ACIT, NEW DELHI vs. M/S DATAVISION SYSTEMS (P) LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 5957/Del/2010 (Assessment Year: 2007-08) And ITA No. 4260/Del/2012 (Assessment Year: 2008-09) ACIT, Vs. Datavision Systems P Ltd, Circle-10(1), 203, Pragati House, New Delhi 47-48, Nehru Place, New Delhi PAN:AAACD3381N (Appellant) (Respondent)

Revenue by : Shri Anshu Prakash, Sr. DR Assessee by: Shri Ajay Baheti, CA Date of Hearing 05/09/2017 Date of pronouncement 18/09/2017

O R D E R PER PRASHANT MAHARISHI, A. M. 1. ITA No. 5957/Del/2010 for assessment year 2007 – 2008, wherein the coordinate bench has passed its order dated 31/03/2011, on appeal before the Hon’ble Delhi High Court by revenue in ITA No. 1156/2010, wide order dated 27/02/2012 Hon’ble high court has remitted the issue back to the file of coordinate bench holding as under:- “4. The 2nd issue raised in the present appeal is in respect of shares, which were sold during the assessment year in question. The assessing officer has held that the shares were stock in trade and these findings were reversed by the CIT (Appeals). The appeal filed by the revenue on this ground has been dismissed by the tribunal. 5. During the course of hearing, lauded counsel for the parties and stated that the order of rabbit may be passed to the tribunal to bring on record the relevant facts and details relating to the sale transactions. We accept the said statement as we find that the tribunal has not dealt with. Factual aspects. It is clarified that we have not decided the issue, expressed any opinion on merits and laid down any ratio. It will be open to the parties to rely upon judgements in support of their contentions. Accordingly on 2nd issue we frame the following substantial question of law “whether the income tax appellate tribunal was justified in holding that the shares sold by the assessee were investment and not stock in trade?”

ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 6. In view of the statements made by the Ld. counsel for the parties, the aforesaid substantial question of law is answered in favour of the revenue and against the assessee and an order of remit is passed.” 2. In view of this, the limited issue before us is whether the capital gain shown by the assessee is business income or capital gains. During the year the assessee has shown the capital gain from long-term capital gain of Rs. 124707/-from mutual funds, income from short-term capital gain of Rs. 1979164/– from reduction of units and income from short-term capital gain of Rs. 1728820/-. 3. Before the assessing officer the assessee submitted that it is shown the above amount as a investment. However, the Ld. assessing officer held that looking to the nature of transaction of shares it was found that the assessee was doing frequent transaction for sale and purchase of shares. He further held that that assessee has dealt in thousands of shares of various scripts and the huge volume itself suggest that assessee was doing the business activities in spite of making investments in treating it as capital gain. Therefore he held that short-term capital gain or non-sale and purchase of shares of Rs. 1728819/- is treated as business income and not as capital gain as shown by the assessee. 4. The Ld. CIT (A). On appeal before him held that the appellant’s investor in share and not a Trader and therefore directed the Ld. assessing officer to treat the income from sale of shares as short-term capital gain and not as business income. 5. Revenue, aggrieved by the order of the CIT A preferred an appeal before the coordinate bench who wide order dated 31/03/2011 wherein at para No. 8 coordinate bench held as under:- “8. We have heard both the parties and gone through the material available on record. From the facts stated above, it is evident that the assessee had invested in shares, including IPOs. In the books of account the purchases have been treated as investment and had been valued at cost. No material has been brought out on record by the AO to prove that assessee held these shares of stock in trade. Moreover, in earlier years. On identical facts, the AO had treated the profits arising on sale of shares as capital gain. Therefore in absence of any material to prove that the shares were held as stock in trade, in our considered opinion Ld. CIT A was justified in deleting the addition. Hence, no interference is called for.”

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ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 a. that assessee company is engaged in the business of providing representation and consultancy services. Therefore, the main business of the assessee company is providing services and not trading in shares. b. That purchase and sale of shares were not related to or allied it to the usual trade or business of the assessee. c. That purchases and sales are made for the purpose of earning capital gain an appreciation on sale of those shares. He therefore submitted that assessee has earned capital gain from mutual funds from reduction of units and from sale of shares. d. That the investment in such kind of securities were made out of its own fund and no borrowings have been made. e. He submitted that assessee has shown business income of Rs. 7 0, 059400/– and income from capital gain is Rs. 3 832691/– and income from house property is also at Rs. 1 811040/– which shows that the main business activity of the assessee is business income and not trading in shares. f. That the purchase of the shares have been shown by the assessee’s investment in its books of accounts and not as stock in trade. g. That no such potential time is devoted on sale of those shares. As many of them are allotted in the initial public offer and subsequently sold on listing. h. That in subsequent year also the identical issue arose where the assessee has shown the income on sale of shares as short-term and long-term capital gain and which is been accepted by the Ld. assessing officer for assessment year 2010 – 11 to 2014 – 15. He referred to the various assessment orders where the assessee has earned income from capital gains both short-term and long-term and Ld. assessing officer in assessment orders under section 143 (3) has accepted the income from capital gains and has not made any adjustment on this account. In view of this it is submitted that income shown by the assessee on sale of shares is as investor and not as a Trader and therefore required to be charged under the head capital gains only and not business income.”

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ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 accounts as investments and not a stock in trade. Assessee has also not borrowed any funds for the purpose of making any investments. This is evident from the balance sheet at page No. 129 of the paper book wherein the share capital of the assessee is Rs. 10 Lacs and reserve and surplus of the assessee is Rs. 45117 0894/–. Therefore the surplus funds of the assessee were invested in the investment in mutual fund and shares. During the year there were 11 transactions of purchase and sale of the shares and as the holding period of the shares are less than 365 days they are shown as short-term capital gain by the assessee. All the shares sold by the assessee are based on actual deliveries. All the shares shown by the assessee are held in its demat account and dividend income earned by the assessee as dividend of Rs. 1 661 8416/– in this year and in previous year of Rs. 1 028 9473/– is also shown as exempt income during the year. All of the shares are valued at cost Only as an investment. The memorandum and articles of Association of the company also authorizes it to invested surplus funds in shares or in any other form of investments. As at 31st March 2007 assessee are shown investment in mutual funds of Rs. 298450997/– and investment in quoted shares of Rs. 97141508/–. Similarly as on 31/03/2006 the assessee has investment in mutual funds of Rs. 302032187/– and investment in quoted shares of Rs. 30461130/-. Therefore, the assessee has invested in these shares as investment activities only and it was not its business activity as per its memorandum also. We also perused the assessment orders of the subsequent years passed by the Ld. assessing officer wherein the above stand of the assessee was accepted that assessee is an investor and not a Trader in shares. In the earlier 2 years assessment on identical facts and circumstances the income from purchase and sale of the shares were also held by the Ld. assessing officer as capital gains. Therefore, in the earlier years as well as in the subsequent years the stand of the Ld. assessing officer was that assessee is an investor and not a Trader in shares. Hon’ble Delhi High Court in case of CIT versus Amit Jain 374 ITR 550 has held as under:- “8. The factors which Courts and Tribunals have to take into consideration whilst deciding whether income gained during a particular period is business income through purchase and sale of shares or other tradable capital assets, or capital gains on account of sale of such assets, has been spelt out and reiterated in a number of decisions. These include Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC); CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC); CIT v Associated Industrial Development Co. (P.) Ltd. [1971] 4 | P a g e

ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 82 ITR 586 (SC); P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) and CIT v N.S.S. Investments (P.) Ltd. [2005] 277 ITR 149/[2007] 158 Taxman 13 (Mad). It was in the light of these decisions that the CBDT Circular No. 4/2007, was issued, indicating the principles applicable in this regard. These criteria are:

(1) Intention of the assessee at the time of purchase of the shares. This can be found out from the treatment given to the purchase in the assessee's books of account. (2) Did the assessee borrow money to purchase the shares, and paid interest for it. Money is generally borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining. (3) Volume and frequency of the purchases and sale/disposals. If purchase and sales are frequent, or there are substantial transactions in an item, that can indicate trade. Habitual dealing in a particular item is indicative of intention of trade. Likewise, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). Another related factor is the duration for which the shares are held. (4) Was the purchase and sale made for realizing profit, or for retention and appreciation in its value. The former indicates the purchases being part of trade; and the latter is indicative of the purchases being an investment. Furthermore, it would be relevant to ask whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. Importantly, a commercial motive is an essential ingredient of trade in this context. (5) Whether the items in question were valued at cost. If so, it would indicate that they were investments. Where they were valued at cost or market value or net realizable value, whichever is less, it will indicate that items were treated as stock-in-trade. (6) Finally, it would be relevant to consider how the assessee is authorized in its Memorandum/Articles.

In the present case, there is no dispute that the opening investment cost for the relevant year AY 2006-07 was Rs.2.60 crores; the corresponding closing value was Rs.4.70 crores. Furthermore, the Court notices that the assessee derived, in addition to the short term capital gains, dividend income to the tune of nearly Rs.10 lakhs. The authorities have all emphasised that even while seeing the cumulative effect of the tests, in the given facts of a case, one test might be determinative or conclusive. At 5 | P a g e

ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 the same time, no single test having regard to the facts of a case and a cumulative effect thereof, need be determinative or conclusive. In the present instance what is apparent is that the assessee, an individual, did not borrow any funds; the share scripts traded were only from amongst what were held by him. Significantly, dividend income amounting to about 4% of the value of the investment was earned by the assessee. What appears to have weighed almost conclusively with the tax authorities in the first and second instance is the value and frequency of the transactions. As underlined by us, that factor alone cannot be conclusive and would have to be weighed along with the totality of facts. An important detail which cannot be overlooked by the Court is that in all past periods and even subsequent periods, similar income reported by the assessee was accepted by the Revenue as short term capital gain. In fact for AY 2005-06, the scrutiny assessment under Section 143 (3) accepted the sum of Rs.1.02 crores as short term capital gain. In the circumstances, it was all the more necessary for the Revenue to point to some unique feature or distinctive material to differentiate the assessee's activities for the subject assessment year, since they fundamentally remained the same and unchanged. 9. On an appropriate application of the authorities, this Court is of the opinion that the ITAT's findings and view cannot be faulted in the circumstances of the case. The question of law is, therefore, answered in favour of the assessee and against the Revenue. The appeal is accordingly rejected.”

ITA No. 4260/Del/2012 Assessment Year 2008-09 11. This appeal has been filed by the Revenue against the order of the ld CIT(A)-IV, New Delhi dated 03.05.2012 wherein, the disallowance made by the ld Assessing Officer u/s 14A of the Act of Rs. 2029957/- was deleted. Further, the short term capital gain on sale of shares amounting to Rs. 8148330/- and income from long

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ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 term capital gain of Rs. 9366656/- has been held by the ld Assessing Officer as business income held by ld CIT(A) as capital gain. 12. The Revenue has raised the following grounds of appeal in ITA No. 4260/Del/2012:- “1. Whether the CIT(A) under the facts and circumstances of the case and in laws was justified in deleting the addition of Rs. 2029957/- made by the Assessing Officer on account of disallowance u/s 14A of the Income Tax Act, 1961. 2. Whether the ld CIT(A) under the facts and circumstances of the case and in law was justified in treating the income from sale and purchase of shares as “Short Term Capital Gain” and “Long Term Capital Gain” instead of business income as assessed by the Assessing Officer?”

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ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 15. The ld Authorised Representative submitted the paper book and stated that in the past as well as in the subsequent years the revenue has on identical facts and circumstances of the case has accepted that the assessee is an investor in the share. He further referred to the balance sheet of the company to show that main business of the company is consultancy services and there is no borrowing for the purpose of buying and selling of the shares. He further contended that assessee has disclosed the above sum as investment. He further stated that there are only 14 transactions during the year and average holding period is 901 days. He further referred to that there is no time devoted for earning this capital gain. With respect to disallowance u/s 14A he submitted that assessee has disallowed the sum on the basis of actual working of expenditure incurred by the assessee for earning exempt income and without recording the satisfaction about the correctness of the same the ld Assessing Officer has invoked the provisions of Rule 8D of Income Tax Rules, 1962. 16. We have carefully considered the rival contentions. On the issue of transaction on purchase and sale of shares is capital gain on business income. It is apparent that not one or two characteristics in isolation to be seen for deciding the issue. In the present case assessee is engaged in the business of consultancy services and has earned a substantial revenue of Rs. 110299886/-. The assessee has investment in mutual funds as well as imported shares which was disclosed in Schedule-V of its balance sheet as investment. The assessee has a share capital of Rs. 10 lacs and reserve and surplus of Rs. 58 crores. It has not borrowed any money for making investment in the shares. During the year it has entered into transaction on sale and purchase of shares through its DEMAT account only 14 transactions were entered into. Furthermore, in subsequent years from AY 2010-11 onwards up to Assessment Year 2014-15 on identical facts and circumstances the ld Assessing Officer in assessment u/s 143(3) of the Act has taken a view that assessee is an investor in shares. In the Assessment Year 2007-08 when the issue is remanded by the Hon'ble High Court we have already taken a view that assessee is a investor and not a trader relying on the decision of the Hon'ble Delhi High Court. In view of above facts and binding judicial precedents for this year we hold that the income from capital gain cannot be treated as business income. In the result ground No. 2 of the appeal of the Revenue is dismissed.

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ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 17. Ground No. 1 of the Revenue of the appeal is against disallowance u/s 14A of the Act where the assessee has earned exempt income of Rs. 2.63 crores has made a disallowance of Rs. 378569/- in computation of total income. The assessee has disallowed the above sum based on the working of salary paid and also to the director towards investment management activity as well as the other salaries and 1/10th of other expenses on account of telephone etc. The ld Assessing Officer without recording the satisfaction about the correctness of the claim of the assessee applied the provisions of Rule 8D of the Income Tax Rules, and worked out total disallowance of Rs. 2408526/- and made the net disallowance of Rs. 2029957/-. The ld CIT(A) deleted the above disallowance for the reason given in para No. 4 of his order. According to him the disallowance made by the assessee is proper. Before us it is contested that no satisfaction has been recorded by the ld Assessing Officer in terms of section 14A(2) of the act. 18. We have carefully considered the above submission. In the present case unless the ld Assessing Officer records his satisfaction about the correctness of the claim of the assessee cannot move ahead for application of Rule 8D of the Act. The Hon'ble Delhi High Court in case of CIT Vs. Taikisha Engineering India ltd 370 ITR 338 (del) has held that it is only when voluntary disallowance made by the assessee u/s 14A of the Act is found to be unsatisfactory on examination of accounts, that Assessing Officer is entitled and authorized to compute deduction under Rule 8D of the IT Rules. As in the present case no such satisfaction is recorded respectfully following the decisioin of Hon'ble Delhi High Court we confirm the finding of the ld CIT(A) to delete the disallowance u/s 14A of the Act. in the result ground No. 1 of the appeal of the Revenue is dismissed. 19. In the result appeal of the Revenue for Assessment Year 2009-10 is dismissed. Order pronounced in the open court on 18/09/2017. -Sd/- -Sd/- (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18/09/2017 A K Keot Copy forwarded to

ACIT,Vs. Datavision Systems P Ltd ITA No. 5957/Del/2010 & 4260/Del/2012 Assessment Year:2007-08 and 2008-09 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

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