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TMI Blog2020 (8) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... ors happened at the broker end and not at the end of the assessee and there is nothing on record which suggest any involvement of assessee or the fact that such punching errors were done at the behest of the assessee. Accordingly, in the facts and circumstances of the case and following the decision of the Coordinate Bench in assessee s own case [ 2019 (5) TMI 1794 - ITAT JAIPUR ] the addition made by the AO is hereby deleted. - Decided in favour of assessee. - Shri Vijay Pal Rao, JM And Shri Vikram Singh Yadav, AM For the Assessee : Sh. P. C. Parwal (CA) For the Revenue : Sh. K. C. Gupta (JCIT) ORDER PER VIKRAM SINGH YADAV, AM: The present appeal by the assessee is directed against the order dated 15.10.2019 of ld. CIT (A), Ajmer for the assessment year 2009-10 wherein the assessee has raised the following grounds of appeal :- 1. The ld. CIT (A) has erred on facts and in law in upholding the validity of the order passed u/s 147 of IT Act, 1961. 2. The ld. CIT (A) has erred on facts and in law in confirming the addition of ₹ 10,29,830/- made by AO alleging that assessee was indulged in transferring fictitious profits/loss to the other clients/beneficiaries by misusing the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ker on various clients, then the Stock Exchange provides the facility to rectify the same by using the client code modification facility so that the transactions can be accounted in the right clients name which were wrongly punched in the name of some other client. Further, the stock exchange has also drawn a list of common violations committed and the applicable penalties where it is stated that if the transfer of trades/errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable . It was submitted that M/s C.M. Goenka Stock brokers Pvt Ltd has confirmed that there are certain inadvertent genuine punching errors which were modified as per guidelines laid down by SEBI vide Circular dated 6.02.2003. Thus the ld. A/R has submitted that the error in the case of the assessee is in respect of few transactions only whereas the assessee has traded in derivatives during the whole year as can be seen from the ledger account of M/s C.M. Goenka Stock brokers Pvt Ltd. The ld. A/R has relied upon the decision of Ahmedabad Bench of the Tribunal in case of ACIT vs. Kunvarji Finance Pvt. Ltd., 119 DTR 1 (Ahd. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is bogus, the AO has to prove and establish that there was a common intention of all the parties which are the number of clients of a single broker to shift the profit or loss to one account to another account. A stray incident of broker involved in manipulating the facility for shifting the profit from one account to another account cannot be considered as a general practice when nothing is on record to show that the assessee as well as the other clients are actively involved in the practice of shifting the fictitious profit or loss from each other s account in the garb of client code modification facility provided by the Stock Exchange. In the case in hand, the gross profit declared by the assessee on account of share trading is more than ₹ 3.41 crores and, therefore, the loss on account of client code modification of ₹ 3,12,790/- is negligible in comparison to the volume of the trades executed by the assessee. We further noted that the Tribunal in a series of decisions has considered this issue and find that a normal amount of error in punching the trading orders during the course of trade hour is a regular feature and, therefore, the Stock Exchange also permits a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and design which in normal course is not possible when they are not related parties as the time limit to modify the client code is very limited after execution of trade/transaction at the stock exchange. The meeting of three minds is essential for misusing this facility and doing this mischievous transfer of profits from one hand to another hand. Until and unless two clients and broker are on the same page and involved in doing this mischievous act by misusing the facility of Client Code Modification such transactions are not possible when the parties are not related to each other party and are independent clients of a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mumbai is not sole basis for reopening the case, there is material and circumstantial evidences which prove that assessee was indulged in misuse of CCM facility. All the material including trade data has been provided to the ld. A/R on 30/11/2016 itself. Thus, when the assessment order is based on the report of the Investigation Wing without any fresh and independent enquiry conducted by the Assessing Officer and the report of the investigation wing in turn is based on the statement of the brokers then without giving the opportunity to the assessee to cross examine the brokers whose statements were recorded by the Investigation Wing it would amount to violation of principles of natural justice. Though, the cross examination may not be an absolute right but once statement is recorded in the back of the assessee and is being used against the assessee then the order passed by the Assessing Officer based on such statement is not sustainable in absence of cross examination. The Hon'ble Supreme Court in the case of Amdaman Timber Industries Vs CCE 127 DTR 241, while dealing with the issue of non-grant of opportunity to cross examine the witness has held as under: 5. We have heard M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. 8. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice. Accordingly, the order of the Assessing Officer is not sustainable when the assessee was not granted an opportunity to cross examine the brokers. In the case in hand, the Assessing Officer has not given any finding that the assessee and the other parties in whose account, the transactions are treated as transfer of profit are in collusion alongwith the broker. There is nothing on record or any fact or finding by the Assessing Officer to suggest that the assessee and the other parties as well as the brokers are in collusion to carry out these transactions of transfer of profit from the account of the assessee in the accounts of other parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was a genuine mistake on the part of its staffs to have punched firm s code instead of its client s code. And that later on when such a mistake was noticed the same was deleted by deleting the trading from the firm s code and credited to the client s code. 9. That the appellant has further submitted that the mistake was done at the broker s level and the firm should not be held responsible for mistake committed by the brokers. 10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session. 5.3.2. I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability: no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise . Then, Misra. J. responded: (SCC pp. 254-55, para 45) 45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F O segment where loss and even income can be booked in clients favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon violations committed and the applicable penalties (PB 21-24) where it is stated that if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable . 3. The broker on an average executes more than 5000 trades in a day. As is calculated by the AO, the exchange is operative only 260 days in a year. Thus, in a year approximately 13 lakhs trades are carried out by the broker. Therefore, the fact that during the year, the broker had carried out 2380 modifications by using CCM facility is irrelevant as it is only 0.18% of the total trades carried out by the broker during the year. Also, the fact the assessee s client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. 4. A statement showing the details of modified client names and the profit/loss to the modified client due to CCM is at PB 27-32. Also by reply dated 15.02.2016 (PB 33-34), the assessee had submitted the confirmations of its parties in whose case modificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR relied on the orders of the authorities below. 3.4 I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures Options Segment (PB 25-26). The stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or suspicion. Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed. Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under: 11. We have heard rival contentions and perused the record. A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The Ld CIT(A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. Ali these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially. 13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of ₹ 3.31 crores and further there was change of code from one client to another client to the tune of ₹ 6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The action of the AO in assessing the above said profits in the hands of the assessee only show that there was no proper application of mind on the part of the assessing officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:- Circular no. MCX/T S/032/2007 January 22, 2007 Client Code Modifications In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under: Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-II (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under. a. The facility of client code modifications intra-day are allowed. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays and on Saturdays the same shall be allowed between 2:00 p.m. to 2:15 p.m. c. However, on the days when trading in commodities takes place till 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. That the Assessing Officer 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 Assessing Officer. 9. The Assessing Officer held the client code modifications to be malafide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the Commodity Exchange, it is evident that client code modification is permitted on the same day. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue s appeal are dismissed. In the case in hand, the AO has disallowed the claim of loss on the basis of the information received from the ADIT (Inv.) Unit-3, Ahmedabad without conducting any independent enquiry or to bring anything on record to show that a particular transaction of client code modification is bogus. Further, when the entire exercise is done by the broker and assessee is having no control over it, then in the absence of any material or fact to show the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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