2019 (5) TMI 1794 - AT - Income Tax

Suppression of income - shifting of profit - Client code modification - fictitious profits/loss - assessee indulged in transferring fictitious profits/loss to the other clients/beneficiaries by misusing the client code modification facility in the F O segment - HELD THAT - AO has disallowed the claim of loss on the basis of the information received from the ADIT (Inv.) Unit-3, Ahmedabad without conducting any independent enquiry or to bring anything on record to show that a particular transaction of client code modification is bogus. When the entire exercise is done by the broker and assessee is having no control over it, then in the absence of any material or fact to show the involvement of the assessee for shifting the alleged bogus loss/profit, the disallowance made by the AO is not sustainable in law. AO has just reproduced the report of the Investigation Wing wherein general observations were made based on the investigation that some of the brokers are indulged in transferring fictitious profit/loss from one client to another client in the garb of client code modification. AO has discussed the modus operandi of the broker for doing these activities. Nothing has been brought on record to show that the assessee has done anything wrong in respect of the claim of loss of ₹ 3,12,790/- whereas the assessee has declared a gross profit of more the ₹ 3.41 crores on account of share trading. Accordingly, following the earlier order of this Tribunal in the case of DCIT vs. Gyandeep Khemka 2018 (10) TMI 1626 - ITAT JAIPUR the disallowance made by the AO is deleted. - Decided in favour of assessee.

Issues Involved:

1. Validity of the order passed under section 147 of the Income Tax Act, 1961.
2. Addition of ?3,12,790/- on account of alleged fictitious profits/losses through client code modification.
3. Addition of ?6,056/- on account of alleged commission paid to brokers for providing entries through client code modification (CCM).

Issue-wise Detailed Analysis:

1. Validity of the order passed under section 147 of the Income Tax Act, 1961:

The assessee did not succeed in challenging the reopening of the assessment under section 147. The Tribunal did not explicitly adjudicate this ground as it became academic in nature due to the findings on the merits of the case favoring the assessee.

2. Addition of ?3,12,790/- on account of alleged fictitious profits/losses through client code modification:

The assessee, engaged in trading shares and derivatives, filed a return declaring an income of ?3,51,16,730/-. The assessment was reopened based on information from the ADIT (Investigation) Unit-1(3), Ahmedabad, regarding misuse of client code modification (CCM) to create fictitious profits/losses. The AO added ?3,12,790/- to the income, alleging shifting of profits through CCM.

The assessee argued that the CCM was a standard practice to rectify punching errors made by brokers and was not an attempt to create fictitious losses. The Tribunal noted that the Stock Exchange allows CCM to correct errors within a limited period and that such modifications are a regular feature in trading. The Tribunal referenced several decisions, including those of the Ahmedabad and Delhi Benches, which held that minor errors in CCM (less than 1% of total transactions) are normal and not indicative of malafide intent.

The Tribunal emphasized that the AO failed to prove that the assessee and other clients colluded with the broker to shift profits/losses. The Tribunal found that the loss of ?3,12,790/- was negligible compared to the declared gross profit of over ?3.41 crores. The Tribunal concluded that the AO did not conduct an independent inquiry and relied solely on the investigation report, which was insufficient to establish the assessee's involvement in fictitious transactions. Consequently, the addition of ?3,12,790/- was deleted.

3. Addition of ?6,056/- on account of alleged commission paid to brokers for providing entries through client code modification (CCM):

The AO added ?6,056/- as commission paid to brokers for facilitating the alleged fictitious transactions through CCM. The Tribunal's findings on the main issue of fictitious profits/losses also applied to this addition. Since the AO did not establish any collusion or malafide intent on the part of the assessee, the addition of ?6,056/- was also deleted.

Conclusion:

The Tribunal found that the AO's additions were based on insufficient evidence and did not establish any collusion or malafide intent by the assessee. The additions of ?3,12,790/- and ?6,056/- were deleted, and the appeal was partly allowed. The issue of the validity of the order under section 147 became academic and was not adjudicated.

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