By TIOL News Service

HYDERABAD, MAR 29, 2017: THE ISSUE IS - Whether AO is justified in treating the transaction of sale of shares as 'income from other sources' and making disallowance u/s 68, when contracting parties had commercially agreed on a price and the assessee has proved the identity & capacitity of the parties to contract. NO is the answer.

Facts of the case:

The assessee declared income of Rs. 30,45,190/- under the head 'income from business' and Rs. 4,47,44,209/- under the head 'long term capital gains'. Assessment u/s 143(3) was completed determining the total income of the assessee at Rs. 6,05,51,300/- after various additions. The AO treated Rs. 4,62,11,400/- as income from other sources u/s 68 against the admission as LTCG by the assessee. On appeal, the CIT(A) was not inclined to go by the view of the AO in treating LTCG as income from other sources u/s 68, and accordingly the directed the AO to treat the amount of Rs4,62,11,400/- as LTCG.

On Appeal, the Tribunal held that,

++ one cannot go by what made the existing directors to buy the shares at an exorbitant rate. It is purely a commercial decision of the two parties. As long as two contracting parties agrees on a price commercially and offers the income to tax, we do not see any reason to doubt the intention of the parties or dealing in these transactions. The AO has brought to tax the capital gain, which is not the sum credited in the books of the assessee, secondly, the assessee has already brought on record the identity of the parties and capacities of the parties. With regard to genuineness of the transaction, assessee has brought on record the transactions as investment in another company. All these shares were recorded in the books of account as investment. The AO has not brought on record anything to suggest any suspicion on the commercial transaction in this case. The payments were made through banking channel and received sale proceeds were also through bank. Considering the observations, on both counts, i.e. commercial decision of the assessee as well as genuineness of the transaction, we hold that the AO was wrong in treating this transaction as 'income from other sources' and making disallowance u/s 68.

(See 2017-TIOL-383-ITAT-HYD)