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TMI Blog2019 (7) TMI 2057X X X X Extracts X X X X X X X X Extracts X X X X ..... ode Modification (CCM) facility and based on the information, AO reopened the assessment u/s 147 of the Act. Accordingly, notice u/s 148 of the Act, dated 06/12/2016 was issued calling for return of income. In response, the assessee filed its return of income on 23/01/2017 admitting loss of Rs. 36,59,561/-, which is similar to the return of income filed on 30/09/2010. Subsequently, assessee asked the reasons for reopening of the assessment. In response, the AO provided the reasons for reopening of assessment. In response, the assessee filed a letter dated 25/03/2017 informing that assessee did not indulge any CCM since the company was not active on stock- exchange during that period. However, AO proceeded with the reassessment of the case. 2.2 During the reassessment proceedings, the AO observed that the assessee is involved in transaction involving in CCM to absorb contrived losses from the other parties and AO came to the conclusion with the following observations in his order, which is reproduced below: "5.2 In this regard the details of the client code modification in assessee's account during FY 2009 -10 were called u/a 133(6) of the IT Act for from the broker CIL Secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... errors, but, has been systematically done so as to facilitate booking of contrived losses to clients as per their requirements. 6.4 Even considering the placement of the alphabets and numbers of the MCC on the keyboard, it cannot be seen as genuine punching errors. Thus these CCM are non-genuine changes even as per parameters laid out in order of SEBI Thus, from the above analysis of the assessee's account, it can satisfactorily be concluded that the real motive behind this array of CCM was to facilitate the clients to avail the losses/profits as per their requirement. 6.5 From the above it can be observed that a cluster of CCMs were used for all the modifications. Thus, CCMs are repeating between only few client codes. This cannot be a co-incidence. This shows that whole facade of the CCM was created to reduce the taxable income by shifting in losses and shifting out the profits in connivance with the broker. 6.6 Again, it can also be observed that the assessee's client code is H 176 and client codes with Whom repeated CCMs happened are HDMI, H1702, H406, H1651. From the keyboard we can see that the positions of the letters & numbers are not adjacent so as to be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment by the AO as proper with reason to believe that the income of the assessee has escaped assessment. 4.1 With regard to CCM, assessee filed a detailed written submission objecting the above addition and submitted that CCM is possible only in two circumstances, i.e., i) when the broker himself finds a genuine mistake in the clients code, he can make the correction suo-moto, whereas, ii) when the correction is made on the advice of the assessee, it can be done only by request in writing. 4.2 However, CIT(A) rejected the submissions of the assessee and dismissed the grounds raised by the assessee by observing as under: "7.16 Coming to the merits of the case, as explained elsewhere in this order, it is an admitted fact that the detailed investigation conducted by Pr. DIT(INV), Ahmadabad, revealed the fact that the assessee has availed the benefit of contrived losses by way of client code modification indulged in through its broker M/s. ClL Securities Ltd. To be precise, twelve modified transactions were carried out by the broker M/s. ClL Securities Ltd. thereby profits earned by the company to the extent of Rs.13,33,688/- was transferred out to the codes of various other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment by disallowing business loss claimed by the assessee to the extent of Rs. 20,10,867/- by observing that assessee is dealing in investment banking and during this AY, assessee has incurred loss of Rs. 13,97,928/- in investment banking, which is given below: Cash market transactions Rs. 1,32,813 Cash market long term transactions Rs. 20,15,661 Futures & option transactions Rs. (-) 35,46,403 Net Loss Rs. 13,97,928 CIT(A) observed that in the computation of income, assessee has adjusted Rs. 20,10,867/- as long term capital gain and declared total business loss under the head 'income from business or profession' as Rs. 36,59,560/-. The long term capital gains, which is declared as loss in business income is claimed as exempt u/s 10(23 ) of the Act. After giving opportunity to the assessee and considering the submissions of the assessee, the CIT(A) enhanced the assessment by bringing to tax the adjustment made in business income. He came to the conclusion with the following findings: "8.9 On other hand, in the instant case, as recorded in the books of account maintained by the assessee, the shares sold by the assessee categorised as cash market long term transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to be assessed as a revenue receipt under the head business rather than capital gains. The relevant portion of the decision is reproduced below for ready reference: "It seems to us that the High Court went beyond the matters which were the subject matter of controversy before the departmental authorities and the Appellate Tribunal. It was never the case of the assessee at any stage that although it was a dealer in shares those shares which were the subject-matter of sale were held by way of investment. It had maintained throughout that all the shares were held by it as an investor and that it could not be regarded as a dealer because the shares did not form its stock-in-trade. That case of the assessee was negatived because of the extensive dealings and other facts and circumstances which were taken into consideration. The figure of purchases and sales as also of the profits relating to the years 1954 to 1957 which were set out in the order of the President of the Tribunal justified the view that although up to a certain point of time it had been assessed as an investor, the multiplicity of the transactions occurring successively over the years supported the departmental stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares has to be treated as business income rather than capital gains. The relevant portion of the decision is reproduced below for ready reference: "The conduct and intention of the assessee has to be considered before deciding the issue as to whether the profit from purchase and sale of shares has to be treated as "capital gain" or "business income". The conduct of the assessee in the instant case by passing the board resolution to do trading in shares of various companies indicates clearly the intention of the assessee to do business in shares. Further, merely because the profit on sale of shares was accepted as "capital gain" in the preceding year will not entitle the assessee to claim it as "short term capital gain" during the impugned assessment year. It is the settled proposition of law that principles of res judicata do not apply to Income Tax proceedings and each assessment year is separate and distinct. Further, the AO in the Assessment Year 2005-06 has not gone through the Board Resolution of the company authorising it to trade in shares. It was only during the appeal proceedings for the Assessment Year 2006 -07 that the Ld. CIT(A) called for the copy of the minutes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account books they were never shown as such ; but we have indicated how the evidence and the material in this case lead to the conclusion that the shares were in fact purchased even initially not as investments, but for the purpose of sale at profit and that they were actually sold with the purpose of earning profit, so that the transactions amounted to an adventure in the nature of trade. Learned counsel also referred to the decision of this court in Ramnarain Sons (Pr.) Ltd v, Commissioner of Income-tax [I961} 41 ITR 534 to urge that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares, and, if the purpose was investment, the fact that, in varying the investment, the sale of those shares resulted in a profit will not make that profit revenue income. The principle is perfectly correct, but is not applicable to the case before us on the finding mentioned by us above that even the initial purchase of these shares by the assessee was not for the purpose of investment for earning income from dividends, but was with a view to earn profit by resale of those share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIL Securities Limited thereby depriving the assessee of its lawful rights which are against the principle of the natural justice. 5. In addition to the above, the Honorable CIT(A) failed to appreciate that the assessment under section 143(3) read with section 148 was completed without passing a speaking order. 6. Further the Honorable CIT (A) failed to appreciate in his enhanced Assessment that entries in the books of accounts alone are not conclusive evidence in determining the nature of Income. The intention of the assessee is an important factor in deciding the same. 7. Any other ground (if any) that may be urged at the time of hearing." 6. Before us, ld. AR submitted that the assessment was reopened u/s 147 of the Act with the reason that the assessee has involved in CCM transactions. He submitted that AO has no reason to believe, but, on suspicion and relying on the third parties information reopened the assessment. He submitted that CCM is possible only in two situations and these modifications are done only by the Brokers. When the broker notices certain mistakes after execution of the trades, brokers are permitted to make changes in the client code, in order to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r notice that copy of the letters written by the assessee to broker and the reply received from the broker. In the letter of the broker, namely, CIL Securities Ltd., informed the assessee that "the matter belongs to more than 8 years old. However, based on verification from available records, we do not find any instructions in writing from your company for any transaction of code modification during FY 2009-10". The copy of above letter is placed on record. 9. Considered the rival submissions and perused the material on record. We notice from the grounds of appeal, assessee has raised ground nos. 2 to 5 on reopening of assessment and confirming the addition on client code modification. 9.1 With regard to the above grounds, we observe that the assessment was reopened on the basis of specific information received by the AO from the DIT(Inv.) that the broker with whom assessee was dealing has involved in CCM. It is a fact that the broker has made CCM in the case of assessee, in which, about 13 transactions were involved. It came to light only in the reopening of assessment. When a specific information is received by the AO from the authentic sources, it is natural on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using CCM facility. These are of the malpractices made by the brokers, but, any suspicious transaction made by the broker, it has to be investigated at the broker level. In the given case, we notice that no such investigation was carried on the broker i.e. CIL Securities Ltd. AO can proceed with the addition when he has specific information that the assessee itself involved in such malpractices. In the given case, AO has not brought on record any specific instruction given by the assessee to the broker for such client code modification. It is only based on the information that there involves CCM, in which, assessee has suffered loss to the extent of Rs. 13,48,175/-. It does not mean that assessee has directly involved, may be, assessee must have benefitted out of it, but, still it is the duty of the AO to bring on record the fact that assessee has directly involved in such activities. From the record, we notice that assessee has incurred heavy losses in this year, we do not understand how shifting of profit will benefit the assessee. Therefore, in our considered view, in the absence of any findings that assessee has given specific instruction to the broker to make such CCM, assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular, the transactions involving stock-in-trade. Assessee cannot treat the above transaction as capital gains just because its long term as well as it has paid security transaction tax on the above investment. Assessee relied on Circular No. 6/2016, in which, the CBDT clarified that surplus generated from sale of shares/securities would be divided as capital gains or business income, where, a) assessee itself opts to trade them as stock-in-trade income arising from transfer of such sales would be treated as income from its business, b) in respect of shares/securities held for a period of more than 12 months, immediately preceding a date of its transfer, if the assessee desires to trade income arising from the transfer as capital gains, the same should not be disputed by the AO and c) in all other cases, nature of transaction was continued to be decided based on the Circular No. 4/2017. In our view, the above Circular may not be applicable in the case of the assessee, since the assessee's main business itself is investment banker and the transactions were specifically transacted in the normal course of business. Therefore, we are in agreement with the findings of ld. CIT(A) an ..... 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