9911796707
TMI Blog2017 (7) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... in trade. The reason behind it is not difficult to understand. Income arising from the business of an assessee is taxed under the head business and profession. So, all the expenses have to be considered while computing the business income. On the other hand, if the securities are held as investment and an assessee earns exempt income, same can be subjected to disallowance as envisaged by the provisions of section 14A. Non compliance of order u/s 144A - Disallowance of loss claimed as F & O trading loss - client code modifications undertaken in the month of March 2010 - loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes - as per CIT-A AO did not conducted enquiry as per directions of the Addl. CIT and disallowed the said loss merely on presumption that these transactions were sham transactions - Held that:- We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent that it has made the order of learned CIT(A) enter the arena of perversity and this order of learned CIT(A) cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is engaged in the business of trading in shares, securities and F&O transactions. In this appeal, the Revenue is aggrieved by two disallowances, one is disallowance u/s 14A read with Rule 8D of the Income-tax Rules, 1962 and second one is disallowance on artificial loss incurred through client code modifications. During assessment proceedings u/s 143(3) r.w.s. 143(2), the A.O. observed that the assessee had earned exempt income and further the assessee had shown dividend income amounting to ₹ 15,97,859/- and had claimed the said amount as exempt. The assessee was asked to show cause as to why the disallowance u/s 14A of the Act should not be made in the case of the assessee. In reply, the assessee submitted as under:- "Justification for disallowance for expenses incurred for dividend: During the year there is no expenses incurred by the company for earning the dividend which has been claimed as exempt in computation of income. The expenses incurred for payment of interest on loans are for the loans which have been taken for the purpose of giving margin money to the broker for the future and options transactions. The expenses other than interest on loans which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs) i) Director expenditure relating to exempt income being STT & D-Mat charges paid -- ii) Amount computed as per Rule 8D(2)(ii) [AXB/C] 8,63,137 A = Interest expenses 876268 B = Average Investment including shares in closing and opening inventories 106428532 C = Average total asset 108047609 iii) 0.5% of average investment (0.5% x ₹ 106428532) 5,32,143/- Total disallowance as per Rule 8D(i+iii+iii) ₹ 13,95,280/- Thus, the A.O. worked out an amount of ₹ 13,95,280/- towards disallowance u/s 14A of the Act, vide assessment order dated 28-03-2013 passed by the AO u/s 143(3) of the 1961 Act. 4. The second issue is with regard to disallowance of loss of ₹ 3,67,83,145/- incurred through client code modifications w.r.t. trade in shares and securities on NSE through its broker. The A.O. observed that during the year the assessee had entered into certain trades in shares and securities on NSE through its brokers and the P&L account showed a loss of ₹ 3,67,83,145/- claimed on account of share trading loss. The assessee was asked to furnish the details by the AO vide letter dated 18-03-2013 which are reproduced as under:- "It is seen that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dified transition in his F&O. (b) These transactions are entered by brokers. M/s Anugrah Stock & Broking Pvt Ltd, M/s Labdhi Finance Corporation and M/s Wellworth Share & Stock Braking Ltd. and shown as modified in the assessee company's name. (c) It was also reported by the Assessing Officer that the assessee has entered and settled the transactions on the same day and it has resulted in loss of ₹ 1,55,89,067/- (i.e. 28,19,798 - ₹ 1,83,98,865/-). It was further reported that the assessee's F&O transactions entered during the F.Y. 2009-10 has resulted in net profit of ₹ 1,51,17,420/-/- (i.e. 2,04,97,205 - ₹ 53,79,785/-). (d) The assessee has adjusted the loss of other companies against the profit of the assessee company and this has resulted into low profit offered for taxation. in his application made u/s 144A the assessee' has stated that the modified transactions are due to the error which has occurred in the punching by the respective brokers. He has taken the plea that the error in punching in the broker's office cannot be reason for any alleged understatement or overstatement of profit or loss by the assessee. Further, the brokers have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata includes the following:- "(i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. (ii) Details of trade time stamp for each transaction where modifications have been carried out. (iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: (iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies from the NSE is as under:- "The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non-institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs). Month No. of modifications Value of modifications in crore of rupees December, 2009 2.75 lakhs 21,896 January, 2010 3.36 lakhs 28,860 February, 2010 4.05 lakhs 35,241 March, 2010 6.18 lakhs 48,794 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot take place from a static position it is always done to set off a trade which has already taken place. (ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.) x) The role of code modifications comes when these synchronized trades do not work due to market volatility. To clarify, suppose there are two clients, A that wants to book a loss and B that want to book a gain. (xi) So A buys stock 'x' from, B at ₹ 100 a share in anticipation that the closing market price will be ₹ 90 rupees. But instead the stock, thanks to a volatile market, moves up and closes at a price of ₹ 110 if the position is squared at the end of the day. A would end up with a ₹ 10 profit instead of a Rs.l0 loss and B is left holding a loss instead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th, 11th, 15th, 22nd,23rd and 25th of March., 2010. (g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. (h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of this order as annexure -A to this order. (i) It could be seen from the above Annexure -A, the modifications are done in the trading hours which is against the normal trading trends and practices. Normally the genuine errors could be traced only at the end or towards the end of the trading session and corrected or modified under intimation to the exchange." Thus, the A.O. doubted the genuineness of the transaction of losses of ₹ 3,67,83,145/- as in the opinion of the AO these transactions are structured pre-planned to generate a loss arising as business loss and these transaction were entered to avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertinent to mention that Assessing Officer has not clarified as to how such interest expenditure debited in profit and loss account is related to earning of dividend. Obviously, the explanation of the appellant and evidences on records support the contention that interest expenditure is not related to earning of dividend. Because of this fact it is not correct on the part of the Assessing Officer to disallow interest expenditure mechanically under Rule 8D(2)(ii) to the extent of ₹ 8,63,137/-. Assessing Officer is therefore directed to delete the disallowance of expenditure of ₹ 8,63,137/-. As regards disallowance of expenditure of ₹ 5,32,143, being 0.5% of average investment, the finding of the Assessing Officer is found to be worth approval. Appellant has not been successful in rebutting the finding of the Assessing Officer that for earning of' dividend there is no element of expenditure. Apparently, investment activities requires support of office, employees, directors. Similarly, the part of the administrative expenses and office expenses can always be attributable for such investment activities. There cannot be any denial of such fact. Appellant has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the assessee cannot be ignored or brushed aside and hence it was observed that assessment order of the AO cannot be sustained on legal footing. After recording the above finding, learned CIT(A) granted the relief to the assessee on the grounds that the AO did not conducted enquiry as per directions of the learned Addl. CIT and the AO disallowed the said loss merely on presumption that these transactions were sham transactions to evade and avoid taxes. The learned CIT(A) observed that these client code modifications necessitated by punching errors in the office of the broker were done during normal trading hours and were as per exchange norms and SEBI circulars. It was observed that there are in few cases similarity in clients codes which were modified such as client code modification from code ANC 21 to PNL 21 as also from 31951 to 31953 The learned CIT(A) observed that when share trading income of ₹ 1,83,53,985/- is brought to tax by the AO, it is contradictory on the part of the AO to disallowed transactional loss of ₹ 3,67,83,146/- It was thus, held that it was wrong on the part of the AO to disallow the loss by treating it as sham transaction more-so when n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee's own capital consisting of share capital and reserves was ₹ 7,98,75,873/- and investments as on 31-03-2010 was only ₹ 3,78,000/- hence, the ld. CIT(A) had rightly allowed the interest expenses incurred by the assessee. It was submitted that shares of ₹ 12,50,94,940/- were held as closing stock-in-trade as at 31-03-2010 and our attention was drawn to page 9 and 13 of paper book filed with the tribunal wherein Profit and loss account and schedules to the account are placed. It is submitted that if shares are not held as investments but as stock-in-trade, no disallowance u/s 14A is warranted as profit from trading are chargeable to tax as business income and shares were held not for earning dividend income but for earning profits from business. The learned counsel also submitted that owned funds of ₹ 7.98 crores representing by share capital and reserves are much higher than investment of ₹ 3,78,000/- held by the assessee in sharesWith respect to client code modifications, it was submitted that confirmations were filed from brokers which are placed in paper book/page 37-67. It was submitted that SBI and NSE circulars allow client code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 7,98,02,973/- (consisting of share capital + reserves-miscellaneous expenditure(debit)). We have observed that the Mumbai-tribunal has decided this issue in the assessee's own case in ITA no. 4847/Mum/2016 for assessment year 2012-13 vide orders dated 07-03-2017, wherein the tribunal held as under: "4.During the course of hearing before us, the Authorised Representative (AR) relied upon the cases of HDFC Bank Ltd (383 ITR 529), India Advantages Securities Ltd (380 ITR 471), Max India Ltd (290 CTR 76). The Departmental Representative (DR) left the issue to the discretion of the Bench. 5.After hearing the rival submissions, we find that the only issue to be decided is as to whether the expenditure eligible to stock in trade can be disallowed invoking the provisions of section 14 A r.w.r.8D of the Rules. We find that in the cases relied upon by the AR, it has been clearly held that no disallowance u/s.14A r.w.r 8D of the Rules, can be made for the securities held as stock in trade. The reason behind it is not difficult to understand. Income arising from the business of an assessee is taxed under the head business and profession. So, all the expenses have to be considered while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Details of trade time stamp for each transaction where modifications have been carried out. (iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: (iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies received from the NSE is as under:- "The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non-institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs). Month No. of modifications Value of modifications in crore of rupees December, 2009 2.75 lakhs 21,896 January, 2010 3.36 lakhs 28,860 February, 2010 4.05 lakhs 35,241 March, 2010 6.18 lakhs 48,794 April, 2010 1.62 lakhs 11,882 (ii) The increase in the client code modifications in the equity derivative segment in March, 2010, is in spite of the fact that trading volume and tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.) x) The role of code modifications comes when these synchronized trades do not work due to market volatility. To clarify, suppose there are two clients, A that wants to book a loss and B that want to book a gain. (xi) So A buys stock 'x' from, B at ₹ 100 a share in anticipation that the closing market price will be ₹ 90 rupees. But instead the stock, thanks to a volatile market, moves up and closes at a price of ₹ 110 if the position is squared at the end of the day. A would end up with a ₹ 10 profit instead of a Rs.l0 loss and B is left holding a loss instead of the anticipated profit. (xii) What the helpful broker does then is to swap the 2 client codes after the close to trading hours, thus gifting A a loss and B a profit. Since on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. (h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of this order as annexure -A to this order. (i) It could be seen from the above Annexure -A, the modifications are done in the trading hours which is against the normal trading trends and practices. Normally the genuine errors could be traced only at the end or towards the end of the trading session and corrected or modified under intimation to the exchange." The assessee in response to notice dated 18-03-2013 issued by the AO did not file any reply before the AO rather sought directions from the Addl. CIT u/s 144A to the AO to not making any disallowance of loss incurred through the transactions of client code modifications, who observed that large number of code changes had been made in assessee's case during the month of March 2010 which were claimed to be punching errors. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes. The A.O. accordingly disallowed the loss claimed of ₹ 3,67,83,146/- and added the same to total income of the assessee, vide assessment order dated 28-03-2013 passed u/s 143(3) of the 1961 Act. The learned CIT(A) while deciding first appeal observed that directions were issued by learned Addl. CIT u/s 144A to AO to cause verifications from NSE as to factual position as per submissions of the assessee and to ascertain correct facts on the basis of information so gathered afterwards from various sources which was not done by the AO. The learned CIT(A) observed that the AO was also directed by learned Addl. CIT vide orders dated 22-03-2013 u/s 144A to determine whether client code change which has appeared in large number in the month of March 2010 , had the effect of reducing the tax payable by the assessee and to see whether the same was adopted as an device for tax avoidance. It was observed by learned CIT(A) that the AO has not made any further investigation or enquiry nor caused any verification from the brokers namely Anugrah Stock and Broking Private Limited, Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Ltd or from Vice President Investigati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 Act which provides as under : "Powers of the [Commissioner (Appeals)]. 251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or 7annul the assessment [(aa) ****** (b) ****** (c) ****** (2) The [Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.-In disposing of an appeal, the [Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the [Commissioner (Appeals)] by the appellant." If the powers of the learned CIT(A) are co-terminus to the powers of the AO including the power of enhancement, the same cannot be used in an arbitrary manner but need to be exercised in a manner to achieve the mandate of the 1961 Act which is directed towards collection of correct taxes from the taxpayer. Any exercise of the power by learned CIT(A) in an arbitra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive figures for January, 2010 was 863 modifications for a total value of ₹ 461crores. (iv) The above facts would indicate that the modifications made were part of an organized tax evasion racket which should be dealt with firmly. (v) the important point to note is that client codes of deals carried out were changed by the brokers after the close of normal trading hours. The income tax act u/s 43(5) normally considers any transaction in which a contract for purchase or sale of any commodity including shares is settled other than by actual delivery or transfer as a speculative transaction. One of the exceptions to this position is contained in proviso (d) to S. 43(5) which states that an eligible transaction in respect of trading in derivative referred to in clause (act) of section 2 of the Securities Contracts Regulation Act, 1956 (42 of 1956) carried out in a recognized stock exchange) shall not be deemed to be a speculative transaction. An eligible transaction is one which is carried out. electronically on screen based systems and supported by a time stamped contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment. When the powers are granted by statute, the same need to be exercised in a manner to achieve the mandate of the 1961 Act to compute correct taxes in the hands of tax-payer. The powers cannot be used in an arbitrary manner otherwise the orders passed in pursuance of such arbitrary use of powers will enter the arena of perversity. The learned CIT(A) was fully aware that the AO could not comply with directions of learned Addl. CIT issued u/w 144A to conduct relevant enquiry, examination and verification as was directed by learned Addl. CIT due to matter getting time barred on 31-03-2013 as direction were issued only on 22-03-2013, it was incumbent on the learned CIT(A) to conduct the necessary enquiry , examination and verifications as were directed by learned Addl. CIT or should have directed AO to conduct such enquiry and furnish remand report to the learned CIT(A) before any relief could be granted by learned CIT(A)). The AO after relying on large number of judicial precedents held the transactions to be collusive and sham with an intent to evade taxes. The learned CIT(A) whose powers being co-terminus with the powers of the AO entered into blame game by blaming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation.Rather the circumstances seen cumulatively takes it to a higher pedestal than being mere a suspicion. We are conscious of the fact that suspicion howsoever stron cannot take the place of proof. The liability to tax under the provisions of the 1961 Act is required to be fastened on the touchstone of preponderance of human probabilities , and strict proof / evidences as required under Indian Evidence Act, 1872 may not be pressed to fasten the tax-liability. No-doubt the assessee has placed on record broker confirmations but perusal of these conformations to suggest that such a large magnitude of client code modifications were carried out in the last month of the previous year i.e. March 2010 and that too in 9 trading sessions and all being ascribed to punching errors do not inspire confidence rather it clearly suggest a collusive, manipulative rigged action by persons acting in concert to evade and avoid taxes which needed further probe to fasten tax-liability on the assessee. We have also gone through brokers confirmation which are part of the paper book/page 37-67 and we have observed that client code is changed from 4403 to 61495 on 04-03-2010 by Wellworth Share and Stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange. If the transaction is held to be 'non-genuine', we are afraid circulars of NSE/SEBI relied upon will not be applicable. Reference is drawn to circular no 663 dated 29-07-2010( Ref. No.: NSE/INVG/2011/184840 issued by NSE wherein it is clearly stipulated as under(relevant portion is extracted below): " The Exchange has provided the facility of client code modification only to rectify genuine errors. Further, as per point 2(a) and 3(B) of the SEBI circular date dated July 5, 2011 , the following client code modifications would be considered as genuine modifications , provided there is no consistent pattern in such modifications; i) Where original client code/name and modified client code/name are similar to each other but such modification are not repetitive. ii) Where original client code and modified client code belong to a family. ( Family for this purpose means spouse, dependent parents, dependent children and HUF)." The assessee case does not fall under the above category of genuine client code modifications allowed by NSE as we have seen that in large number of client code modifications, there are no similarity between wrong code and correct code and secondl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessment and on facts it was held that the AO is suspecting income to have escaped assessment rather having reasons to believe that income has escaped assessment. These cases relied upon by the assessee were clearly distinguishable and are not relevant for deciding the instant appeal wherein facts are materially different as set out above. For Now, we are of the considered view, the appellate order of the learned CIT(A) cannot be sustain in the eyes of law as it is suffering from serious flaw and is perverse as indicated by us as above, and hence we are inclined to set aside the order of learned CIT(A) and restore the matter to the file of the learned AO for fresh adjudication of the issue on merits in accordance with law and in compliance with directions issued by Addl. CIT vide orders dated 22-03-2013 passed u/s 144A of the 1961 Act. Needless to say proper and adequate opportunity of being heard shall be granted by the AO to the assessee in accordance with principles of natural justice in accordance with law. The AO shall admit all relevant evidences and explanations submitted by the assessee in its defense. We order accordingly. 10. In the result, appeal filed by the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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