TaxTMI 
TaxTMI 
2015 (4) TMI 539
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....-06 (by Revenue) 2. In this appeal by the Revenue following grounds were raised:- "1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,87,75,583/- made on account of suppression of profit by the assessee company by way of client code modification by the brokers in a large number of commodity transactions. 2. The Ld. CIT(A) has erred in law and on facts in accepting the view of the appellant that the disclosure at the time of search had no basis to be accepted. 3. The Ld. CIT(A) has erred in law and on facts in holding that the AO was not justified in invoking the provisions of Section 145(3) of the Act. 4. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the A.O. 5. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent." 3. The facts of the case are that the assessee-company is engaged in the business of share trading; F&O transactions in shares and securities, commodity trading, speculation in shares and commodities etc. The assessee-company is part of group of companies which include Kunwarji Commodity Broke....
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.... the profits so as to reduce the incidence of tax in the case of Kunwarji Group. I have also considered the detailed submissions made before me on behalf of the appellant Company and have also gone through the various judicial pronouncements cited before me. At the very outset, it may be stated that the huge additions made by the Assessing Officer in the assessment years under appeal on the basis of client code modifications have no reference to any seized material. These additions have been made by the Assessing Officer entirely on the basis of certain post-search enquiries made from the Commodity Exchanges. These enquiries revealed that Kunwarji Commodity Brokers Pvt. Limited (KCBPL), which is engaged in the business of brokerage on Commodity Exchanges, has carried out client code modifications. There is no other material or evidence to support the additions made by the Assessing Officer and the Assessing Officer has drawn his own inferences from the client code modifications. Further, the additions made by the Assessing Officer are on the basis of certain assumptions. The main basis of the Assessing Officer for making the additions is that large number of client code modificatio....
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....g any material or evidence on record to even remotely suggest that the assessees of this Group resorted to deliberate client code modifications with a view to reduce incidence of tax. 4.12 Further, whatever modifications have been carried out, the reasons for sue-modifications were thoroughly explained before the Assessing Officer as also before me. The assessee's explanation has been summarised under six points at pages - 42 to 43 of the Statement of Facts. These reasons are convincing and obviously, the client code modifications have been carried out to rectify genuine punching errors. If such genuine errors are not rectified, and the transactions allowed to continue in the name of wrong clients, it would result into a chaotic situation. Therefore, I see no merit in the conclusion drawn by the Assessing Officer that client code modifications were carried out with a view to transfer profits. This view is further strengthened by the fact that the additions made by the Assessing Officer are entirely in the nature of "notional profit" and not "real income", which has also been termed as "notional" by the Assessing officer himself in the notice u/s. 142(1) issued by him. (i)....
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.... Assessing Officer have also been explained at pages - 45 to 50 of the Statement of Facts. 4.13 Another factor which cannot be ignored is that all transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been generated on accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees. All the points raised by the Assessing Officer during the course of assessment proceedings have been duly and properly replied to by various letters filed by the assessee as enumerated at pages 57 to 66 of the Statement of Facts which have been reproduced supra. 4.14 Considering the entire facts and the legal position, I have no hesitation in holding that the additions made by the Assessing Officer in the four Assessment Years under appeal on account of client code modifications are without any basis and accordingly these additions are deleted." 4. The Revenue, aggrieved with the order of the ld. CIT(A), is in appeal before us. 5. At the time of hearing bef....
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....at client code modification is unusually high; but if it is looked in comparison to total number of trade transactions, it would be clear that the total number of trade transactions were more than 38 lacs and the percentage of the client code modifications with reference to total number of trade was less than 1% i.e. 0.94%. He referred to the Circular issued by MCX and pointed out that the client code modification upto 1% is permitted by the MCX and if there is client code modification greater than 1% but less than 5%, then penalty of Rs. 500/- is levied and if it is between 5-10%, then penalty of Rs. 1000/- is levied. He, therefore, submitted that client code modification upto 1% is not unusually high but is minimum which occurs in this line of trade. He further pointed out that the commodity exchange is a new concept and has started recently. He also pointed out that the brokers and his staff were also new in this line of trade and therefore, a bonafide error while punching the transactions or the client code usually takes place and the commodity exchange permits the modification of client code on the same day. He referred to the time of the client code modification and pointed o....
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....of client code modification is concerned, the same needs to be adjudicated on the basis of facts relating to client code modification and not on the basis of the disclosure made at the time of search on the basis of incorrect facts stated by the authorized officer. 8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer believed the client code modification to be malafide because in his opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T&S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:- "Circular no. MCX/T&S/032/2007 January 22, 2007 Client Code Modifications In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under: Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-II (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under.....
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....n upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs. 500/-. In the context of the circular issued by Commodity Exchange, let us examine whether the client code modification done by the broker i.e. KCBPL is unusually high. At page No.16 on paragraph No.4.3, the CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. That the Assessing Officer has not given any reason on what basis he presumed t....
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....parties in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts, we do not find any justification to interfere with the order of the CIT(A) in this regard and the same is sustained; and Ground Nos. 1 and 3 of the Revenue's appeal are rejected. 12. Ground No.2 of the Revenue's appeal is with regard to the claim of the Revenue that the CIT(A) ought to have directed for the addition in respect of the income disclosed by the assessee at the time of search. 13. It is submitted by the ld. Departmental Representative that during the course of search, statement of Shri Nayan Thakkar was recorded. He is the Director of the assessee-company. In his statement dated 25.03.2008, he disclosed the unaccounted income of Rs. 12 Crores. That on 10.04.2008, he furnished a letter before the Assistant Director of Income-tax in which he gave the break-up of Rs. 12 Crores, which reads as under:- "(a) M/s.....
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....ects and discrepancies. He was asked to explain the same without giving the copy of such Annexure-1. In that background, he offered some additional income. However, during the course of assessment proceedings, the assessee vide letter dated 27.03.2009 requested for supplying of the Annexure-1. The Assessing Officer vide reply dated 27.08.2009 confirmed that there is no Annexure-1 but only Annexure-A which was inadvertently mentioned as Annexure-1. That when the assessee received the photocopies of all the seized documents, the assessee verified those documents with the books of accounts and found that there is not a single discrepancy in the assessee's seized books of accounts. Since there was no discrepancy in the assessee's books of accounts and the seized documents, the assessee did not offer any undisclosed income. From these facts, it is evident that disclosure made by the assessee at the time of search was erroneous, based upon incorrect facts conveyed by the authorized officer who was recorded his statement. He, therefore, submitted that the order of the CIT(A) is fully justified and the same should be sustained. In support of this contention, he relied upon the foll....
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....ure made at the time of search. The relevant finding of the CIT(A) in this regard reads as under:- 3.6 I have given a careful consideration to the facts having bearing on this issue and the submissions made on behalf of the appellant Company. There is no dispute that during the course of search Shri Nayan Thakkar disclosed income of Rs. 1.2 crore and this disclosure was subsequently confirmed by filing a letter wherein the amount of disclosure was also bifurcated. However, all the relevant facts which have been brought to my notice in the Statement of Facts and also during the course of the hearing show that when the statement of Shri Nayan Thakkar was being recorded during the course of search, no specific incriminating papers or documents were available and were confronted to him. As a matter of fact, voluminous records in the form of loose papers, documents, books of account and digital record were found and seized, the contents of which were never ascertained at the time of search nor the assessees of this Group were specifically informed about such contents. It is true that the search continued non-stop for a period of. 36 hours and the statement of Shri Nayan Thakkar was c....
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....modifications. 3.7 From the above referred .letter dated 2nd September, 2009 addressed to the Assessing Officer and the statement recorded u/s. 132(4), which I have perused, it becomes clear that the disclosure was obtained by the authorized officer on account of the following four counts : (1) Annexure-1 (2) Seized material "A-6, Kachha books seriated from A-18 to A-29". (3) Other irregularities / discrepancies (4) Client code modification. It is an admitted fact that no addition has been made in the assessment order on account of the first three aspects. It is also an admitted fact that the code modification details were not available and not confronted at the time of search. Code modification details were obtained by the Department from the Commodity Exchanges in post search inquiries and no such details were confronted at the time of search operations and accordingly, the basis of the disclosure did not exist. So far as the first three aspects are concerned, even the Assessing Officer has admitted that there is no such quantum of disclosure on the basis of the seized material, alleged incriminating documents or Annexure-1. So far as Code modification is con....
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....ent made voluntarily by the assessee could form the basis of assessment. The mere fact that the assessee retracted the statement could not make the statement unacceptable. The burden lay on the assessee to establish that the admission made in the statement at the time of survey was wrong and in fact there was no additional income. Thus burden was not even attempted to be discharged. The order of the Tribunal was based on facts and no question of law arose from it." 19. In the case of Garibdas Chandrika Prasad vs. CIT, 230 ITR 771 (MP), heir Lordships of Madhya Pradesh High Court has held as under:- "that as per the findings recorded by the three authorities, i.e. the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal, the assessee failed to show that U was an individual person, who was also doing the money lending business and thereafter the affidavit was produced to justify the undisclosed income of the assessee. All the authorities below had found that there was a contradiction between the statement recorded on oath of U and the subsequent affidavit filed by him. A perusal of the record showed that the affidavit of U filed by the assessee was nothing ....
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....ficer to make further inquiry in respect of shop owners. In the Assessment Order, in paragraph No.6(1), while referring to the explanation tendered by the assessee, the Assessing Officer has referred to one of the loose papers seized during the search and seizure operation under section 132 of the Act and recorded that the explanation was in contradiction to the notings in the seized document that these relate to Ratan Market Project containing names of shop holders, amount received from them, construction account with show-wise details. It is, thus, apparent that when the Tribunal refers to the duty of the Assessing Officer to make further inquiries in respect of the shop owners, it is in this context. The tribunal has also, as noticed hereinbefore, found that all the seized papers do not relate to Ratan Market Project. In these circumstances, it is not possible to accept the contention raised on behalf of the appellant that the Tribunal had omitted to consider other material." 23. In the case of CIT vs. Radhe Associates, (2013) 37 taxmann.com 336 (Guj.), the Hon'ble Jurisdictional High Court held as under:- "3. We have heard Ms. Paurami Sheth, learned counsel for the Re....
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....08. From the last page of the statement, it is evident that it was concluded on 26th March 2008. No time was mentioned on the conclusion of the statement. However, the statement is running into 10 pages, therefore, it can safely be inferred that it was concluded on the early hours of 26th March 2008. In the case of Kailashben Manharlal Chokshi (supra), the Hon'ble Jurisdictional High Court held that if a statement is recorded at midnight, much credence cannot be given to such statement because the person would not be in a position to make any correct or conscious disclosure in a statement recorded at odd hours. The ratio of the above decision of the jurisdictional High Court would be squarely applicable to the facts of the assessee's case because the statement was recorded at the midnight of 25th and 26th March 2008. 25. The Revenue has heavily relied upon the question No.21 and answer thereto in the statement of Shri Nayan Thakkar, which reads as under:- "Q.21 I am showing you various papers and documents which have been seized from your office premise as per Annexure-1, in which various defects and discrepancies are observed. You are requested to explain the same. A....
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....nexure-1. It was stated by the ld. Counsel that there was no Annexure-1 at all, and in response to the assessee's letter during the assessment proceedings, the Assessing Officer admitted these facts vide letter dated 27.08.2009 by the Deputy Commissioner of Incometax which reads as under:- "Office of the Dy. Commissioner of Income-tax, Central Circle-1(1), 3fd floor, Aayakar Bhavan, Ashram Road, Ahmedabad - Phone: 079-27546781 No.DCIT/CC1(1)/Ahd/Kunvarji/2009-10 Date: 27.08.2009 To: The Principal Officer Kunvarji Finance Pvl. Ltd. 310, Shyamak Complex, Nr. Kamdhenu Complex, Ambawadi, Ahmedabad Sir, Sub: Clarification on certain claims made by you in the affidavit filed alongwith return of income of A.Y.2002-03 to 2008-09 -reg. Ref: 1. Affidavit alongwith returns filed by you for A.Y.2002-03 to 2008-09 2. Your letter dated 27.03.2009 filed on 30.03.2009 You have claimed in the affidavit filed with the return of income that you have not been provided with the copies of Annexure-1, which has been mentioned in Question No.21 of statement of Shri Nayan Thakkar recorded in the course of his statement at 310, Shyamak....
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.... at the time of hearing before us. During the course of search also the officer recording the statement of Shri Nayan Thakkar has not specified any discrepancy or defect in any of the seized documents but made a general statement that there were defects and discrepancies in the various documents seized from the assessee's premises. Such assertion by the authorize officer is found to be factually incorrect. In the affidavit of Shri Nayan Thakkar furnished before the Assessing Officer these facts have been clarified. He stated that after getting the photocopy of the seized documents and their verification with reference to the books of accounts, since no discrepancy was noticed, no undisclosed income was offered in the Return of Income. If there was any discrepancy or defect in the assessee's books of accounts or the seized documents indicating any undisclosed income, the Assessing Officer ought to have mentioned the same in the assessment order. In the case of Kailashben Manharlal Chokshi (supra), the Hon'ble Jurisdictional High Court has noticed that when during the course of assessment proceedings the assessee has given the proper explanation for investment in various ....
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....sessee) 30. At the time of hearing before us, the ld. Counsel did not press the Cross-objections and accordingly, the same are rejected. IT(SS)A Nos. 677 to 680/Ahd/2010 : AY 2005-06 to 2008-09 (by Revenue) 31. In all these appeals, common grounds are raised, and therefore, all these appeals were heard together. 32. Ground Nos. 1 & 3 of the Revenue's appeals in all the years under consideration are with regard to the deletion of the addition made by the Assessing Officer on account of client code modification. These grounds are identical to Ground Nos. 1 & 3 of the Revenue's appeal in the case of M/s. Kunvarji Finance Pvt Ltd. vide IT(SS)A No.615/Ahd/2010 for Assessment Year 2005-06. Therefore, for the detailed discussion in the case of M/s. Kunvarji Finance Pvt Ltd in IT(SS)A No.615/Ahd/2010 (supra) for Assessment Year 2005-06, we do not find any justification to interfere with the order of the CIT(A) in this regard. Accordingly, Ground Nos. 1 & 3 of the Revenue's appeals are rejected. 33. Ground No.2 of the Revenue's appeal is with regard to the addition which should have been sustained on account of disclosure of income in the statement recorded at....