2020 (8) TMI 809 - AT - Income Tax

Suppression of income - shifting of profit - Client code modification - fictitious profits/loss Addition made on account of transferring of fictitious profits/loss to other clients in the garb of client code modification - addition on basis the information received from ADIT Investigation and held that the assessee was involved in shifting out ascertained profits - HELD THAT - AO has referred to the report of the Investigation Wing and general modus operandi - there is nothing on record in terms of any independent examination by the AO of the transactions undertaken by the assessee during the year wherein it has reported gross profits, summoning and examining the broker i.e, M/s C.M. Goenka Stock brokers Pvt Ltd and determining any involvement of assessee in such transactions. M/s C.M. Goenka Stock brokers Pvt Ltd has also confirmed that there are certain inadvertent genuine punching errors which were modified as per guidelines laid down by SEBI vide Circular dated 6.02.2003, therefore, the puching errors happened at the broker end and not at the end of the assessee and there is nothing on record which suggest any involvement of assessee or the fact that such punching errors were done at the behest of the assessee. Accordingly, in the facts and circumstances of the case and following the decision of the Coordinate Bench in assessee s own case 2019 (5) TMI 1794 - ITAT JAIPUR the addition made by the AO is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the order passed under Section 147 of the IT Act, 1961.
2. Addition of ?10,29,830/- alleging transfer of fictitious profits/losses through client code modification (CCM) in the F&O segment.
3. Addition of ?20,596/- on account of alleged commission paid to brokers for providing alleged entries through CCM.

Detailed Analysis:

1. Validity of the Order Passed Under Section 147 of the IT Act, 1961:

The assessee challenged the reopening of the assessment under Section 147, which was initiated based on information received from the ADIT (Investigation) regarding fictitious profits and losses created by brokers through client code modification in the F&O segment on NSE. The Tribunal found that the issue became academic in nature due to the findings on merits being in favor of the assessee. Consequently, the Tribunal did not adjudicate this ground and dismissed it as infructuous.

2. Addition of ?10,29,830/- Alleging Transfer of Fictitious Profits/Losses Through Client Code Modification (CCM):

The assessee contested the addition made by the AO, asserting that the client code modifications were genuine and done by the broker to rectify punching errors, not by the assessee. The assessee's representative argued that the volume of trades was substantial, and the alleged fictitious loss was negligible in comparison. The Tribunal examined the facts and noted that client code modifications are a regular business practice permitted by the stock exchange to rectify genuine errors. The Tribunal referred to several precedents, including the assessee's own case for A.Y 2010-11, where similar additions were deleted.

The Tribunal highlighted that the AO did not conduct any independent inquiry or provide evidence of collusion between the assessee, other clients, and the broker. The Tribunal also noted that the percentage of client code modifications was within the permissible error margin of 1%, as allowed by the stock exchange without any penalty. The Tribunal concluded that the disallowance made by the AO was not sustainable in law and deleted the addition of ?10,29,830/-.

3. Addition of ?20,596/- on Account of Alleged Commission Paid to Brokers for Providing Alleged Entries Through CCM:

This ground was consequential to the main issue of fictitious profits/losses through CCM. Since the Tribunal found the main addition to be unsustainable and deleted it, the consequential addition of ?20,596/- was also deleted.

Conclusion:

The Tribunal deleted the additions made by the AO on account of fictitious profits/losses and commission paid to brokers, finding that the client code modifications were genuine and within permissible limits. The appeal of the assessee was allowed, and the order passed under Section 147 was dismissed as infructuous due to the favorable findings on merits.