2021 (7) TMI 184 - AT - Income Tax

Tribunal confirms dismissal of tax addition for client code modification, stressing need for concrete evidence

D.C.I.T., Central Circle-1 (1), Ahmedabad. Versus M/s Kaizen Stock Trade Pvt. Ltd., (Now amalgamated with M/s. Kunvarji Fincorp Pvt. Ltd.)

D.C.I.T., Central Circle-1 (1), Ahmedabad. Versus M/s Kaizen Stock Trade Pvt. Ltd., (Now amalgamated with M/s. Kunvarji Fincorp Pvt. Ltd.) - TMI Issues Involved:1. Deletion of disallowance of loss of Rs. 1,86,47,974/- due to client code modification (CCM).2. Validity of reassessment notice and order under section 143(3) read with section 147 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deletion of disallowance of loss of Rs. 1,86,47,974/- due to client code modification (CCM):The Revenue raised concerns regarding the deletion of a disallowance of Rs. 1,86,47,974/- made by the Assessing Officer (AO) on account of profit shifted out and loss shifted in through CCM. The AO argued that the assessee engaged in the business of shares broking had manipulated client codes to evade taxes by booking artificial profits and losses. The AO's analysis indicated deliberate and consistent efforts to shift losses from one client to another, which was supported by data from the National Stock Exchange (NSE).The assessee contended that no addition could be made solely based on NSE data, as there were no allegations from SEBI or the stock exchange regarding tax evasion through CCM. The assessee maintained that all transactions were recorded in the books of accounts and settled through banking channels, without any evidence of cash settlements. The assessee also argued that the AO's reliance on statements from other brokers was misplaced as there was no direct evidence against the assessee or its broker.The learned Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's arguments, noting that the AO's conclusions were based on presumptions and lacked corroborative evidence. The CIT(A) observed that all transactions were supported by contract notes and settled through account payee cheques. The CIT(A) also highlighted that the client code modifications were less than 1% of total transactions, suggesting no significant tax evasion intent. The CIT(A) relied on various judicial precedents, including the case of Kunvarji Finance Pvt. Ltd., which supported the view that client code modifications within a certain percentage were normal and did not indicate malafide intent.The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's addition was based on suspicion without concrete evidence. The Tribunal noted that client code modifications were allowed by stock exchanges to rectify genuine errors and that the AO failed to prove any cash transactions or malafide intent. The Tribunal also pointed out that modifications were made in the mid-year, making it unlikely for the assessee to ascertain its profit or loss at that time. Consequently, the Tribunal dismissed the Revenue's appeal.2. Validity of reassessment notice and order under section 143(3) read with section 147 of the Income Tax Act, 1961:The assessee filed a Cross Objection (CO) challenging the validity of the reassessment notice and order under section 143(3) read with section 147, arguing that the reassessment was made on a non-existent company due to amalgamation. The assessee also contended that the reassessment was based on information from the Investigation Wing without independent application of mind by the AO.However, the Tribunal did not address the CO's grounds on the validity of the reassessment, as it had already decided the main issue in favor of the assessee on merit. Therefore, the Tribunal dismissed the CO filed by the assessee.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 1,86,47,974/- on account of CCM. The Tribunal also dismissed the CO filed by the assessee challenging the validity of the reassessment notice and order. The judgment emphasized the need for concrete evidence rather than presumptions in making additions based on client code modifications.