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TMI Blog2019 (12) TMI 1228X X X X Extracts X X X X X X X X Extracts X X X X ..... initiate the action under s.147 of the Act. The reasons recorded were based on prima facie material which, in turn, clearly indicated the relationship between the formation of belief and the reasons for such belief. The belief entertained by AO is, in our view, not arbitrary or irrational. We thus see no error on the part of the AO to exercise the powers under s.147 of the Act. Ground No.1 of assessee s appeal concerning validity of jurisdiction under s.147 of the Act is accordingly dismissed. Additions made on account of losses shifted in/ profit shifted out from the hands of the assessee owing to modification carried out by the broker in the client code assigned to assessee and other corresponding client - HELD THAT:- Modifications within the relatives were also regarded as genuine errors by SEBI as per the aforesaid circular. The shifting of trade in the correct client code falling in the Distance 1 category, thus, cannot be regarded as any kind of alleged misuse of CCM facility. We find considerable force in the aforesaid plea of the assessee. It is quite plausible that error of such type by way of wrong punch of client code could occur as normal incident of business wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 category requires to be rejected outrightly. We thus decline to interfere with the action of Revenue in respect of losses falling in Distance 4 category. Having analysed the extent of modification distance-wise, the AO is directed to grant relief to the assessee in all captioned appeals in respect of losses attributable to Distance 1 and Distance 2 category. - I.T.A. Nos. 708 & 709/Ahd/2018, I.T.A. Nos. 705 & 706/Ahd/2018 - - - Dated:- 18-12-2019 - Shri Pradip Kumar Kedia, Accountant Member And Smt. Madhumita Roy, Judicial Member For the Appellant : Shri B. R. Popat And Shri Rohan Popat, A.Rs. For the Respondent : Shri Dileep Kumar, Sr.D.R. ORDER PER PRADIP KUMAR KEDIA - AM: The captioned appeals directed at the instance of assessee arise from the respective orders of the Commissioner of Income Tax (Appeals) ( CIT(A) ) against different assessment years as tabulated below: ITA Nos. Name of assessee AY CIT(A) s order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered broker. The return filed by the assessee was processed under s.143(1) of the Act. Thereafter, the case was reopened under s.147 of the Act on 30.03.2016 on the basis of certain information from the Investigation Wing of the Income Tax Department. The reasons recorded for reopening the case was provided to the assessee and objection raised by the assessee. The objections on reopening were disposed of in the course of re-assessment proceedings. The AO thereafter observed that Investigation Directorate, Ahmedabad has conducted survey under s.133A of the Act on the premises of several brokers. It was found by the Investigation Wing that Client Code Modification (CCM) facility permitted to the brokers by the Exchanges/SEBI to set out bonafide errors is being misused for tax evasion by reallocation of profits from one client to another in connivance with the brokers. List of such persons who have used CCM and took benefit by shifting out profit/shifting in losses to reduce their taxable income was also shared by the Investigation Wing with the AO. This list inter alia included the name of the captioned assessees. The trade date related to all transactions entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shifting out of profit of and shifting in of losses. Thus, by resorting to CCM, in total the income was reduced by ₹ 1,16,078/- by the appellant. Accordingly, the AO added ₹ 1,16,078/- to the income of the appellant. The present appeal is against the above action of the AO. It is seen that the appellant carried out large number of transactions in stock exchange through broker Mangal Keshav Securities Limited, Investigation Wing of the Income Tax Department at Ahmedabad had carried out surveys u/s 133A of the Act on brokers in Ahmedabad and had analysed data from different stock exchanges from F.Y. 2009-10 to 2010-11. Analysis of this data indicated that there was systemic shifting of huge crystallized losses using CCM in the F O segment at the National Stock Exchange. This analysis indicated that CCM was used for purpose other than for rectifying genuine errors. Name of the appellant figured in the list of persons who had used CCM to shift out profit/shift in losses. In survey u/s 133A of the Act on Mangal Keshav Securities, broker of the appellant, it was found that the broker indulged in large scale Client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis or digit edit analysis which helps to know the minimum number of edits required to change one code to another. This analysis indicates whether the code is wrongly typed or is completely replaced. In the case of the appellant, for 33 CCMs on average 1 edit happened for each CCM. This establishes that CCMs were not carried out to rectify any genuine error rather to completely replace one client code with other. Further, based on survey u/s 133A of the Act in the case of the broker Mangal Keshav Securities, it was found that the broker had indulged in large scale CCMs to facilitate losses and profits as pr requirements of its clients. The AO had information that Keshav Mangal had carried out very high number of CCMs on the NSE F 0 segment as follows:- F.Y. Total CCM 2008-09 33501 2009-10 48358 2010-11 32021 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in order to evade tax on stock exchange transactions. The appellant is one of several of such beneficiaries who in connivance with their brokers have benefitted from CCMs. Ratio of decisions relied on by the appellant is not applicable to the present case as these are distinguished on facts. Further, the SEBI Circular relied on by the appellant is not applicable since 19.08.2016 and here the period is F.Y.10-11. In view of discussion above, it is held that the AO was justified in making addition of ₹ 1,16,078/- Accordingly, addition of ₹ 1,16,078/- is upheld. This ground of appeal is rejected. 7. In the result, the appeal is dismissed. 7. Further aggrieved by the denial of relief claimed before the CIT(A), the assessee preferred appeal before the Tribunal. 8. Before the Tribunal, the learned AR for the assessee raised two fold objections; (i) challenged the jurisdiction assumed under s.147 of the Act and (ii) claimed that the Revenue authorities have misdirected themselves on facts and law on the aspects of merits of the addition. We would quote the arguments advanced on behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he details of all the modified trade data by using client code modification ie. modified trade in which the assessee was original client as well as the modified trade in which the assessee was modified client. In respect of the modified trade transaction by using client code modification (CCM) it is pertinent to mention that Client Code Modification means modification / change of the client codes, after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. Every client is given a code which is registered with the stock exchanges. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Over a period of time, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he criteria. Therefore, in order to investigate the gamut behind the CCM the Directorate, Ahmedabad Investigation Wing has collected all India data of CCM from different exchanges and analyzed the data, The preliminary analysis of this data indicates towards the systemic shifting of huge crystallized losses using CCM. The results of the analysis indicate that the finding of SEBI that CCM was used for purpose other than for rectifying the genuine errors was nothing but a euphemism for Tax Evasion. In view of the above, this office has also analyzed the trade data in which CCM was resorted. On analysis of the trade data for the year under consideration, it is seen that in this case the assessee has shifted out total profit of ₹ 128678/- and shifted in the losses of ₹ 12600/-. Thus, by resorting the CCM, the assessee has reduced the taxable income to the tune of ₹ 116078/-. Further, in order to ascertain the total no. of edits in both type of modification i,e. when the assessee was original client (OCC) and when the assessee was modified client (MCC), analysis of the modified transaction ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and is not required to hold conclusively against the assessee. The test of jurisdiction under s.147 of the Act is not the ultimate result of the inquiry but whether the AO entertained a bonafide belief upon the definite information presented before him. Power under this Section, of course, cannot be exercised on mere rumors or suspicions. If there is tangible material showing escapement of income, that would be sufficient to reopen the assessment. In our view, the AO was in possession of the relevant information and material germane to the allegation to enable him to hold prima facie belief towards escapement of income. The report of the investigation wing would constitute relevant material unless such report or information is absolutely vague or based on unspecific information. However, whether material available before AO would conclusively prove the escapement is not the concern at the stage of reopening. The information available with the AO in the instant case provides specific estimate of diversion of profits due to modifications and is thus reliable in character. Such specific nature of information is capable to grant cause or justification or a suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategories as tabulated on behalf of the assessee. It will be relevant to reproduce the tabulated statement for a bird eye view of the classification: Distance-wise breakdown of CCM figures (*) Amit Shah HUF Mona Shah Amit Shah A.Y. 2011-12 A.Y. 2010-11 A.Y. 2011-12 A.Y. 2011-12 ITA No.708/A/18 ITA N0.705/A/18 ITA N0.706/A/18 ITA N0.709/A/18 DOH:03/12/19 Bench: B Distance '1'. Profit switched out 153,133 2,350 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 4,439,900 Loss switched in - - 20,976 Profit switched in - - 280,550 Loss switched out - - - 485,603 Sub-total (46,395) - (862,025} (3,694,723) Distance '4': Profit switched out - - - 220,169 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Difference, if any - - (*) Compiled on the basis of and to the extent of the soft format data supplied by the AO (**) Distance-wise breakdown not available since the AO did not supply transaction-specific details. 12.1 In the tabulated statement noted above, the assesse has segregated the extent and magnitude of modification in client code at five different levels. Distance 1 level denotes the involvement of client codes of two parties to be broadly the same except one digit difference. For instance, the client code BHA-1 and BHA-2 has only one difference i.e. in numerical number and will fall in Distance 1 . Likewise, BHA-1 and BHB-1 will also fall in Distance 1 category being only one difference in alphabet. Distance 1 is also stated to include modifications client code of relatives inter se. As regards modification falling in Distance 1 category, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of SEBI Circular. Such error in punching of trade does not call for any adverse inference. Consequently, the AO is directed to delete the losses shifted in or profits shifted out owing to modifications in client code falling in Distance 1 category as tabulated above with regard to all captioned assessees. 12.3 Adverting to purported shifting in of losses or shifting out of profits falling in Distance 2 category, it is the case on behalf of the assessee that such modification up to two alphabet or numeric in the client code also requires a benign consideration, more so, when such modification in the client code is resulted in both shifting in of losses as well as shifting out of losses and similarly shifting out of profits as well as shifting in profits covering different months. It is further case of the assessee (with reference to tabulated month-wise analysis of the data as provided by the department in soft copy) that such shifting in of losses or shifting out of profits has happened every month in both ways. For instance, the assessee has shifted in loss of ₹ 46,808/- in April 2010 itself when he cannot predict the resultant profits at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o shift in losses/shift out profit in the hands of an interested client. Such modifications in client code, in our view, do not fall within the league of bonafide error when seen on the touchstone of preponderance of probabilities. The concerted and systematic modification in client code to the advantage of assessee is an orchestrated affair to suppress profits generated on trades. We thus decline to interfere with the action of AO with reference to losses falling in Distance 3 category. 12.5 Losses resulting from client code modification falling in Distance 4 category would automatically fall in highly doubtful category as a near impossibility. The client code of one client stands substituted by an altogether modified client code. Losses resulting in the hands of the assessee from such revamp in the client code, if permitted, will obfuscate ground reality of tax escapement arising from such modifications. Such fundamental modification in the client code lacks any tangible purpose but to accommodate a willing client by the broker in wrongful indulgence. Thus, the plea of the assessee in respect of losses from modification calling in Distance 4 category require ..... X X X X Extracts X X X X X X X X Extracts X X X X
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