TaxTMI 
TaxTMI 
2024 (1) TMI 1073
X X X X Extracts X X X X
X X X X Extracts X X X X
....ued without fulfilling the conditions laid down under the said section. Thus the reopening is not valid and the assessment framed on the basis of invalid notice should be cancelled. 2. The CIT(A) erred in law and on facts in confirming the addition of Rs. 4,36,644/- by alleging that the assessee has shifted profit to another entities through client code modification undertaken by its broker in the transactions undertaken at recognised stock exchanges ignoring the submissions and evidences placed on record. Thus the addition so made should be deleted." 4. I have heard the rival submissions and perused the materials available on record. The return of income for the Asst Year 2009-10 was filed by the assessee on 25.8.2009 declaring total loss of Rs 73,315/- . The ld. AO observed that the assessee had derived income from business of financing activities and trading in shares and securities. The assessment of the assessee was sought to be reopened by the ld. AO on the ground that the assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. This fact got unearthed based on some information received from Assistant Director of Income Tax (Investigation), Ahm....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact tax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset. Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified. I have examined the ITR and the assessment record of the assessee in respect of FY 2008-09 relevant to A.Y. 2009-10 and the following facts are noted: a) The return of the assessee shows that during the year it has undertaken transactions in sale/purchase of shares, and its turnover could have included the transactions contrived by way of CCM. In the relevant period, the assessee has filed return of Income of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the return already filed on 25.9.2009 may be treated as a return in response to notice issued u/s 148 of the Act. The assessee sought for the reasons recorded for reopening the assessment and the same were duly supplied to the assessee. The assessee filed objections for the reasons recorded vide letter dated 14.12.2016. These objections were not disposed of by the speaking order by the ld.AO thereby violating the guidelines provided by the Hon'ble Supreme Court in the case of GKN Driveshafts Ltd reported in 259 ITR 19 (SC). The ld. AO issued notice u/s 143(2) of the Act on 28.11.2016 which was the same date of filing of return by the assessee in response to notice u/s 148 of the Act. I find that the ld. AO had initiated the re-assessment proceedings way back on 31.3.2016 itself and had been waiting for the assessee to file a return in response to notice u/s 148 of the Act by offering the alleged profit earned by the assessee due to CCM amounting to Rs 4,36,644/-. But since the return was filed vide letter dated 28.11.2016 disclosing Nil income, there was no need for any verification of the said return by the ld. AO. In our considered opinion, the ld. AO had already perused the or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ttached herewith in a compact disc (CD) as annexure-1 2. Point no.-2 Ledger account of M/s Vayoo Nandan Finance Company Private Limited-Annexure-2 3. Point no.---3 Account Details of M/s Vayoo Nandan Finance Company Private Limited Client Code-V28 DP ID- IN3O3108 DP CLIENT ID-10004815 4. Point No.4 M/s Vayoo Nandan Finance Company Private Limited is our regular client since 12th March 1996. Copy of client agreement form is enclosed as Annexure-3 5 Point no.-5 Complete details of Shares/Derivatives- Copy of contract notes attached as annexure-1 and copy ledger as annexure-2 6. Point no.-6 The transactions are under taken on NSE and BSE. 7. Point no.7,8 & 9 The details regarding client code modification error in punching/entering the client code came to our knowledge while reconciling the dient wise transactions as per the orders placed by them and on cross confirmation of the orders with them. The said data feeding mistake has been subsequently rectified by replacing the correct client code of Vayoo Nandan Finance Company Private in place of client code of other parties wrongly entered by our staff members at the time of order received on telephone from the client.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Bench of this Tribunal in the case of Globus Power Generation Ltd vs ACIT in ITA No. 6438/Del/2019 for Asst Year 2009-10 dated 3.5.2023. The relevant operative portion of the said order is reproduced below:- 8. We find that the assessee have been objecting right from the beginning that it is not aware as to how the figure of loss of Rs. 46,07,275/- of income escaping assessment mentioned in the reasons, was even arrived at. This is evident from the reply letter dated 26.12.2016 filed by the assessee before the Id AO wherein, the assessee had categorically denied that the broker had carried out any client code modification in its case to book artificial losses. The assessee had also stated that it is not even aware as to how the figure of Rs. 46,07,275/- regarding alleged artificial loss booked through CCM mentioned in the show cause notice was even arrived at nor is there any information T regarding the broker who is alleged to have carried out client code modification. The assessee submitted that it had no details of transaction of Rs. 46,07,275/- in its records. None of these contentions were even sought to be addressed by the lower authorities. 9. We find that the reasons ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssed under section 68 as cash credit. 5.1 He submitted that learned Assessing Officer acted only on the basis of suspicion and it could not be said that it was based on belief that income chargeable to tax had escaped assessment. He referred to page 5 of reasons recorded where the learned Assessing Officer noted that: "The assessee's code was modified 44 times in OCC to shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs. 4,420/-. The data clearly shows that the modification was not no grounds of feeding in erroneous data." He further submitted that finally while making the addition learned Assessing Officer at page 16 of order of Assessment, however, concluded that: "In view of above, the profit of Rs. 6,47,201/- claimed by the assessee in the above mentioned transactions is treated as a contrived profit artificially generated through the misuse of the CCM. The profit is, therefore, liable to be taxed and added to the total income of the assessee as unexplained investment u/s 68 r.w.s. 115BBE of the Income-tax Act, 1961." 5.2 The Ld. Counsel accordingly, submitted that reasons recorded are thus factually incorrect too, or the learned Assessing O....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment." 5.5.1 Further, the Tribunal in Radiance Stock Traders (P) Ltd. vs. ITO (supra), has held as under: "6.1 After perusing the aforesaid reasons recorded, I find that information" was received on 21.3.2016 from Asstt. Director of Income Tax (Investigation) Unit- 1(3), 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd / or relevant portions of such report should be enclosed alongwith the reasons." 6.3.1 Hence in the absence of such material, the allegation and assumptions are nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis. 4.8 In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction, hence, the reassessment is quashed." 5.5.2 Similarly, in the case of Kamal Kishoree Aggarwal vs. ACIT (supra), the Tribunal has observed as under: "7. I find that the reasons recorded for issuance of notice u/s 148 was as under: "REASONS FOR BELIEF THAT THE INCOME HAS ESCAPEDASSESSMENT IN THE CASE OF SHRI GOPAL GUPTA FORTHE ASSESSMENT YEAR 2009-10 As Survey Report in R/o client code modification (CCM) has been received from ADIT (Inv.) U-1(3) Ahmadabad disseminating of beneficiary clients who have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011- 12.... 8. We find that in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned by Shri Atul Sethi. 2. Thereafter, the return was processed under 143(1) of the IT Act. However, the case was not selected for scrutiny/or scrutinized us 143(3) of the Act. Subsequently, information through email was received on 11/03/2016 from Asstt. Director of Income Tax (Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted old profits using Client Code Modification. 3. It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client code is unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. Client Code Modification means modification/change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-103, dated February 6, 2003 SEBI mandated that the slack exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on-genuine iv. Both buy and sell log of different trades have been modified to most of the client. v. Number of trade client code modifications substantially increased during the closing months of the financial year. vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F & O segment. vii The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix. These brokers revised their computation for A.Y 2010-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted have accepted and withdrawn their claim of nun-genuine losses in F&O segment in A.Y-2010-11. They have revised their computation for A.Y.-2010-11 and paid taxes accordingly. The report of I&CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion. 6. An action was also undertaken ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to account the findings of SEBI, DG I&CI. Data available with department in form of Form no. 3BB and the information collected by way of surveys. The report points out that the essence of lax evasion through CCM is that if the Broker has punched in both Buy and Sell Orders for a given quantity of a given security then at the end id the trading session he has with him an ascertained loss/gain on this Buy Sell pair that he can shift during the CCM window. The analysis of the Investigation Wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders front a given Original Client Code (OCC) or to a given Modified Client Code (MCC) for a given Broker 10. The following steps were followed for analysis and computing the quantum of losses profits shifted due to the CCM: for computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit has already been given by the department. 12. I have gone through the report as well as the basic data of transaction in respect of my assessee which was supplied with the report. My findings on the issue arc as under: a) The return of the assessee shows that it is involved in sale purchase in stock exchanges and its gross turnover could have included the transactions contrived by way of CCM. b) The transactions which involved CCM in case of assessee are as under i) The assessee's code was modified 44 times in OCC to Shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs 4.420/ The data clearly shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: To shift out profits. The Assessee's OCC of FSTP have been modified to new codes in MCC as under. Replaced Code Number of Times q I 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44 (ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one transaction in which he got OCC of someone else modified to its Code to gather losses. The original codes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vestigation wing and subsequent analysis of report of investigation wing, data of transactions and verification at ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained losses & shift out profits of Rs. 6,47,201/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysts subsequent to the information, I have reason to believe that an amount at least of Rs. 6,47,201/-& commission @ 2%, amounting to Rs. 12,944/- (@2%) has escaped assessment in case the of M/s Stratagem Portfolio P Ltd for the A.Y. 2010-11 within the meaning of Section 147/148 of Income-tax Act, 1961." 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purch....