2019 (8) TMI 1892 - HC - Income Tax

Client code shifting - Shifting of income by client code modification - Profit shifting an exercise carried out by the assessee which used to trade in stocks and securities, with trading members - AO citing a SEBI circular of 29.07.2011, and after examining several instances held that the shifting was contrary to the guidelines inasmuch as there was no similarity, in the nature of transactions or the parties, involved with client code - assessee s appeal was allowed on both the questions of reopening of assessment as well as on the merits - ITAT took into account the submissions of revenue, specially the effect of the circular dated 29.07.2011 and also significantly observed that neither was survey conducted u/s 133(6) by the AO despite the specific request of the assessee nor was any notice u/s 131 issued in respect of transactions which led to the shifting of profits - HELD THAT - Counsel stressed that the SEBI circular, is decisive and that the shifting of client code was in respect of suspect parties. It is not disputed by the Revenue that pursuant to the so called violation of the SEBI circular, further investigation or enquiry was not carried out by the AO before concluding that the amounts claimed as shifting of profits, were in fact dubious and had to be added back in the manner that the AO actually did. Furthermore, the findings of the CIT (A) have been confirmed by the ITAT; consequently, the Court is now called upon to examine and appreciate concurrent factual findings. No substantial question of law arises.

Summary

Issues:
1. Profit shifting by the assessee in trading stocks and securities.
2. Validity of re-assessment proceedings and additions made by the ITAT.
3. Opportunity for cross-examination of brokers and collusion among parties.
4. SEBI circular's impact on profit shifting.
5. Lack of further investigation by the AO post SEBI circular violation.

Analysis:

1. The case involved profit shifting by the assessee in trading stocks and securities with trading members. The AO, for the assessment year 2009-10, found the shifting contrary to guidelines due to lack of similarity in transactions or parties involved with client code. The assessee's appeal was allowed on both reopening of assessment and merits.

2. The revenue's appeal to the ITAT partially succeeded, validating re-assessment proceedings but concurring with CIT(A) on additions made. The ITAT noted the absence of a survey under section 133(6) or notice under section 131, emphasizing the lack of evidence of collusion among parties.

3. The ITAT emphasized the need for establishing collusion among the assessee, other parties, and brokers for profit shifting. It highlighted the necessity of money exchange as consideration for profit transfer, and the absence of evidence showing trades were initially carried out as per the assessee's instructions.

4. The Court considered the impact of the SEBI circular on profit shifting, with the revenue stressing its significance in identifying suspect parties involved in client code modification.

5. The Court noted the lack of further investigation post SEBI circular violation, leading to the AO's conclusion on shifting profits without substantial evidence. The CIT(A)'s findings, upheld by the ITAT, were deemed conclusive, requiring no substantial question of law, resulting in the dismissal of the appeal.