2019 (3) TMI 1993 - AT - Income Tax

Addition on account of Client Code punching error - CIT-A deleted the addition - as per the investigation carried by Directorate I CI Mumbai and by Directorate of Investigation Ahmedabad it was found that fictitious profits and losses were created by some brokers by misusing the client code modification facility in F O segment on National Stock Exchange (NSE) - HELD THAT - The facts for the year consideration are an identical to the fact for A.Y. 2009-10 and the AO has selected only those transactions which would result shifting the profit from the account of the assessee and ignored the other instances of mistakes of client code where the loss is shifted from the account of the assessee. Following the earlier order of this Tribunal and having regard to the facts that the error in the client code modification is only 0.11% for this year in comparison to permissible error of 5% we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Disallowance u/s 14A - addition restricted by the ld. CIT(A) to @ 0.5% of the average investment - HELD THAT - It is a clear that the ld. CIT(A) has applied correct rate as applicable for the year under consideration whereas the AO has applied amended rule which was not applicable for the year under consideration. Accordingly, in view of the facts that as per the formula given in Rule 8Dthe disallowance @ 0.5% of the average investment was to be calculated on account of administrative expenditure. Hence, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Reopening of assessment u/s 147 - HELD THAT - The report of the investigation received by the AO in respect of the alleged misuse of client code modification facility for shifting of profit along with the order passed U/s 143(3) r.w.s. 147 for the assessment year 2009-10 constitute a tangible material for forming the belief that income assessable to tax has escaped assessment. We further note that the Assessing Officer had already passed the order U/s 143(3) r.w.s. 147 of the Act for the assessment year 2009-10 and concluded that the assessee has shifted profit in the garb of client code modification facility. Thus, the reassessment order passed for the A.Y. 2009-10 constitutes a tangible material for the AO to form the belief that the income assessable to tax has escaped assessment for the year under consideration and accordingly, the AO issued a notice U/s 148 of the Act on 15.03.2017. Hence, in view of the facts that reopening in the case of the assessee is after the reassessment order passed by the AO for the A.Y. 2009-10 the reopening cannot be held to be based on change of opinion or borrowed satisfaction. Further, the proviso to Section 147 of the Act cannot be invoked for the year under consideration when there is no original assessment U/s 143(3) of the Act. Accordingly, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Addition u/s 14A r.w.r. 8D - HELD THAT - AO noted that the assessee has made huge investment and earned exempt income. It is not a case of isolated instance of investment made by the assessee but the assessee is involved in regular activity of investment and therefore, indirect administrative expenditure for earning the exempt income has to be computed as per Rule 8D of the Income Tax Rules. The assessee is otherwise engaged in the regular activity of trading in the NSE and therefore, the investment made by the assessee necessarily involved its managerial establishment, clerical staff etc. Accordingly, we do not find any merits or substance in the addition of the assessee when the AO has specifically pointed out that the huge expenditure incurred by the assessee in respect of his office staff. Accordingly, the addition sustained by the ld. CIT(A) is upheld.

Summary

Issues Involved:
1. Deletion of addition on account of transfer out of ascertained profit/loss.
2. Deletion of addition on account of commission paid for acquiring accommodation entry.
3. Deletion of addition under Section 14A despite amendment to Rule 8D.
4. Validity of reopening based on alleged client code modification.
5. Disallowance under Section 14A.

Detailed Analysis:

1. Deletion of Addition on Account of Transfer Out of Ascertained Profit/Loss:
The Revenue challenged the deletion of an addition of Rs. 62,32,362/- made by the AO due to a client code punching error. The DR argued that investigations revealed brokers misused the client code modification facility to create fictitious profits and losses. The AR countered by citing a previous Tribunal decision in the assessee's favor, noting that the error rate was negligible (0.11%) compared to the permissible 5% error margin set by SEBI. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's assessment was based on the Investigation Wing's report without independent enquiry and denied the assessee's right to cross-examine brokers, violating principles of natural justice.

2. Deletion of Addition on Account of Commission Paid for Accommodation Entry:
The AO made an addition of Rs. 1,25,016/- for commission paid to acquire accommodation entries. This issue was deemed consequential to the first issue. Given the Tribunal's decision on the first issue, this addition was also deleted.

3. Deletion of Addition Under Section 14A Despite Amendment to Rule 8D:
The AO disallowed Rs. 2,57,264/- under Section 14A, applying Rule 8D at 1% of the average investment. The CIT(A) restricted this to 0.5%, the correct rate for the year under consideration. The Tribunal upheld the CIT(A)'s decision, noting that the AO applied an amended rule not applicable for the year in question.

4. Validity of Reopening Based on Alleged Client Code Modification:
The assessee contested the reopening of assessment based on client code modification, citing a Bombay High Court decision. The Tribunal noted that the original return was processed under Section 143(1) and not 143(3). The AO's reassessment order for the previous year (2009-10) constituted tangible material for forming a belief of income escapement. The Tribunal found the reopening valid, as it was based on new tangible material and not a change of opinion.

5. Disallowance Under Section 14A:
The assessee argued that no expenses were incurred to earn exempt income, thus Section 14A should not apply. The Tribunal upheld the AO's and CIT(A)'s decisions, noting that the assessee's regular investment activities involved indirect administrative expenses, necessitating a disallowance under Rule 8D.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all counts, dismissing the Revenue's appeal and the assessee's cross-objection. The key points included the negligible error rate in client code modifications, the proper application of Rule 8D at 0.5%, and the validity of reopening based on new tangible material.