TaxTMI 
TaxTMI 
2019 (2) TMI 109
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.... 133 A of the IT Act was conducted by the investigation wing of Ahemdabad at the business premises of 12 stock brokers across India on 23.03.2015. As per analysis of the data received from the national stock exchange and information provided by the stock brokers, the ADIT (Investigation) came to the conclusion that the assessee has misused the facility of Client Code Modification (CCM) provided to the stock brokers to avail contrived loss of Rs. 31,90,855/-. The details of all the transactions original as well as modified was provided by the investigation wing are as under :- Sl. No. Name of Beneficiary Address of Beneficiary PAN Name of Broker When OC- (Ascertained profit) When MC (Ascertained of Losses) Net Reduction income due 1 Mohan Aggarwal Advance Chemical Industries 14-Kishan Market- Sirkiwalan- Hauzqazi Delhi- 110006 AADPA8839L Gaurav Investments & Consultancy 1593542.5 -1597312.5 -3190855 3. In view of the above the Assessing Officer issued notice u/s 148 of the IT Act after recording satisfaction note with due approval. The assessee in response to the same filed its return of income declaring total income of Rs. 9,84,190....
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.... "reason to believe" that income of the appellant had escaped assessment and in view thereof the proceedings initiated are illegal, untenable and therefore unsustainable. 1.3 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that reasons recorded mechanically without application of mind do not constitute valid reasons to believe for assumption of jurisdiction u/s 147 of the Act 2 That the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in sustaining an aggregate addition of Rs. 31,90,855/- representing loss incurred on account of genuine business transaction in futures and options by the appellant 2.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the loss incurred is supported by documentary evidence in the shape of contract notes; and payment of applicable taxes. In such circumstances, disallowances made on the basis of surmises, conjectures and suspicion and without bringing on record any specific evidence establishing that loss incurred is not genuine and therefore not allowable is highly arbitrary, unjustified and untenable. 2.2 That the le....
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....ere also granted in a mechanical manner. Therefore, the reassessment proceedings are null and void. 6. So far as the merit of the case is concerned, referring to page 3 and para 4.1 of the assessment order, the Ld. Counsel for the assessee drew attention of the bench to the following observation of the Assessing Officer :- "4.1 Over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss - book entries were then used to evade taxes." 7. Referring to para 6 page 11 of the assessment order, the Ld. Counsel for the assessee drew the attention of the bench to the following observation of the Assessing Officer :- "6. In response, the broker M/s. Gaurav Investments & Consultancy (Pvt) Ltd. has stated that Client Code Modification was done in his office to rectify the clerical errors / operational lacunae while punching orders and it was done by our staff after consulting the clients on t....
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....sessing Officer has reopened the assessment on the basis of the information in the shape of the report of the Investigation Wing of Mumbai and Ahmadabad. There is no dispute that the assessee has done trade at stock exchange through the stock broker M/s C.M. Goyenka Stock Brokers Pvt. Ltd. and during the year under consideration, there were various instances of Client Code Modification whereby certain transactions were executed in the name of the assessee, were subsequently modified as to the other clients of the said broker. This modification was done as per the norms of the stock exchange which allows the brokers to carry out necessary Client Code Modification after execution of the trade but in a limited period of V2 hour. This facility is no doubt provided to the brokers to rectify the genuine mistakes committed in typing the wrong codes or the mistakes in punching the client codes at the time of trade transactions on the stock exchange. Thus, in simple words, the Client Code Modification facility allows the broker to correct the mistakes which are committed during the course of doing the trade on behalf of the various clients. There may be some instances of misusing this facil....
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....ification of the error by using the Client Code Modification facility has been considered and decided by this Tribunal in the series of decisions as relied by the assessee. The Coordinate Bench of this Tribunal in the case of Nobel Securities Vs ITO (supra) has also considered an identical issue in para 3.1 to 3.4 as under: "3.1 Apropos Ground No. 2 and 2.1 of the assessee, the facts as emerges from the order of the ld. CIT(A) is as under:- 5.3.1. I have gone through the assessment order as well as submissions made by the appellant. Following facts have emerged. 1. That the appellant is a partnership firm engaged in the business of trading in share. 2. That the firm is doing trading on its own behalf and on behalf of its clients. 3. That on the basis of an information received from Directorate of Income Tax (Intelligence & Criminal Investigation) that the appellant had booked a loss of Rs. 27,63,104/- due to modification made by the assessee in F& O segment to the third parties through the Client Code Modification facility. 4. That the AO had reopened the case u/s 148 of the Act by duly recording the reasons 5. That the....
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....the staff in punching the wrong client code i.e. client code of the appellant instead of client code of its clients. However, the appellant's claim, to my mind, is hollow as clearly made out by the AO in the assessment order that such modifications are done 2380 times involving 55 clients over a period of 197 days during the year under consideration. Mistake cannot be repeated so brazenly over such a number of times. Even if the end of the session, still the facility cannot be allowed to be manipulated for undue gains and create a situation where the income/loss can be diverted. In this regard, I have also taken into account the Apex court judgement in the case of Mcdowell & Co. Ltd. It is worthwhile to quote from the landmark judgement as under:- ''Misra,J. who delivered judgement on behalf of himself and three other Judges (other than Reddy. J.) extracted the following observation from the judgement of Gujarat High Court (ITR pp 200- 01) in the case of CIT vs. Sakarlal Balabhai (affirmed by the Supreme Court in CIT vs. Vadilal Lallubhai): (SCC 253-54, para 43) ' 'Tax avoidance postulates that the assessee is in receipt of amount which is real....
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.... Appellant's ground of appeal on the issue is dismissed.'' 3.2 During the course of hearing, the ld. AR of the assessee prayed for deletion of addition by filing the following written submission. ''1. It is submitted that the assessee is a trading in share business not in the capacity of broker but on its own account and for it clients. The assessee, itself, is a client of M/s Artistic Finance Pvt. Ltd which carried out transactions on behalf of the assessee and the clients of the assessee. Every client is assigned a unique client code which is punched in at the time of transactions. The AO issued notice u/s 131 to M/s Artistic Finance Pvt. Ltd. who vide letter dated 05.03.2016 (PB 37-38) explained that the assessee is its major client and provides them with a huge volume of transactions. The operating staff who are not well qualified, to save time had prefixed the client code of the assessee in the system as default which led to error in punching of client codes at the time of transactions. To rectify the error in punching of client code, a facility known as 'Client Code Modification (CCM)' is provided by the stock exchange till 4:15 P....
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....therefore, there does not arise any question to disallow the same. 5. The Ld. CIT(A) only on surmises and conjectures observed that these transactions are of the assessee ignoring that M/s Artistic Finance Pvt. Ltd. has admitted that these transactions are not of the assessee. The reliance placed by him in case of McDowell & Co. Ltd. is thus misplaced and not applicable. 6. Reliance in this connection is placed in the case of ACIT Vs. Kunvarji Finance Pvt. Ltd. 119 DTR 1 (Ahd.) (Trib.) where it was held that as per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intra-day i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume ....
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....ed is applicable". It is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that 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. It may be noted that ITAT Ahemdabad Bench in the case of ACIT vs. Kunvarji Finance (P) Ltd. 119 ld. DR 1 had observed that the client code modification is permitted intra day i.e. on the same day. The relevant portion of the decision is as under:- ''As per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusua....
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.... brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable. 12. Under these set of facts, the next question that arises is - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee. It is a fact that the assessee company has started its operations only in July, 2005 by converting individual membership into corporate membership. Further, the commodity exchange was about 3-4 years old only at the relevant point of time. Hence, the assessee cannot be considered to be an established player in the years under consideration. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions ....
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....f profit would arise between the related parties only. If the assessee had really shifted the profits to an outsider, then the human probabilities would suggest that the assessee would have received back corresponding amount from the recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view. 15. The Ld CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% of the total transactions only and in our view, the said volume, in fact, vindicates the explanation of the assessee. Further none of the clients has been found to be bogus and all of them have complied with KYC norms, meaning thereby the identity of all the clients stand proved. None of them has disowned the transactions and all of them have also declared the income in their respective returns of income. All these factors, in our view, support the contention....
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....ll 11:55 p.m. the client code modification will be allowed only upto 12:00 p.m. d. At all times, Proprietary trades shall not be allowed to be modified as client trades and client trades shall not be allowed to be modified as proprietary trades. e. In order to ensure that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under: S. No Percentage of Client Code changed to total orders (matched) on a daily basis Penalty (Rs.) 1 Less than or equal to 1% Nil Nil 2 Greater than 1% but less than or equal to 5% 500 3 Greater than 5% but less than or equal to 10% 1000 4 Greater than 10% 10000 f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped. With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Members are requeste....
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....ommodity Exchange, it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. When the client code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be malafide. 10. Moreover, the ld. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client....
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....), Ahmedabad without conducting any enquiry on the same by Assessing officer and without considering the fact of the case of assessee in light of the issue is not a tangible and relevant material to form opinion that income has escaped assessment. It is noted that the proceedings u/s. 147 of the Act can be initiated only on the basis of the tangible material and not on the basis of assumptions and presumptions. The precondition u/s. 147 of the Act is "reason to believe" and, the expression is stronger than the word "satisfied". The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable. In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for assuming jurisdiction, as has been held in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC) and ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 (SC). Hence, in this case the proceedings have been initiated on the basis of no material much less any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiat....
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....te on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: "it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries". In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the presentcase." I further note that in the reasons recorded assessee has relied upon the information by the Investigation Wing, Ahmedabad, the AO has stated that having perused and considered the in....
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.... formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer, For these reasons, the Court is satisfied that the findings by the ITAT cannot be disturbed." (B). Hon'ble High Court of Madhya Pradesh in the case of CIT vs. S. Goyanka Lime & Chemicals Ltd. reported in (2015) 56 taxmann.com 390 (MP) has held as under:- "7. We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has only recorded so "Yes, I am Satisfied". In the case of Arjun Singh vs. Asstt. DIT (2000) 246 ITR 363 (MP), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:- (A) Hon'ble Delhi High Court in the case of Pr. CIT vs. M/s NC Cables Ltd. in IT A No. 335/2015 has held as under 11. Section 151 of the Act clearly stipulates that the CIT(a), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT(A) has to record elaborate reasons for agreeing ....
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....rd sanction for issuing notice under section 148, reopening of assessment was invalid - Whether Special Leave Petition filed against impugned order was to be dismissed - Held, Yes (in favour of the Assessee)." 6.4 I further note that it is well settled law that reasons alone can be looked into and, cannot be supported by any supplementary or additional material. 6.5 I further note that Assessing Officer at page no. 2 of his assessment order dated 8.12.2017 u/s. 147/143(3) of the Act stated as under:- "Obiection to reopening Assessee filed objection vide letter dated 24.11.2017 to the notice u/s. 148/reason recorded. Removal of objection The objection filed by the assessee were rejected vide order dated 27.11.2017." 6.6.1 After perusing the aforesaid extracts from the assessment order, it is evident that the assessee has raised objection to initiation of assessment proceedings u/s. 147 of the Act vide letter dated 24.11.2017 and the aforesaid objections were disposed of by the AO vide order dated 27.11.2017, which shows that the AO did not accept the objections so filed, he shall not proceed further in the matter with in a very s....