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2019 (12) TMI 1228
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.... A. Shah 2010-11 21.02.18 24.11.2017 143(3) r.w.s. 147 of the Act 706/Ahd/18 Monaben A. Shah 2011-12 22.02.18 14.11.2017 143(3) r.w.s. 147 of the Act 2. At the beginning of the hearing, it was stated on behalf of the assessee that all the four matters captioned above are inter-connected and involves common issue. Accordingly, all the four matters were heard together for adjudication purposes. 3. We shall take assessee's appeal in ITA No. 708/Ahd/2018 pertaining to Amitkumar A. Shah HUF concerning AY 2011-12 as a lead case for adjudication. ITA No. 708/Ahd/2018 - AY- 2011-12 (in case of Amitkumar A. Shah HUF) 4. The ground of appeal raised by assessee reads as under: "1. Confirming the action of the AO in re-opening the assessment for the reasons as recorded and conveyed in due course of time to the Appellant; and 2. Confirming the action of the AO in making disallowance of Rs. 1,16,078/- and thereby making addition of the said amount to the returned income, for the reasons as stated in the body of the order." 5. The assessee filed its return of the income declaring total profit at Rs. 10,64,380/- for AY 2011-12. The ret....
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....sses owing to code modification and increased the assessed income to the tune of Rs. 1,16,078/-. The assessed income was accordingly computed at Rs. 11,80,460/-. 6. Aggrieved by the action of the AO, the assessee preferred appeal before the CIT(A). The CIT(A) however did not find merit in the appeal of the assessee and observed that the assessee failed to refute the allegations of the AO which was based on concrete information and scientific analysis of data obtained from the stock exchange. The CIT(A) accordingly refused any indulgence in the conclusion drawn by the AO. The relevant para of the appellate order of CIT(A) dealing with the merits of the case is reproduced hereunder: "5.3 After considering findings of the AO and submissions of the appellant, this ground is adjudicated as under. It is seen that the AO had information that the appellant in connivance with his broker Mangal Keshav Securities had indulged in Client Code Modification (CCM) to shift in losses and the same was set off against taxable income of the appellant. The AO had information that there were 33 transactions of the appellant in which CCM had been done. By doing CCM in these 33 transa....
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....the modified client , the counterparties were common. This cannot be a sheer coincidence. If the client code modification is done to rectify a genuine error, the corresponding client code could be any. But here, there is a set of client codes with which the modifications are done to the transactions of the appellant. Further, the AO has carried out the Levenshtein Distance Analysis or digit edit analysis which helps to know the minimum number of edits required to change one code to another. This analysis indicates whether the code is wrongly typed or is completely replaced. In the case of the appellant, for 33 CCMs on average 1 edit happened for each CCM. This establishes that CCMs were not carried out to rectify any genuine error rather to completely replace one client code with other. Further, based on survey u/s 133A of the Act in the case of the broker Mangal Keshav Securities, it was found that the broker had indulged in large scale CCMs to facilitate losses and profits as pr requirements of its clients. The AO had information that Keshav Mangal had carried out very high number of CCMs on the NSE F & 0 segment as follows:- F.Y. Total CCM 200....
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....der to evade tax on stock exchange transactions. The appellant is one of several of such beneficiaries who in connivance with their brokers have benefitted from CCMs. Ratio of decisions relied on by the appellant is not applicable to the present case as these are distinguished on facts. Further, the SEBI Circular relied on by the appellant is not applicable since 19.08.2016 and here the period is F.Y.10-11. In view of discussion above, it is held that the AO was justified in making addition of Rs. 1,16,078/- Accordingly, addition of Rs. 1,16,078/- is upheld. This ground of appeal is rejected. 7. In the result, the appeal is dismissed." 7. Further aggrieved by the denial of relief claimed before the CIT(A), the assessee preferred appeal before the Tribunal. 8. Before the Tribunal, the learned AR for the assessee raised two fold objections; (i) challenged the jurisdiction assumed under s.147 of the Act and (ii) claimed that the Revenue authorities have misdirected themselves on facts and law on the aspects of merits of the addition. We would quote the arguments advanced on behalf of the assessee while dealing with the respective points. 9. The learned DR fo....
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....lient as well as the modified trade in which the assessee was modified client. In respect of the modified trade transaction by using client code modification (CCM) it is pertinent to mention that Client Code Modification means modification / change of the client codes, after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. Every client is given a code which is registered with the stock exchanges. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. 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 fac....
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....anges and analyzed the data, The preliminary analysis of this data indicates towards the systemic shifting of huge crystallized losses using CCM. The results of the analysis indicate that the finding of SEBI that CCM was used for purpose "other than for rectifying the genuine errors" was nothing but a euphemism for Tax Evasion. In view of the above, this office has also analyzed the trade data in which CCM was resorted. On analysis of the trade data for the year under consideration, it is seen that in this case the assessee has shifted out total profit of Rs. 128678/- and shifted in the losses of Rs. 12600/-. Thus, by resorting the CCM, the assessee has reduced the taxable income to the tune of Rs. 116078/-. Further, in order to ascertain the total no. of edits in both type of modification i,e. when the assessee was original client (OCC) and when the assessee was modified client (MCC), analysis of the modified transaction has also been done with the help of levenstine table. The Levenshtein Distance Analysis or digit edit analysis helps us know the minimum number of edits required from changing one code to another. The Levenshtein Distance analysis establ....
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.... course, cannot be exercised on mere rumors or suspicions. If there is tangible material showing escapement of income, that would be sufficient to reopen the assessment. In our view, the AO was in possession of the relevant information and material germane to the allegation to enable him to hold prima facie belief towards escapement of income. The report of the investigation wing would constitute relevant material unless such report or information is absolutely vague or based on unspecific information. However, whether material available before AO would conclusively prove the escapement is not the concern at the stage of reopening. The information available with the AO in the instant case provides specific estimate of diversion of profits due to modifications and is thus reliable in character. Such specific nature of information is capable to grant cause or justification or a supposition that income has escaped assessment and consequently would confer jurisdiction on the AO to reopen assessment. 10.5 The reliance placed on the decision of the Hon'ble Bombay High Court in Coronation Agro Industries Ltd. (supra) on behalf of the assessee is misplaced. In that case, the reason did ....
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.... N0.709/A/18 DOH:03/12/19 Bench: 'B' Distance '1'. Profit switched out 153,133 2,350 - 12,900 Loss switched in 1,858 116,140 71,375 Profit switched in 12,600 11,040 - 153,133 Loss switched out 71,375 Sub-total (69,158) 6,832 (116,140) 68,858 Distance '2' Profit switched out 525 731,192 42,016 1,501,772 Loss switched in - 1,552,986 1,195,951 169,117 Profit switched in - 2,089,409 - 261,031 Loss switched out - 84,859 24,517 1,391,957 Sub-total (525) (109,910) (1,213,450) (17,901) Distance '3': Profit switched out 46,395 - 862,025 4,439,900 Loss switched in - - 20,976 Profit switched in - - 280,550 Loss switched out - - ....
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.... one client account to another. 'Distance 3' reflects three digit modifications to record the trade in purportedly correct client code. 'Distance 4' transaction occurred at Stock Exchange similarly reflects vast difference of four digits between one client code qua another. 12.2 It is the case of the assessee that inadvertent error in punching the client code can happen at the time of recording the trade order by the broker to be executed on the platform of the stock exchange. For instance, instead of putting the trade order under the client code BHA-1, it might possibly have been wrongly punched as BHB-1 or BHA-2 on the part of the broker. Such human errors are normal incidents of trade and are suitably rectified by the end of the day and Contracts notes are issued for the correct client code and settled as per the terms of the contract. It is further case of the assessee that most of the CCMs falling under 'Distance 1' category are among the relatives bearing similar clients codes. It was thus submitted that no adverse inference in respect of such modifications should be drawn more so in the light of express SEBI circular dated 19th August, 2016 where modifications of client c....
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....at losses have not been purchased in last few months of financial year (December 2010 to March 2011) but the losses have arisen in the very beginning of the financial year, benefit of doubt, if any, would surely lean towards the assessee in such facts. The AO is thus directed to delete the adjustment in the assessed income to the extent of amount attributable to trade transactions falling in 'Distance 2' category of CCM. 12.4 Similar is the explanation of the assessee in respect of losses arising due to CCM falling in 'Distance 3' category. The assessee (Amitkumar A. Shah HUF) has statedly switched out profit of Rs. 46,395/- falling in 'Distance 3' category. In this regard, it is the case of the assessee that the original client code was BHA-2 assigned to assessee 'Amitkumar A. Shah HUF'. The modified client code is BHB 51 assigned to one 'Bhautik R. Gnadhi HUF'. The transaction has happened in the beginning of the financial year i.e. on 29.04.2010. It is the case of the assessee that when seen from the point of view of mistake in original client code, the punching error is in last two digits i.e. A-2 in BHA-2 and therefore the mistake is only in two digits instead of three d....