2016 (8) TMI 1488 - AT - Income Tax

Addition on account of suppressed income due to client code modifications - HELD THAT - Issue decided in favour of assessee as relying on in the case of Kunvarji Finance Pvt.Ltd 2015 (4) TMI 539 - ITAT AHMEDABAD transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus whatever profits have been generated or accounting of actual trade have been offered and brought to the charge of tax in the cases of concerned assessees. These findings of fact recorded by the ld. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts we do not find any justification to interfere with the order of the CIT(A) in this regard and the same is sustained - Decided against revenue.

Summary

Issues Involved:
1. Legitimacy of notice issued under Section 153C read with Section 153A of the Income Tax Act.
2. Addition on account of suppression of profit.
3. Assumption of misuse of Client Code Modification facility.
4. Non-consideration of important details and explanations provided by the assessee.
5. Initiation of penalty proceedings under Section 274 read with Section 271(1)(c) of the Income Tax Act.
6. Levy of interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legitimacy of Notice Issued under Section 153C read with Section 153A:
The Assessee initially filed its return for AY 2006-07 on 31/12/2006. Following a search and seizure action on the "Kunwarji Group," documents belonging to the assessee were found, leading to proceedings under Section 153C read with Section 153A. The Assessee, however, did not press this ground, and it was dismissed as not pressed.

2. Addition on Account of Suppression of Profit:
The AO determined that the Assessee had suppressed profits amounting to ?66,45,567/- through client code modifications facilitated by Kunwarji Commodity Brokers Pvt. Ltd. (KCBPL). The AO's calculations were based on the assumption that client code modifications were used to transfer profits and losses between clients. The CIT(A) upheld the AO's findings, stating that the modifications were not for genuine errors but had premeditated motives to suppress actual profits.

3. Assumption of Misuse of Client Code Modification Facility:
The AO and CIT(A) concluded that the client code modifications by KCBPL were unusually high and done with malafide intentions. However, the ITAT referred to a previous decision in the case of Kunvarji Finance Pvt. Ltd., where it was determined that client code modifications up to 1% of total transactions were normal and permissible as per MCX guidelines. The ITAT found no basis for the AO's assumption of malafide intentions, especially since modifications were allowed intra-day and were within permissible limits. Thus, the addition on account of suppression of profit was directed to be deleted.

4. Non-Consideration of Important Details and Explanations:
The Assessee argued that the AO did not consider communications and explanations provided by KCBPL and other relevant details during the assessment proceedings. The CIT(A) noted that the AO had indicated the lack of explanation from the Assessee regarding the profit earned through client code modifications. However, the ITAT found that all transactions were duly accounted for in the books of the concerned parties, and profits/losses were appropriately taxed, negating the AO's assumptions.

5. Initiation of Penalty Proceedings under Section 274 read with Section 271(1)(c):
The AO initiated penalty proceedings under Section 274 read with Section 271(1)(c) for alleged concealment of income. However, given the ITAT's decision to delete the addition on account of suppressed profits, the basis for penalty proceedings was effectively nullified.

6. Levy of Interest under Sections 234A, 234B, 234C, and 234D:
The AO levied interest under Sections 234A, 234B, 234C, and 234D of the Income Tax Act. With the ITAT's decision to delete the addition, the consequential levy of interest would also be impacted, as the primary addition itself was not sustained.

Conclusion:
The ITAT allowed the appeal of the Assessee, directing the deletion of the addition made by the AO on account of suppressed profits due to client code modifications. The decision was based on the precedent set by a previous case involving similar facts, where client code modifications within permissible limits were deemed normal and not indicative of malafide intentions. Consequently, the penalty proceedings and interest levied were also impacted by this decision.