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TMI Blog2023 (5) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... it or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. Thus, we have no hesitation in quashing the reassessment proceedings as they are not sustainable in the eyes of law. Decided in favour of assessee. - ITA No. 6438/Del/2019 - - - Dated:- 3-5-2023 - SHRI C.M. GARG, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER For the Assessee : Sh. Ritesh Bajaj, Adv For the Revenue : Sh. Vipul Kashyap, Sr. DR ORDER PER M. BALAGANESH , A. M. 1. This appeal of the assessee in ITA No. 6438/Del/2019 for A.Y. 2009- 10 arises out of the order by the Ld. Commissioner of Income Tax(Appeals)-31, New Delhi in appeal No. 231/18-19/10607-16-17 dated 12.06.2019 (hereinafter referred to as Ld. CIT(A) in short) against the order of assessment passed u/s 147/143(3) the Income Tax Act, 1961 (hereinafter referred to as Act) dated 28.12.2016 by the Ld. ACIT, Circle- 6(2), New Delhi (hereinafter referred to as ld. AO). 2. The assessee has raised the following gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any verification of the facts, this additional ground is admitted and taken up for adjudication. 5. We have heard the rival submissions and perused the materials available on record. The assessee company is engaged in trading of derivatives. The return of income for AY 2009-10 was filed by the assessee on 30.09.2009, declaring total income of Rs. 1,76,79,150/-. The assessment was completed u/s 143(3) of the Act on 23.12.2011 accepting the return of income. Later, this assessment was sought to be reopened by the ld AO on the ground that the assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. This fact got unearthed pursuant to survey conducted in some other case. The reasons recorded by the ld AO for reopening of the assessment are reproduced herein:- The assessee has filed return of income on 30.09.2009 returning a total income at Rs.1,76,79,150/-. The scrutiny assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter The Act ) has been completed on 23.12.2011 determining income at Rs. 1,76,79,150/-. 2. In this case information dissipated by the Pr. DIT(Inv.), Ahmedabad that in survey u/s 133A it was found that some brokers by m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted revealed that some broker was involved by misusing the client code modification facility of NSE and engaged in providing non-genuine losses and profits. The reason does not specify whether the broker through whom the assessee had carried out the transaction of trading of derivatives was involved in such malpractices; 8. We find that the assessee have been objecting right from the beginning that it is not aware as to how the figure of loss of Rs. 46,07,275/- of income escaping assessment mentioned in the reasons, was even arrived at. This is evident from the reply letter dated 26.12.2016 filed by the assessee before the ld AO wherein, the assessee had categorically denied that the broker had carried out any client code modification in its case to book artificial losses. The assessee had also stated that it is not even aware as to how the figure of Rs. 46,07,275/- regarding alleged artificial loss booked through CCM mentioned in the show cause notice was even arrived at nor is there any information regarding the broker who is alleged to have carried out client code modification. The assessee submitted that it had no details of transaction of Rs. 46,07,275/- in its records. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons by way of client code modification by the broker has resulted into any income to the assessee, which could be assessed under section 68 as cash credit. 5.1 He submitted that learned Assessing Officer acted only on the basis of suspicion and it could not be said that it was based on belief that income chargeable to tax had escaped assessment. He referred to page 5 of reasons recorded where the learned Assessing Officer noted that: The assessee s code was modified 44 times in OCC to shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs.4,420/-. The data clearly shows that the modification was not no grounds of feeding in erroneous data. He further submitted that finally while making the addition learned Assessing Officer at page 16 of order of Assessment, however, concluded that : In view of above, the profit of Rs. 6,47,201/- claimed by the assessee in the above mentioned transactions is treated as a contrived profit artificially generated through the misuse of the CCM. The profit is, therefore, liable to be taxed and added to the total income of the assessee as un-explained investment u/s 68 r.w.s. 115BBE of the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee s broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. 5.5.1 Further, the Tribunal in Radiance Stock Traders (P) Ltd. vs. ITO (supra), has held as under: 6.1 After perusing the aforesaid reasons recorded, I find that information was received on 21.3.2016 from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad without conducting any enquiry on the same by Assessing Officer and without considering the fact of the case of assessee in light of the issue is not a tangible and relevant material to form opinion that income has es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be confronted alongwith reasons wherein it has been held as under: (iii) where the reasons make a reference to another document, whether as a letter or report, such document and / or relevant portions of such report should be enclosed alongwith the reasons. 6.3.1 Hence in the absence of such material, the allegation and assumptions are nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis. 4.8 In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction, hence, the reassessment is quashed. 5.5.2 Similarly, in the case of Kamal Kishoree Aggarwal vs. ACIT (supra), the Tribunal has observed as under: 7. I find that the reasons recorded for issuance of notice u/s 148 was as under: REASONS FOR BELIEF THAT THE INCOME HAS ESCAPED ASSESSMENT IN THE CASE OF SHRI GOPAL GUPTA FOR THE ASSESSMENT YEAR 2009-10 As Survey Report in R/o client code modification (CCM) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income on 27.09.2010 declaring Rs.5,06,454/- income. The details of the directors of the assessee company obtained from recants are hereunder:- (a) Alul Sethi (b) Gautam Jagga The return has been verified A digitally signed by Shri Atul Sethi. 2. Thereafter, the return was processed under 143(1) of the IT Act. However, the case was not selected for scrutiny/or scrutinized us 143(3) of the Act. Subsequently, information through email was received on 11/03/2016 from Asstt. Director of Income Tax (Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses shifted old profits using Client Code Modification. 3. It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client code is unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-genuine iv. Both buy and sell log of different trades have been modified to most of the client. v. Number of trade client code modifications substantially increased during the closing months of the financial year. vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F O segment. vii The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix. These brokers revised their computation for A.Y 2010-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted have accepted and withdrawn their c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were making changes in the client details after execution of trades citing genuine errors In April 2012, SEB1 passed an order against NSE for being negligent in discharge of its duties in a case of modification of client codes. 9. The report of Ahmedabad Investigation Wing has been compiled after taking into account the findings of SEBI, DG I CI. Data available with department in form of Form no. 3BB and the information collected by way of surveys. The report points out that the essence of lax evasion through CCM is that if the Broker has punched in both Buy and Sell Orders for a given quantity of a given security then at the end id the trading session he has with him an ascertained loss/gain on this Buy Sell pair that he can shift during the CCM window. The analysis of the Investigation Wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders front a given Original Client Code (OCC) or to a given Modified Client Code (MCC) for a given Broker 10. The following steps were followed for analysis and computing the quantum of losses profits shifted due to the CCM: for computation of the profits and losses shifted on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lient to another only CCM wherein equal number of buy and sell trades between two clients have been shifted have been taken for computation of the losses profits shifted due to CCM. To be more specific and in simple terms, modifications which appear to be genuine or resemble at being germane were ignored and not considered in this report. Such benefit has already been given by the department. 12. I have gone through the report as well as the basic data of transaction in respect of my assessee which was supplied with the report. My findings on the issue are as under: a) The return of the assessee shows that it is involved in sale purchase in stock exchanges and its gross turnover could have included the transactions contrived by way of CCM. b) The transactions which involved CCM in case of assessee are as under i) The assessee s code was modified 44 times in OCC to Shift out profits Rs.6,42,781 and one time in MCC to Shift in loss of Rs 4.420/ - The data clearly shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: To shift out profits. The Assessee s OCC of FSTP have been modified to new codes in M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessees. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for a purpose other than genuine punching errors. 13. It should also be kept in mind that Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not he accepted as evidence in a court of law. In clandestine transactions, like that of CCM, it is impossible to have direct evidence or demonstrative proof of every move, the AO has no choice but to take recourse to preponderance of evidence available. 14. A careful scrutiny of information received from the investigation wing and subsequent analysis of report of investigation wing, data of transactions and verification at ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained losses shift out profits of Rs.6,47,201/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysts subsequent to the information, I have rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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