2019 (8) TMI 101 - AT - Income Tax

Suppression of profit - hare / stock broker - allegation of obtaining fictitious loss by the assessee company by way of Client Code Modification (CCM) by the brokers in large number of commodity transaction - HELD THAT - Nothing has been brought on record to establish that the assessee was in collusion with brokers or other parties so as to indulge in the practice of client-code modification with a view to shift the profits. On the facts, onus was on revenue to rebut the assessee s stand by bringing cogent material on record which would prove the nexus of the assessee with the activity of client-code modification. The additions have been made merely on the basis of general observation of the investigation wing. It is trite law that no additions could be made merely on the basis of pure guess work, suspicion, conjectures or surmises. The applicable rules of the stock exchanges permit client-code modification so as to rectify the punching errors within certain time after closing of the trade. Nothing would suggest that the modifications were done in breach of the applicable rules or any punitive action was taken by the stock exchanges against the assessee s broker for violation of the said facility. It is also evident that the percentage of modified trades in terms of value as well as volume was miniscule in comparison to total trades carried out by the assessee with the broker. The onus was on revenue to dislodge the assessee s claim. Except for general observation of investigation wing, there was no minimum adverse material on record against the assessee which would prima-facie prove that loss was fictious and the assessee was in connivance with brokers which warrant the first appellate authority to investigate the matter further. All the transactions were duly reflected in the books, the transactions were through banking channels and the ledger confirmations were placed on record. - Decided against revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Legitimacy of additions made on account of suppression of profit and obtaining fictitious loss through Client Code Modification (CCM).

Detailed Analysis:

1. Validity of Reassessment Proceedings:

The reassessment proceedings were initiated based on information from the Investigation Wing, Ahmedabad, alleging that the assessee benefited from client-code modification (CCM). The case was reopened following due process, including the issuance of notices under sections 148, 143(2), and 143(1). The Ld. CIT(A) upheld the reopening of the case, stating that the information from the investigation wing provided a reasonable belief that certain income had escaped assessment. This was deemed sufficient to justify the reassessment proceedings.

2. Legitimacy of Additions Made on Account of Suppression of Profit and Obtaining Fictitious Loss through CCM:

Facts and AO’s Findings:

- The assessee, a share/stock broker, was initially assessed under section 143(3) and later reassessed under section 143(3) r.w.s. 147, where the income was determined at ?166.28 Lacs against a returned loss of ?42.13 Lacs.
- The reassessment was triggered by information from the Investigation Wing alleging misuse of CCM to artificially shift profits and losses, reducing legitimate tax liability.
- The AO concluded that the assessee benefited from CCM to the extent of ?166.28 Lacs, noting that all four digits of the original client code were modified, indicating intentional manipulation rather than genuine errors.

Assessee’s Defense:

- The assessee argued that the modifications were due to genuine punching errors and were done within the permissible time limits set by SEBI/stock exchanges.
- The assessee provided supporting documents, including bills, contract notes, ledger accounts, balance confirmations, and bank statements, to substantiate the genuineness of the transactions.
- It was contended that the modifications constituted only 2.36% of the total transaction volume, and the adverse material used by the AO was not confronted with the assessee, violating natural justice principles.

CIT(A)’s Findings:

- The CIT(A) agreed with the AO on the validity of reassessment but found the additions on merits to be baseless.
- It was observed that the modifications were permissible and constituted a small percentage (0.54%) of the total trades.
- The CIT(A) noted that the AO did not establish any correlation or collusion between the assessee and the brokers or other parties involved.
- The additions were deemed to be based on assumptions and surmises without concrete evidence.

Tribunal’s Findings:

- The Tribunal upheld the CIT(A)’s decision, emphasizing that the onus was on the revenue to disprove the assessee’s claims with cogent material evidence.
- The Tribunal highlighted that all transactions were duly reflected in the books, confirmed by brokers, and conducted through banking channels.
- It was noted that client-code modification is a facility allowed by stock exchanges to rectify genuine errors, and there was no evidence of breach of applicable rules or punitive action against the broker.
- The Tribunal referenced several judicial precedents, including decisions in ITO V/s Pat Commodities Services P. Ltd. and M/s Sambhavnath Investment V/s ACIT, which supported the assessee’s position that additions based on suspicion and conjecture could not be sustained.

Conclusion:

The Tribunal concluded that the revenue failed to provide substantial evidence to support the additions made for suppression of profit and obtaining fictitious loss through CCM. The appeal was dismissed, and the order of the CIT(A) to delete the impugned additions was upheld.