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2017 (3) TMI 1729 - AT - Income TaxValidity of notice issued u/s 148 - reasons to believe - Held that - No plausible reason from ld. AR of the assessee that the Department has wrongly invoked the provisions of Section 148 of the Act on the assessee without disposing off the objections. It is noted that the after recording the reasons, the notice u/s 148 was issued on 26-03-2015 and copy of the reasons for reopening of the case was provided to the assessee on 15-04-2015 by the Department. In such a situation, no force in the arguments of the assessee and thus Ground No. 1 of the assessee is dismissed. Suppression of income - assessee was indulged in transferring fictitious profits/loss to the other clients/ beneficiaries by misusing the client code modification facility to the F&O segment and thereby created a loss - Held that - Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable . It is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that the assessee s client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code.It may be noted that in the case of ACIT vs. Kunvarji Finance (P) Ltd. 2015 (4) TMI 539 - ITAT AHMEDABAD had observed that the client code modification is permitted intra day i.e. on the same day. - Decided in favour of assessee.
Issues Involved:
1. Validity of notice issued under Section 148. 2. Confirmation of the addition of ?27,63,104 by the AO, alleging the assessee's involvement in transferring fictitious profits/losses through client code modification. Issue-wise Detailed Analysis: 1. Validity of Notice Issued Under Section 148: The assessee challenged the validity of the notice issued under Section 148 of the Income Tax Act. The notice was issued based on information from the Directorate of Income Tax (Intelligence & Criminal Investigation), which indicated that a loss of ?27,63,104 was created due to modifications in the F&O segment transactions. The notice was issued on 26-03-2015 after recording the reasons, and the reasons were provided to the assessee on 15-04-2015. The assessee raised objections to the initiation of proceedings, which were disposed of by the Department on 28-08-2015. The CIT(A) upheld the validity of the notice, and the Tribunal found no plausible reason to challenge this decision. Therefore, the Tribunal dismissed Ground No. 1 of the assessee. 2. Confirmation of Addition of ?27,63,104: 2.1 Facts and Findings: The assessee, a partnership firm engaged in trading shares, was found to have used the client code modification facility in the F&O segment on the NSE. The AO alleged that the assessee transferred fictitious profits/losses to its clients, creating a loss of ?27,63,104. The assessee claimed that the modifications were due to genuine mistakes by its staff or brokers and were rectified within the allowed time. 2.2 Arguments by the Assessee: The assessee argued that the modifications were legitimate corrections of errors made by brokers. They provided evidence that the client code modifications were a small percentage (0.18%) of the total trades and were within the guidelines of the stock exchange. The assessee also cited a decision by the ITAT Ahmedabad Bench in ACIT vs. Kunvarji Finance Pvt. Ltd., which held that client code modifications within 1% of total orders were permissible and not unusually high or mala fide. 2.3 Tribunal's Decision: The Tribunal considered the regularity and volume of the modifications (2380 times involving 55 clients over 197 days) and found the assessee's claim of inadvertent mistakes unconvincing. The Tribunal referenced the Supreme Court's judgment in McDowell & Co. Ltd., emphasizing that tax avoidance through artifice or device is not permissible. The Tribunal concluded that the assessee used the client code modification facility to book losses and transfer transactions to clients, thereby compromising real income. The AO's addition of ?27,63,104 was justified, and the Tribunal upheld this addition. 2.4 Conclusion: However, the Tribunal also noted that the client code modifications were within permissible limits and followed the decision of the ITAT Ahmedabad Bench, which allowed similar modifications. Therefore, the Tribunal allowed Ground No. 2 and 2.1 of the assessee, reversing the addition made by the AO. Final Judgment: The appeal of the assessee was partly allowed, dismissing the challenge to the validity of the notice under Section 148 but allowing the grounds related to the addition of ?27,63,104. The order was pronounced in the open court on 23/03/2017.
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