TaxTMI 
TaxTMI 
2022 (1) TMI 339
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....he Act, the assessee filed the return of income on 02.09.2013 declaring the taxable income at Rs. 53,99,850/-. During the course of assessment proceedings, the AO observed that the assessee company is a member of Stock Exchanges and doing trading for the clients as well as in its own account. It is also a client with M/s Jaypee Capital Services Ltd., for trading in commodities. These companies are registered with NSE, MCX, and NCDEX. These are also registered with the United Stock Exchange. During the course of search and post search proceedings, the evidences of Client Code Modifications done by these companies in their own account as well as in the accounts of clients were found. The special auditors appointed u/s 142(2A) had observed that the assessee company has shifted loss amounting to Rs. 237,54,77,970/- which have occurred all through by itself on/or on behalf of the clients. The AO, therefore, confronted the same to the assessee and asked him to explain the following:- (i) Explain the reason and necessity of each client code modification and how the same are in conformity of guidelines of Stock Exchanges. (ii) To show cause as to why the amount of profit ....
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....at his profit may be reduced. Another person may have huge losses would like to take some profit, so that some capital is formed and same time he do not have to pay any taxes. This practice of providing profit and losses was very common in old days before advent of electronic exchanges. Even after introduction of online trade, the practice continues taking advantage of facility of CCM. The SEBI therefore continue to instructions with regard to regulating the CCM. At last now, the stock exchanges are required to inform Income Tax Department about the CCM done by each broker. (ii) The auditor in his report submitted that the assessee during the year under consideration shifted profit of Rs. 1,10,58,200/- and loss of Rs. 2,42,400/- from one client to another client. The assessee shifted profit/loss among its group companies also. The same is being considered in the case of group companies separately in their individual cases. Therefore, amount is being taken out of the volume of transactions for the purpose determining the commission/profit earned by the assessee. (iii) To the outside persons, the total shifting of profit in individual cases was Rs. 4,440/- in MCX an....
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....nts and the income likely to be received from such investment is exempt and interest and other expenses are claimed in the Profit & Loss Account. Rejecting the various explanations given by the assessee, the AO made disallowance of Rs. 1,77,82,267/- to the total income of the assessee. 5. During the course of assessment proceedings, the AO noted that the assessee company has granted advances in the nature of loan during the year to Shri Gaurav Arora and to another group company M/s Jaypee Capital Services Ltd. and M/s Arora Timber Ltd., in which Shri Gaurav Arora has a substantial interest. Therefore, invoking the provisions of section 2(22)(e) of the Act, the AO made addition of Rs. 19,34,21,760/- to the total income of the assessee. The AO further noted from the financial statements of the assessee that interest expenses amounting to Rs. 1,90,91,632/- was paid on borrowed funds. The special auditors had observed that the company has granted interest-free advances to shareholders, group companies and others, the purpose of which is not made available to them. Since the assessee company has not provided the nexus of funds borrowed and granted as loan, the special auditors had he....
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.... entry is given, on which commission income is determined by the A.O. @ 3.5C: of profit/loss shifted. (ii) It has been further analyzed by the A.O., that 20% of such CCM transactions, has been considered as genuine errors. However, the CCM, have been done in order to provide accommodation entries and therefore, it has been held that the assessee has earned commission @ 3.5% of Rs. 874,367/-, for providing such accommodation entries of Rs. 2,49,81,929/- (20% less than the sum of profit or loss shifted out of group). (iv) During appellate proceedings, appellant has submitted that the CCM, is modification change of client codes, after execution of trades. This facility is provided by the Stock Exchange/ Commodity Exchange, in order to rectify any error or wrong data entry done by the staff of appellant broker company, at the time of punching orders. Further, it is submitted that these CCM, is subjected to certain guidelines provided by the SEBI, with regard to the execution of entries, genuinely punched wrong and not as a routine. The observations of the Special Auditor regarding huge number of CCM transactions, are grossly incorrect, being misused to shift the profi....
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.... Therefore, it is submitted by the appellant that in their case, these errors are less than 1% of the total number of transactions entered into and the entries relating to CCM and have been accepted by both the parties. The A.O. has not brought any evidence to support the allegation apart from suspicion on the basis of SEBI guidelines. Hence, it is submitted by the appellant that there is no justification for drawing any adverse inference on this account, without bringing any specific anomaly with regard to genuineness of the transactions and no fine has been imposed by concerned authorities in respect of CCM. It is further submitted by the appellant that the A.O. himself has made this addition by doing a guess work, whereby he has accepted that 20% of such CCM transactions, are genuine errors a 80%, as non-genuine errors and therefore, the entire addition on this account, is not correct. Therefore, it is submitted by the appellant that, the suspicion, cannot be a basis for making any addition. (vi) It is further submitted by the appellant that the entries, which are being alleged, w profit/losses arising from the alleged transactions by the A.O., are all be....
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....ove, addition of Rs. 636,835/- on account of hotel and staff welfare expenses, is confirmed. Accordingly, ground no. 15, is hereby dismissed." 9. So far as the disallowance of Rs. 1,77,82,267/- by invoking the provisions of section 14A read with section 8D by the AO is concerned, the ld.CIT(A) deleted the same by observing as under:- "10.3 Findings: The findings are as under:- 10.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:- (i) As per A.O., during the year under consideration, though, no dividend income has been earned, but the assessee has made the investment amounting to Rs. 1,10,61,51,815/-. However the A.O. was of the view that the assessee has not shown any expenditure against the income which might have been arisen as a dividend income on such investment, which is a exempt income and accordingly, the A.O. invoked the provisions of section 14A and determined the disallowance u/r 8D at Rs. 1,77,82,267/. (ii) During the appellate proceedings, the appellant has stated that the investment in gr....
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....balance in case of Shri. Gaurav Arora is Rs. 11.15 crore. The assessee has not charged any interest on such alleged loan provided to him. (ii) During the appellate proceedings, it has been submitted by the appellant that chart showing the nexus between the borrowed funds used for business purposes and interest paid filed now, was also submitted during the assessment proceedings, vide which it can be clearly observed that borrowed funds are utilized for business only. From the perusal of submission filed during assessment proceedings, it can be observed that there are regular business transactions amongst the group persons / entities and the same are running throughout the year, which are attributed to the business of shares/futures/option of securities etc. In this background, the interest element on these funds cannot be disallowed, being part and parcel of business transactions. Further, the exercise of calculating peak balance on these accounts and then attributing interest expenses to the same, by the A.O. is incorrect. The assessee has filed detailed explanation before A.O. regarding money borrowed, on which interest has been paid and its utilization for business purp....
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....is hereby allowed." 11. So far as the addition of Rs. 19,34,21,760/- made by the AO on account of deemed dividend by invoking the provisions of section 2(22)(e) of the Act is concerned, the ld.CIT(A) deleted the same by observing as under:- "12.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:- The A.O. in the assessment order, has made an addition of Rs. 19,34,21,760/- 2(22)(e), for the -following reasons: (i) The companies namely M/s Jaypee Capital Services Pvt. Ltd.(JCPL), and M/s Futurz Next services (P) Ltd.(FNSL), are closely held companies. The assessee has substantial holding in JCPL. There are large number of transactions including payments by the JCPL to the assessee. Further, the group companies are also making the payments to each other regularly as per the ledger account submitted. (ii) The ledger account submitted by the appellant, consists of large number of transactions in respect of shares transactions done by assessee, as client of JCPL, which are not covered u/s 2(22)(e) of the act. However,....
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....the special auditor and A.O., did not take into consideration, the business transactions entered into by the appellant/concern with this company. This fact is evident from the amount of Rs. 19,34,21,760/-, computed by the A.O. in the case of JCPL on the basis of alleged re-casted copy of account, as against the actual copy of account maintained in the books of accounts of this company. (c) It has been further submitted that the even alleged account prepared by the special auditor (in case of JCPL), which has not been followed by the A.O. and has prepared another account. The A.O. has taken alleged loan amount by adopting lesser of the payment made by JCPL to the appellant/concerns and net balance available on a particular date. Therefore, it is, submitted that even the alleged account prepared by the A.O., does not reflect the correct nature of the account, as same is prepared without following any accounting principles and ignoring the nature of each transaction. It is argued that the A.O. cannot ignore the nature of business transactions entered into by the assessee/group concerns with JCPL, which are relating to share/currency/derivatives and therefore, it is wrong on p....
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....re it has been alleged by the A.O. that transactions of sale/purchase of share/currency/derivatives, are not genuine. In fact, these purchase and sale transactions, have not even doubted by the special auditor in the audit report as well as by the A.O. in assessment order. The special auditor and A.O. has re-casted the ledger account by not considering the business transaction of sale/purchase of share/currency/derivatives, which is not correct, since deemed dividend cannot be computed by way of pick and choose of few transactions, rather an account has to be considered in its entirety. The above view, is also supported by the ratio laid down in the decision by Jurisdictional High Court of Delhi in the case of CIT Vs. Creative Dyeing & Printing (P.) Ltd., [2009] 184 TAXMAN 483 (DELHI), as under: " 11. The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Raj Kumar's case (supra) deals with that part of the definition of deemed dividend under section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder by a company in the ordinary course of its business wh....
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....ely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. 10.5 If this purpose is kept in mind then, in our view, the word 'advance ' has to be read in conjunction with the word 'loan '. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 'advance ' may or may not include lending. The word 'advance' if not found in the company of or in conjunction with a word 'loan ' may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum to what meaning one would attribute to the term 'advance '. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The sa....
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.... delete disallowance u/s 36(i)(iii). (e) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete disallowance made u/s 14A. (f) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in arriving at the conclusion that the transaction in the client ledger account, are related to business activities. (g) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by holding that recasting of ledger account of assessee in the books of JCSL by the AO is not correct. (h) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by deleting the addition of Rs. 19,34,21,760/- made on account of deemed dividend u/s 2(22)(e) of the Act. (i) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding that all the transactions with JCPL are business transaction, thus, ignoring the fact that assessee company is a client of JCPL and it was obliged to pay only the profit earned by the assessee company. (j) That the....
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.....CIT(A) while deleting the addition has observed that the volume of Client Code Modification occurred, are within the permissible limit allowed by the SEBI and the Exchange/SEBI, has not found any violation of rules and regulations related to CCM, and the CCM transactions are falling within the prescribed limit of less than 1%. Referring to the decision of the Hon'ble Mumbai High Court in the case of Pr. Commissioner of lncomtax-13 Vs. Pat Commodity Services Pvt. Ltd.; the decision of the Ahmedabad Bench of the Tribunal in case of ACIT vs. Kunvarji Finance (P.) Ltd., [2015] 40 ITR (Trib) 64, order dated 19.03.2015; the decision of the Mumbai Bench of the Tribunal in the case of M/s. Sambhavnath Investment Vs. ACIT, vide ITA No.3109/Mum/2011, order dated 31st December 2013 and various other decisions, he submitted that identical issue has been decided in favour of the assessee. He further submitted that the coordinate Bench of the Tribunal in the case of sister concern of the company, namely, Jaypee Financial Services Ltd., for AY 2011-12 has decided the identical issue and has deleted the addition. Since the facts of the present case are identical to the facts of the case decided b....
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....cribed limit. It is the submission of the Ld. DR that it is not a genuine mistake and the transactions are not genuine. Further the CCM was done by the assessee through its sister concern M/s. Futurz Next Services Limited through which the profit of the assessee company was reduced by Rs. 1.90 crores. According to the Ld. DR the CCM is akin to penny stock. It is the submission of the Ld. Counsel for the assessee that the transactions entered into by the assessee are not found to be false or untrue and although SEBI is the regulator no action has been taken by SEBI holding that the transactions are not genuine. Further no adverse material has been found by the search party during the course of search and the revenue even have not gone to the broker who has done the CCM. It is also his argument that it is not known as to whom the account has shifted. 11. We find some force in the argument of the Ld. Counsel for the assessee. We find force in the argument of the Ld. Counsel for the assessee that client code modification is the internal matter of the broker and assessee has no control over it. The AO in the instant case has not spelt out as to on which scrips the assessee has ....
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....receiving information from the DIT (I & Cl), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect i.e. receipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has stated the complete details of the Modus Operandi of creation of fictitious profit and / or losses with a malafide intention of escaping taxes. However, the AO has neither proved nor lead any evidence in case of any single transaction, which he has added to the income of the assessee, being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee. 8. It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any assessee should compulsorily have the following ingredients i.e. i) A valid ....
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....lty. No co- relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours. According to us, such co-relation was necessary to fasten any liability upon the assessee. 12. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed." 13. We find the Ahmedabad Bench of the Tr....
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....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. in international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Page | 18 Members are requested to take note of the FMC directives and ensure strict compliance." From the above, it is evident that client code modification is permitted intra- day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is Rs. 500/-. If it is greater than 5% but less than 10%, penalty is Rs. 1000/- and if it is greater than 10%, then penalty is Rs. 10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs. 500/-. In the context of the....
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....de 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 code modification can be considered in the hands Of the assessee. 11. The Id. CIT(A) in paragraph 4.13 of his order has also recorded the findings that "all transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees." These findings of fact recorded by the Id. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed, there cannot be any basis or justification for considering ....
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....and while supporting the order of the CIT(A) submitted that the assessee is having business transactions with the clients and the transactions with these clients are only business transactions and no loan transaction has taken place. He submitted that the assessee during the impugned assessment year has incurred a sum of Rs. 1,90,91,632/- towards interest on borrowed funds out of which the AO has disallowed an amount of Rs. 95,45,816/- on estimate basis. He submitted that the assessee company has not granted any loan to Shri Gaurav Arora or Arora Timber Ltd. as alleged by the AO. All these transactions are business transactions and there are regular business transactions throughout the year wherein there are regular receipt and payment transactions accruing in the account. Further, all these transactions are attributed to the business of shares/future/auction of securities. 20.1 Referring to various decisions including the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT, [2007] 158 Taxman 74 (SC), and in the case of Hero Cycles (P.) Ltd. v. CIT, [2015] 63 taxmann.com 308 (SC), he submitted that the advances given to group companies are allowable ex....
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....ted the disallowance the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of the CIT(A) on this issue. We find, the ld.CIT(A) while deleting the addition has given a finding that the assessee is having business transaction with Shri Gaurav Arora and M/s Arora Timber Ltd., and no loan transaction has taken place. Further, the assessee is having sufficient own capital and free reserves which is more than the advances given to Shri Gaurav Arora and M/s Arora Timber Ltd. 21.1. We find, identical issue had come up before the Tribunal in the case of group concerns, namely, Jaypee Capital Serves Ltd. We find, the Tribunal vide ITA No.1384/Del/2017, order dated 17.01.2020, for AY 2013-14 while deciding the issue in favour of the assessee has observed as under:- "11. So far as addition of Rs. 24,15,000/- made by the AO and confirmed by the ld. CIT (A) u/s 36(1)(iii) is concerned on account of disallowance of interest is concerned, assessee company has come up with specific plea that it has not granted any loans to Futurz Next Services Pvt. Ltd. rather all are regular business transactions supported with regular ....
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....as not committed any error in following the above decision of the Hon'ble Delhi High Court. Accordingly, we uphold the same. The ground of appeal of the Revenue is dismissed." 23. In view of the above and in view of the detailed reasoning given by the ld.CIT(A) on this issue, we do not find any infirmity in the same. Accordingly, the order of the CIT(A) on this issue is upheld and the ground raised by the Revenue is dismissed. 24. Ground of appeal (e) relates to the order of the CIT(A) in deleting the addition of Rs. 1,77,82,267/- made by the AO u/s 14A r.w. Rule 8D. 25. The ld. DR submitted that the AO was justified in making the addition since it was showing substantial investments in shares of other companies and the assessee is required to incur expenses on acquiring the funds for investments. Therefore, the ld.CIT(A) was not justified in deleting the addition. 26. The ld. Counsel for the assessee, on the other hand, submitted that since the assessee has not received any dividend income during the year, therefore, in view of the decision of the Hon'ble Supreme Court and jurisdictional High Court, no addition u/s 14A r.w. Rule 8D is called for and, therefore, the....
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....sessee is in association with the said party is on account of business transaction and transacted by the assessee being a client and shareholder of the company. He submitted that similar addition on account of deemed dividend was made in the case of Shri Gaurav Arora which has been deleted by the Tribunal vide ITA No.2034 & 2035/Del/2016, order dated 17th December, 2018 for AY 2011-12. He submitted that facts being similar, the ld.CIT(A) is fully justified in deleting the addition. He also relied on the following decisions:- i) CIT vs. Raj Kumar (2009) 318 ITR 462 (Del); ii) CIT v, Sunil Sethi in ITA No. 569/2009 dated 03.02.2010 (Delhi HC); iii) CIT v. Creative Dyeing & Printing Pvt. Ltd. [2009] 318 ITR 476 (Del); iv) CIT v. Arvind Kumar Jain in ITA No. 589 of 2011 dated 30.09.2011 (Delhi HC); v) Krishan Murari Lal Agarwal v. DCIT [2013] 59 SOT 136 (ITAT, Agra Bench) 28.3 He also relied on the CBDT Circular No.19/2017 dated 12.06.2017 whereby it has been clarified that the advances which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' u/s 2(22)(e) of the Act. He accordingly submitted....