2019 (2) TMI 720 - HC - Income Tax

Addition being the profits of the Company on account of the large scale client code modifications - transfer the profits of the company to other clients for the purposes of adjustment of their incomes to evade payment of tax - motive of the client code modification was to indulge in circular trading to enable the generation of either profits or losses as required by clients at the end of the financial year - Held that - Tribunal accepted the assessee s explanation and discarded the Revenue s theory that profit of the assessee s company were passed on to the clients. It was also noticed that the Revenue has not contended that the client code modification facility is often misused by the assessee to pass on losses to the investors, who may have sizable profit arising out of commodity trading against which such losses can be set off. The Revenue normally points out number of such instances of client code modifications as well as nature of errors in filling of the client code. At any rate, what can be taxed in the hands of the present assessee is the income escaping assessment. Even if the Revenue s theory of the assessee having enabled the clients to claim contrived losses, the Revenue had to bring on record some evidence of the income earned by the assessee in the process, be it in the nature of commission or otherwise. In the present case, the Assessing Officer has added the entire amount of doubtful transactions by way of assessee s additional income, which is wholly impermissible. - Decided against revenue.

Summary

Issues:
1. Whether the Tribunal was justified in upholding the deletion of the addition of profits of the Company on account of large scale client code modifications for tax evasion purposes?
2. Whether the Tribunal erred in upholding the deletion when the Assessing Officer established that the motive behind client code modifications was to engage in circular trading for generating profits or losses as required by clients?

Analysis:

Issue 1: The appeals involved the same assessee and arose from a common background related to the deletion of additions in the income of the assessee company. The respondent assessee, a private limited company providing commodity services, faced scrutiny for client code modifications aimed at passing profits or losses to clients. The Assessing Officer believed these modifications facilitated circular trading for tax evasion. The Tribunal rejected the Revenue's theory of misuse but accepted the assessee's explanation, noting the absence of evidence that profits were passed on to clients. The Tribunal emphasized that only income escaping assessment could be taxed, requiring evidence of income earned by the assessee. The Assessing Officer's blanket addition of doubtful transactions as additional income was deemed impermissible, as it lacked specific evidence tying the assessee's income to the alleged tax evasion scheme. The Court concluded that the appeals did not serve a useful purpose and dismissed both.

Issue 2: The second issue questioned whether the Tribunal erred in upholding the deletion despite the Assessing Officer's assertion that client code modifications aimed to generate profits or losses for clients. The Tribunal's decision hinged on the lack of concrete evidence linking the assessee's income to the alleged tax evasion scheme. It was noted that the Revenue failed to demonstrate how the client code modifications directly led to income for the assessee, such as through commissions or other means. The Tribunal's rejection of the Revenue's theory was based on the principle that only actual income escaping assessment could be taxed, necessitating specific evidence of the assessee's gains from the alleged circular trading activities. The Court affirmed the Tribunal's decision, emphasizing the requirement of concrete evidence to establish tax liability and dismissing the appeals.

This comprehensive analysis of the judgment highlights the key legal issues, the factual background, the arguments presented, and the reasoning behind the Court's decision in each aspect of the case.