2010 (2) TMI 892 - AT - Income Tax

Ad hoc disallowances reduced; household expense addition deleted; LTCG from share sales not treated as undisclosed income

ITAT (Agra) partly allowed the appeal: AO's ad hoc disallowances were reduced-telephone expense set at 1/7 and car expense at 1/10 (CIT(A) had fixed 1/6 ... Income under the head 'Long-Term Capital Gains' (LTCG) - Disallowance of telephone and car expenses - AO disallowed 1/4th of the total expenses - CIT(A) has reduced this disallowance to 1/6th - Held that:- These additions are simply ad hoc but still in the case of the assessee as an individual non-business user of the expenses cannot be ruled out. But the disallowances in question are on higher side. In the interest of justice we reduce the disallowances to 1/7th in telephone account and 1/10th in car account. Addition in the account of household expenses - Held that:- As before making ad hoc disallowance AO is bound to bring some concrete basis on which he can make additions in the account of house-hold expenses. The reply of the assessee comes thereafter only. This addition being simply ad hoc and based on guess work cannot be sustained in the eyes of law. The entire addition is, therefore, ordered to be deleted. Sale of shares - Undisclosed income - Capital Gain vs. Income from other sources - assessee had acquired the shares, the purchase of which was duly declared by the assessee in earlier years which stand accepted by the revenue - assessee contended that decision of the lower authorities are influenced by the general observation of the Investigation Wing that arose a suspicion turned into conclusive proof in the minds of the authorities that everybody who has sold the shares at a high price has converted his unaccounted money through accommodation entries - Held that:- It was the duty of the AO to bring on record sufficient evidences and material to prove that the documents filed by the assessee were bogus, false or fabricated and the long-term capital gain shown by him was actually his income from undisclosed sources. The only material to support such conclusion of the lower authorities is either the findings of the DDI in general investigations or the observation that the assessee could not prove the transaction to be genuine one. This is the settled law in view of the decision of CIT v. Daulat Ram Rawatmull [1964 (3) TMI 14 - SUPREME COURT] that the apparent is real. It is undisputed that assessee has supplied all the evidence regarding the purchase. Entire approach of the lower authorities are based on suspicion, surmises and conjectures, the same cannot be approved. CIT(A) has erred on facts as well as in law in upholding the order of the Assessing Officer treating the income under the head 'Long Term Capital Gain' as sham and bogus and taxing the same under the head 'income from other sources' - appeal of the assessee is partly allowed. Issues Involved:1. Whether the Long-Term Capital Gains (LTCG) declared by the assessee should be treated as genuine or as income from undisclosed sources under section 68 of the Income-tax Act, 1961.2. Disallowance of expenses under the head 'telephone and car expenses.'3. Addition made in the account of household expenses.Detailed Analysis:1. Long-Term Capital Gains (LTCG):Facts:- The assessee filed a Return of Income (ROI) declaring total income, including LTCG from the sale of shares.- The shares were purchased in a public issue and sold through a broker registered with the Delhi Stock Exchange.- The Assessing Officer (AO) doubted the genuineness of the sale transaction due to the abnormal increase in share prices and treated the sale proceeds as undisclosed income under section 68.Arguments:- The assessee provided evidence of the share purchase, allotment, and sale through a registered broker.- The AO and CIT(A) acted on suspicion rather than substantive evidence.- The broker's identity and transaction details were confirmed, and the sale proceeds were received through banking channels.Judgment:- The Judicial Member accepted the genuineness of the transactions, citing that the department accepted the purchase of shares in the previous year, and the sale was through a registered broker.- The Accountant Member disagreed, emphasizing the lack of substantial evidence and the abnormal price increase, suggesting the transaction was stage-managed.- The Third Member sided with the Judicial Member, highlighting the need for concrete evidence to prove the transaction as bogus. The case was decided in favor of the assessee, treating the LTCG as genuine.2. Disallowance of Expenses:Facts:- The AO disallowed 1/4th of the telephone expenses and 1/6th of car expenses, which was reduced by the CIT(A) to 1/6th and 1/10th, respectively.Arguments:- The disallowances were considered ad hoc but necessary due to non-business use.Judgment:- The Tribunal found the disallowances on the higher side and reduced them to 1/7th for telephone expenses and 1/10th for car expenses, partly allowing the ground.3. Addition in Household Expenses:Facts:- The AO estimated household expenses higher than what was declared by the assessee, leading to an addition.Arguments:- The addition was based on general observations without concrete evidence.Judgment:- The Tribunal held that ad hoc additions without concrete basis could not be sustained. The entire addition was deleted, allowing the ground in favor of the assessee.Conclusion:- The appeal was partly allowed, with the LTCG treated as genuine, the disallowances on expenses reduced, and the addition in household expenses deleted. The decision emphasized the need for concrete evidence over suspicion and conjectures in tax assessments.