tribunal also referred to the case of Kabul Chawla (380 ITR 573) by the Hon'ble Delhi High Court, which reinforced that completed assessments could only be interfered with if incriminating material was found during the search.2. Classification of Gains from Sale of Shares:For the assessment years 2005-06 and 2006-07, the issue was whether gains from the sale of shares should be classified as capital gains or business income. The Tribunal emphasized that the intention of the assessee at the time of purchasing shares is crucial. The Tribunal noted that the assessee had shown shares as investments in their balance sheets, valued at cost, and had maintained separate accounts for derivative profits and capital gains. The Tribunal referred to the CBDT Circular No. 6/2016, which provides guidelines for determining whether income from the sale of shares should be treated as capital gains or business income. The Tribunal concluded that the assessees were investors, not traders, and thus gains from the sale of shares should be treated as capital gains. The Tribunal also addressed the AO's contention regarding the IPO scam, stating that the mode of acquisition of shares does not change the nature of the transaction from investment to trading.3. Allowance of Losses Arising from Sale of Shares:The Tribunal addressed the AO's denial of set off of losses on the grounds that the transactions were with related parties and were off-market transactions. The Tribunal found no merit in the AO's allegations, stating that transactions with related parties do not automatically make them sham or bogus. The Tribunal noted that the accounts of M/s. Grace Investment were audited and that the purchase and sale prices were verifiable from the stock market. The Tribunal also pointed out that the AO had accepted gains from similar transactions, which undermined the AO's position. The Tribunal directed the AO to allow the set off of losses against gains.Penalty under Section 271(1)(c):Since the Tribunal directed the AO to treat the gains as capital gains and allowed the set off of losses, there was no basis for the levy of penalty under Section 271(1)(c) of the Act. The Tribunal cited the principle 'Sublato Fundamento Credit Opus,' meaning if the foundation is removed, the superstructure falls. The Tribunal also referred to the case of Amit Jain (33 Taxmann.com 178), where the Hon'ble Delhi High Court held that penalty cannot be levied if the head of income is changed.Conclusion:The Tribunal allowed the appeals of the assessees for the assessment years 2000-01 to 2004-05, directed the AO to treat gains from the sale of shares as capital gains for the years 2005-06 and 2006-07, and allowed the set off of losses. Consequently, the Tribunal directed the deletion of penalties levied under Section 271(1)(c) of the Act.