2020 (12) TMI 303 - AT - Income Tax

Additions on account of Client-code modification (CCM) - undisclosed profit on future and option transaction in shares - HELD THAT - Practice of client-code modification is permissible as per the rules of stock exchanges since the possibility of punching errors could not be ruled out at the time of carrying out the transactions and human error was inevitable. The modifications to the extent of 1% could be done without any penalty and even the modification of 5% would attract meager penalty of ₹ 500/-. The same would support the fact that due to large volume of transactions, the punching errors could not be ruled out while carrying out the trades and therefore, a facility was given to the stock-brokers to modify the same within certain norms. No such norms have been shown to have been violated by the assessee while carrying out the modification. No penalty is shown to have been imposed on the assessee since the modification done by the assessee was only to the extent of 1.15% of total trades which could not be termed as abnormal on the given facts and circumstances. Whole basis of making additions in the hands of the assessee is information of DIT (Inv.) wherein it was alleged that the profits were shifted by client code modification. To substantiate these allegations was the onus of revenue. The assessee had filed confirmatory letters of all category-3 clients wherein all these clients owned up the transactions and also confirmed that the profits so earned by them on these transactions were duly reflected in their respective returns of income. These confirmations could not be controverted by the revenue. By filing these documentary evidences, the assessee had duly discharged its onus to prove the genuineness of the modifications. AO, despite being provided with another opportunity by way of remand proceedings, could not rebut the evidences filed by the assessee and failed to bring on record any adverse material against the assessee to dislodge the assessee s claims. No additions are sustainable in law on mere doubts, conjectures or surmises. The onus was on revenue to substantiate the allegations with corroborative evidences. However, this onus has remained un-discharged. Decided in favour of assessee.

Summary

Issues Involved:

1. Confirmation of alleged undisclosed profit on future and option transactions in shares.
2. Confirmation of commission earned from contra parties on client code modification.

Issue-wise Detailed Analysis:

1. Confirmation of Alleged Undisclosed Profit on Future and Option Transactions in Shares:

The primary issue revolves around the confirmation of ?85,29,160/- as undisclosed profit from future and option (F&O) transactions in shares. The assessee, a resident firm engaged in trading shares and derivatives, was subjected to reassessment proceedings based on information from the Director of Income Tax (Intll. & Criminal Inv.), Mumbai. The information suggested tax evasion through client-code modification (CCM) to reduce overall tax liabilities by shifting profits. The case was reopened, and an assessment was framed, resulting in an addition of ?347.17 Lacs on account of alleged undisclosed profit from F&O transactions. The assessee argued that the modifications were genuine and attributable to human error, as the modifications were only 1.15% of total trades. The principal broker, M/s Inventure Growth & Securities Ltd. (IGSL), confirmed that the modifications were made to correct punching errors.

The Ld. CIT(A) provided substantial relief but sustained an addition of ?85.29 Lacs for category-3 transactions, which were transactions with clients unrelated to the assessee. The assessee contended that the volume of trades was high, leading to default punching errors, and the modifications were genuine. The Ld. CIT(A) noted that client-code modification is permissible under stock exchange rules and that the modifications were within acceptable limits. However, the Ld. CIT(A) confirmed the addition for category-3 transactions, stating that the frequency of errors was too high to be genuine.

Upon appeal, the Tribunal found that the practice of client-code modification is permissible and that the modifications made by the assessee were within acceptable limits. The Tribunal noted that the revenue failed to substantiate the allegations with corroborative evidence and that the assessee had provided confirmatory letters from all category-3 clients, who owned the transactions and confirmed that the profits were reflected in their respective income tax returns. The Tribunal concluded that no additions could be sustained based on mere doubts or suspicions and deleted the addition of ?85.29 Lacs.

2. Confirmation of Commission Earned from Contra Parties on Client Code Modification:

The second issue pertains to the confirmation of ?73,703/- as commission earned from contra parties on client code modification. The Ld. AO had estimated a commission of ?3 Lacs, which was reduced to ?73,703/- by the Ld. CIT(A). The assessee argued that the modifications were genuine and that no commission was earned from these transactions. The Tribunal, having deleted the addition of ?85.29 Lacs, also concluded that the commission income against these transactions would not survive. Consequently, the addition of ?73,703/- was also deleted.

Conclusion:

The Tribunal allowed the appeal by the assessee, deleting the additions of ?85.29 Lacs and ?73,703/- on the grounds that the revenue failed to provide substantial evidence to support the allegations of undisclosed profit and commission income from client code modifications. The Tribunal emphasized the need for corroborative evidence and the inadmissibility of additions based on mere suspicions. The appeal was partly allowed in favor of the assessee.