TaxTMI 
TaxTMI 
2018 (10) TMI 1626
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.... case and in law', the CIT(A) is justified in deleting the additions of transfer out of ascertained profits amounting to Rs. 3,50,99,887/- and transfer in of ascertained losses amounting to Rs. 1,94,602/- and commission payment of Rs. 7,05,890/- for obtaining accommodation entries of transfer in and transfer out of losses and profits merely by observing that assessee himself was not a brokers." 3. "Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the additions by observing that the additions were not based on any sound footing but were based on theory & assumption when the transaction initially punched in the client code of the assessee were edited as many as 1354 times during the relevant financial year clearly ruling out the possibility of any genuine error," "The Appellant crave, leave or reserving the right to amend modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 3. Ground No. 1 of the appeal is regarding quashing of reassessment for want of notice U/s 143(2) of the Income Tax Act, 1971 (in short the Act). The assessee is individual and filed ....
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....362. He has supported the order of the ld. CIT(A) on this issue. 7. We have considered the rival submissions as well as relevant material on record. There is no dispute that the order passed by the Assessing Officer without issuing notice U/s 143(2) of the Act is invalid as the same would amount to passing the assessment order without jurisdiction. Section 143(2) of the Act confers the jurisdiction to the Assessing Officer to pass the scrutiny assessment. Section 143(2) of the Act is an essential condition before completion of assessment U/s 143(3) of the Act. Therefore, once a return has been furnished by the assessee, the Assessing Officer, if considered it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under paid the tax shall serve on the assessee a notice requiring him to attend the office of the Assessing Officer or to produce any evidence in support of the return. Therefore, before making an addition or disturbing the returned income, it is mandatory to serve a notice U/s 143(2) of the Act to given an opportunity to the assessee to appear before the Assessing Officer or to produce the evidenc....
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....nt appeal it is seen that although notice U/s 148 & 142(1) were issued, there is no mention of issue of notice U/s 143(2) any time before the completion of the reassessment proceedings. Thus, in so far as the validity on the non issue of notice U/s 143(2) before the close of the reassessment proceedings is concerned, I am in agreement with the appellant that this constituted a fatal error towards upholding the validity of reassessment proceedings. This issue has been dealt by several highest judicial authorities and the opinion in this regard is summarized in a few orders ratios/extracts of which are quoted below:- ......................................... On this ground, the reassessment cannot be considered as a valid one and is liable to be quashed." Thus, apart from the above observation, the ld. CIT(A) has not given any finding of fact on this issue and quashed the reassessment by following the various decisions on legal issue. Once the notice U/s 143(2) of the Act was issued by the Assessing Officer as it is part of the assessment record then we do not find any defect or illegality in the reassessment order so far as the requirement of n....
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....f client code modification whereby the profits were shifted from assessee's account to these 97 parties in the garb of Client Code Modification after execution of trades and therefore, it cannot be a genuine mistake for which this facility is allowed by the SEBI and stock exchange. The Assessing Officer has given the details of all 97 persons in whose favor the profits were shifted total amounting to Rs. 3,50,99,887/-. Further the profit to the tune of Rs. 1,94,602/- was also shifted in respect of the three other persons. Thus, a total instances of shifting of profit is 100 in the case of the assessee. Thus, the Assessing Officer has established a case that the assessee has misused the facility of Client Code Modification and has shifted out of income of Rs. 3,50,99,887/- to various parties and also shifted in losses of Rs. 1,94,602/- from three parties and in this way it has reduced its taxable income of Rs. 3,52,94,489/-. The Assessing Officer has rightly considered 2% commission on all those transactions and computed the said amount of commission paid at Rs. 7,05,890/-. Hence, the ld DR has submitted that the modus operandi of involvement of misusing the Client Code Modification....
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....egedly recorded by the Investigation Wing and relied upon by the Assessing Officer. Even notice U/s 133(6) or 131 of the Act were not issued by the Assessing Officer despite the specific request made by the assessee. The ld AR has referred to the details of the correct figures of Client Code Modification in the case of assessee at 499 which is only 0.47%. Thus, once the error is within the limit of the reasonable margin as per the NSE/SEBI circular dated 05/7/2011 and 29/07/2011 and then such an error which is rectified by the brokers as per the facility of Client Code Modification cannot be held as misuse and bogus transactions. The ld AR has pointed out that the modification of client code is allowed which is to correct the mistakes and the transactions carried out on behalf of a particular client should not be recorded in the account of the other client and therefore it is the rectification exercise which corrects the transaction in the hand of the client on whose behalf the trade is executed. In support of the contention he has relied upon the following case laws: (1) ITA No. 911/JP/2016, M/s Noble Securities Vs ITO, order dated 23/03/2017. (2) ITA Nos. 3498 &....
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....ity and doing this mischievous transfer of profits from one hand to another hand. Until and unless two clients and broker are on the same page and involved in doing this mischievous act by misusing the facility of Client Code Modification such transactions are not possible when the parties are not related to each other party and are independent clients of a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of ½ hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and are closely related party. These transactions are even otherwise cannot be predesigned or planned as it can be done only after transaction is executed on the stock exchange and subsequently once the result and outcome of the transaction is known to the parties,....
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....30/11/2016 itself." Thus, when the assessment order is based on the report of the Investigation Wing without any fresh and independent enquiry conducted by the Assessing Officer and the report of the investigation wing in turn is based on the statement of the brokers then without giving the opportunity to the assessee to cross examine the brokers whose statements were recorded by the Investigation Wing it would amount to violation of principles of natural justice. Though, the cross examination may not be an absolute right but once statement is recorded in the back of the assessee and is being used against the assessee then the order passed by the Assessing Officer based on such statement is not sustainable in absence of cross examination. The Hon'ble Supreme Court in the case of Amdaman Timber Industries Vs CCE 127 DTR 241, while dealing with the issue of non-grant of opportunity to cross examine the witness has held as under: "5. We have heard Mr. Kavin Gulati, learned senior counsel appearing for the assessee, and Mr. K. Radhakrishnan, learned senior counsel who appeared for the Revenue. 6. According to us, not allowing the assessee to cross-examine the w....
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.... for accepting or rejecting the submissions. 8. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice." Accordingly, the order of the Assessing Officer is not sustainable when the assessee was not granted an opportunity to cross examine the brokers. In the case in hand, the Assessing Officer has not given any finding that the assessee and the other parties in whose account, the transactions are treated as transfer of profit are in collusion alongwith the broker. There is nothing on record or any fact or finding by the Assessing Officer to suggest that the assessee and the other parties as well as the brokers are in collusion to carry out these transactions of transfer of profit from the account of the assessee in the accounts of other parties by misusing the client code modification facility. Therefore, even if the broker might have involved in such mischievous practice but to make such addition in the hands of the assessee it is nec....
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....s code. And that later on when such a mistake was noticed the same was deleted by deleting the trading from the firm's code and credited to the client's code. 9. That the appellant has further submitted that the mistake was done at the broker's level and the firm should not be held responsible for mistake committed by the brokers. 10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session. 5.3.2 I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artistic Finance (P) Ltd. to modify the client code and book it in the name of the....
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.... transferred to and vested in some other person, there is no avoidance of tax liability: no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise''. Then, Misra. J. responded: (SCC pp. 254-55, para 45)''45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'' In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F& O segment where loss and even income can be booked in clients favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such transaction can be transfe....
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....the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable". 3. The broker on an average executes more than 5000 trades in a day. As is calculated by the AO, the exchange is operative only 260 days in a year. Thus, in a year approximately 13 lakhs trades are carried out by the broker. Therefore, the fact that during the year, the broker had carried out 2380 modifications by using CCM facility is irrelevant as it is only 0.18% of the total trades carried out by the broker during the year. Also, the fact the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. 4. A statement showing the details of modified client names and the profit/loss to the modified client due to CCM is at PB 27-32. Also by reply dated 15.02.2016 (PB 33-34), the assessee had submitted the confirmations of its parties....
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....be deleted.'' 3.3 During the course of hearing, the ld. DR relied on the orders of the authorities below. 3.4 I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearin....
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....sidering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.'' Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed." Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under: "11. We have heard rival contentions and perused the record. A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed t....
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....ns. Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. Though the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The Ld CIT(A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. Ali these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially. 13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of Rs. 3.31 crores and further there was change of code from one client to another client to the tune of Rs. 6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The action of the AO in assessing the above said profits....
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....e 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. a. The facility of client code modifications intra-day are allowed. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for th....
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....tion 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 the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer. ....
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....ion. 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. Thus in the said case, it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue's appeal are dismissed. 12. Now we take the cross objection of the assessee, wherein the assessee has rai....
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.... in deleting the addition made by the Assessing Officer. Therefore, in view of our finding on this issue in the matter of revenue's appeal, grounds No. 2 and 3 of the C.O. become infructuous. 15. Ground No. 4 of the C.O. is regarding validity of reopening. The ld AR of the assessee has submitted that the original assessment was completed U/s 143(3) of the Act and the Assessing Officer has reopened the assessment after expiry of four years from the end of the assessment year, therefore, in absence of failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment, the reopening after four years is not permissible. He has referred to the proviso to Section 147 of the Act and submitted that the reopening is hit by the proviso to Section 147. The ld AR has contended that the assessee has disclosed all the relevant facts in the original return of income and the assessment was completed U/s 143(3) of the Act then the case of the assessee does not fall in the category of failure on the part of the assessee to disclose fully and truly all relevant facts and material necessary for assessment. He has referred to the reasons recorded by the A....
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....by misusing the Client Code Modification facility in derivatives transactions on NSE during March, 2010. In some cases of brokers as well as clients, survey U/s 133A was carried out by the Department and it has admittedly being confirmed having misused the facility of client code modification to create fictitious losses/profits and further admittedly explained in the case of assessee also to receive commission at the rate varying from 0.5% to 2% on this account." The Assessing Officer has referred to the information in possession, which was gathered during the survey U/s 133A carried out by the department at Mumbai and Ahmadabad. Thus, the Assessing Officer himself was not involved in the survey proceedings, which is the basis for reopening of the assessment as per the reasons recorded by the Assessing Officer. The facts recorded by the Assessing Officer that the assessee has fictitiously transferred the profits in respect of trading of derivatives through broker C.M. Goyenka Stock brokers is not a new fact but the transactions were duly part of the assessee's book of account and the assessee has offered the income from these transactions which were done on behalf of the assesse....
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....enue that in view of the decision of the Apex Court in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), the Assessing Officer is entitled to re-open the Assessment for whatever reasons and the same cannot be subjected to jurisdictional review, is preposterous. First of all, taking out a word or sentence from the entire judgment, divorced from the context and relying upon it, is not permissible (see CIT v. Sun Engg. Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297 (SC)). It may be useful to reproduce the context in which the sentence in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s case (supra) being relied upon by the Revenue to support its case, was made. The context, is as under:- "The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitutions. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed to confer jurisdiction under section 147(a) two conditions were required to be satisfie....
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....an only be the basis of forming the belief However, the belief must be independently formed in the context of the material obtained that there is an escapement of income. Otherwise, no meaning is being given to the words 'to believe' as found in Section 147 of the Act. Therefore, the words 'whatever reasons' in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), only means whatever the material, the reasons recorded must indicate the reasons to believe that income has escaped assessment. This is so as reasons as recorded alone give the Assessing Officer power to re-open an assessment, if it reveals/indicate, reasons to believe that income chargeable to tax has escaped assessment. 12. The re-opening of an Assessment is an exercise of extra-ordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before reopening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of re-opening Assessment and its reasons which would evidence the linkage/nexus to the c....
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....ble Jurisdictional High Court in the case of Sandeep Stocks Pvt. Ltd. Vs ACIT (supra) had occasion to consider the issue of reopening of the assessment based on the same information received from ADIT relating to fictitious profit and losses created by some brokers by misusing Client Code Modification facility in F&O Segment on NSE and held as under: "Having heard both the; counsel, this court finds that the petitioner had submitted initial return on 27September, 2009. The case was assessed under Section 143(3) on 23.11.11 at total income of Rs. 23,54,40,980/- and assessment order was passed and the same attained finality. The petitioner was issued a notice on 29March, 2016 under Section 148 quoting that the income chargeable to tax for assessment, 2009-2010 has escaped. On having asked by the petitioner to provide reasons for reassessment, the respondents provided reasons as noted above. A look at the said reasons shows that the Department has gathered information received from their ADIT relating to fictitious profits and losses created by some brokers by misusing the Client Code Modification Facility in F&O segment on NSE during the financial year 2008-2009 and on the b....
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....s establish that no amount has escaped assessment. However, we do not find this to be a fit case to interdict the reassessment proceedings. In the present case however, this Court finds that the assessee has first raised objections arid after reply to the objections, has approached this. Court challenging both the reasons provided initially as well as in reply and the objections. This Court agrees to the submission of the learned counsel for the petitioner that even in the reply and the objection, there is no specific averment that the petitioner was having any knowledge relating to the conduct of the said brokers and therefore, presumption of shifting of certain profits at the level of assessee is not made out prima facie and in the circumstances therefore, the detailed reasons as has been observed in the judgment passed by Delhi High Court ought to have been made available to the petitioner. In view thereof, the action of reopening of assessment on the basis of the reasons as provided letter dated 3.8.2016 is not made out. The assumption of jurisdiction of reassessment under Section 148 was therefore not justified and the petitioner cannot be said to have failed....