TaxTMI 
TaxTMI 
TaxTMI 
2022 (1) TMI 339
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.... 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 belonging to you shifted through CCM to other concerns/person should not be added in your income and the....
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.... 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 and NCDEX. The amount of total loss shifted to outside persons in MCX and NCDEX was Rs. 3,12,22,972/-. It has been discussed above that the assessee could not expla....
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....nations 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 held that interest expenditure aggregating to Rs. 1,90,91,632/- attributable to such borrowings could not be allowed as business expenditure u/s 36(1)(iii) of the IT Act. On bei....
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....dered 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 profit / loss from one client to another. However, in appellate proceedings, it has been submitted CCM transactions, have been recorded less than 1%, and no penal action has been taken by the exchange in this regard, me....
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....he 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 being assessed to tax and profit/losses, are included in total income declared in each of such case, which has been charged 1 Therefore, it is submitted that, there cannot be any allegation of intention to avoid taxes by shifting profit to loss by manipulating entries. From the above, following facts emerge:- > The volume of CC....
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....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 group company JCSL, was strategic investment and not made for earning the dividend income. The dividend income on this investment was NIL and therefore, the A.O. was wrong in invoking provision of section 14A. The appellant has also relied upon the hon'able Delhi High Court decision in the case of CIT vs. Holcim India P. Ltd. ITA no. 486/2014 and ITA no. 299/2014 dated 05.9.2014. The ratio laid down by this decision is tha....
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....l 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 purposes. The A.O. has not pointed out any inaccuracy in the submission filed by the assessee. The assessee having utilized the borrowed funds for business purposes and therefore, it is submitted that no amount can be disallowed u/s 36(l)(iii) of the Act. (iii) In alternate, assessee has also submitted that in light of the judgment of Hon'ble Supreme Court in the case of M/s S.A. Builders Ltd. vs. CIT (A) 2007 (158) Taxmann 74 SC and M/s Hero Cycles Pvt. Ltd. Vs. CIT 2015 (63 Taxmann.com 3....
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....asons: (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, where there are cheque payments, the same has to be considered as loan/advance for the purpose of section 2(22)(e) of the Act. It is further held by the A.O. that the JCPL, have granted advances in the nature of loan to the assessee The payment received from the JCPL by assessee is to be treated as deemed dividend in the hands of the assessee. The objections/arguments submitted by the appellant during the appellate proceedings are discussed as under:- (i) The JCPL, is share/currency/derivatives brokers, with whom the appellant and the group concerns maintain clien....
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....opting 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 part of the A.O. to consider running account of business transactions as loans and advances, so as to consider the same as deemed dividend under section 2(22)(e)of the Act. (iii) It is further submitted by the appellant that the ledger account maintained in the books of accounts of JCPL, copy of which was submitted before the A.O. as well as in the appellate proceedings, shows that the same is a running account of purchase/sale. The cheque payments & receipts are relating to transactions of share/currency/derivatives and there is no loan/advance transactions. From the above, following facts emerge: (a) The transactions....
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....urisdictional 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 where the lending of money is a substantial part of the business of the company [section 2(22)(e)( ii)J i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports (P.) Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would therefore be covered by section 2(22)(e)( ii) and consequently payments even for business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e....
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....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 said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing 'it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them'and our Supreme Court in the case of Rohit Pulp & Paper Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610." (p.165) 12. Therefore, we hold that the Tribunal was correct in holding that the amounts advance for business transaction between the parties, namely, the assessee-company and M/s Pee Empro Exports (P.) Ltd. was not such to fall within the definition of d....
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....,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 order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law. (k) That the grounds of appeal are without prejudice to each other. (1) That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal." 13. Grounds of appeal No. (a) to (c) by the Revenue relate to the order of the CIT(A) in deleting the addition of Rs. 8,74,367/- made by the AO on account of Client Code Modification. 14. The ld. DR heavily relied on the order of the AO. He submitted that the AO, on the basis of report of the special auditors had made the addition on the ground that the assessee shifted its profit to other clients or shifted loss to itself from other clients during the year under consideration and the ld.CIT(....
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....ted 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 by the Tribunal, therefore, the order of the ld.CIT(A) being in consonance with the law should be upheld and the grounds raised by the Revenue should be dismissed. 16. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs. 8,74,367/- on account of Client Code Modification on the ground that the assessee has shifted its profit to other clients or shifted loss to its sister concerns as alleged by the Special Auditors appointed by the Department. We find, the ld.CIT(A) deleted the addition on the ground that the volume of Client Code Modification occurred are within the permissible limit allowed ....
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.... 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 shifted the profit. We find the AO nowhere in the assessment order has mentioned of any statement of broker of the assessee regarding the admission of any client code modification. We find in the instant case the addition has been made by the AO despite assertions by the assessee that it was not a registered broker on the stock exchange. There is also nothing on record to suggest that the CCM was done at the behest of the assessee. Further, there is no addition or adverse view taken in the case of the other person with whose accounts presumption is being made that transaction has been shifted. Admittedly there is nothing on record that the revenue has gone to the broker to find out as to who is the beneficiary of the CCM. Further the transactions have not been held to be non genuine. So far as the argument of the Ld. DR that ....
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....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 transaction must have been executed on the Stock Exchange. ii) The customer of the registered share broker should confirm & agree that the transaction entered into by the broker belongs to him. iii) The payment Ibr purchases and/or receipt of sale proceeds should have happened between the Bank Accounts of the broker & his customer. iv) The above transaction must have been accounted for in the hooks of account of the registered broker as well as his customer. v) The eventual profit/loss on the transactions executed on the Stock Exchange & exchange of monies having happened as well as getting accounted in the respective books of account would eventually result into taxable profit and/or loss in the hands of such customers of the registered broker. 9. Whereas, the AO in the present case has mechanically added amounts as income of assessee without....
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....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 Tribunal in the case of ACIT Vs. Kunvarji Finance (P) Ltd. reported in 401 ITR (T) 64 has held as under :- 8. We have carefully considered the 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 lett....
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....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 circular issued by Commodity Exchange, let us examine whether the client code modification 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 Asses....
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....ccounted 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 those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. 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. 14. The various other decisions relied on by the Ld. Counsel for the assessee also supports his case that no addition can be made by the AO where CCM is done by the broker. 15. Since in the instant case it is an admitted fact that the assessee is not a member of any exchange and cannot execute CCM and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any action treating the transactions to be non genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI, therefore,....
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....d 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 expenses u/s 36(1)(iii) of the Act. Since, in the instant case, these are business transactions, therefore, no disallowance u/s 36(1)(iii) is called for. Further, the Tribunal in the case of group concern, namely, M/s Jaypee Capital Service Ltd. for the AY 2013-14 in ITA No.1384/Del/2017, order dated 17.01.2020 has deleted such disallowance. He submitted that in the case of Gaurav Arora also the Tribunal vide order dated 17.12.2018 in ITA No. ITA Nos.2034, 2035/Del/2016 for the AY 11-12 has held that the transactions of Gaurav Arora with the assessee and other group concern are in the nature of commercial transaction. 20.2 In his another plank of argument, the ld. Counsel submitted that the assessee has sufficient own funds as well as interest free funds which have been used to make these business advances which is evident from the balance sheet, copy of which is placed at page 7 of the paper book. He submitted that the paidup share capital of the company is Rs. 1 crore and the reserves from surplus of the company is Rs. 48,89,70,877/....
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....a that it has not granted any loans to Futurz Next Services Pvt. Ltd. rather all are regular business transactions supported with regular receipt and payment transactions occurring in the account. It is also contended by the ld. AR for the assessee that all the transactions are attributed to the business of shares/future/option of securities and drew our attention towards its financial ledger for the period 01.04.2012 to 31.03.2013, available at pages 64 to 68 of the paper book wherein business transactions with Futurz Next Services Pvt. Ltd. have been recorded. 12. It is also contended by the ld. AR for the assessee that advances to the group companies have been given out of its own paid up share capital and reserve & surplus of Rs. 3,24,81,89,677/- for commercial expediency to the group companies and relied upon the decision of S.A. Builders Ltd. vs. CIT (2007) 158 taxman 74 (SC). So, in view of the financials brought on record by the assessee company discussed in the preceding para, we are of the considered view that since transactions are pertaining of business of shares/future/option of securities & advances having been given on account of commercial expediency of the group ....
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....le Supreme Court and jurisdictional High Court, no addition u/s 14A r.w. Rule 8D is called for and, therefore, the order of the CIT(A) is fully justified. 27. We have heard the rival arguments made by both the sides and perused the orders of the authorities below. We have also considered the various decisions cited by the ld. Counsel for the assessee in the synopsis as well as in the case law compilation. It is an admitted fact that the assessee company has not earned any exempt income or dividend income during the year, a fact brought on record by the AO himself. It has been held by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 that in absence of any exempt income, disallowance under Section 14-A of the Act of any amount was not permissible. Similar view has been taken in the case of PCIT vs. McDonald's India Pvt. Ltd, vide ITA 725 of 2018. Further, the SLP filed by the Revenue on this issue has been dismissed by the Hon'ble Supreme Court in the case of PCIT Vs. Oil Industries Development Board, [2019] 103 taxmann.com 326 (SC). Since, in the instant case, the assessee has admittedly not received any dividend income during the year, therefor....
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.... the word 'advance' u/s 2(22)(e) of the Act. He accordingly submitted that the order of the CIT(A) being in consonance with law should be upheld and the ground raised by the Revenue on this issue be dismissed. 29. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs. 19,34,21,760/- u/s 2(22)(e) on the ground that the advances in the nature of 'loan and advance' has been received by the assessee from M/s Jaypee Capital Services Ltd. and the assessee company has more than 10% shareholding in Jaypee Capital Services Ltd. We find, the ld.CIT(A) deleted the addition made by the AO holding that the transactions in the client ledger account are transactions entered in the ordinary course of business and are relating to sale/purchase of shares/currency/derivatives only. The reasons for which the ld.CIT(A) had deleted the addition 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, ....