2017 (9) TMI 1837 - AT - Income Tax

Computing the capital gains arising on transfer of a capital asset acquired by the assessee under gift - HELD THAT - It has been held by Bombay High Court in Manjula J. Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT that the expression held by the assessee used in Explanation (iii) to section 48 has to be understood in the context and harmoniously with other Sections and as the cost of acquisition stipulated in section 49 means the cost for which the previous owner had acquired the property the term held by the assessee should be interpreted to include the period during which the property was held by the previous owner. Hence indexation of cost of improvement shall be allowed from the date the previous owner acquired that asset. Further Hon ble Delhi High Court in case of Arun Shungloo Trust 2012 (2) TMI 259 - DELHI HIGH COURT has also held that benefit of indexation cost of improvement by previous owners in cases covered by section 49 would be allowed. Also in Smt. Daisy Devaiah 2014 (11) TMI 944 - KARNATAKA HIGH COURT has held that when an asset is acquired by way of inheritance cost of acquisition of asset should be calculated on basis of cost of acquisition by previous owner and said cost of acquisition has to be calculated on basis of indexed cost of acquisition as provided in Explanation (3) to section 48. We find that the present issue is squarely covered by the above judgments. We therefore uphold the order of the Ld. CIT(A). Addition made on account of profit transferred due to client code changes - the assessee has done this transfer during the market hours and the volume of these transfers is also huge - HELD THAT - As decided in M/S. SAMBHAVNATH INVESTMENT VERSUS THE ACIT CENTRAL CIRCLE-46 MUMBAI 2014 (1) TMI 84 - ITAT MUMBAI we failed to understand how can the assessee modify the client code or the details of transactions which have been transacted by the authorized broker RSBL on MCX. A person transacting through a registered broker cannot have any access to the terminal of the registered broker with the exchange be it stock exchange or commodity exchange. Thus the allegation of the Revenue authorities that the assessee has modified the client code does not have any basis. On the contrary the transactions of the assessee with RSBL who in turn has transacted with MCX are supported by various contract notes. There is no more evidence to show that the broker RSBL has denied to have entered into these transactions on behalf of assessee. Mistake has occurred due to wrong punching of client code by the staff of the broker and the same was later on rectified with the NSE. It may be mentioned that even the NSE was aware of the fact that client code was initially punched wrong and thereafter it has been corrected by the broker. There is no illegality noticed in this change of client code. This is a mere human error and it can happen in every sphere of life. Therefore this error is not so important which can lead to disallowance of entire loss - See E NET INFOWAYS P. LTD. 2012 (12) TMI 1186 - ITAT DELHI

Summary

Issues:
1. Computation of capital gains on transfer of a capital asset acquired by the assessee under gift.
2. Addition made on account of profit transferred due to client code changes.

Issue 1: Computation of Capital Gains
The appeal addressed the computation of capital gains arising from the transfer of a capital asset acquired by the assessee under gift. The dispute centered around whether the indexed cost of acquisition should be calculated based on the year the previous owner first held the asset or the year the assessee became the owner. The Assessing Officer (AO) considered the holding period starting from the date of gift, resulting in Short Term Capital Gains (STCG). The assessee cited the judgment of the Bombay High Court in CIT vs. Manjula J. Shah, which the AO did not follow. The Commissioner of Income Tax (Appeals) relied on the Manjula J. Shah case and ruled in favor of the assessee. The tribunal upheld the CIT(A)'s decision, citing precedents from the Bombay and Delhi High Courts and the Karnataka High Court, emphasizing indexation of cost of improvement by previous owners and the calculation of cost of acquisition based on the previous owner's indexed cost.

Issue 2: Addition on Account of Profit Transfer
The second and third grounds of appeal revolved around the addition made by the AO on account of profit transferred due to client code changes. The AO added a substantial amount to the assessee's income, alleging that the client code modifications indicated an attempt to reduce taxable income significantly. The CIT(A) referred to previous tribunal decisions and ruled in favor of the assessee. The tribunal considered various cases where client code modifications were rectified by the exchange or were due to human error, emphasizing that such changes did not necessarily imply fraudulent activities. The tribunal highlighted that the burden of proof regarding profit shifting to unrelated beneficiaries was not met by the AO, who relied on reports without concrete evidence. The tribunal upheld the CIT(A)'s decision based on the precedents and dismissed the appeal.

In conclusion, the tribunal's judgment addressed the issues of capital gains computation and profit transfer due to client code changes, providing detailed analysis and relying on relevant legal precedents to support its decisions.