DCIT, NEW DELHI vs. M/S. DIVYA SHAKTI TRADING SERVICES LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “C” New Delhi

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER

I.T.A. No.5178/DEL/2012 Assessment Year: 2008-09

DCIT, vs. M/s. Divya Shakti Trading Circle-10(1), Services Ltd., New Delhi. (Now M/s. Indiabulls Advisory Services Ltd.) TAN/PAN: AACCD4953E (Appellant) (Respondent)

Appellant by: Ms. Sunita Singh, CIT-DR Respondent by: Shri Gautam Jain, Adv. and Shri Lalit Mohan, Adv. Date of hearing: 08 01 2021 Date of pronouncement: 08 04 2021

O R D E R PER AMIT SHUKLA, JM:-

The aforesaid appeal has been filed by the Revenue against the impugned order dated 23.07.2012, passed by Ld. Commissioner of Income Tax (Appeals)-III, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Year 2008-09. The sole ground raised by the Revenue reads as under: “1. Whether the CIT(A) under the facts and circumstances of the case and in law was justified in holding that profit of Rs.35,14,66,127/- earned by the assessee on sale of shares is short term capital gain and not business income.”

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S.No. Name of Company No. of share No. of shares sold acquired 1. Orchid Chemical & 540,230 540,230 Pharmaceuticals Ltd. 2. Nitco Limited 5300 5300 3. Omaxe Limited 24426 24426 4. DLF Limited 6567294 6,567,294 5. Edelweiss 5202 5202 6. BGR Energy Systems 5835 5838 7. Reliance Power 142896 142896 Limited 8. Reliance Energy 408982 408982 Limited 9. Grabal Alok Impex 1900000 1900000 Limited 10. Prakash Industries 1250000 Nil Limited

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is the method adopted for valuation of stock in trade. Plus surplus/deficit on sale of shares was not shown as trading profit but as capital profit in the profit and loss account. Thus, the transactions carried out by the assessee cannot be treated as Business Income but assessee falls in the category of investors. In so far as frequency of transaction is concerned, assessee had given following details.

Month Purchase Sale April Acquired Share of 1 co Nil Disposed off 2 co's share May Acquired Share of 1 co June Nil Nil July Nil Nil August Acquired Share of 1 co Nil Disposed off 1 co's September Nil share October Nil Nil November Acquired Share of 1 co Nil Disposed off 2 co's share December Acquired Share of 2 co's Disposed off 1 co's share January Acquired Share of 1 co Disposed off 3 co's February Acquired Share of 3 co's share Disposed off 2 co's share March Acquired Share of 2 co's

Apart from that various judicial pronouncement was also referred and relied upon.

(a) The assessee is not maintaining separate books of accounts for the alleged investments and regular business. No separate bank account is maintained for diffracting the alleged investment made and for business activity. The

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assessee was utilizing the sales proceeds of the alleged investments for the purpose of business. Similarly, the assessee was utilizing the funds of business for alleged purchase of investment/ shares. Merely, an assumption by the assessee that a particular purchase is investment is not sufficient. If it is allowed then every person shall opt for income trading of shares as capital gain income, only because tax on capital gain is either levied lesser rate or Nil rate. (b) The turnover of these shares was to the tune of Rs.69,06,09,30,892/-. This in itself shows that it was trading activity.

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not from investments and also claimed expenditure. Later the assessee after weaving thoughts and concocted a story for changing its income from Business to Capital gain just to avoid tax liability, it moved petition U/s 264 of the I.T. Act before the Ld. Commissioner of Income Tax, Delhi -IV, New Delhi on 19th March, 2010 by submitting that “During the relevant previous year the assessee company made transaction for purchase and sale of isolated scrip of GIICL. The income arising out of the above has been mistakenly treated as business income instead of capital gains by the assessee at the time of filing the return. The Ld.CIT, Delhi -V, New Delhi called for a report from the AO, who vide his reply dated 10.05.2010 submitted his report and recommended for the rejection of the petition filed on the basis that the assessee itself has treated it as his business income and paid taxes accordingly, therefore also, there is no reason that the same should now be treated as short term capital gain. In the light of above discussion, the alleged short-term capital gain amounting to Rs. 35,14,66,127/- earned on entire sale and purchase of shares is treated as business income and is taken as business income by rejecting the special tax treatment as per Section 111 (A), since it was its business.”

“In the assessment order, the Assessing Officer has mentioned that appellant was doing frequent transactions of

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sales and purchase of shares throughout the year. However, it is seen from the details tiled by the appellant that appellant did not either purchased or sold any shares in the month of June 2007, July 2007 and October 2007. It is also seen that in several months the appellant has transacted' only in single scrip. It is also observed that in the month of April appellant acquired shares of one company and did not sold anything. In the month of May appellant acquired shares of one company and sold shares of two companies. In the month of June and July there was no purchase or sale. In the month of August appellant acquired shares of one company only and did not sale anything. In the month of September and October, appellant did not make any investment in shares and sold only shares of one company in the month of September. In the month of November appellant acquired shares of one company but did not sell anything. In the month of December appellant acquired shares of two companies and also sold shares of two companies. In the month of January appellant acquired shares of one company and sold shares of one company. In the month of February appellant acquired shares of three companies and also sold shares of three companies. In the month of March shares of two companies were purchased and also sold share of two companies. From the above, it is seen that appellant has made investment in the shares of 10 companies only during this year and delivery of all such shares, which were subsequently transferred in the depositary account of the appellant company. The retails also proves that the appellant

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was not transacting in shares throughout the year as alleged by the Assessing Officer. If the appellant was alleged in the business activities of sale and purchase of shares he would not have its activities in a particular month and the transactions would not have limited ten companies only. The investments made by the appellant during the year have been shown by the appellant as investment in its books of accounts and balance sheet. It is claimed by the appellant that these shares were purchased for investment purposes and same have been shown under the head investment portfolio’ separately. It is seen from the investment schedule that these shares have been shown under the head investment. There is no frequent purchase and sales of shares in other companies except the purchase and sales done in the shares of Ten companies. It is seen that all transactions of purchase and sales are delivery based transactions. It is also seen that investments in the shares have been reflected at cost price in the balance sheet. Had the appellant engaged in the trading of shares, the valuation of the same would have been done lower of the market value or cost which is not the case here. It is claimed by the appellant that investment in the shares was done occasionally in few scrips just to maximize the wealth and to park the surplus funds available with the appellant. The appellant has claimed that there are no borrowed funds utilized by the appellant in making the investments and in the books of accounts of the company the purchase of shares were recorded as investments and not as stock in trade. The Surplus generated out of sale of

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investments was not shown as operating income, but shown as other income. The appellant has claimed that it has paid STT on these sale and purchase of these shares and has not claimed as expenditure. During the course of appellant proceedings the AR of the appellant has drawn my attention to para 3 of the assessment order wherein the ASSESSING OFFICER has mentioned that the appellant’s main business is sale and purchase of shares. This observation of the ASSESSING OFFICER is factually incorrect. As stated above the appellant is engaged in the business of Financial Consultancy and advisors and from that business it has shown income of Rs. 141,84,797/- during the year. During the course of appellate proceedings, the appellant submitted that all transactions have been delivery based and were settled by way of payment, the appellant has also submitted that it has maintained separate records for investment and trading of shares without delivery. The holding of the shares on which short term capital has been claimed ranges from few days to few months. It is claimed by the appellant that investment was made in the shares with the intentions to hold the same for long term appreciation and for earning dividends. However, the investments was offloaded because of appreciation and maximizing the wealth. It is also contended by the appellant that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particulars transaction as investment or trading transaction. It is further contended by the appellant that except in few cases the

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holding period ranges more than one month to three month. I am in full agreement with the submission of the appellant that period of holding of shares and not receipt of dividend income is not a decisive factor for treatment of particular transaction as investment or trading transaction. One has to see the intention of the person who is doing sale and purchase of shares. The Circular No. 4 of 2007 issued by the CBDT also does not prescribed any time limit of holding of shares where shares are purchased for investment purposes. It is observed from the details filed by the appellant that it has made investment in the shares of Ten Companies during the year. However these shares were offloaded after holding for some time to maximize the wealth. The sale and purchase was limited in the shares of Ten companies during the year, if the appellant would have engaged in the trading of shares, the frequency of sale and purchase would have been very high and it would not have been limited to the shares of Ten companies. However that element is not evident in the case of appellant. The circular No.4 of 2007 has clearly mentioned that a person can have two port-folio, one for investment purposes and another for trading purposes. In this circular no time limit has been prescribed for holding a share to determine whether the shares were held for investment or stock in trade. These things have to be determined by intention of the person who is doing investment or purchase of shares. In the case of appellant, the circumstances clearly suggest that he had purchased shares only for investment purposes

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and not for trading purposes. The shares purchase for trading purposes were non delivery based and for that separate details are maintained. In view of the facts stated above, it is clearly established that shares purchased by the appellant were for investment purposes and capital gain received on such sales is liable to be taxed under the head short term capital gain. Hence, the action of the ASSESSING OFFICER of treating the short term capital gain as business income was not justified. I therefore direct the ASSESSING OFFICER to treat the surplus received on sale and purchase of shares as short term capital gain as declared by the appellant in its return of income. As a result this ground of appeal of the appellant is allowed.”

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transaction of shares as business income and only in this year the assessee has claimed transaction of short term capital gain. She also referred to the relevant observation and finding of the Assessing Officer given at pages 9 to 12 and also order made reference to the earlier order of the Tribunal dated 23.08.2018 specifically paragraphs 5 and 8, and therefore, she submitted that the said finding of the Tribunal cannot be reversed.

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32,75,57,511 is only from sale of shares of DLF Ltd. That on one hand learned Assessing Officer has held the income from sale and purchase of shares as business income i.e. taxable income and on the other hand on the same investment also made disallowance u/s 14A of the Act. The Assessing Officer has made addition on the basis of previous assessment year 2007-08, however completely ignoring the facts of the instant year. The Assessing Officer has noted that for assessment year 2007-08 the assessee in its submission dated 16,09.2009 (submitted on 17.09.2009) clearly mentioned that the company is engaged in the business of buying, selling and dealing in securities of any kind, shares, debentures, debenture stocks, properties, bonds units obligations and other securities. However, he ignored the submission made for year under consideration that assessee is in the business of providing financial consultancy and all allied and auxiliary services as evident from financial statement of the assessee given at page 29 of Paper Book as under:-. “1. Overview Divya Shakti Trading Services limited (“the company”) was incorporated on November 02, 2006. The Company is in business of providing financial consultancy and all allied and auxiliary services.

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and purchase of shares as business income has noted that “In Asstt. Year 2007-08, the assessee itself treated its income as income from business and profession”. He pointed out that which has also been noted by learned Assessing Officer that assessee has moved petition u/s 264 in light of the guidelines issued by Central Board of Direct Taxes in circular no. 4/2007 dated 15.06.2007 that profit from sale of shares of GHCL be taxed under the head ‘capital gain' and not under the head ‘business income’. He further added that in the preceding years i.e. assessment year 2007-08 assessee company earned profit from sale of shares of only in one company, namely GHCL and has no shares at the end of preceding assessment years on the contrary in the year under consideration assessee company has closing investment namely shares of M/s Prakash Industries Ltd., out of shares acquired during the year under consideration and, profit from sale shares of such shares has been offered by the assessee and accepted by the revenue under the head ‘capital gain in all the subsequent assessment years. Thus, he submitted that allegation of assessing officer that assessee itself treated its income as income from business and profession in preceding assessment year i.e. 2007-08 has no relevance for treating the income of year under consideration as business income. He reiterated that in the case of the appellant income from sale of shares has

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been accepted as income under head ‘capital gain’ in the succeeding years as evident from the chart hereunder:

Assessment Treatment Assessment Sr. Treatment by Profit and loss Year by Assessee u/s No from sale of Assessing shares Officer 143(3) i) 2009-10 (18,81,81,415) Short Term Accepted as 143(3) ii) 2010-11 9,685 Capital Gain capital loss 143(3) iii) 2011-12 22,125 143(3) iv) 2012-13 1,55,106 143(1) v) 2013-14 5,230 143(3) vi) 2014-15 5,85,221 (22,14,637) Long Term 143(3) Capital Gain 14,21,558 vii 2015-16 Short Term 143(1) Capital Gain

Decision

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gain. The details of investment and disinvestment during the year were as under:

Opening Balance Purchase Sales

Quantity Quantity Amount (Rs.) Quantity Amount (Rs.) In shares-Non Amount trade (Quoted) (Rs.) DLF Ltd. 65,67,294 559,51,80,629 65,67,294 592,27,38,140 — — Edelweiss Capita Ltd. 5,202 42,91,650 5,202 77,65,870 — — Nitco Tiles Ltd. 5,300 10,72,805 5,300 10,58,740 — Omaxe Ltd. 24,426 75,72,060 24,426 86,15,121 — — — — Orchid 5,40,230 14,06,48,490 5,40,230 14,21,53,703 Chemical & Pharmaceuticals Ltd. — — 5,838 28,02,240 5,838 52,18,963 BGR energy Systems Ltd. Reliance Power 1,42,896 6,43,03,200 1,42,896 4,98,57,585 Ltd. — — — — 19,00,000 20,02,05,731 19,00,000 18,79,64,808 Grabal Alok Impex Ltd. Reliance Energy Ltd. 4,08,982 60,98,09,848 4,08,982 63,53,57,960 — — Prakash — — — — 12,50,000* 23,75,00,000 Industries Ltd.

Month Purchase Sale April Acquired share of 1 co Nil May Acquired share of 1 co Disposed off 2 cos. share June Nil Nil

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July Nil Nil August Acquired share of 1 co Nil September Nil Disposed off 1 co’s share October Nil Nil November Acquired share of 1 co Nil December Acquired share of 2 co’s Disposed off 2 co’s share January Acquired share of 1 co Disposed off 1 co’s share February Acquired share of 3 co’s Disposed off 3 co’s share March Acquired share of 2 co’s Disposed off 2 co’s share

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in the balance sheet as per Schedule VI of the Companies Act, 1956 and, not as “stock in trade”. Further, the shares had been valued at cost as per the Accounting standard issued by the Institute of Chartered Accountants of India for valuation of investment and not on cost or market price, whichever is lower which is the method adopted for valuation of stock in trade. Surplus/deficit on sale of shares was not shown as “trading profit” or “operational income” but was disclosed as profit from sale of investment.

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In the present case, the assessee is an employee and is in ice of a company. He has salaried income. The assessee had made purchases and had sold securities. He is maintaining two separate portfolios i.e. investment portfolio and trading portfolio. The Assessing Officer has admitted the said position in the assessment order. It is pointed out that the shares in question which are subject matter of short term capital gains form part of the investment portfolio and were not part of the trading portfolio. We are not concerned with the trading portfolio in the present case as profits and gains from the trading portfolio have to be treated as business income/loss. As far as seven shares/transactions subject matter of short term capital gains are concerned it is noticeable that in four cases, the shares were held for a period of more than 7 months, 8 months, 8.5 months and 11 months. In three cases shares were held for 2.4 months, 2.5 months and 4 months. Quantum or total number shares is substantial but the transactions in question are only seven in number and the period of holding as mentioned above cannot be treated as insignificant and small. Quantum or total number may not be determinative but in a given case keeping in view period of holding may indicate intention to make investment. The Tribunal applying the aforesaid tests in the present case has accepted the position of the assessee that these shares which are subject matter of short term capital gains were rightly held by the assessee and treated by the assessee an investment portfolio and not a trading portfolio. We also notice that the Tribunal has mentioned that the assessee has received substantial dividend income of more than '19 lakhs and '27 lakhs in the assessment year 2005-06 and 2006-07. The Assessing Officer as noticed above was influenced to a large extent of the fact that the assessee had earned huge profits during the year in

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question from the sale of the said shares. This can happen even in case of investment portfolio because when investment is liquidated to earn gains and. change their portfolio. Element of uncertainty and risk is always there when a person deals in securities but this factor cannot be determinative factor whether the assessee is trading in shares or is an investor. Some investors do take risk. The Assessing Officer has recorded that during the financial year 2006-07, the assessee had indulged in frequent and regular trade in securities. The Assessing Officer did not refer to and specifically dealt with the transactions in question though the chart and the figures noted above in this order were available and on record at the time of original assessment. He has not mentioned whether the assessee had indulged in frequent transactions in the previous period or subsequently. Merely because the assessee had sold the said shares in the relevant year and made substantial gains and could not show basically the objective for acquiring the shares was not as an investor but as a trade. The ratio of sales and purchase may be relevant in a particular case but when an assessee liquidates any investment, the said ratio will always be in favour of sales. [Emphasis supplied].” 18. Thus, when assessee itself has classified its shares into investment portfolio, and had sold the shares in the relevant year itself after making substantial gain, then it cannot be held that assessee was not an investor but a share trader. Here, the assessee’s business as clarified by the ld. counsel was not dealing in purchase and sale of shares but for providing financial consultancy and all allied and auxiliary services. As pointed out before us,

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there were many months where assessee had undertaken no transaction and in other several months assessee had transacted only in one scrip. Thus, such a pattern cannot be reckoned that there was a huge frequency of purchase and sale of shares. As stated above, the assessee has made investment and disinvestment in shares of 10 scrips which are all delivery based transactions and the main gain is only from one particular scrip i.e., DLF Ltd. If detail of date-wise transaction is taken into consideration of various scrips which are as under, then it can be seen that transaction are not huge which has been the allegation of the Assessing Officer:

Date Quantity Amount Date Quantity Amount Profit ORCHID CHEMICAL & PAHARMACEUTICALS LTD. 4-Apr-07 5,40,230 260 14,06,48,490 4-May-07 65,823 265 1,74,19,826 7-May-07 1,96,743 265 5,21,86,185 9-May-07 3,252 260 8,44,102 10-May-07 64,236 262 1,66,17,209 11-May-07 2,10,176 261 5,48,86,381 14,21,53,703 5,40,230 14,08,48,490 5,40,230 15,05,213 NITCO LTD. QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 8- May- 07 5,300 2,02,416 10,72,805 30-May-07 5,300 10,58,740 5,300 10,72,805 5,300 10,58,740 (14,065) OMAXE LIMITED QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 2-Aug- 07 24,426 310.00 75,72,060 20-Sep-07 24,426 380.89 88,15,121 24,426 75,72,060 24,426 88,15,121 12,43,061

DLF LIMITED QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 19,55,000 924.77 180,79,29,653 6-Nov- 07

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27-Dec-07 14,96,000 1,006.12 150,51,53,326 28-Dec-07 4,59,000 1,021.29 48,87,70,468 2,68,909 899.97 24,20,09,042 21- Jan- 08 22-Jan- 08 1,28,931 851.88 10,98,34,101 23-Jan- 08 1,33,900 919.06 12,30,62,501 24-Jan- 08 4,88,302 894.81 43,69,35,289 1-Feb- 08 10,20,220 802.40 81,86,27,696 4-Feb-08 864.64 105,50,92,17 12,20,262 0 5-Feb-08 8,20,000 879.49 72,11,79,262 8-Feb- 08 1,45,784 802.67 11,70,18,027 11-Feb- 08 24,26,248 799.49 193,97,66,320 13-Feb-08 2,00,504 812.58 16,29,21,702 14-Feb-08 3,60,000 860.65 30,98,33,736 15-Feb-08 10,00,000 851.75 85,17,51,609 19-Feb-08 1,19,081 857.91 10,21,60,952 21-Feb-08 1,01,493 833.60 8,46,04,988 25-Feb-08 21,416 834.72 178,76,375 26-Feb-08 4,00,000 834.15 33,36,64,167 27-Feb-08 3,69,538 838.15 30,97,29,384 592,27,38,14 8567294 559,51,80,629 66,67,294 0 32,75,57,51 EDEL WEISS CAPITAL LIMITED QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 4-Dec- 07 5,202 825 42,91,850 1,492. 14-Dec-07 5,202 86 77,65,870 5,202 42,91,650 5,202 77,65,870 34,74,220 BGR ENERGY SYSTEMS LTD. QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 26- Dec -07 5,838 480 28,02,240 3-Jan-08 5,838 893.96 52,18,963 5,838 28,02,240 5,838 52,18,963 24,16,723 RELIANCE POWER LTD. 1,42,896 450 6,43,03,200 1-Feb- 08 13-Fbe-08 1,42,896 348.91 4,98,57,585 1,42,896 6,43,03,200 1,42,896 4,98,57,585 (1,44,46,615) RELIANCE ENERGY LIMITED (Currently known as Reliance Infrastructure LtdO). QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT

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2,50,000 1,712.00 42,80,00.927 15-Feb- 08 27-Feb-08 2,50,000 1720 42,99,49,131 1,58,982 1,143.58 16,18,08,920 24-Mar- 08 25-Mar-08 1,58,982 1292 20,54,08,830 4,08,982 60,98,09,847 4,08,982 63,53,57,961 2,55,48,114 GRABAL ALOK IMPEX LIMITED QUANTITY RATE AMOUNT DATE QUANTITY RATE AMOUNT PROFIT 19,00,000 105.37 20,02,05,731 18-Mar- 08 4,84,73,2 27-Mar-08 5,00,000 97 88 13,94,91, 28-Mar-08 14,00,000 100 520 18,79,64, 1,90,000 20,02,05,731 19,00,000 808 (1,22,40,924) PRAKASH INDUSTRIES LTD. RATE DATE RATE QUANTITY AMOUNT QUANTITY AMOUNT PROFIT 3-Jan-08 190 12,50,000 23,75,00,000 Closing 23,75,00,000 Balance TOTAL Profit 33,50,44,238

Order pronounced in the Open Court on 8th April, 2021

Sd/- Sd/- [O.P. KANT] [AMIT SHUKLA] [ACCOUNTANT MEMBER] JUDICIAL MEMBER DATED: 8/04/2021 PKK: