2020 (2) TMI 1712 - AT - Income Tax

Ingenuine Loss in client code modification in F O account - whether there is no indication in the lower authorities orders as to whether that the assessee s demat account in any way involved such a client code modification or not? - HELD THAT - As decided in Kundan Investment Ltd. 2003 (3) TMI 62 - CALCUTTA HIGH COURT all the shares related to the reputed companies and were quoted shares in the stock exchanges and were purchased and sold at the prevalent quoted market rates, which was verified from the statement of the slack exchanges. On these basis, the Tribunal found that the CIT(A) had proceeded on the basis of suspicion that there might be some ingenuinity in the transactions. On the basis of the materials produced, the Tribunal came to a finding of fact, which does not seem to be perverse. Whether the shares could be sold immediately on the date of purchase or not was a question of business expedience. Whether the decision was correct or wrong cannot the question, which can be a subject-matter of decision in such a case. In order to find out whether the transaction is genuine or in genuine it is neither the expedience nor correctness of the decision nor the business expertise of the person to be considered. It is to be considered on the basis of the materials that there was no such transaction and that these share transactions were paper transactions. The suffering of loss could not be a factor for such purpose. Having regard to the facts and circumstances of the case, the view taken by the Tribunal allowing share loss cannot be said to be erroneous or perverse. Thus we direct the Assessing Officer to delete the addition in question - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening proceedings under Section 147.
2. Correctness of treating the assessee’s loss as not genuine due to client code modification in the F&O account.

Detailed Analysis:

1. Validity of Reopening Proceedings under Section 147:
The learned counsel for the assessee did not press the issue challenging the validity of the reopening proceedings. Therefore, this issue was not addressed in the judgment.

2. Correctness of Treating the Assessee’s Loss as Not Genuine:
The primary issue in this case was the correctness of the lower authorities' action in treating the assessee's loss of ?25,43,874/- as not genuine due to client code modification in the F&O account. The tribunal noted the absence of any indication in the lower authorities' orders regarding whether the assessee’s demat account was involved in such client code modification.

The tribunal referred to a similar case, Shagun Business Services Pvt. Ltd. vs. Income Tax Officer, where the issue of client code modification was adjudicated. In that case, the CIT(A) had upheld the assessing authority's action, treating the disallowance of losses as bogus due to alleged client code modification by the broker. The CIT(A) observed that the assessee had not substantiated its bona fides with proper evidence, such as books of accounts or objections raised with the broker. The CIT(A) concluded that the modifications were not genuine and upheld the addition.

The tribunal also referred to another case, M/s. Khaitan Trade Holdings Pvt. Limited vs. ITO, where the Assessing Officer disallowed the claim on account of derivative transactions, holding that the losses were incurred by someone else and transferred to the assessee through client code modification. The First Appellate Authority upheld this order, applying the theory of human probabilities.

However, upon appeal, the tribunal found that the assessee had provided sufficient documentary evidence, including contract notes, bank statements, and confirmations from the National Stock Exchange (NSE). The tribunal held that client code modifications are permitted by NSE within a prescribed time limit and that the modifications in the assessee's case were genuine. The tribunal emphasized that additions based on surmise and conjecture are not permissible in law.

In the present case, the tribunal adopted the detailed reasoning from the aforementioned cases and directed the Assessing Officer to delete the addition of ?25,43,874/-, concluding that the unexplained cash credit addition was not sustainable.

Conclusion:
The tribunal allowed the assessee's appeal partly, directing the deletion of the addition in question. The order was pronounced in open court on 14/02/2020.