2019 (2) TMI 1683 - AT - Income Tax

Bogus loss from client code modification (CCM) and stage- managing - HELD THAT - As decided in M/S RATNABALI COMMODIT IES PVT. LTD. VERSUS INCOME TAX OFFICER, WARD-12 (3) , KOLKATA 2017 (6) TMI 1211 - ITAT KOLKATA in order to find out whether the transaction is genuine or ingenuine, it is neither the expedience or correctness of the decision nor the business expertise of the person to be considered. It is to be considered on the basis of the materials that there was no such transaction and that these share transactions were paper transactions. The suffering of loss could not be a factor for such purpose. Having regard to the facts and circumstances of the case, the view taken by the Tribunal allowing share loss cannot be said to be erroneous or perverse. CasesCIT vs. Emerald Commercial Ltd. Anr. 2001 (3) TMI 67 - CALCUTTA HIGH COURT , CIT vs. Dhawan Investment Trading Co. Ltd. 1998 (3) TMI 76 - CALCUTTA HIGH COURT and CIT vs. Currency Investment Co. Ltd. 1999 (6) TMI 12 - CALCUTTA HIGH COURT relied on. Respectfully following the same, we hold that the impugned loss claimed by assessee is genuine loss in the above facts and circumstances of the case and therefore eligible for deduction. Accordingly, AO is directed. This ground of assessee's appeal is allowed. As we put up a specific query to the department as to whether assessee s broker carried out the relevant client code modification as per prescribed rules or not. There is no such violation pointed out during the course of hearing before me. Therefore, adopt the above detailed discussion mutatis mutandis to delete the impugned addition - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of the assessment.
2. Validity of the reassessment proceedings.
3. Legitimacy of the loss claimed by the assessee due to Client Code Modification (CCM).

Issue-wise Detailed Analysis:

1. Reopening of the Assessment:
The CIT(A) examined the reopening of the case and found that the Assessing Officer (AO) had recorded valid reasons for reopening the assessment for the year 2009-10. The AO had based the reopening on information received from the Investigation Wing at Mumbai, which indicated that the assessee had availed of entries of bogus losses amounting to ?11,41,737 by indulging in Client Code Modification (CCM) and stage-managing a contrived loss.

2. Validity of the Reassessment Proceedings:
The CIT(A) upheld the validity of the reassessment proceedings, stating that the AO had followed all the necessary procedures and legal requirements. The CIT(A) referenced several judicial precedents to support the principle that the AO must have a "reason to believe" that income had escaped assessment, which is broader than mere "satisfaction." The CIT(A) found that the AO had a proximate and live link with the formation of belief, and the information received from the Investigation Wing was sufficient to reopen the assessment. The CIT(A) dismissed the appellant's arguments that the AO had not acted in "belief" but on mere "satisfaction" and that the reassessment proceedings were void ab initio.

3. Legitimacy of the Loss Claimed by the Assessee Due to Client Code Modification (CCM):
The CIT(A) found that the assessee had indulged in shifting profit and loss of share business through CCM. The AO had recorded specifics of the transactions and noted that the assessee failed to provide proper evidence to sustain its claim, such as books of accounts or objections raised with the broker. The CIT(A) observed that the appellant did not bring anything on record to prove the rationale for CCM and that the modifications were on an acceptable level. The CIT(A) referred to a SEBI Circular which mandates strict vigilance on client code modifications, allowing genuine mistakes to be rectified. The CIT(A) concluded that the modifications were not genuine and upheld the AO's action of adding back the amount of ?11,41,737.

Separate Judgment:
The ITAT Kolkata referred to a similar case (M/s. Ratnabali Commodities Pvt. Ltd Vs. ITO) where the addition made by the AO for bogus loss due to CCM was deleted. The ITAT found that the client code modifications were carried out within the time permitted by the NSE and that the transactions were supported by contract notes, payment of STT, and banking channels. The ITAT concluded that the AO's addition was based on surmise and conjecture, which is not permissible in law. The ITAT adopted the same reasoning to delete the impugned addition of ?11,41,737 in the present case, rendering the assessee's legal ground challenging the reopening as infructuous.

Conclusion:
The appeal was partly allowed, with the ITAT deleting the addition of ?11,41,737 made by the AO. The reassessment proceedings were upheld as valid, but the legitimacy of the loss claimed due to CCM was recognized, leading to the deletion of the addition.