2016 (4) TMI 989 - AT - Income Tax

Assessment of sale of shares - Short Term Capital Gain or Long Term Capital Gain or under the head Business Income - Held that - The assessee has emphasized that mode of acquisition would not be a factor to decide the nature of transaction. Under this alleged modus operandi at the most the assessee could procure large number of shares but can that would change the character of transaction from investment to trader. There is no evidence with the Revenue to establish the nexus. The moment a cartel is being formed by number of persons to carry out an activity in an organized manner with profit motive and the activity is akin to business or trade as defined in section 2(13) of the Income Tax Act then the arguments raised by the ld.counsel for the assessee would not stand. But the AO has neither recorded statement of the assessee nor collected any material which can demonstrate that the assessee has colluded with Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. in a manner that would indicate that shares were acquired for the purpose of trade. Such nexus has not been established. The observation of the CIT(A) is only inferential without any concrete material in the possession of the AO. Therefore in our opinion the activity of the assessee by virtue of mode of acquisition of shares cannot be segregated into two parts. The ld.CIT(A) has erred in creating an artificial distinction only on the basis of mode of acquisition. We allow the appeal of the assessee and direct the AO to tax the surplus on sale of shares under the head short term capital/long term capital instead of business income treated by him. Penalty u/s 271(1)(c) - Held that - We have already upheld that surplus on sale of shares is to be assessed as short term capital gain. Therefore there cannot be any question to visit the assessee with penalty. Apart from above we are of the view that the assessee has disclosed all the facts fully and completely. There is no change in the ultimate taxable income of the assessee. The AO has only changed the head of income i.e. the assessee has claimed the surplus on sale of shares to be assessed under the head of capital gain. The AO has assessed it under the head Business Income . There cannot be any allegation against the assessee for concealment of income or furnishing inaccurate particulars to this extent. Thus otherwise also no penalty on the first is issue is imposable.- Decided in favour of assessee Non addition of dividend stripping amount and levy imposed by the National Stock Exchange - Held that - The assessee had made huge investment in shares. Some of the shares might have been sold and it failed to keep track that dividend might have been declared. The CIT(A) has rightly observed that there was a bona fide human error in non-inclusion of dividend stripping amounts. As far as other ground is concerned it is always a debatable issue whether levy imposed by the National Stock Exchange was penalty in nature or compensatory in nature. It was disallowed and not disputed by the assessee but that would not goad the AO to visit the assessee with penalty. - Decided in favour of assessee

Summary

Issues Involved:

1. Whether the receipts received by the assessee on the sale of shares should be assessed under the head "Short Term Capital Gain," "Long Term Capital Gain," or "Business Income."
2. Whether the penalty imposed under section 271(1)(c) of the Income Tax Act is justified.

Issue-Wise Detailed Analysis:

1. Assessment of Receipts from Sale of Shares:

The primary issue in ITA No.3326/Ahd/2009 and ITA No.3440/Ahd/2009 was to determine whether the receipts from the sale of shares should be classified under "Short Term Capital Gain," "Long Term Capital Gain," or "Business Income." The assessee had declared a short-term capital gain of Rs. 7,64,52,057/- in its return of income for the assessment year 2006-07. The Assessing Officer (AO) scrutinized the accounts and concluded that the assessee's transactions in shares should be treated as business income, citing various tests laid down by the Supreme Court in CIT Vs. H. Holck Larson, 160 ITR 67. The AO highlighted factors such as the volume of transactions, short holding periods, frequency of transactions, and the involvement in an IPO scam with Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd., to support his conclusion.

The Commissioner of Income Tax (Appeals) [CIT(A)] partly accepted the AO's findings, bifurcating the transactions into two parts. The CIT(A) treated the receipts from shares purchased through Smt. Rupal Naresh Panchal and Sugandh Estate and Investment Pvt. Ltd. as business income, amounting to Rs. 4,16,74,781/-, while allowing the balance surplus of Rs. 3,47,77,276/- to be treated as short-term capital gains.

The assessee contended that its activities were consistent with those of an investor, as evidenced by the treatment of shares as investments in its accounts, the payment of securities transaction tax, and the lack of borrowed funds for share purchases. The Tribunal found that the AO and CIT(A) had not provided concrete evidence of collusion between the assessee and the entities involved in the IPO scam. The Tribunal concluded that the mode of acquisition of shares should not alter the nature of the transactions from investment to trading. Consequently, the Tribunal directed the AO to assess the surplus on the sale of shares under the head "Short Term Capital Gain" or "Long Term Capital Gain," rather than "Business Income."

2. Justification of Penalty under Section 271(1)(c):

In IT(SS)A.No.3/Ahd/2012, the issue was whether the penalty imposed under section 271(1)(c) for concealment of income or furnishing inaccurate particulars was justified. The AO had initiated penalty proceedings based on three additions: reclassification of short-term capital gains as business income, non-addition of Rs. 85,500/- representing dividend stripping, and an addition of Rs. 39,974/- as a penalty imposed by the National Stock Exchange.

The CIT(A) deleted the penalty, reasoning that the issue of whether income from the sale of shares should be classified as capital gains or business income is debatable, with various judicial precedents supporting both views. The CIT(A) also noted that the assessee had disclosed all relevant facts fully and correctly, and there was no concealment of income. Regarding the dividend stripping amount, the CIT(A) considered it a bona fide human error, and the penalty imposed by the National Stock Exchange was deemed a debatable issue.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee had disclosed all facts and there was no change in the ultimate taxable income. The Tribunal found no merit in the Revenue's appeal and rejected it, confirming that no penalty under section 271(1)(c) was warranted.

Conclusion:

The Tribunal allowed the appeal of the assessee (ITA No.3326/Ahd/2009), directing the AO to assess the surplus on the sale of shares under the head "Short Term Capital Gain" or "Long Term Capital Gain." The appeals of the Revenue and the Cross Objection (CO) filed by the assessee were dismissed. The Tribunal also upheld the deletion of the penalty under section 271(1)(c), finding no grounds for its imposition.