2019 (8) TMI 604 - AT - Income Tax

Allowability of alleged fictitious loss by way of Client Code Modification (CCM) - commission paid to brokers to obtain fictitious loss through CCM - HELD THAT - AO has not brought on record that even the instructions for CCM was ever given by the assessee. Hence, in these circumstances, the assessee can t be held responsible for CCM if any done at the end of the broker. AO except for the fact of receiving information from the DIT (I CI), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect i.e. receipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. AO in the present case has mechanically added amounts as income of assessee without verifying furnishing evidences on record that all the above steps have actually happened in the case of all the transactions which he has added as assessee s income. In our view, by no stretch of imagination can any AO consider a transaction on the Stock Exchange as income of a person other than the one who has either actually received monies in his bank account (in case of profit) and/or paid any monies from his bank account (in case of losses). Nothing has been placed on record by the AO to demonstrate that any proceedings were ever initiated against the assessee by the SEBI or any stock exchange. It was also clarified by the Ld. AR that the broker, through whom the assessee carried on share transactions, were also not imposed any penalty. No co-relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours. According to us, such co-relation was necessary to fasten any liability upon the assessee. We rely upon the decision in the case of M/s.Sambhavanath Investment v. ACIT 2014 (1) TMI 84 - ITAT MUMBAI wherein it was held that CCM within 1 % is absolutely normal. Accordingly the addition was deleted. In the facts of the present case also, CCM is within 1 % No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of additions made on account of suppression of profit and obtaining fictitious loss by the assessee company through Client Code Modification (CCM).
2. Commission paid to brokers to obtain fictitious loss through CCM.

Issue-wise Detailed Analysis:

1. Deletion of Additions on Account of Suppression of Profit and Obtaining Fictitious Loss through CCM:

The assessee, a company engaged in trading shares, derivatives, and commodities, filed its return of income for AY 2010-11 declaring a total income of Rs. Nil. The Assessing Officer (AO) alleged that the assessee claimed fictitious losses through CCM to the tune of ?8,88,25,335/-. However, the learned CIT(A) found that the AO's allegation was factually incorrect, noting transactions resulting in a profit of ?6,93,60,345/- on account of CCM by the broker, with no loss to the appellant from those CCM. The CIT(A) highlighted that the AO did not verify the transactions despite having the PAN details of the entities involved.

The CIT(A) also noted that the loss of ?1,94,64,990/- was duly recorded in the appellant's books, which the AO did not find defective. The AO failed to prove that the appellant instructed the CCM or had control over the brokers. The CIT(A) observed that the CCM transactions were genuine as they involved relatives and friends of the appellant's directors and occurred throughout the year, not just at the end of the year to generate artificial profits and losses.

The CIT(A) further emphasized that the percentage of CCM turnover to total turnover was minuscule, between 0.35% to 0.55%, indicating the genuineness of the transactions. The AO did not provide any material evidence to prove that the CCM was not genuine, and none of the clients disowned the transactions. The CIT(A) concluded that the AO's allegations were based on assumptions and surmises without any concrete evidence.

The CIT(A) referred to several judicial precedents, including the decisions in M/S Sambhavanath Investment V ACIT, ACIT v Kunvarji Finance (P) Ltd, and ITO vs. Pat Commodity Services P. Ltd., which supported the view that CCM within 1% is normal and not indicative of shifting profits or losses. The CIT(A) directed the deletion of the disallowance of ?8,32,28,416/- as fictitious loss by the AO, with the AO free to take remedial measures if higher courts reversed or modified the decision.

2. Commission Paid to Brokers to Obtain Fictitious Loss through CCM:

The AO alleged that the assessee paid commissions to brokers to obtain fictitious losses through CCM. However, the CIT(A) found no evidence to support this allegation. The CIT(A) noted that the AO did not bring on record any material to prove that the parties to whom profits or losses were transferred were in collusion with the appellant. There was no evidence of any payment made by the appellant to the brokers or other parties in exchange for the alleged fictitious losses.

The CIT(A) emphasized that the AO's addition was based on general information and assumptions without concrete evidence. The AO did not establish any correlation between the appellant and the other parties involved in the transactions. The CIT(A) concluded that the AO's disallowance was not sustainable as it was based on mere presumption and suspicion without any factual basis.

Conclusion:

The Tribunal upheld the CIT(A)'s findings, noting that the AO did not provide any evidence to support the allegations of fictitious losses through CCM or commission payments to brokers. The Tribunal emphasized that the assessee, not being a registered broker, could not have modified client codes, and the AO failed to prove any malafide intention or collusion. The Tribunal dismissed the revenue's appeal and upheld the deletion of the addition on merits. Consequently, the assessee's appeal challenging the reopening of the assessment became academic and was also dismissed. The Tribunal concluded that the CIT(A)'s findings were judicious and well-reasoned, and there was no reason to interfere with them.