2022 (5) TMI 215 - AT - Income Tax

Addition on account of client code modifications - HELD THAT - NSE permits client code modification to rectify the errors /mistakes while punching the transactions. Genuine client code modifications are permissible. As per the guidelines issued by NSE, client code modifications within the relatives, as defined under the provisions of Companies Act, 1956 is allowed. The assessee has categorically stated that client code modifications in the instant case are among the family members. This fact has not been disputed by the Revenue. No material has been brought on record to show that any penal action has been taken by Stock Exchange or SEBI against the broker of the assessee for carrying out fictitious client code modifications for suppression of profits. The observations made by AO assessment order that brokers are indulging in transferring fictitious losses to different clients to reduce the tax liability, are generic. There is no specific allegation of such fictitious client code modification supported by cogent evidence to suggest that the broker of the assessee at the instance of assessee or the assessee has indulged in such nefarious activities. Assessee has pointed that during the First Appellate proceedings the assessee requested to provide copy of remand report. Despite repeated requests, the copy of remand report was not furnished to the assessee. It is a well settled principle of natural justice that before taking cognizance of any material the same should be furnished to the opposite side to rebut the same. In the instant case the CIT(A) has failed to provide opportunity to the assessee to furnish his comments on the observation made by AO in the remand report. Any material on which reliance has been placed to make the addition/confirming the addition without confronting it to the assessee would make the order void. - Appeal of assessee allowed.

Summary

Issues involved:
1. Reopening of assessment
2. Addition on account of client code modifications

Reopening of assessment:
The appeal challenged the order of the Commissioner of Income Tax(Appeals) regarding the assessment year 2009-10. The appellant did not press ground No.2 of the appeal related to the reopening of assessment under section 147 of the Income Tax Act, 1961. The appellant's representative argued that the addition on account of client code modifications was made without proper appreciation of facts. The appellant contended that client code modifications were carried out within family members, as permitted by the guidelines of the National Stock Exchange (NSE). The broker confirmed the client code modifications were legitimate, and there was no penalty imposed by regulatory bodies. The appellant cited relevant case laws to support their arguments.

Addition on account of client code modifications:
The appellant contested the addition of Rs.8,33,792 on account of client code modifications. The Assessing Officer had relied on information from the Directorate of Income Tax (C&CI) without providing concrete evidence linking the appellant to fictitious transactions. The appellant argued that the client code modifications were genuine and permissible under NSE guidelines, especially when done within family members. The appellant also highlighted the failure to provide a copy of the remand report during the first appellate proceedings, violating principles of natural justice. The Tribunal found merit in the appellant's arguments and allowed grounds No.3 to 5 of the appeal. Consequently, the addition related to commission paid to the broker for client code modifications was also deleted as a consequential result of the earlier findings.

Conclusion:
The Tribunal partially allowed the appeal by the assessee, concluding that the addition on account of client code modifications lacked merit and was based on unsubstantiated assumptions. The Tribunal emphasized the importance of providing the appellant with necessary documents and opportunities to respond to allegations, upholding principles of natural justice. The decision highlighted the need for concrete evidence before making additions to an assessment, especially when challenging the legitimacy of financial transactions.