Assessee wins appeal: Capital gains upheld, additions deleted, further verification ordered

Smt. Sarah Faisal Hawa Versus ACIT-21 (3), Mumbai

Smt. Sarah Faisal Hawa Versus ACIT-21 (3), Mumbai - Tmi Issues Involved:
1. Treatment of Short Term Capital Gain (STCG) as Business Income.
2. Treatment of Long Term Capital Gain (LTCG) as Business Income.
3. Addition on account of gifts as unexplained cash credit under section 68.
4. Addition on account of low withdrawals.
5. Denial of set off of short term capital loss against short term capital gain.
6. Addition on account of dividend stripping under section 94(7).
7. Addition under section 68 treating advances received as unexplained cash credits.

Detailed Analysis:

1. Treatment of STCG and LTCG as Business Income:
The assessee contested the treatment of STCG and LTCG as Business Income by the AO. The Tribunal noted that for AY 2007-08, the CIT(A) had reversed the AO's action of treating capital gains as Business Income, and this decision was affirmed by the Tribunal. The Tribunal emphasized the principle of consistency, noting that the assessee had been treated as an investor in shares in previous years and subsequent years, with capital gains consistently recognized. Therefore, the Tribunal allowed the appeals for all relevant assessment years, directing that STCG and LTCG be treated as capital gains rather than Business Income.

2. Addition on account of gifts as unexplained cash credit under section 68:
The AO had added Rs. 21,50,000 as unexplained cash credits under section 68, treating the gifts received by the assessee as unexplained. The Tribunal found that the assessee had provided confirmations, ITRs, and passbooks of the donors, thus discharging the primary onus to prove the identity, capacity, and genuineness of the transactions. The AO had not brought any contrary material on record. Consequently, the Tribunal allowed this ground of appeal, deleting the addition.

3. Addition on account of low withdrawals:
The AO had added Rs. 1,50,000 on account of low withdrawals, citing insufficient details provided by the assessee. The Tribunal observed that the AO made the addition without providing specific opportunity to the assessee during the reassessment proceedings. The Tribunal found that the AO had not conducted any inquiry or brought any material evidence to support the addition. Therefore, the Tribunal deleted the addition, allowing this ground of appeal.

4. Denial of set off of short term capital loss against short term capital gain:
The assessee argued for the set off of short term capital loss (STCL) against short term capital gain (STCG) as per section 74 of the Act. The Tribunal, considering that it had allowed the treatment of gains as capital gains, directed the AO to verify the loss and set off the claim in accordance with the law. This ground of appeal was allowed for statistical purposes.

5. Addition on account of dividend stripping under section 94(7):
The AO had disallowed Rs. 20,799 under section 94(7) related to dividend stripping. The Tribunal found that the AO made the disallowance without verifying the facts and only based on the observations of the PCIT. The Tribunal restored this ground to the AO for verification of facts and passing an order in accordance with the law, providing an opportunity to the assessee.

6. Addition under section 68 treating advances received as unexplained cash credits:
The AO had added Rs. 40,00,000 under section 68, treating advances received from friends as unexplained cash credits. The Tribunal noted that the assessee had provided ledger accounts, confirmations, bank statements, and statements recorded under section 131. The AO had not verified these documents. The Tribunal restored this ground to the AO for fresh consideration and verification of the evidence, directing the AO to provide an opportunity to the assessee before passing the order.

7. Addition on account of low withdrawals (AY 2009-10):
Similar to the previous years, the AO had added Rs. 2,25,000 on account of low withdrawals. The Tribunal, following its earlier observations, deleted this addition, allowing the ground of appeal.

Conclusion:
The Tribunal allowed the appeals of the assessee on several grounds, emphasizing the principle of consistency and the necessity for the AO to verify facts and provide opportunities to the assessee before making additions. The Tribunal directed the AO to treat capital gains as such and not as Business Income, deleted additions under section 68 for gifts and low withdrawals, and restored certain issues for fresh consideration and verification.