2018 (11) TMI 131 - AT - Income Tax

Tribunal Decisions on Sale of Shares: STCG vs. LTCG

Smt. Annapurna Maheshwari And Shri Pradeep Maheshwari HUF Versus ACIT 4 (1), Inodre

Smt. Annapurna Maheshwari And Shri Pradeep Maheshwari HUF Versus ACIT 4 (1), Inodre - TMI Issues Involved:1. Treatment of Short Term Capital Gain (STCG) as income from other sources.2. Treatment of Long Term Capital Gain (LTCG) as unexplained credits under Section 68.3. Denial of exemption under Section 10(38) for LTCG.4. Classification of trading profit as business income versus capital gains.Detailed Analysis:1. Treatment of Short Term Capital Gain (STCG) as income from other sources:The primary issue in the appeals was the treatment of STCG arising from the purchase and sale of equity shares as income from other sources. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] treated these transactions as sham and bogus, and consequently, taxed them as unexplained credits under Section 68 of the Income Tax Act. The AO observed significant delays between the date of purchase and the payment for shares, raising suspicions about the genuineness of the transactions. Despite the assessee providing necessary documents such as contract notes, payment proofs, and demat account details, the AO and CIT(A) held that the transactions were not genuine.The Tribunal, however, found that the transactions were genuine, supported by contract notes, demat account entries, and payments made through banking channels. The Tribunal relied on the precedent set by the Co-ordinate Bench in the case of Shri Omprakash Phatandas Phajwani, where similar facts led to the conclusion that the transactions were genuine and the STCG should not be treated as income from other sources.2. Treatment of Long Term Capital Gain (LTCG) as unexplained credits under Section 68:In the case of Shri Pradeep Maheshwari HUF, the AO treated LTCG claimed as exempt under Section 10(38) as unexplained credits under Section 68, alleging the transactions were sham and bogus. The CIT(A) upheld this view. The Tribunal, however, found that the transactions were genuine, supported by contract notes, demat account entries, and payments made through banking channels. The Tribunal applied the same reasoning as in the STCG cases, holding that the transactions were genuine and should not be treated as unexplained credits under Section 68.3. Denial of exemption under Section 10(38) for LTCG:The Tribunal examined whether the shares were held for more than 12 months to qualify for exemption under Section 10(38). It was found that the shares were transferred to the demat account of the assessee after the payment for the purchase was made, and the shares were held for less than 12 months. The Tribunal held that the transactions did not qualify for the exemption under Section 10(38) and should be treated as STCG.4. Classification of trading profit as business income versus capital gains:For the assessment year 2010-11, the AO treated a portion of the STCG as business profit, arguing that the shares were sold within a short period and were not transferred to the demat account. The Tribunal found that the assessee was not a regular trader of shares and the transactions were not intra-day or forward market trading. The shares were held in the demat account of the broker and sold within a short period. The Tribunal held that the profit should be treated as STCG and not as business income.Conclusion:The Tribunal allowed the appeals of Smt. Annapurna Maheshwari for the assessment years 2008-09 and 2010-11, directing the AO to treat the profits from the sale of shares as STCG. In the case of Shri Pradeep Maheshwari HUF, the Tribunal partly allowed the appeal, directing the AO to treat the income as STCG instead of LTCG, as the shares were held for less than 12 months. The Tribunal emphasized the importance of genuine documentation and adherence to legal provisions in determining the nature of income.