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2015 (8) TMI 973 - AT - Income TaxAddition relating to shifting of profits made - trading activity at MCX - CIT(A) deleted addition - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee? - Held that - A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee. As noticed by the Ld CIT(A), the MCX, the stock exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable. None of the clients was shown as related to the assessee herein. Normally the question of shifting of profit would arise between the related parties only. If the assessee had really shifted the profits to an outsider, then the human probabilities would suggest that the assessee would have received back corresponding amount from the recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view. CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% of the total transactions only and in our view, the said volume, in fact, vindicates the explanation of the assessee. Further none of the clients has been found to be bogus and all of them have complied with KYC norms, meaning thereby the identity of all the clients stand proved. None of them has disowned the transactions and all of them have also declared the income in their respective returns of income. All these factors, in our view, support the contentions of the assessee. CIT(A) was justified in deleting the additions made in both the years under consideration. - Decided in favour of assessee.
Issues Involved:
1. Legality and implications of client code modifications. 2. Validity of the appraisal report used by the AO. 3. Alleged shifting of profits to clients and tax implications. 4. Non-collection of margin money. 5. Proportionate profit ratio between own turnover and client turnover. 6. Applicability of Supreme Court decisions on tax evasion. Detailed Analysis: 1. Legality and Implications of Client Code Modifications: The assessee, a member of MCX and NCDEX, was found to have indulged in client code modifications, where trades initially executed under its own code were later shifted to clients' codes. The AO viewed this as a method to shift profits and reduce tax liability. However, the assessee argued that such modifications were necessary for quick execution of orders and were a common practice in the trade. The MCX Circular dated 9th November 2006, acknowledged that client code modifications were inevitable and imposed penalties only if such modifications exceeded 1% of total orders. The CIT(A) noted that the assessee's modifications were around 3%, which was within acceptable limits and not illegal. 2. Validity of the Appraisal Report Used by the AO: The CIT(A) held that the AO's reliance on the appraisal report from the Investigation Wing without independent application of mind weakened the case. Citing the Supreme Court decision in CIT V/s Greenfield Corporation (2009) 314 ITR 81, the CIT(A) emphasized that the AO must independently evaluate the issues rather than solely depend on the appraisal report. 3. Alleged Shifting of Profits to Clients and Tax Implications: The AO alleged that the assessee shifted profits to clients to reduce tax burden, citing the Supreme Court decision in McDowell and Co. Ltd (1985) 154 ITR 148. However, the CIT(A) found no evidence supporting this allegation. The clients had complied with KYC norms, disclosed their PAN numbers, and reported the profits in their tax returns. The CIT(A) observed that none of the clients disowned the transactions, and many had paid taxes on the profits. Additionally, the CIT(A) noted that the AO failed to establish any receipt of equivalent cash or money's worth by the assessee, which is crucial to prove profit shifting. 4. Non-collection of Margin Money: The AO criticized the assessee for not collecting margin money. The CIT(A) clarified that margin money collection depends on the understanding between the broker and the clients. The regulatory body should address any defaults in this regard, not the AO. 5. Proportionate Profit Ratio Between Own Turnover and Client Turnover: The AO observed a disproportionate profit ratio between the assessee's own turnover and client turnover. The CIT(A) dismissed this comparison as unwarranted and not a valid basis for making additions. 6. Applicability of Supreme Court Decisions on Tax Evasion: The AO relied on Supreme Court decisions in McDowell and Co. Ltd (1985), Associated Rubber Industries Ltd (1986) 157 ITR 77 (SC), and CIT V/s Durga Prasad More 82 ITR 540 (SC) to support the allegations of tax evasion. The CIT(A) found these decisions inapplicable as there was no evidence of tax evasion or profit shifting to related parties. Conclusion: The CIT(A) concluded that the assessee justified the client code modifications, which were within acceptable limits and not illegal. The clients were genuine, KYC compliant, and had reported the profits in their tax returns. The AO's reliance on the appraisal report without independent verification, and the lack of evidence for profit shifting or tax evasion, led to the deletion of the additions. The ITAT upheld the CIT(A)'s order, dismissing the Revenue's appeals and confirming that the additions were based on suspicion and surmises without proper evidence. Final Order: Both appeals filed by the Revenue were dismissed. The ITAT upheld the CIT(A)'s decision, emphasizing the need for independent evaluation and substantial evidence to support allegations of profit shifting and tax evasion.
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