2021 (7) TMI 184 - AT - Income Tax

Addition of profit shifted out and the loss shifted in by way of Client code modification - Profit or the loss during the time when code were modified - transactions in F O segment through the involvement of the broker - AO on the basis of the data received from the National stock exchange found that there was the change in the code of the assessee maintained with the broker with respect to certain transactions carried out in F and O segment - HELD THAT - Admittedly client codes were modified of the assessee as per the information received from the Stock Exchange. Client code modifications may give rise to the doubt/ suspicion which requires detailed investigations from the parties concerned to reveal the truth. Merely, there were client codes modifications carried out by the broker cannot be the basis to draw an inference against the assessee. In fact, in case of client code modification the code of the other party is entered at the place of the assessee. Thus the other party is also required to be investigated whether the other party was involved in such transaction. Besides this there has to be brought other corroborative evidences suggesting that there was the exchange of cash among the parties involved in such client code modification - no such exercise has been carried out by the authorities below. As such there is no whisper in the order of the authorities below that there was the cash transfer between the parties for transferring the income of the assessee to the other party and vice versa. Thus in the absence of such verification/examination carried out by the authorities below, we are not inclined to uphold the findings of the AO. The number of transactions in respect of which the client codes were modified are less than 1% of the total transactions carried out by the assessee. Therefore, such changes in the client code cannot be said as a colourable device adopted for shifting out and shifting in the profit/loss. The changes in the codes were not made at the fag end of the year under consideration i.e. March 2010. In other words it was not possible for the assessee to ascertain its profit or the loss during the time when code were modified as the changes were made in the mid-of the year. Thus it cannot be said that the assessee to reduce its taxable income has resorted to client code modification method. There is no basis on the part of the AO alleging that changes in the code limited to one digit represent genuine punching errors whereas changes in the codes ranging between 4 to 5 digits do not represent the genuine punching errors. The changes in the number of digits in the code cannot be a criteria to draw an inference against the assessee. We are not inclined to disturb the findings of the ld. CIT-A. Accordingly we uphold the same and direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Deletion of disallowance of loss of ?1,86,47,974/- due to client code modification (CCM).
2. Validity of reassessment notice and order under section 143(3) read with section 147 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of loss of ?1,86,47,974/- due to client code modification (CCM):

The Revenue raised concerns regarding the deletion of a disallowance of ?1,86,47,974/- made by the Assessing Officer (AO) on account of profit shifted out and loss shifted in through CCM. The AO argued that the assessee engaged in the business of shares broking had manipulated client codes to evade taxes by booking artificial profits and losses. The AO's analysis indicated deliberate and consistent efforts to shift losses from one client to another, which was supported by data from the National Stock Exchange (NSE).

The assessee contended that no addition could be made solely based on NSE data, as there were no allegations from SEBI or the stock exchange regarding tax evasion through CCM. The assessee maintained that all transactions were recorded in the books of accounts and settled through banking channels, without any evidence of cash settlements. The assessee also argued that the AO's reliance on statements from other brokers was misplaced as there was no direct evidence against the assessee or its broker.

The learned Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's arguments, noting that the AO's conclusions were based on presumptions and lacked corroborative evidence. The CIT(A) observed that all transactions were supported by contract notes and settled through account payee cheques. The CIT(A) also highlighted that the client code modifications were less than 1% of total transactions, suggesting no significant tax evasion intent. The CIT(A) relied on various judicial precedents, including the case of Kunvarji Finance Pvt. Ltd., which supported the view that client code modifications within a certain percentage were normal and did not indicate malafide intent.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's addition was based on suspicion without concrete evidence. The Tribunal noted that client code modifications were allowed by stock exchanges to rectify genuine errors and that the AO failed to prove any cash transactions or malafide intent. The Tribunal also pointed out that modifications were made in the mid-year, making it unlikely for the assessee to ascertain its profit or loss at that time. Consequently, the Tribunal dismissed the Revenue's appeal.

2. Validity of reassessment notice and order under section 143(3) read with section 147 of the Income Tax Act, 1961:

The assessee filed a Cross Objection (CO) challenging the validity of the reassessment notice and order under section 143(3) read with section 147, arguing that the reassessment was made on a non-existent company due to amalgamation. The assessee also contended that the reassessment was based on information from the Investigation Wing without independent application of mind by the AO.

However, the Tribunal did not address the CO's grounds on the validity of the reassessment, as it had already decided the main issue in favor of the assessee on merit. Therefore, the Tribunal dismissed the CO filed by the assessee.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of ?1,86,47,974/- on account of CCM. The Tribunal also dismissed the CO filed by the assessee challenging the validity of the reassessment notice and order. The judgment emphasized the need for concrete evidence rather than presumptions in making additions based on client code modifications.