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2019 (12) TMI 820 - AT - Income TaxAssessment u/s 153A - suppression of income - Addition made on account of Client Code Modification(CCM) - HELD THAT - Client code modification is permitted intraday, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is ₹ 500/-. If it is greater than 5% but less than 10%, penalty is ₹ 1000/- and if it is greater than 10%, then penalty is ₹ 10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of ₹ 500/-. CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. AO has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the AO. Since in the instant case it is an admitted fact that the assessee is not a member of any exchange and cannot execute CCM and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any action treating the transactions to be non genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI, therefore we are of the considered opinion that there is no perversity in the order of the CIT(A) deleting the addition. - Decided against revenue.
Issues Involved:
1. Legitimacy of Client Code Modifications (CCM) by the assessee. 2. The extent of CCM and its compliance with SEBI guidelines. 3. The genuineness of the transactions and whether the CCM was used for tax evasion. 4. The role of the assessee in executing CCM and its impact on the declared income. 5. The validity of the addition made by the Assessing Officer (AO) based on the CCM. Issue-wise Detailed Analysis: 1. Legitimacy of Client Code Modifications (CCM) by the assessee: The AO noted that the assessee, a client of registered brokers M/s. Jaypee Capital Services Ltd. and Futurz Next Services Ltd., engaged in substantial CCM, which was suspected to be non-genuine. The special auditor's report indicated that the CCM was used to shift profits and suppress income. The AO made an addition of ?1,90,71,392/- to the assessee's income based on these findings. 2. The extent of CCM and its compliance with SEBI guidelines: The CIT(A) observed that the CCM transactions were within the permissible limit of less than 1% of total transactions, as allowed by SEBI guidelines. The SEBI circular NSCCL/SEC/2004/0464 dated May 31, 2004, allows CCM up to 1% without any penalty. The CIT(A) noted that no penal action was taken by the exchange or SEBI against the group concerns for the CCM, indicating compliance with the regulations. 3. The genuineness of the transactions and whether the CCM was used for tax evasion: The CIT(A) found that the transactions were genuine and conducted in the normal course of business. The CCM entries were duly recorded in the books of accounts and reported to the exchange. The AO's suspicion of tax evasion was not supported by any concrete evidence. The CIT(A) emphasized that the profit/loss from the transactions was included in the total income declared and taxed at the maximum marginal rate. 4. The role of the assessee in executing CCM and its impact on the declared income: The CIT(A) highlighted that the assessee was not a member of any exchange and could not execute CCM. The CCM was done by the group concerns, and the volume of CCM was within the permissible limit. The CIT(A) concluded that the AO's addition was unjustified as the transactions were genuine and within regulatory limits. 5. The validity of the addition made by the Assessing Officer (AO) based on the CCM: The Tribunal upheld the CIT(A)'s order, stating that the AO did not provide sufficient evidence to support the allegation of non-genuine CCM. The Tribunal noted that the AO relied heavily on the special auditor's report without independent verification. The Tribunal also referenced several judicial precedents, including the Bombay High Court decision in PCIT Vs. PAT Commodities Services Pvt. Ltd., which held that mere CCM by a broker does not imply income escapement without evidence of income earned through CCM. Conclusion: The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to delete the addition of ?1,90,71,392/-. The Tribunal concluded that the CCM transactions were genuine, within permissible limits, and the assessee did not engage in any tax evasion. The AO's addition was based on suspicion without concrete evidence, and the assessee's role in executing CCM was not established. The Tribunal's decision was consistent with SEBI guidelines and judicial precedents, ensuring that the transactions were conducted in compliance with regulatory norms.
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