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TaxTMI 
TaxTMI 
TaxTMI 
2024 (1) TMI 1073
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....t u/s 148 of the Act as valid though notice u/s 148 was issued 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....
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....to evade taxes. 4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used 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, a....
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.... Act, the ld. AO issued notice u/s 148 of the Act on 31.3.2016 which is beyond the period of 4 years from the end of the relevant assessment year. The assessee filed a letter dated 28.11.2016 stating that 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 ret....
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....AACV0437F, AY-2009-10 Dear Sir This is in reference to your letter dated 28.11.2016 are humbly submitting the following details and information point wise: 1. Point no.-1 Contract Notes of all transaction attached 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 th....
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....tax notice of M/s Vayoo Nandan Finance Company Private Limited has been subsequently rectified while replacing the correct client code of Vayoo Nandan Finance Company Private Limited in place of client code of other parties wrongly mentioned by our staff members." 7. I find that the issue in dispute is squarely covered by the decision of the Coordinate 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....
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....sing Officer is without any tangible material to support that such client code modification has been done for evasion of the tax. Further, he submitted that the Learned Assessing Officer is not justified in making the belief that profit or loss shifted to other persons by way of client code modification by the broker has resulted into any income to the assessee, which could be assessed 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....
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....n the said judgment as under: "4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and/or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there 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 info....
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....om Investigation Wing he has reason to believe that income of the assessee has escaped which has not been conformed to the assessee company, in the course of assessment proceedings, though in view of the judgment of Hon'ble Delhi High Court in the case of Sabh Infrastructure Ltd. Vs. ACIT reported in 398 ITR 198 the same was to be confronted alongwith reasons wherein it has been held as under: "(iii) where the reasons make a reference to another document, whether as a letter or report, such document and / 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 ....
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....ot be sustained. We, therefore, set aside the impugned order of reassessment passed u/s 147 of the Act and allow this ground of appeal of the assessee." 5.3 In the instant case, though the Assessing Officer has reproduced the reasons recorded, for ready reference same are reproduced here as under: "1. The assessee is a company filed its return of income on 27.09.2010 declaring Rs. 5,06,454/- income. The details of the directors of the assessee company obtained from recants are hereunder:- (a) Alul Sethi (b) Gautam Jagga The return has been verified A digitally signed 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 ....
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....cation u/s 131 (IA) of the Act was conducted in the cases of few brokers. The brokers admitted misuse of Client code modification & receipt of commission of 0.5 to 2%. In addition, following patterns were observed in the I&CI report: i. Number and percentage of modified trades traded value is significantly higher in the total number of trades/traded value of particular client indulging into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-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 ....
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....e Indian markets were seeing diem code modifications to the tune of Rs. 50,000 Rs. 60,000 crore a month, which came down to just about Rs. 100 crore soon after SEBI action. Quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing 'genuine errors' In April 2012, SEB1 passed an order against NSE for being "negligent in discharge of its duties" in a case of modification of client codes. 9. The report of Ahmedabad Investigation Wing has been compiled after taking into 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 d....
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....gation Wing and were duty considered. In case the submission had merits, these were duly honoured. The final set of beneficiaries as compiled contained only such beneficiaries for whom no tenable contention remains standing. To counter the contention of Brokers that the Department has not taken into account the open positions shifted from one client to another as a result of CCM as the shifting of one leg of trade (i.e. buy or sell open position) from one client to another only CCM wherein equal number of buy and sell trades between two clients have been shifted have been taken for computation of the losses profits shifted due to CCM. To be more specific and in simple terms, modifications which appear to be genuine or resemble at being germane were ignored and not considered in this report. Such benefit 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 transacti....
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....person is original client and losses are shifted in when the client is modified client. This trend show that the CCM has been carried out for nongenuine purposes in the case of assessees. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for a purpose other than genuine punching errors. 13. It should also be kept in mind that Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not he accepted as evidence in a court of law. In clandestine transactions, like that of CCM, it is impossible to have direct evidence or demonstrative proof of every move, the AO has no choice but to take recourse to preponderance of evidence available. 14. A careful scrutiny of information received from the investigation 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....
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....hed the reassessment proceeding, we are not adjudicating other ground of the appeal challenging validity of the reassessment as well as on the merit of the additions." 9. In view of the aforesaid observations and respectfully following the judicial precedent relied upon by the assessee hereinabove, we have no hesitation in the reassessment proceedings as they are not sustainable in the eyes of law. Since, reopening is quashed on technical ground there is no need to adjudicate the grounds raised by the assessee on merits and they are left open. The grounds raised by the assessee are allowed. 10. ) In the result, appeal of the assessee is allowed." 8. Further I find that the similar issue had also been addressed by the Hon'ble Bombay High Court in the case of Coronation Agro Industries Ltd vs DCIT reported in 390 ITR 464 (Bom) wherein it was held as under:- "4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which ma....