2013 (8) TMI 739 - AT - Income Tax

Tribunal rules in favor of assessee on capital gains treatment

The Tribunal partly allowed the assessee's appeal, ruling in favor of the assessee on the treatment of short term capital gain as capital gains, modifying ... Treatment of short term capital gain as business income - investment in shares – Assessee is an individual and proprietor of M/s. Urmi Plastics which is engaged in the business of manufacturing of PVC, pouches and tubing - Apart from business income, assessee also showed capital gain income both under the head long term and short term for share transactions – Assessee's share transactions are to be considered as trading transactions assessed both short term capital gain and long term capital gain offered by the assessee as business income - Held that:- Assessee was involved in share transactions in earlier years and also in later years. Considering the transactions and submissions of the assessee, the same cannot be treated as business income as assessee had no borrowed funds, no set up to do share transactions as a trading activity - Coupled with the fact that the assessee has neither claimed benefit of opening and closing stock, nor AO disturbed the working of the assessee except treating the gain as business income, income declared by the assessee as short term capital gain can not be treated as business income. Transaction to be treated as short term or long term capital gain - Assessee got the shares transferred to demat account as on 31.03.2005 and sold as on 18.04.2005 - There is no verifiable evidence to establish whether the assessee purchased shares on 02.04.04 as claimed – Held that:- Assessee purchased the shares and transferred them into demat account on 31.03.05 - Gain earned by the assessee can be brought to tax as capital gain but as short term capital gain, as there is evidence of purchase as on 31.03.05 and sale as on 18.04.05 - A.O. is directed to treat gains as short term capital gain and tax accordingly. Commission amount on presumption and notion for computing tax - Commission paid at 5% for arranging long term capital gain – Held that:- The transaction is neither proved as an arranged one and nor there is evidence on record that the assessee arranged transaction by paying any commission. The presumptions cannot be made while bringing an amount to tax and no notional amount can be brought to tax – Deletion of commission amount as there is no evidence of assessee paying any commission so to sustain the addition so made. Issues Involved:1. Treatment of short term capital gain as business income.2. Treatment of long term capital gain as business income.3. Treatment of long term capital gain as bogus income.4. Addition of commission paid for arranging long term capital gain.Detailed Analysis:1. Treatment of Short Term Capital Gain as Business Income:The assessee's short term capital gain of Rs.17,42,057/- was treated by the Assessing Officer (AO) as business income, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the trading activity was not substantial and the gains were from delivery-based transactions, which should be treated as capital gains. The assessee cited previous assessments and relevant case laws, including Gopal Purohit vs. Jt.CIT, to support the claim that such gains should be treated as capital gains. The Tribunal, after considering the facts and submissions, concluded that the assessee's share transactions could not be treated as business income due to the lack of borrowed funds, no setup for trading activity, and consistent treatment of such gains as capital gains in previous years. Therefore, the Tribunal allowed this ground in favor of the assessee.2. Treatment of Long Term Capital Gain as Business Income:The AO treated part of the long term capital gain of Rs.73,488/- from the sale of shares of Amtek Auto Ltd. as business income, which was confirmed by the CIT(A). The CIT(A) noted that the assessee engaged in repetitive transactions in the same scrip, indicating a trading activity. The Tribunal, however, directed the AO to accept the long term capital gain as such for the shares held for more than a year and treat the balance as short term capital gain. The Tribunal allowed this ground, modifying the CIT(A)'s order.3. Treatment of Long Term Capital Gain as Bogus Income:The AO treated the long term capital gain of Rs.23,58,900/- from the sale of shares of Interlink Finance Ltd. as bogus income, citing the non-existence of the broker and the admission of issuing bogus bills by the broker's director. The CIT(A) confirmed the addition, treating Rs.22,48,000/- as unexplained investment and Rs.2,46,900/- as business income. The Tribunal found that the shares were transferred to the assessee's demat account by 31.03.2005 and sold on 18.04.2005, indicating the purchase occurred in the previous assessment year. Therefore, the Tribunal directed the AO to treat the gain as short term capital gain, rejecting the CIT(A)'s enhancement of the purchase cost. This ground was partially allowed.4. Addition of Commission Paid for Arranging Long Term Capital Gain:The AO estimated a commission of Rs.1,17,945/- allegedly paid for arranging the long term capital gain, which was confirmed by the CIT(A). The Tribunal found no basis or evidence for such an estimation and held that presumptions cannot be made for tax purposes. The Tribunal deleted the addition, allowing this ground in favor of the assessee.Conclusion:The Tribunal partly allowed the assessee's appeal, providing relief on the treatment of short term capital gain, modifying the treatment of long term capital gain, and deleting the addition of estimated commission. The order was pronounced in the open court on 20th August, 2013.