2019 (1) TMI 97 - AT - Income Tax

Tribunal affirms Long Term Capital Gains treatment for share sale income, rejects Revenue's Rule 46A challenge.

The Tribunal upheld the CIT(A)'s decision to classify income from the sale of shares as Long Term Capital Gains, allowing set-off against brought forward ... Addition made on account of Long Term Capital Gain as against the income from other sources held by the AO - Held that:- All the investments made out of assessee’s account and it was routed through the demat account of its Director. CIT(A) accepted the submissions of the assessee that in the earlier years, AO assessed the same as capital gain the fact of which not disputed by the DR. The fact of treating the assessee is the beneficial owner of the said investments and the Director allowed his demat account for assessee’s business transaction in purchase and sale of shares is not disputed by the assessee. - Decided against the revenue. Issues Involved:1. Classification of income from the sale of shares as Long Term Capital Gain (LTCG) versus income from other sources.2. Acceptance of reconciliation of sales by the CIT(A) and alleged violation of Rule 46A of Income Tax Rules, 1962.Issue-wise Detailed Analysis:1. Classification of Income from Sale of Shares:The primary issue in this case was whether the profit of Rs. 49,85,861/- from the sale of shares should be classified as Long Term Capital Gain (LTCG) or as income from other sources. The Assessing Officer (AO) treated the profit as income from other sources, denying the set-off against the brought forward LTCG loss. The AO's reasoning included the following points:- The investments were held in the name of the Director of the Company.- Transactions were conducted through the Director's demat account.- The Company and the Director are distinct entities, and the transactions made by the Director cannot be treated as those of the Company.- The property/capital asset was held by the Director, and the company-assessee did not have any rights over them.- The demat account of the Director was used for the transactions, and the Company was not the owner of the transactions leading to assets.The assessee contended that:- The investments were made out of the company's surplus funds and routed through the Director's demat account due to the company's lack of a demat account.- The Director acted in a fiduciary capacity, and all costs and profits/losses from the investments were borne by the company.- Similar transactions in earlier years were accepted by the AO as belonging to the company.- The beneficial ownership of the investments always belonged to the company, and the Director had no beneficial interest in the shares.The CIT(A) accepted the assessee's submissions, noting that the funds for the investments came from the company and that the beneficial ownership of the investments belonged to the company. The CIT(A) directed the AO to assess the amount as capital gains and allow the set-off against the brought forward losses. The Tribunal upheld this decision, agreeing with the CIT(A)'s findings and noting that the facts were consistent with earlier years where similar transactions were accepted as capital gains.2. Acceptance of Reconciliation of Sales and Alleged Violation of Rule 46A:The second issue involved the CIT(A)'s acceptance of the reconciliation of sales submitted by the assessee and the alleged violation of Rule 46A of Income Tax Rules, 1962. The Revenue argued that the CIT(A) accepted new evidence in violation of Rule 46A. However, the assessee contended that no new evidence was filed before the CIT(A) and that the issue was similar to that in the preceding year (AY 2003-04), where the Tribunal had decided in favor of the assessee.The Tribunal noted that the CIT(A) had examined the assessment record and found no change in the material facts from the preceding year. The Tribunal also observed that the Revenue did not provide any contrary order from a higher forum regarding the decision for AY 2003-04. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's grounds on this issue.Conclusion:In conclusion, the Tribunal upheld the CIT(A)'s decision to classify the income from the sale of shares as Long Term Capital Gains and allowed the set-off against the brought forward losses. The Tribunal also found no violation of Rule 46A in the acceptance of the reconciliation of sales by the CIT(A). The appeal of the Revenue was dismissed in its entirety.