TaxTMI 
TaxTMI 
2017 (7) TMI 428
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....n deleting of Rs. 8,63,137/- u/s. 14A made on account of expenditure incurred towards earning exempt income in the form of dividend ?". 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of loss of Rs. 3,67,85,146/- on account of client code modifications made by the assessee in the month of March 2010 when the entire gamut of facts clearly point towards these being sham transactions?. 3. The appellant prays that the order of the CIT(A) on the grounds above, may be set aside and that of the Assessing Officer be restored." 3. The brief facts of the case are that the assessee company is engaged in the business of trading in shares, securities and F&O transactions. In this appeal, the Revenue is aggrieved by two disallowances, one is disallowance u/s 14A read with Rule 8D of the Income-tax Rules, 1962 and second one is disallowance on artificial loss incurred through client code modifications. During assessment proceedings u/s 143(3) r.w.s. 143(2), the A.O. observed that the assessee had earned exempt income and further the assessee had shown dividend income amounting to Rs. 15,97,859/- and had claimed....
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....urred by way of interest during the previous year which was not directly attributable to any particular income or receipt, hence, in accordance with the formula of Rule 8D is applicable in this case. The AO invoked provisions of Section 14A(2) and the claim of the assessee that no expenditure was incurred in relation to the income which does not form part of the total income under the Act was rejected by the AO. The mechanism as provided u/s 14A(3) was invoked and method as prescribed under Rule 8D of the 1962 Rules was applied. The A.O. accordingly applied Rule 8D and worked out the disallowance u/s 14A of the Act as under:- Particulars Amount (Rs) Amount (Rs) i) Director expenditure relating to exempt income being STT & D-Mat charges paid -- ii) Amount computed as per Rule 8D(2)(ii) [AXB/C] 8,63,137 A = Interest expenses 876268 B = Average Investment including shares in closing and opening inventories 106428532 C = Average total asset 108047609 iii) 0.5% of average investment (0.5% x Rs. 106428532) 5,32,143/- Total disallowance as per Rule 8D(i+iii+iii) Rs. 13,95,280/- Thus, the A.O. worked out an amount of....
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....s raised. In relation to the said question, the assessee has sought the guidance of the undersigned and made the said application. Accordingly, a report in the regard as called for from the concerned A.O. i.e. ITO 9(2), Mumbai. The A.O. has submitted a report vide letter dated 20.3.2013. A hearing was also fixed with the assessee in the matter on 21/3/2013. Shri Sunul Shah, CA and AR appeared. He was asked if he had any further submissions to make on the basis of report made by the Assessing Officer, However, AR has reiterated the submission made earlier:- The brief facts of the case are as follows:-. (a) In the month of the March 2010, the assessee has shown modified transition in his F&O. (b) These transactions are entered by brokers. M/s Anugrah Stock & Broking Pvt Ltd, M/s Labdhi Finance Corporation and M/s Wellworth Share & Stock Braking Ltd. and shown as modified in the assessee company's name. (c) It was also reported by the Assessing Officer that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs. 1,55,89,067/- (i.e. 28,19,798 - Rs. 1,83,98,865/-). It was further reported that the assessee's F&O transactions en....
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....ce for tax avoidance and to pass the assessment order accordingly." The A.O. after considering the directions of the Addl. CIT vide order dated 22- 03-2013 u/s 144A of the Act observed that from the report of various financial newspapers indicated that the NSE had allowed its member brokers to make clients modifications to the tune of Rs. 55,000 crores in March, 2010 against which investigation had been started by DIT (I&CI), Mumbai after obtaining approval from CBDT and the results and findings of the said inquiries with reference to the assessee's transactions had been forwarded to the A.O. Notices were issued to the NSE calling for relevant data includes the following:- "(i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. (ii) Details of trade time stamp for each transaction where modifications have been carried out. (iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: (iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies f....
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.... example, the broker may wrongly feed the client code of the husband when the shares are actually held by the wife. Similarly, there may be confusion between a HUF and individual having the same name. It is also observed that mutual funds follow a practice of purchasing shares under the code and then allotting to different schemes at the end of the day. (vii) Other than the above, it is difficult to understand how a code change can legitimately occur. (viii) Code changes reported by the Exchange have been made to set off a trade made in normal trading hours though screen based trading in some earlier trading session. To clarify, a code change cannot take place from a static position it is always done to set off a trade which has already taken place. (ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is normally done during normal trading hours using synchronized trades (called 123 trades:....
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....has also observed from the assessee's F&O Transactions entered during the F.Y. 2009-1O has resulted in net profit of Rs. 1,51,17,420/- (i.e. Rs. 2,04,97,205- Rs. 53.,79,785). (e) It is observed from the details that the assessee has adjusted the loss on sale of shares of other companies against the profit of the assessee company and resulted into low profit offered for taxation. (f) There are total of 1113 transaction on sale side involving transaction value of Rs. 40,51,75,893/- and 1353 transaction on buy side involving transactions value of Rs. 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th, 11th, 15th, 22nd,23rd and 25th of March., 2010. (g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. (h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of ....
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.... administrative expenses, office, salary and wages and other related expenses is not at all related to investment in shares. Therefore, the arguments of the ld. A.R. that no expenditure has been incurred for earning dividend of Rs. 15,97,859/-, is not tenable. However, the argument that interest expenditure is not related to investment as same was incurred in connection with loan taken for giving margin money to the broker for F&O transaction, therefore, the interest expenditure of Rs. 8,76,268/- is not directly or indirectly related to earning of dividend, is convincing one. Further, it is pertinent to mention that Assessing Officer has not clarified as to how such interest expenditure debited in profit and loss account is related to earning of dividend. Obviously, the explanation of the appellant and evidences on records support the contention that interest expenditure is not related to earning of dividend. Because of this fact it is not correct on the part of the Assessing Officer to disallow interest expenditure mechanically under Rule 8D(2)(ii) to the extent of Rs. 8,63,137/-. Assessing Officer is therefore directed to delete the disallowance of expenditure of Rs. 8,63,137/-. ....
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....IT(A) that the AO has not made any further investigation or enquiry nor caused any verification from the brokers namely Anugrah Stock and Broking Private Limited, Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Ltd or from Vice President Investigation, NSE or from General Manager, SEBI. The finding was recorded by learned CIT(A) that when no further investigation or proper verification has been made by the AO, there is no compliance of order u/s 144A dated 22-03-2013 of the Addl. CIT and hence it was observed by the learned CIT(A) that contentions of the assessee cannot be ignored or brushed aside and hence it was observed that assessment order of the AO cannot be sustained on legal footing. After recording the above finding, learned CIT(A) granted the relief to the assessee on the grounds that the AO did not conducted enquiry as per directions of the learned Addl. CIT and the AO disallowed the said loss merely on presumption that these transactions were sham transactions to evade and avoid taxes. The learned CIT(A) observed that these client code modifications necessitated by punching errors in the office of the broker were done during normal trading hours and....
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.... dated 7th March, 2017 whereby the Tribunal has considered the disallowance u/s 14A r.w.s. Rule 8D and held that the no disallowance can be made u/s 14A r.w. Rule 8D for the securities held as stock-in-trade. The ld. counsel for the assessee drew our attention to the page 9 of the paper book filed with the tribunal whereby the copy of P&L account for the year ended March, 2010 is placed and submitted that the assessee's income mainly consists of brokerage and share trading income and the shares were held as stock-in-trade. He submitted that the assessee's own capital consisting of share capital and reserves was Rs. 7,98,75,873/- and investments as on 31-03-2010 was only Rs. 3,78,000/- hence, the ld. CIT(A) had rightly allowed the interest expenses incurred by the assessee. It was submitted that shares of Rs. 12,50,94,940/- were held as closing stock-in-trade as at 31-03-2010 and our attention was drawn to page 9 and 13 of paper book filed with the tribunal wherein Profit and loss account and schedules to the account are placed. It is submitted that if shares are not held as investments but as stock-in-trade, no disallowance u/s 14A is warranted as profit from trading are chargeable....
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....al by the assessee that the assessee has made investments in shares to the tune of Rs. 3,78,000/- (Previous Year Rs. 3,78,000/- as on 31- 03-2009) which were held as 'Investments' in its books of accounts as on 31- 03-2010, while investments in shares and securities as on 31-03-2010 were Rs. 12,50,94,940 which were held as stock-in-trade (previous year as on 31- 03-2009 of Rs. 8,70,06,123/-) -ref. pb/page 3-18). We have also observed that the assessee's own funds are to the tune of Rs. 7,98,02,973/- (consisting of share capital + reserves-miscellaneous expenditure(debit)). We have observed that the Mumbai-tribunal has decided this issue in the assessee's own case in ITA no. 4847/Mum/2016 for assessment year 2012-13 vide orders dated 07-03-2017, wherein the tribunal held as under: "4.During the course of hearing before us, the Authorised Representative (AR) relied upon the cases of HDFC Bank Ltd (383 ITR 529), India Advantages Securities Ltd (380 ITR 471), Max India Ltd (290 CTR 76). The Departmental Representative (DR) left the issue to the discretion of the Bench. 5.After hearing the rival submissions, we find that the only issue to be decided is as to whether the expenditure....
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....newspapers that the NSE had allowed its members brokers to make client modifications to the tune of Rs. 55,000 crores in March 2010. Investigations in the matter was carried by DIT(I&CI), Mumbai after obtaining the approval of the CBDT. The notices were issued to NSE calling for relevant details as under : "(i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. (ii) Details of trade time stamp for each transaction where modifications have been carried out. (iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: (iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies received from the NSE is as under:- "The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non-institutional clients only in the equity derivatives segment (there is no change in the number of modifications in I....
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....n the above, it is difficult to understand how a code change can legitimately occur. (viii) Code changes reported by the Exchange have been made to set off a trade made in normal trading hours though screen based trading in some earlier trading session. To clarify, a code change cannot take place from a static position it is always done to set off a trade which has already taken place. (ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.) x) The role of code modifications comes when these synchronized trades do not work due to market volatility. To clarify, suppose there are two clients, A that wants to book a loss and B that want to book a gain. (xi) So A buys stock 'x' from, B at Rs. 100 a share in anticipation that the closing market pr....
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.... for taxation. (f) There are total of 1113 transaction on sale side involving transaction value of Rs. 40,51,75,893/- and 1353 transaction on buy side involving transactions value of Rs. 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th , 11th, 15th, 22nd,23rd and 25th of March., 2010. (g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. (h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of this order as annexure -A to this order. (i) It could be seen from the above Annexure -A, the modifications are done in the trading hours which is against the normal trading trends and practices. Normally the genuine errors could be traced only at the end or towards the end of the trading session and corrected or modified under intimation to the exchange." The asses....
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....se transactions are genuine. The A.O. finally concluded that the assessee's transactions have no commercial purpose apart from the avoidance of tax liability and are sham transaction. The A.O. also cited several case laws in support of his conclusion are illustrated vide his order page No. 20 to 24 to come to conclusion that these are not genuine transactions but sham and colorable transactions with objective of evading taxes. The A.O. accordingly disallowed the loss claimed of Rs. 3,67,83,146/- and added the same to total income of the assessee, vide assessment order dated 28-03-2013 passed u/s 143(3) of the 1961 Act. The learned CIT(A) while deciding first appeal observed that directions were issued by learned Addl. CIT u/s 144A to AO to cause verifications from NSE as to factual position as per submissions of the assessee and to ascertain correct facts on the basis of information so gathered afterwards from various sources which was not done by the AO. The learned CIT(A) observed that the AO was also directed by learned Addl. CIT vide orders dated 22-03-2013 u/s 144A to determine whether client code change which has appeared in large number in the month of March 2010 , had the ....
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....t that it has made the order of learned CIT(A) enter the arena of perversity and this order of learned CIT(A) cannot be sustained in the eyes of law and is liable to be set aside. The powers of the learned CIT(A) is co-terminus with the powers of the AO including powers to enhance assessment, after following due procedures as contemplated by law. Attention is drawn to Section 251(1)(a) and 251(2) of the 1961 Act which provides as under : "Powers of the [Commissioner (Appeals)]. 251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or 7annul the assessment [(aa) ****** (b) ****** (c) ****** (2) The [Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.-In disposing of an appeal, the [Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the [....
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....2010 1.62 lakhs 11,882 (ii) The increase in the client code modifications in the equity derivative segment in March, 2010, is in spite of the fact that trading volume and turnover actually fell during this months. (iii) The number of client code modifications in the currency derivative segment in March, 2010 was 19395 and the value thereof was Rs. 13282 crores while the comparative figures for January, 2010 was 863 modifications for a total value of Rs. 461crores. (iv) The above facts would indicate that the modifications made were part of an organized tax evasion racket which should be dealt with firmly. (v) the important point to note is that client codes of deals carried out were changed by the brokers after the close of normal trading hours. The income tax act u/s 43(5) normally considers any transaction in which a contract for purchase or sale of any commodity including shares is settled other than by actual delivery or transfer as a speculative transaction. One of the exceptions to this position is contained in proviso (d) to S. 43(5) which states that an eligible transaction in respect of trading in derivative referred to in clause (act) of section 2 of the Se....
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....on was passed on by DIT(I&CI) to the AO. No enquiry could be conducted by AO during assessment proceedings nor in response to directions of Addl. CIT dated 22-03-2013. The learned CIT(A) also did not conducted any enquiry nor directed AO to conduct any enquiry during appellate proceedings. The powers of learned CIT(A) are co-terminus with the powers of the AO including power of assessment. When the powers are granted by statute, the same need to be exercised in a manner to achieve the mandate of the 1961 Act to compute correct taxes in the hands of tax-payer. The powers cannot be used in an arbitrary manner otherwise the orders passed in pursuance of such arbitrary use of powers will enter the arena of perversity. The learned CIT(A) was fully aware that the AO could not comply with directions of learned Addl. CIT issued u/w 144A to conduct relevant enquiry, examination and verification as was directed by learned Addl. CIT due to matter getting time barred on 31-03-2013 as direction were issued only on 22-03-2013, it was incumbent on the learned CIT(A) to conduct the necessary enquiry , examination and verifications as were directed by learned Addl. CIT or should have directed AO to....
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.... was rightly directed by learned Addl CIT vide directions dated 22-03-2013 u/s 144A of the 1961 Act. The huge magnitude of client code modifications in the last month of the previous year as well in the case of the assessee all the client code modifications being accorded and ascribed to punching errors cannot be mere chance to say that it is in the realm of suspicion or speculation.Rather the circumstances seen cumulatively takes it to a higher pedestal than being mere a suspicion. We are conscious of the fact that suspicion howsoever stron cannot take the place of proof. The liability to tax under the provisions of the 1961 Act is required to be fastened on the touchstone of preponderance of human probabilities , and strict proof / evidences as required under Indian Evidence Act, 1872 may not be pressed to fasten the tax-liability. No-doubt the assessee has placed on record broker confirmations but perusal of these conformations to suggest that such a large magnitude of client code modifications were carried out in the last month of the previous year i.e. March 2010 and that too in 9 trading sessions and all being ascribed to punching errors do not inspire confidence rather it cl....
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....de numbers 61495,7744,10057, 8428, 74561, 6449 , 8014, 7015,74562 etc. Regarding the contention of the assessee that NSE/SEBI permits the client code modifications, we have gone through the relevant circulars which are placed in paper book/page 68-72, we have observed that the said circulars clearly allows only 'genuine' client code modifications of transactions in the stock exchange. If the transaction is held to be 'non-genuine', we are afraid circulars of NSE/SEBI relied upon will not be applicable. Reference is drawn to circular no 663 dated 29-07-2010( Ref. No.: NSE/INVG/2011/184840 issued by NSE wherein it is clearly stipulated as under(relevant portion is extracted below): " The Exchange has provided the facility of client code modification only to rectify genuine errors. Further, as per point 2(a) and 3(B) of the SEBI circular date dated July 5, 2011 , the following client code modifications would be considered as genuine modifications , provided there is no consistent pattern in such modifications; i) Where original client code/name and modified client code/name are similar to each other but such modification are not repetitive. ii) Where original client code and m....