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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 ..... the Act 706/Ahd/18 Monaben A. Shah 2011-12 22.02.18 14.11.2017 143(3) r.w.s. 147 of the Act 2. At the beginning of the hearing, it was stated on behalf of the assessee that all the four matters captioned above are inter-connected and involves common issue. Accordingly, all the four matters were heard together for adjudication purposes. 3. We shall take assessee's appeal in ITA No. 708/Ahd/2018 pertaining to Amitkumar A. Shah HUF concerning AY 2011-12 as a lead case for adjudication. ITA No. 708/Ahd/2018 - AY- 2011-12 (in case of Amitkumar A. Shah HUF) 4. The ground of appeal raised by assessee reads as under: "1. Confirming the action of the AO in re-opening the assessment for the reasons as recorded and conveyed in due course of time to the Appellant; and 2. Confirming the action of the AO in making disallowance of Rs. 1,16,078/- and thereby making addition of the said amount to the returned income, for the reasons as stated in the body of the order." 5. The assessee filed its return of the income declaring total profit at Rs. 10,64,380/- for AY 2011-12. The return so filed included profit/loss resulting from trades carried out on the platform of stock exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was accordingly computed at Rs. 11,80,460/-. 6. Aggrieved by the action of the AO, the assessee preferred appeal before the CIT(A). The CIT(A) however did not find merit in the appeal of the assessee and observed that the assessee failed to refute the allegations of the AO which was based on concrete information and scientific analysis of data obtained from the stock exchange. The CIT(A) accordingly refused any indulgence in the conclusion drawn by the AO. The relevant para of the appellate order of CIT(A) dealing with the merits of the case is reproduced hereunder: "5.3 After considering findings of the AO and submissions of the appellant, this ground is adjudicated as under. It is seen that the AO had information that the appellant in connivance with his broker Mangal Keshav Securities had indulged in Client Code Modification (CCM) to shift in losses and the same was set off against taxable income of the appellant. The AO had information that there were 33 transactions of the appellant in which CCM had been done. By doing CCM in these 33 transactions, there was shifting out of profit of and shifting in of losses. Thus, by resorting to CCM, in total the income was red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But here, there is a set of client codes with which the modifications are done to the transactions of the appellant. Further, the AO has carried out the Levenshtein Distance Analysis 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 2011-12 243 The appellant failed to refute the allegations of the AO which were based on concrete information and scientific analysis of the same. During the appellate procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 1,16,078/- Accordingly, addition of Rs. 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 while dealing with the respective points. 9. The learned DR for the Revenue, on the other hand, relied upon the lower authorities and submitted on merits that it is highly improbable that so many transactions will require modification of client code assigned to assessee with altogether different characters in a routine manner and as a regular feature except fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes. SEBI conducted a probe into 'modification of client codes' by brokers, pursuant to observations by the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, 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 Rs. 128678/- and shifted in the losses of Rs. 12600/-. Thus, by resorting the CCM, the assessee has reduced the taxable income to the tune of Rs. 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 has also been done with the help of levenstine table. The Levenshtein Distance Analysis or digit edit analysis helps us know the minimum number of edits required from changing one code to another. The Levenshtein Distance analysis established that client code modification in this case has been done to reduce the tax liability by shifting out the ascertained profit and shifting in the contrived loss. Further, It is also necessary to mention that a survey u/s.133A of Act was carried out in the case of the assessee's broker i.e. Mangal Keshav Securities. During the course of the survey it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 supposition that income has escaped assessment and consequently would confer jurisdiction on the AO to reopen assessment. 10.5 The reliance placed on the decision of the Hon'ble Bombay High Court in Coronation Agro Industries Ltd. (supra) on behalf of the assessee is misplaced. In that case, the reason did not indicate the basis for the AO to come to a reasonable belief towards escapement and the AO had no material to prove link that modification was done to escape assessment of a part of its income and modification was not on account of genuine error. In the instant case, a live link between CCM and the assessee as a beneficiary thereof is discernable from the record before the AO at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; Distance '2' Profit switched out 525 731,192 42,016 1,501,772 Loss switched in - 1,552,986 1,195,951 169,117 Profit switched in - 2,089,409 - 261,031 Loss switched out - 84,859 24,517 1,391,957 Sub-total (525) (109,910) (1,213,450) (17,901) Distance '3': Profit switched out 46,395 - 862,025 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 Loss switched in - - - Profit switched in - - - 1,584 Loss switched out - - Sub-total - - - (218,585) Distance '5': Profit switched out - - Loss switched in - - - - Profit switched in - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts notes are issued for the correct client code and settled as per the terms of the contract. It is further case of the assessee that most of the CCMs falling under 'Distance 1' category are among the relatives bearing similar clients codes. It was thus submitted that no adverse inference in respect of such modifications should be drawn more so in the light of express SEBI circular dated 19th August, 2016 where modifications of client codes post execution of trades on national exchanges were classified as genuine errors on account of punching or typing original client code qua the modified client code bearing closely similar character. 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 while entering the orders on behalf of the client by the broker. Such errors are to be rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to assessee 'Amitkumar A. Shah HUF'. The modified client code is BHB 51 assigned to one 'Bhautik R. Gnadhi HUF'. The transaction has happened in the beginning of the financial year i.e. on 29.04.2010. It is the case of the assessee that when seen from the point of view of mistake in original client code, the punching error is in last two digits i.e. A-2 in BHA-2 and therefore the mistake is only in two digits instead of three digits as read by the Levenshtein Distance Theory applied by the AO. We do not however see any substance in the plea of the assessee for excluding additions to the extent of modifications fall in 'Distance 3' category. Not only the client code i.e. BHA-2 and BHB-51 are materially and substantially different and belongs to two altogether different clients, said punching errors are not plausible. Such so called error, if permitted in the Office of the member broker as normal incident, would create transactional chaos. The Market Regulator SEBI has also frowned hard on such modifications. Such substantial modification in client code would naturally involve some indulgence of mind with set purpose to shift in losses/shift out profit in the hands of an intereste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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