TaxTMI 
TaxTMI 
2019 (7) TMI 295
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....s. 6,95,466/- made on account of commission paid to brokers to obtain fictitious loss through Client Code Modification without considering the fact that a significant percentage of transaction is charged from clients by the brokers to obtain such fictitious loss. The grounds raised in cross-objections reads as under: - 1. The learned CIT(A) failed to appreciate that reopening of assessment is bad in law as A.O. did not have reason to believe that income has escaped assessment and he merely relied on information received from Investigation wing and further reopening is nothing but change of opinion and hence reopening is bad in law. 2. The learned CIT(A) failed to appreciate that A.O for justifying reopening relied on information not contained in recorded reasons and hence, reopening is bad in law. 3. The learned CIT(A) failed to appreciate that reopening of assessment is bad in law as notice u/s 143(2) was issued before disposing objections to reopening thereby violating the mandatory procedure laid down in GKN Drive-shafts (India) Ltd v ITO (2003) 259 ITR 19(SC) and hence reopening is bad in law. 4. The order of the learned CIT(A) deleting addition of Rs. 2,31,82,003/- is....
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....ts particular account maintained with the broker. In this facility, the broker could change the client-code of a particular trade and transfer the trade from one account to another account during the trading hours & within time limit permitted by the stock exchange after the close of trading hours. After the modification in client-code is made, it was submitted to the stock exchange for information and necessary modification / up-dation in the data. However, many brokers misused this facility for creating artificial losses / profits and provided such fictitious profits / losses to various clients by charging some commission. An expert opinion was obtained from NSE to indicate the existence of genuine and non-genuine client-code modification. 2.5 In the above background, Ld. AO formed an opinion that the assessee company was a beneficiary of such practice and has reduced its overall profit by taking fictitious losses to the extent of Rs. 231.82 Lacs from the concerned brokers. The assessee was asked to provide complete details of client-code modification done by the broker in his account. The assessee was also confronted with details of fictious loss alleged to taken by the assesse....
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....ellant filed before me. Assessing Officer reached the conclusion that Appellant has obtained non genuine loss of Rs. 2,31,82,203/- in Shares trading i.e. Derivatives (F&O) trading with the intention to reduce tax liability on the basis that CCM is misused at the end of the year to shift profits and losses. However, this observation is factually incorrect as it is found from the records that CCM was carried out by the broker on daily basis throughout the year and not at the year end. 6.3.2. The Assessing officer has not brought on record any material to show that the broker was in connivance and under the control of the Assessee and that the Assessee had given any instructions for CCM to be done in his name. 6.3.3. It has been explained by the Ld. AR that the Appellant had done a genuine business in trading in Derivative (F&O) through registered Share Brokers and all transactions are supported by bills/contracts and all transactions are recorded in the books of accounts. The Assessing officer has not found any defect in the books of accounts. 6.3.4. It has been explained by the Ld.AR that when the file was reopened by the AO on whatever information supplied to him by the I&CI,....
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....o huge volume of transaction CCM become inevitable. Further if CCM is done at the end of the day/same day within the SEBI, then there is no question of shifting profits or losses. 6.3.9. 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 has been pointed out that that none of the clients has disowned the transactions carried on by the assessee. As noticed, the stock exchange is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has 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 Stock Exchange is also accepting the fact that such kind of client code modification is inevitable. The AO has not brought on record that in the relevant case the ratio between gross total transactions trades and the CCM trade were abnormally high. On the contrary, the Ld. AR has submitted that the ratio is quite small compared to the total transactions, otherwise the SEBI or the concerned stock exchange would have imposed penalty o....
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....ere is no material on record in the assessment order to prove that the other parties, alleged to be counterparts/ beneficiary of Profit or Loss/ received the Profit but did not include the same while computing P&L a/c or they were fictitious and were mechanism to siphon off the Profit of the appellant. 6.3.13.While the AO has taken cognizance of the general information provided by I&CI and thereafter reopened the file. However, the AO has not brought any material on record to prove that that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the appellant. No correlation between the appellant, on the one hand and the other parties, on the other hand, has been brought on record to correlate that these parties were in collusion with each other and were known to each other so that one party diverted its profit or loss to the other parties. There is nothing on record to suggest that the said losses were purchased and the other parties were given cash or cheque payment in view of such favours. Hence, the correlation of such transactions also, is not established in the assessment order. 6.3.14. Thus it may be seen that th....
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....the case of Pat Commodity Services P. Ltd. (supra) is reversed or modified by the Hon'ble High Court of Bombay or Supreme Court. In the result this ground of the appellant on the above issue is Allowed. Consequently, the estimated addition of 3%, being alleged commission paid by the assessee to procure the above transactions, was also deleted. Aggrieved the revenue is in further appeal before us. 4.1 The DR, relying upon the stand of Ld. AO, submitted that the assessee failed to establish the genuineness of the transactions and therefore the additions were justified. Reliance has been placed on the decision of Hon'ble High Court of Calcutta rendered in Pr.CIT V/s India Finance Ltd. [81 Taxmann.com 135] & Hon'ble Delhi High Court rendered in CIT V/s Vashishth Chay Vyapar Ltd. [66 Taxmann.com 371]. The Ld. DR also justified the validity of reassessment proceedings in view of the fact that Ld. AO was in receipt of tangible information which, prima-facie, indicated escapement of income. 4.2 The Ld. Sr. Counsel, Dr.K.Shivram, controverting the same, submitted that nothing on record would establish that the loss transactions were not genuine. Arguments have been made to submit ....
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....e notice u/s 143(2) has been issued prior to disposing off the objections raised by the assessee. However, we find that there was no bar under law for issue of notice u/s 143(2) prior to disposal of assessee's objections and the disposal-off of the objections was not pre-requisite for the issue of notice u/s 143(2). Accordingly, Ground Nos. 1,2 & 3 of cross-objections stand dismissed. 5.2 Coming to the merits of the case, we find that client-code modification is a facility granted by stock exchanges / SEBI to brokers so as to take care of the punching errors which take place during trading hours. It is undisputed fact that the assessee was not a registered broker and could not carry out any modifications at his end. Another fact is that nothing on record establishes the fact that the said modifications were done at assessee's behest. The transactions of the assessee's were duly supported by bills / contract notes. The assessee placed on record confirmation of few parties whose name appear in the data provided to the assessee wherein they have confirmed the transactions as belonging to them only. No evidence has been brought on record to establish that any of the party disown the....
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....actions carried on by the assessee. As noticed by the Ld CIT(A), the MCX, the stock exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has 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 i....
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.... of the assessing officer. 14. Another important point that is relevant here is that none of the clients was shown as related to the assessee herein. Normally the question of shifting of 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. No....