TaxTMI 
TaxTMI 
2017 (7) TMI 428
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....the case and in law, the Ld. CIT(A) was justified in 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 sh....
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....utilized for purchasing the shares. The A.O. observed that the expenditure incurred 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....
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....the office on 20.3.2013. During the course of scrutiny assessment, a question in relation to understatement or overstatement of profit or loss was 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 transacti....
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.... directed to determine whether the client code change, which have appeared in large numbers during the month of March, 2010 have had the effect of reducing the tax payable by the assessee and are in effect a device 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 don....
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....tems and supported by a time stamped contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above. (vi) Code changed can legitimately occur in some circumstances. For 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 ....
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....ing Pvt. Ltd., M/s Labadhi Finance Corporation and M/s Wellworth Share & Stock Broking Ltd. and shown as modified in the assessee company's name. (c ) It. is seen from the details availed from NSE that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs.l,55,89,067/- (i.e. Rs. 28,19,798- Rs. l,83,98,865). (d) It 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 o....
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....n the business of trading in shares, securities and F&O transaction with surplus fund, there is share trading investment of Rs. 12,50,94,940/-. Since there is a common activities related to share trading and also involvement in investment capable of dividend, the part of expenditure debited in profit and loss account is definitely attributable to the investment activities. There cannot be any denial that some part of the 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,....
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.... 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 to determine whether client code change which has appeared in large number in the month of March 2010, had the effect of reducing the tax payable by the assessee and to see whether the same was adopted as an device for tax avoidance. It was observed by learned CIT(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(....
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....at there is tax evasion It was submitted that investigation in the matter had been started by the DIT(I&CI),Mumbai after obtaining the approval of CBDT and the outcome of the inquiries with reference to the assessee was intimated to the A.O. and accordingly the disallowances were made. 8. The ld. counsel for the assessee submitted that the Mumbai Tribunal in assessee's own case in ITA No. 4847/Mum/2016 for A.Y. 2012-13 vide orders 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 incur....
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.... Revenue is aggrieved in this case by deletion of addition of Rs..8,63,137/- by learned CIT(A) which addition was made by the AO by applying Rule 8D(2)(ii) r.w.s. 14A w.r.t. interest expenditure incurred by the assessee The assessee did earn dividend income of Rs. 15,97,859/- which was claimed as exempt under the 1961 Act. We have observed from the perusal of audited financial statements which are placed in paper book filed with the tribunal 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, wh....
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....ng Private Limited , M/s Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Limited and said F & O transaction were shown as assessee's transaction post modification to reflect loss in the hands of the assessee to the tune of Rs. 3,67,83,145/-, the said loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes. The AO observed that there were reports in various financial 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: ....
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.... 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above. (vi) Code changed can legitimately occur in some circumstances. For 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 t....
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....n the assessee company's name. (c ) It. is seen from the details availed from NSE that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs.l,55,89,067/- (i.e. Rs. 28,19,798- Rs. l,83,98,865). (d) It 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 i....
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..... doubted the genuineness of the transaction of losses of Rs. 3,67,83,145/- as in the opinion of the AO these transactions are structured pre-planned to generate a loss arising as business loss and these transaction were entered to avoid taxes and is a fiscal nullity being colorable device to evade taxes, as held by the AO. The AO observed that there is a nexus between the broker and the assessee in entering into these transactions which are preplanned and premeditated with object to generate losses to offset the profits made previously made or to be made in future with a view to avoid and evade taxes. The AO observed that the onus lies on the assessee to prove that these 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....
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....83,53,985/- is brought to tax by the AO , it is contradictory on the part of the AO to have disallowed transactional loss of Rs. 3,67,83,146/-. It was thus, held by learned CIT(A) that it was wrong on the part of the AO to disallow the loss by treating it as sham transaction more-so when no action has been taken by SEBI and NSE against the assessee. Thus the disallowance of loss of Rs. 3,67,83,146/- as was made by the AO was deleted by learned CIT(A) vide appellate order dated 05-08-2014. We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent 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 dispo....
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....olation of proviso (d) to Section 43(5) of the 1961 Act. The relevant extract of NSE replies are 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 Institutional accounts consisting mainly of Mutual Funds and FIIs). Month No. of modifications Value of modifications in crore of rupees December, 2009 2.75 lakhs 21,896 January, 2010 3.36 lakhs 28,860 February, 2010 4.05 lakhs 35,241 March, 2010 6.18 lakhs 48,794 April, 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, 2....
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....h, 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. The finding of learned CIT(A) that SEBI and NSE has not taken any action against the assessee is also not supported by any material on record as no such enquiry was conducted by AO and/or CIT(A). It was only in response to initial enquiry conducted by DIT(I&CI) based on newspaper reports from NSE that NSE confirmed that there was a spectacular rise in client code modifications in March 2010 which indicates towards tax evasion, which information 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 assessme....
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....the 1961 ACT. In our considered view, the appellate order of learned CIT(A) is perverse and cannot be sustained keeping in view factual matrix of the case. The AO based on material on record on the touchstone of preponderance of human probabilities surrounding the case has come to conclusion that these losses are not genuine and are sham and collusive to evade taxes. The AO based hus decision on large number of judicial precedents which found mention in the assessment order at page 20-24. There is per-se no perversity in the assessment order of the AO as the facts surrounding the case clearly and strongly suggests and points to a collusive action on the part of the assessee and brokers who were acting in concert to avoid and evade taxes, which needed further probe to come to definitive conclusions as 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.Rat....
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....oted above to reflect that there is vast difference between the wrong codes from where the transactions were shifted to a correct code and possibility of punching error with such differential codes and that too in only 9 trading sessions which happened to be the month of March 2010(last month of previous year) in large magnitude of transactions was not mere coincidence and is a strong pointer to manipulation and collusive action of certain person acting in concert to evade taxes. This also raises another important question as to how many client codes are maintained by the assessee with the same broker and the reasons to have multiple codes. As could be seen above that large number of client codes are maintained by the assessee with the broker namely Wellworth Share and Stock Brokers Limited namely code 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. I....
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....but these inconsistencies collectively are on higher pedestal than merely being a suspicions which requires deeper probe to unearth the collusive action on behalf of certain parties acting in concert to manipulate the system to evade and avoid taxes. The assessee has placed reliance on decision of the tribunal in the case of Pat Commodity Services Private Limited(supra) which was decided on its own facts and there were small fraction of transactions effected by client code modification while in the instant case we have seen that large number of transactions with large magnitude were affected by client code modifications in the month of March 2010 which was itself categorized by NSE were effected towards tax evasion. Similarly , the assessee has placed reliance on decision of Hon'ble Bombay High Court in the case of Coronation Agro Industries Limited v. DCT in ITA no. 2627 of 2016 vide judgment dated 23-11-2016 wherein Hon'ble Bombay High Court was seized with an issue of escapement of income u/s 148 of the 1961, wherein Hon'ble jurisdictional High Court held that the notice u/s 148 of the 1961 Act was without jurisdiction as it lacks reason to believe that income chargeable to tax ....