9911796707
TMI Blog2020 (8) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... d to brokers for providing alleged entries through CCM." 2. In Ground no. 2, the assessee has challenged the action of the ld CIT(A) in confirming the addition made by the AO on account of transferring of fictitious profits/loss to other clients in the garb of client code modification. 3. The assessee is an individual and engaged in the business of trading in shares and securities as well as doing trading in derivative segment. The assessee filed his return of income on 30th September, 2009 declaring total income of Rs. 1,96,24,560/- which was assessed under section 143(3) on 21.11.2011. Subsequently, the AO reopened the assessment by issuing notice under section 148 on 29th March, 2016 by recording the reasons that information has been received from the ADIT (Investigation) Unit-1(3), Ahmedabad regarding fictitious profits and losses were created by some brokers by misusing client code modification facility in F&O segment on NSE. The AO accordingly proposed to assess an amount of Rs. 13,07,110/- on account of shifting out profits in the garb of client code modification. The AO completed the assessment under section 143(3) read with section 147 whereby an addition of Rs. 10,29,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of ITO vs. M/s. Abhishek Fincap Services Pvt. Ltd. in ITA No. 2750/Del.2017 dated 13.09.2017. The ld. A/R has also relied upon the decision of the Coordinate Bench in assessee's own case for A.Y 2010-11 wherein on similar facts and circumstances of the case, the appeal of the assessee was allowed. 5. Per contra, the ld. D/R has relied upon the orders of the authorities below and submitted that the AO has received the information from Investigation Wing whereby it was found that certain brokers were indulged in shifting the fictitious profits/losses in the garb of client code modification in the Stock Exchange. The assessee has also claimed loss on account of client code modification, therefore based on the material as gathered during the investigation, the disallowance made by the AO is justified. Further, he relied on the findings of the lower authorities. 6. We have heard the rival contentions and purused the material available on record. We find that the Coordinate Bench in assessee's own case for A.Y 2010-11 (supra) has dealt with the identical matter and its findings read as under: "5. We have considered the rival submissions as well as the relevant material on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pened during the course of large volume of trades executed by the broker on behalf of various clients. Therefore, this is a normal business practice on daily basis as per the guidelines of the NSE. The Coordinate Bench of this Tribunal in case of DCIT vs. Gyandeep Khemka in ITA No. 695/JP/2018 and C.O. No. 15/JP/2018 dated 23.10.2018 has considered an identical issue in para 11 and 11.1 as under :- "11. We have considered the rival submissions as well as relevant material on record. We note that the Assessing Officer has reopened the assessment on the basis of the information in the shape of the report of the Investigation Wing of Mumbai and Ahmadabad. There is no dispute that the assessee has done trade at stock exchange through the stock broker M/s C.M. Goyenka Stock Brokers Pvt. Ltd. and during the year under consideration, there were various instances of Client Code Modification whereby certain transactions were executed in the name of the assessee, were subsequently modified as to the other clients of the said broker. This modification was done as per the norms of the stock exchange which allows the brokers to carry out necessary Client Code Modification after execution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fted from one client to another client to serve the interest of parties. Prior to the execution of the transaction, it is not possible to conceive or preconceive the transfer of the transaction from one account to another account. We note that the Assessing Officer has not conducted any enquiry in this matter but has passed the assessment order based on the report of the Investigation Wing. The assessee has specifically raised objection and demanded cross examination which was denied by the Assessing Officer in para 4.8 of the assessment order as under: "4.8 The Ld. A/R also contended for jccross examination of brokers u/s 131 by placing reliance upon certain case laws and requested for providing relied upon documents viz. statements etc. The relied upon details were provided from time to time to the Ld. A/R during the course of hearing and the modus operandi was discussed in detail. The Ld. A/R was also made aware of the Hon'ble Supreme Court judgment in the case C Vasantlal & Co. V/s CIT 45 ITR 206(SC) (3 Judge Bench) wherein the Apex court had observed that "...the ITO is not bound by any technical rules of the law of evidence. It is open to him to collect material to fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies alongwith brokers are in collusion. Further there should also be exchange of money between the parties as a consideration for such a transfer of profit. Even otherwise when it is not found that originally these trades were carried out by the broker as per the instructions of the assessee and subsequently these were transferred in the account of the other persons to shift the profit. 11.1. We note that this issue of rectification of the error by using the Client Code Modification facility has been considered and decided by this Tribunal in the series of decisions as relied by the assessee. The Coordinate Bench of this Tribunal in the case of Nobel Securities Vs ITO (supra) has also considered an identical issue in para 3.1 to 3.4 as under: "3.1 Apropos Ground No. 2 and 2.1 of the assessee, the facts as emerges from the order of the ld. CIT(A) is as under:- 5.3.1. I have gone through the assessment order as well as submissions made by the appellant. Following facts have emerged. 1. That the appellant is a partnership firm engaged in the business of trading in share. 2. That the firm is doing trading on its own behalf and on behalf of its clients. 3. That on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. The appellant has claimed that the purchases were wrongly done in the name of M/s. Noble Securities inadvertently punching its client code and that subsequently it was rectified by the brokers within time allowed by the exchange. So the whole submission of the appellant is hinged upon the inadvertent mistake of the staff in punching the wrong client code i.e. client code of the appellant instead of client code of its clients. However, the appellant's claim, to my mind, is hollow as clearly made out by the AO in the assessment order that such modifications are done 2380 times involving 55 clients over a period of 197 days during the year under consideration. Mistake cannot be repeated so brazenly over such a number of times. Even if the end of the session, still the facility cannot be allowed to be manipulated for undue gains and create a situation where the income/loss can be diverted. In this regard, I have also taken into account the Apex court judgement in the case of Mcdowell & Co. Ltd. It is worthwhile to quote from the landmark judgement as under:- ''Misra,J. who delivered judgement on behalf of himself and three other Judges (other than Reddy. J.) extracted the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity with which such transactions have been effected, the AO is justified in rejecting the claim of the appellant and added such transaction in the hand of the appellant's income. Accordingly, the addition of Rs. 27,63,104/- is sustained. Appellant's ground of appeal on the issue is dismissed.'' 3.2 During the course of hearing, the ld. AR of the assessee prayed for deletion of addition by filing the following written submission. ''1. It is submitted that the assessee is a trading in share business not in the capacity of broker but on its own account and for it clients. The assessee, itself, is a client of M/s Artistic Finance Pvt. Ltd which carried out transactions on behalf of the assessee and the clients of the assessee. Every client is assigned a unique client code which is punched in at the time of transactions. The AO issued notice u/s 131 to M/s Artistic Finance Pvt. Ltd. who vide letter dated 05.03.2016 (PB 37-38) explained that the assessee is its major client and provides them with a huge volume of transactions. The operating staff who are not well qualified, to save time had prefixed the client code of the assessee in the system as default which led to error in punchi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when pointed out, it was transferred to the respective client account who have shown the same in their return of income. Thus, assessee has nothing to do with this loss and therefore, there does not arise any question to disallow the same. 5. The Ld. CIT(A) only on surmises and conjectures observed that these transactions are of the assessee ignoring that M/s Artistic Finance Pvt. Ltd. has admitted that these transactions are not of the assessee. The reliance placed by him in case of McDowell & Co. Ltd. is thus misplaced and not applicable. 6. Reliance in this connection is placed in the case of ACIT Vs. Kunvarji Finance Pvt. Ltd. 119 DTR 1 (Ahd.) (Trib.) where it was held that as per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / 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 is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that 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. It may be noted that ITAT Ahemdabad Bench in the case of ACIT vs. Kunvarji Finance (P) Ltd. 119 ld. DR 1 had observed that the client code modification is permitted intra day i.e. on the same day. The relevant portion of the decision is as under:- ''As per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable. 12. Under these set of facts, the next question that arises is - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee. It is a fact that the assessee company has started its operations only in July, 2005 by converting individual membership into corporate membership. Further, the commodity exchange was about 3-4 years old only at the relevant point of time. Hence, the assessee cannot be considered to be an established player in the years under consideration. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of shifting of profit would arise between the related parties only. If the assessee had really shifted the profits to an outsider, then the human probabilities would suggest that the assessee would have received back corresponding amount from the recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view. 15. The Ld CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% of the total transactions only and in our view, the said volume, in fact, vindicates the explanation of the assessee. Further none of the clients has been found to be bogus and all of them have complied with KYC norms, meaning thereby the identity of all the clients stand proved. None of them has disowned the transactions and all of them have also declared the income in their respective returns of income. All these factors, in our view, support t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 11:55 p.m. the client code modification will be allowed only upto 12:00 p.m. d. At all times, Proprietary trades shall not be allowed to be modified as client trades and client trades shall not be allowed to be modified as proprietary trades. e. In order to ensure that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under: S. No Percentage of Client Code changed to total orders (matched) on a daily basis Penalty (Rs.) 1 Less than or equal to 1% Nil Nil 2 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 clarifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. When the client 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 ld. Assessing Officer has computed the notional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 involvement of the assessee for shifting the alleged bogus loss/profit, the disallowance made by the AO is not sustainable in law. The AO has just reproduced the report of the Investigation Wing wherein general observations were made based on the investigation that some of the brokers are indulged in transferring fictitious profit/loss from one client to another client in the garb of client code modification. The AO has discussed the modus operandi of the broker for doing these activities. However, nothing has been brought on record to show that the assessee has done anything wrong in respect of the claim of loss of Rs. 3,12,790/- whereas the assessee has declared ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
