2017 (5) TMI 1715 - AT - Income Tax

Loss on account of derivative activities - modification of the client code - AO believed the client code modification to be mala fide to escape the tax liability - AO confirmed the aforesaid loss from National Stock Exchange (NSE) u/s 133(6) and found that several modifications were carried out by these brokers in the codes of the client - HELD THAT - On perusal of the records we find that client code modification was done negligible nos. of times whereas the total number of trade transactions are 3,11,866 only. Thus the client code modification is less than 1 per cent of the total trading transactions. It is undisputed fact that the client code was modified fewer number of times and this fact was very much in the knowledge of the stock exchange. It is because that the information for the modification of the client code was gathered by the AO from the NSE which proves beyond doubt that the assessee has not modified any client code without informing to the NSE. Had there been mismatch in the code between the report submitted by the broker of the assessee and that of the NSE, the question/doubt on the genuineness of the transaction arise? No justification for the allegation of the AO that the client code modification was with the mala fids intention. When the client code was modified on the stock exchange without informing the same day then it can be inferred there is some mala fide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done online on the stock exchange, in our opinion, there was no basis or justification to hold the transaction to be bogus. All transactions at the exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profit/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits/loss have been generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessee. These findings of facts recorded by the ld CIT(A) have not been controverted by the Ld. DR 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 has not actually been incurred - Decided in favour of assessee.

Summary

Issues:
- Disallowance of loss on account of derivative activities.

Analysis:
1. The appeal by the Revenue and Cross Objection by the assessee were against the order of the Commissioner of Income Tax (Appeals) regarding the allowance of a loss on derivative activities for a specific amount.
2. The main issue raised by the Revenue was the correctness of allowing the loss of a substantial amount on account of derivative activities.
3. The assessee, a private limited company, claimed losses under derivative activities for a significant amount. The Assessing Officer confirmed the losses from specific brokers and issued notices to ascertain the reasons for modifications in client codes.
4. The Assessing Officer disallowed the loss, adding it to the total income of the assessee. The assessee appealed to the CIT(A), who observed that the losses were genuine and allowed the loss incurred through one broker but upheld the disallowance for losses incurred through another broker.
5. Both the Revenue and the assessee appealed the CIT(A)'s decision.
6. The issue was whether the modifications in client codes were genuine, with the Revenue arguing that the modifications were mala fide, while the assessee presented evidence to the contrary.
7. The Tribunal found that the modifications in client codes were minimal compared to the total transactions, and there was no basis to conclude mala fide intentions. All transactions were duly accounted for, and the profits/losses were offered for tax, leading to the rejection of the Revenue's appeal and allowance of the assessee's Cross Objection.
8. Consequently, the appeal of the Revenue was dismissed, and the Cross Objection of the assessee was allowed.