2013 (9) TMI 1060 - AT - Income Tax

CIT order u/s 250 - not allowing the loss incurred to be set-off against other income by AO - Held that - The investigation initiated by the AO is not taken to the logical end. In our view, the AO prematurely shifted the onus to the assessee. At the same time, the assessee also relied on the human probabilities without doing his part by obtaining the information about the correctness of the address of Aadya Trading and Investment Pvt. Ltd if any. Regarding Client Code Modification ( CCM ) related allegations of the AO, we find that the NSE has a definite policy in this regard. We find the AO made enquiries with the NSE, who replied to the AO vide the letter dated 3.11.2010. The same is extracted at para 4.1 of the Assessment order. On perusal of the same, we find that the language used in the letter varies with the one used and narrated in the actual policy adopted by the NSE on this CCM. The fact that loss is transferred to Client No 31 is to the benefit of the assessee, there is some amount of responsibility on his part to do in the interest of the justice. Assessee being the beneficiary of the impugned loss and the claimer of the deduction by way of set off against the other income, or the Broker, who is party to such generation of loss, needs to demonstrate on what basis the client Codes No.SJ17 and M032 are similar to that of the assessee. Are the names are similar? Are these three clients are part of the assessee s family? How the SJ17 or MO32 are akin to MO 31? These are the logical questions which are required to be answered by the claimer of the deduction or generator of the impugned losses. Therefore, basis facts relating to peculiar issues enlisted above, are essentially required for meaningful adjudication of the ground raised before us. Thus, in the interest of the justice, we set aside the order of the CIT(A) and restore the issue to the files of the AO for fresh adjudication after completing the enquiries initiated in the regular assessment proceedings. AO shall grant reasonable opportunity of being heard to the assessee. Accordingly, the solitary ground raised by the assessee is set aside.

Issues Involved:
1. Genuineness of business losses claimed by the assessee.
2. Onus of proof regarding the genuineness of transactions.
3. Client Code Modification and its implications.
4. Human probabilities and the plausibility of transactions.

Detailed Analysis:

1. Genuineness of Business Losses Claimed by the Assessee:

The core issue revolves around the genuineness of the business losses claimed by the assessee, amounting to Rs. 56,85,860/-. The assessee, engaged in trading shares and derivatives, reported significant business losses from derivatives transactions, which were set off against other income. The Assessing Officer (AO) alleged that these losses were generated with the aim of reducing tax liability and were not genuine. The AO's investigation revealed that the transactions were executed through a Delhi-based broker, Aadya Trading & Investment Pvt. Ltd., and involved client code modifications, raising suspicions about the authenticity of the losses.

2. Onus of Proof Regarding the Genuineness of Transactions:

The AO issued notices to the National Stock Exchange (NSE) to verify the details of the transactions and client code modifications. The NSE provided the requisite details, which indicated that the transactions initially belonged to other clients (SJ17 and M032) and were later transferred to the assessee's account (CM031). The AO concluded that the transactions were a colorable device designed to evade tax, relying on the Supreme Court judgment in McDowell & Co. Ltd. v. CTO. The assessee, however, claimed that the losses were genuine and that the broker should explain the client code modifications. The CIT(A) upheld the AO's decision, emphasizing that the assessee failed to prove the genuineness of the losses and that the transactions were a colorable device.

3. Client Code Modification and Its Implications:

The client code modifications were a significant point of contention. The AO found that the transactions were initially recorded under different client codes and later transferred to the assessee's account. The assessee argued that these modifications were due to human error and that the broker should be responsible for explaining them. The CIT(A) and AO, however, were not convinced and held that the modifications were part of a scheme to generate fictitious losses. The Tribunal noted that the NSE allows client code modifications under specific circumstances, such as similarity of names or family codes, and emphasized the need for further investigation to determine the genuineness of the transactions and the clients involved.

4. Human Probabilities and the Plausibility of Transactions:

The CIT(A) applied the test of human probabilities, citing Supreme Court judgments in Durga Prasad More and Sumati Dayal, to conclude that the transactions were not genuine. The Tribunal acknowledged that the AO's conclusions were based on suspicion and surmises without conclusive evidence. The Tribunal emphasized the need for a thorough investigation to uncover the truth and determine whether the transactions were indeed a colorable device. The Tribunal directed the AO to complete the enquiries initiated during the assessment proceedings, including obtaining details from the broker and verifying the genuineness of the clients and transactions involved.

Conclusion:

The Tribunal set aside the order of the CIT(A) and remanded the case to the AO for fresh adjudication after completing the necessary enquiries. The Tribunal highlighted the importance of bringing more basic facts to the record and ensuring a thorough investigation to determine the genuineness of the transactions and the business losses claimed by the assessee. The appeal was allowed for statistical purposes, with the AO directed to grant reasonable opportunity to the assessee during the remand proceedings.

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