2013 (4) TMI 873 - AT - Income Tax

ITAT rules in favor of taxpayer on capital gains & gift exemption under Income Tax Act

The ITAT allowed the appeals, ruling that the long-term capital gain on the sale of shares was genuine and exempt under Section 10(38) of the Income Tax ... bogus LTCG - denying the long term capital gain exemption claimed by the assessee u/s. 10(38) - shares which the assessee sold was a “penny stock” - manipulation of share stocks - bogus claim - additions made u/s. 153A - Liability of tax on assessee for gift amount credited from a person who is not a relative of the assessee nor he has any business connections - the assessee brother has already offered receipt of such gift from a non relative as his own income - HELD THAT:- according to the assessee since shares were held for a period of more than 12 months, therefore, the income from sale of such shares is long term capital gain and the same is exempt u/s.10(38). It is the case of the revenue that the income so claimed as exempt u/s.10(38) is not long term capital gain and has to be treated as “income from other sources” since the shares so sold are penny stocks and the assessee, neither in the past nor in subsequent years, has traded in such shares and earned such huge income. Further, Arun Agrawal family, who originally had claimed such long term capital gain as exempt had subsequently offered such income as business income in the returns filed and earning of such huge income is against all human probabilities. Identical facts and circumstances we are of the considered opinion that the assessee is entitled to claim exemption u/s.10(38) of long term capital gain on account of sale of shares of Fast Tract Entertainment Ltd. decided by him. Accordingly, the order passed by the Ld. CIT(A) is set-aside and the AO is directed to allow the claim of the assessee. Application of section 056(v) of income tax on the facts of the case, admittedly the provision was introduced by the Finance Act, 2004 and is applicable to any sum of money exceeding ₹ 25,000/- received from any person other than the persons specified in the said provision on or after 01-09-2004. In the instant case the assessee has received the gift on 24-05-2004 which was credited in the bank account of the firm “Siva Agro Industries” in which the assessee is a partner. Therefore, the provisions of section 56(v) are not applicable to the facts of the present case. Merely because the amount was credited to the capital account of the partner on 31-03-2005 cannot be a ground to apply the provisions of section 56(v) when the gift was received on 29-05- 2004 by the assessee and the same was credited to the bank account in the firm wherein he is a partner. In this view of the matter, we set-aside the order of the CIT(A) and direct the AO to delete the addition. This ground by the assessee is accordingly allowed. Issues Involved:1. Whether the long-term capital gain on sale of shares claimed by the assessee is genuine or should be treated as income from undisclosed sources.2. Whether the gift received by the assessee should be treated as genuine or as income from undisclosed sources.Issue-wise Analysis:1. Long-Term Capital Gain on Sale of Shares:The assessee, an individual, was subjected to a search action under Section 132 of the Income Tax Act on 16-06-2009. The search revealed that the assessee had declared a capital gain of Rs. 20,67,286/- from the sale of shares of Fast Track Entertainment Ltd., which was claimed as exempt under Section 10(38) of the Income Tax Act. The Assessing Officer (AO) noted that the shares were purchased off-market and later dematerialized before being sold. The AO suspected these transactions as manipulations to introduce unaccounted funds into the financial system, labeling the shares as 'penny stocks.'The AO highlighted that several members of the Kalika Group, to which the assessee belonged, were involved in similar transactions and had offered such income as taxable in revised returns. The AO concluded that the capital gain claimed by the assessee was income from undisclosed sources.The CIT(A) upheld the AO's decision, leading the assessee to appeal before the ITAT. The ITAT considered various documents, including purchase and sale contract notes, balance sheets, dematerialization requests, and demat certificates. The ITAT also reviewed the decision in the case of Surendra Shantilal Peety and other family members, where similar claims of long-term capital gain were allowed.The ITAT found that the assessee had provided sufficient evidence to prove the genuineness of the transactions, including the purchase and sale of shares through recognized stock exchanges, payment of Securities Transaction Tax (STT), and proper documentation. The ITAT concluded that the AO and CIT(A) had wrongly treated the transactions as bogus without substantial evidence.The ITAT allowed the assessee's appeal, holding that the long-term capital gain on the sale of shares of Fast Track Entertainment Ltd. was genuine and exempt under Section 10(38) of the Income Tax Act.2. Gift Received by the Assessee:The AO noted that the assessee had credited an amount of Rs. 15 lakhs on 31-03-2005 as a gift received from one Mr. Jadhumani Pradhan, a non-resident Indian. The AO questioned the genuineness of the gift, citing the lack of a relationship or business connection between the assessee and the donor. The AO also pointed out discrepancies in the gift deed and applied the provisions of Section 56(v) of the Income Tax Act, treating the gift as income from undisclosed sources.The CIT(A) upheld the AO's decision, stating that the assessee's brother had also received a similar gift and offered it as income. The CIT(A) concluded that the gift was not genuine and confirmed the addition made by the AO.The assessee appealed before the ITAT, arguing that the gift was received on 24-05-2004, before the applicability of Section 56(v), which was introduced by the Finance Act, 2004, effective from 01-09-2004. The assessee provided evidence of the gift, including the bank statement showing the credit of the gift amount and the signed gift deed.The ITAT found that the gift was indeed received before the effective date of Section 56(v) and that the provisions of Section 56(v) were not applicable. The ITAT also noted that the CIT(A) had incorrectly stated that the assessee's brother received a gift from the same donor. The ITAT concluded that the gift was genuine and directed the AO to delete the addition.Conclusion:The ITAT allowed the appeals filed by the respective assessees, accepting the genuineness of the long-term capital gain on the sale of shares and the gift received by the assessee. The ITAT directed the AO to allow the claims of exemption under Section 10(38) and delete the addition made under Section 56(v).