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TMI Blog2019 (12) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asked the assessee to explain the genuineness of the client code modification the AO also confronted the report of the special auditor. 3. Rejecting the various explanations given by the assessee and observing that in the case of member (broker) group companies of the assessee, it has been held that the client code modification is by and large not for the genuine reasons and for extraneous consideration and that the assessee suppressed its income in its books of accounts by shifting its profit to other clients as alleged by special auditors in their report, the AO made addition of ₹ 1,90,71,392/-. 4. In appeal the Ld. CIT(A) deleted the addition by observing as under :- 7.3 Findings: The findings are as under:- I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objection/argument of the appellant are discussed as under:- (i) It has been stated by the A.O. in the assessment order, that the Client Code Modifications (CCM), are carried out by the group companies of assessee, to which assessee is also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. In the explanations, it has been clarified that these errors are part of the normal course business activities and permissible even as per the Circular issued by National securities Clearing Corporation Ltd. in circular no. NSCCL/SEC/2004/0464, dated 31.5.2004, where error upto 1% of the total number of transactions, is even permissible, without any fine. The circular is, reproduced as under: NATIONAL SECURITIES CLEARING CORPORATION LIMITED Download Ref No. NSE/CMPT/5128 Circular No. NSCCL/SEC/2004/0464 May 31, 2004 To, All Members, (ii) Sub:- Penalty for client code modification. (iii) In pursuance of the Bye laws and Regulations of NSCCL and in partial modification to circulars no. NSE/CMPT/4041 dated March 27, 2003 and NSE/CMPT/4991 dtd. April 16, 2004, it is hereby notified that the penalty structure for client code modification in the capital market (Cash Segment) is being revised. The new penalty structure is as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CCM done by group concerns, are genuine, The volume of CCM occurred, are within the permissible limit allowed by the SEBI, and The Exchange / SEBI, has not found any violation of rules and regulations relating to CCM, and the CCM transactions are falling within the prescribed limit. In view of the above, I agree with the arguments of the appellant and the CCM transactions, are found to be genuine. Accordingly, I hold that the A.O. was not justified in making addition on the above basis. Therefore, the addition of ₹ 1,90,71,392/- made by the A.O., is deleted. Accordingly, ground no. 12 and 14, are hereby allowed. 5. Aggrieved with such order of the CIT(A), the revenue is in appeal before the Tribunal by raising the following grounds :- (a) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete addition made on account of Client Code Modification(CCM) (b) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. However, over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. CCM especially in the Futures and Options Segment (F O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. 4. It is pertinent to note that SEBI conducted a probe into 'modification of client codes by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2010. With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year when the book profits/losses of various clients have crystallized. 5. It is pertinent to note that SEBI conducted a probe into 'modification of client codes by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2010. With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, the Indian markets were seeing client code modifications to the tune of ₹ 50,000 - ₹ 60,000 crore a month, which came down to just about ₹ 100 crore soon after SEBI's action. The probe also showed that the quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing genuine errors'. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent code and modified client code belong to a family. (Family for this purpose means spouse, dependent parents, dependent children and HUF) 9. Thereafter, vide Circular no. NSE/INVG/2011/670 dated 26.08.2011, NSE has again clarified that In the joint meeting held between SEBI and Exchanges, it was decided that the following clarifications be issued for client code modifications: The following would constitute genuine errors with regard to client code modifications: Error due to communication and/or punching or typing such that the original client code/name and the modified client code/name are similar to each other. Modification within relatives ( Relative for this purpose would mean Relative as defined under the Companies Act, 1956). 7. Referring to the decisions of the Hon ble Supreme Court in the case of Durga Prasad More reported in 82 ITR 540 and Sumati Dayal reported in 214 ITR 801, he submitted that the surrounding circumstances and human probabilities should not be ignored by the taxing authority. Referring to the decision of the Hon ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He submitted that in the instant case the revenue has not challenged the transactions nor held them to be false. Although SEBI is the regulator, however, no action has been taken by SEBI and they have not held the transaction to be non-genuine. He submitted that there is no adverse material in this case although a search has taken place and nothing incriminating was found during the course of search. He submitted that assessee is not a party to any such transaction of non genuine of CCM. He submitted that the revenue has not gone to the broker to find out as to whom this amount got shifted. He further submitted that the stock exchange has accepted the reasonable error margin up to 5% and, therefore, since the percentage of trade which are rectified are not only within the range on the lower side of the range of error margin, therefore, no adverse view can be taken. He also relied on the following decisions :- 1. M/s. Coronation Agro Industries Ltd. Vs. DCIT [WP No.2627 of 2016 ] dated 23.11.2016 2. Prashant Agencies Pvt. Ltd. and PPN Properties PVt. Ltd. Vs. ITO ITA No.3059/Del/2018 3. ITO Vs. Abhishek Fincap Srvices Pvt. Ltd. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. According to the Ld. DR the CCM is akin to penny stock. It is the submission of the Ld. Counsel for the assessee that the transactions entered into by the assessee are not found to be false or untrue and although SEBI is the regulator no action has been taken by SEBI holding that the transactions are not genuine. Further no adverse material has been found by the search party during the course of search and the revenue even have not gone to the broker who has done the CCM. It is also his argument that it is not known as to whom the account has shifted. 11. We find some force in the argument of the Ld. Counsel for the assessee. We find force in the argument of the Ld. Counsel for the assessee that client code modification is the internal matter of the broker and assessee has no control over it. The AO in the instant case has not spelt out as to on which scrips the assessee has shifted the profit. We find the AO nowhere in the assessment order has mentioned of any statement of broker of the assessee regarding the admission of any client code modification. We find in the instant case the addition has been made by the AO despite assertions by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has stated the complete details of the Modus Operandi of creation of fictitious profit and / or losses with a malafide intention of escaping taxes. However, the AO has neither proved nor lead any evidence in case of any single transaction, which he has added to the income of the assessee, being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee. 8. It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any assessee should compulsorily have the following ingredients i.e. i) A valid transaction must have been executed on the Stock Exchange. ii) The customer of the registered share broker should confirm agree that the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours. According to us, such co-relation was necessary to fasten any liability upon the assessee. 12. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed. 13. We find the Ahmedabad Bench of the Tribunal in the case of ACIT Vs. Kunvarji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Greater than 1 % but less than or equal to 5% 500 3 Greater than 5% but less than or equal to 10% 1000 4 Greater than 10% 10000 f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped. With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. in international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Members are requested to take note of the FMC directives and ensure strict compliance. From the above, it is evident 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be malafide. 10. Moreover, the Id. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client code modification can be considered in the hands Of the assessee. 11. The Id. CIT(A) in paragraph 4.13 of his order has also recorded the findings that all transactions at the Commodities Exchanges have been duly accounted in the books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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