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2015 (4) TMI 328 - ITAT AHMEDABAD

2015 (4) TMI 328 - ITAT AHMEDABAD - TMI - Undisclosed income on the basis of client code modification - CIT(A) deleted the addition - Held that:- 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 .....

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in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts, we do not find any justification to interfere with the order of the CIT(A) in this regard and the same is sustained - Decided against revenue.

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nt that there were defects and discrepancies in the various documents seized from the assessee’s premises. Such assertion by the authorize officer is found to be factually incorrect. In the affidavit of Shri Nayan Thakkar furnished before the Assessing Officer these facts have been clarified. He stated that after getting the photocopy of the seized documents and their verification with reference to the books of accounts, since no discrepancy was noticed, no undisclosed income was offered in the .....

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ies, the addition cannot be made on the basis of statement made at odd hours. Thus we find that the officer recording the statement of Shri Nayan Thakkar has mentioned that various defects and discrepancies have been observed from the papers and documents seized from the assessee’s premises. However, any defects or discrepancies were not specified. In view of the above, we are of the opinion that on the facts of the assessee’s case uphold the order of the CIT(A) - Decided against revenue. - IT(S .....

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inst the order of the CIT(A)-I, Ahmedabad dated 25.6.2010 for the Asstt.Year 2005-06. IT(SS)A.No.656/Ahd/2010 is the appeal of the Revenue and CO.No.297/Ahd/2010 is the Cross-Objection of the assessee, and are directed against the order of the CIT(A)-I, Ahmedabad dated 25.6.2010 for the Asstt.Year 2006-07. IT(SS)A.No.657/Ahd/2010 is the appeal of the Revenue and CO.No.298/Ahd/2010 is the Cross-Objection of the assessee, and are directed against the order of the CIT(A)-I, Ahmedabad dated 25.6.201 .....

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income on the basis of client code modification. 3. Brief facts of the case are that the assessee is a director in Kunwarji Finstock Pvt. Ltd. (KFPL) and is engaged in the business of commodity transaction through the broker, Kunwarji Commodities Brokers Pvt. Ltd. (KCBPL) and is an investor in shares and securities. In the Kunwarji group of cases, a search under section 132(1) of the Act was carried out on 25.3.2008. During the course of search, books of accounts and documents as per Annexures A .....

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he client code had been resorted to with malafide intention and for the purpose of transferring the profit/loss from one client to another, though he admitted in the assessment order that there are possibilities of committing mistakes that may require modification of client code. However, he was of the opinion that the assessee-company and KCBPL are the group concerns and since there was unusually high number of client code modifications in the case of the assessee, he was of the opinion that th .....

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r-wise ratio of client code modification. 4. On appeal, the CIT(A) allowed the appeal of the assessee by following his decision rendered in the case of KFPL and observed as under: 11. Grounds No. 3 which is common for the assessment years 2005-06, 2007-08 and 2008-09 is as under: 3. On the facts and in the circumstances of the case, the Assessing Officer erred in assuming that profits were allegedly suppressed by the appellant on account of Client Code Modifications by the brokers, Kunwarji Comm .....

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parties and these transactions duly matched with the data of the Commodity Exchanges. The mismatch which has been worked out by the Assessing Officer is only on account of the fact that the Assessing Officer has calculated notional profits on the assumption as if Client Code Modifications were not carried out and the transactions were closed on the expiry date. While deciding the appeals in the case of KFPL, on similar issues, it was forcefully argued before me that the addition on the basis of .....

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. 2007-08 and 2008-09 is allowed. 5. At the time of hearing both the parties agreed before us that this issue was now covered in favour of the assessee by the decision of the Ahmedabad Bench of the Tribunal in the case of ACIT Vs. M/s.Kunvarji Finance Pvt. Ltd. and Others, in IT(SS)A.Nos.615 to 618/Ahd/2010 & Others order dated 19.3.2015. 6. We find that the Tribunal in the said order dated 19.3.2015, on this issue, has held as under: 8. We have carefully considered the arguments of both the .....

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ads 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 .....

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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 2 Greater than 1% but less than or equal to5% 500 3 Greater than 5% but less than or equal to 10% 1000 4 Greater than 1 .....

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compliance. From the above, it is evident that client code modification is permitted intra-day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is ₹ 500/-. If it is greater than 5% but less than 10%, penalty is ₹ 1000/- and if it is greater than 10%, then penalty is ₹ 10,000/-. From the above, the only inference that can be drawn is that as .....

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No.4.3, the CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our 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 .....

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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 a .....

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s no basis or justification to hold the same to be malafide. 10. Moreover, the ld. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the pr .....

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brought to the charge of tax in the cases of concerned assessees. These findings of fact recorded by the ld. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It i .....

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Asstt.Year 2005-06, Ground no.3 in Asstt.Year 2006-07, Ground No.3 in Asstt.Year 2007-08, the Ground no.2 in the Asstt.Year 2008-09 are directed against the order of the CIT(A) holding that the disclosure made by the appellant cannot be assumed to be voluntary and based on seized documents. 9. The CIT(A) has decided the issue as under: 6. This ground of appeal primarily challenges the finding of the Assessing Officer that the disclosure of ₹ 12,00,00,000 made by Shri Nayan Thakkar was vol .....

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aring on this issue and the submissions made on behalf of the appellant Company. There is no dispute that during the course of search Shri Nayan Thakkar disclosed income ofRs.1-2 crores and this disclosure was subsequently confirmed by filing a letter wherein the amount of disclosure was also bifurcated. However, all the relevant facts which have been brought to my notice in the Statement of Facts and also during the course of hearing show that when the statement of Shri Nayan Thakkar was being .....

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n Thakkar was commenced at about 11 O'clock in the-night and continued upto 5.00 AM next day. I have also observed that at the time of recording the statement u/s.132(4), the authorities referred to Annexure- 1, which was made the basis of disclosure. However, there seemed to be lack of clarity and uncertainty with respect to 'Annexure-A'. Subsequently, it was informed to the assessee that the said Annexure-1 should be constituted as Annexure-A and that the said Annexure-A contained .....

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through the voluminous seized records and even the copy of the statement recorded on 25/26th March, 2008 was given to the appellant company on 20th March, 2009 after one year of the search. Moreover, I have .also verified the content of the letter dated 10-04-2008, addressed by Shri Nayan Thakkar to the Asst. Director of Income-tax. In the said letter, he has clearly stated he was allowed inspection of seized material only for about 3 ½ hours and that for . proper verification of the same .....

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dings, the Assessing Officer has been unable to refer to any seized material, on the basis of which unaccounted income could be proved or established. It proves that whatever additions have been made by theAssessing Officer are not based upon any. seized documents and the same been made on the basis of various data collected by the Department Commodity Exchange which reflected client code modifications. 3.7 "From the above referred letter dated 2nd September, 2009 addressed to Assessing Off .....

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dification details were not available and not confronted at the time of search. Code modification details were obtained by the Department from the 'Commodity Exchanges in post search inquiries and no such details were confronted at-the time of search operations and accordingly, the basis of the disclosure did not exist. So far-as the first three aspects are concerned, even the Assessing Officer has admitted that there is no such quantum of disclosure on the basis of the seized material, alle .....

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valuables, assets or expenditure. In spite of exhaustive inquiries at the time of search and during the post search inquires and also at the time of assessment proceedings no undisclosed assets or expenditure were ever found out or referred to which can correspond to the alleged undisclosed income and accordingly, the view of the appellant that the disclosure at the time of search had no basis has to be accepted." 8. For the same reasons in the present case also I hold that the disclosure m .....

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by the assessee at the time of search. 13. It is submitted by the ld. Departmental Representative that during the course of search, statement of Shri Nayan Thakkar was recorded. He is the Director of the assessee-company. In his statement dated 25.03.2008, he disclosed the unaccounted income of ₹ 12 Crores. That on 10.04.2008, he furnished a letter before the Assistant Director of Income-tax in which he gave the break-up of ₹ 12 Crores, which reads as under:- (a) M/s. Kunvarji Financ .....

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time of search was not offered; therefore, the addition for undisclosed income declared at the time of search ought to have been sustained by CIT(A). That the Assessing Officer worked out the addition on account of client code modification. Since the addition worked out due to client mode modification was more than ₹ 8 crores, no separate addition for undisclosed income declared at the time of search was made. However, when the CIT(A) deleted the addition made by the Assessing Officer on a .....

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without any pressure or coercion from the Department. In support of this contention, he relied upon the following decisions:- (i) Rameschandra & Co. vs. CIT : (1988) 168 ITR 375 (Bom.) (ii) Ramesh T. Salve vs. ACIT : (2000) 75 ITD 75 (Mum.) (iii) Dr. S.C. Gupta vs. CIT : (2001) 248 ITR 782 (iv) Garibdas Chandrika Prasad vs. CIT : 230 ITR 771 (MP) (v) Hotel Kiran vs. CIT : 82 ITD 453 (Pune) 14. The ld. Counsel for the assessee, on the other hand, stated that during the course of search, state .....

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come. However, during the course of assessment proceedings, the assessee vide letter dated 27.03.2009 requested for supplying of the Annexure-1. The Assessing Officer vide reply dated 27.08.2009 confirmed that there is no Annexure-1 but only Annexure-A which was inadvertently mentioned as Annexure-1. That when the assessee received the photocopies of all the seized documents, the assessee verified those documents with the books of accounts and found that there is not a single discrepancy in the .....

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f this contention, he relied upon the following decisions:- (i) Kailashben Manharlal Chokshi vs. CIT : (2010) 328 ITR 411 (Guj) (ii) CIT vs. K. Bhuvanendra and Others (2008) 303 ITR 235 (Mad.) (iii) DCIT vs. Ratan Corporation: (2005) 145 Taxman 503 (Guj.) (iv) CIT vs. Radhe Associates : (2013) 37 taxmann.com 336 (Guj.) 15. We have carefully considered the arguments of both the sides and perused the material placed before us. The facts of the case are that a search and seizure action was conducte .....

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fered income of ₹ 8 crores in the hands of the assessee and balance ₹ 4 crores in the hands of individuals and other group entities. In the Return of Income, no undisclosed income was offered for taxation as was admitted in the statement during the course of search. However, an affidavit was furnished retracting the statement given at the time of search. The Assessing Officer did not accept the assessee s affidavit and the submissions made during the course of assessment proceedings; .....

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e irregularities in the business affairs of the company and discrepancy in income, and worked out for different years (A.Y. 2005-06 to 2008-09) is ₹ 17.71 Crores, which is in excess of the amount of ₹ 12 crores voluntarily disclosed by the Kunwarji Group , no separate addition is being made on this issue in the case of the assessee. The CIT(A) was of the opinion that no addition is required to be made on account of disclosure made at the time of search. The relevant finding of the CI .....

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Facts and also during the course of the hearing show that when the statement of Shri Nayan Thakkar was being recorded during the course of search, no specific incriminating papers or documents were available and were confronted to him. As a matter of fact, voluminous records in the form of loose papers, documents, books of account and digital record were found and seized, the contents of which were never ascertained at the time of search nor the assessees of this Group were specifically informed .....

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ly, it was informed to the assessee that the said Annexure-l should be construed as Annexure-A and that the said Annexure-A contained a list of 65 items of books/ documents/ papers. It is also observed that on the basis of this Annexure-A, statement u/s 132(4) was recorded; however, the said Annexure was not made the basis of addition. Moreover, the Assessing Officer has not been able to deal with the contents of affidavit in a convincing manner. Regarding the delay in retraction, the facts and .....

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y stated that he was allowed inspection of seized material only for about 3 ½ hours and that for proper verification of the same, the copies there of may be provided. He has also stated that the disclosure was made on account of certain irregularities, defect and mistakes in record keeping and business affairs. However, there is nothing on record to prove that there was any such irregularity, defect or mistake either in the record keeping or seized material. The entire position was also e .....

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Exchanges which reflected client code modifications. 3.7 From the above referred .letter dated 2nd September, 2009 addressed to the Assessing Officer and the statement recorded u/s. 132(4), which I have perused, it becomes clear that the disclosure was obtained by the authorized officer on account of the following four counts : (1) Annexure-1 (2) Seized material "A-6, Kachha books seriated from A-18 to A- 29". (3) Other irregularities / discrepancies (4) Client code modification. It i .....

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ree aspects are concerned, even the Assessing Officer has admitted that there is no such quantum of disclosure on the basis of the seized material, alleged incriminating documents or Annexure-1. So far as Code modification is concerned, it has been dealt with by me on merits while dealing with the grounds relating to the addition. Accordingly, the statement recorded u/s. 132(4) had no basis of arriving at the disclosure of ₹ 12 crores which did not contain any year or which did not even re .....

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re were ever found out or referred to which can correspond to the alleged undisclosed income and accordingly, the view of the appellant that the disclosure at the time of search had no basis has to be accepted. 16. The Revenue aggrieved with the order of the CIT(A) is in appeal before us. 17. Before coming to the factual arguments of both the sides, it would be more appropriate to first discuss the judicial pronouncements relied upon by the ld. CIT-DR as well as ld. Counsel for the assessee. The .....

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Officer made the addition of ₹ 18,052/-. The assessee filed appeal before the First Appellate Authority. The AAC admitted the appeal and deleted the addition. On appeal by the Revenue, the Tribunal held that AAC was wrong in entertaining the appeal. On a reference, the Hon ble High Court has held that the Appellate Assistant Commissioner had no jurisdiction to consider the ground of appeal against the addition of ₹ 18,052 relating to alleged suppressed sales of Sarki . 18. In the cas .....

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The order of the Tribunal was based on facts and no question of law arose from it. 19. In the case of Garibdas Chandrika Prasad vs. CIT, 230 ITR 771 (MP), heir Lordships of Madhya Pradesh High Court has held as under:- that as per the findings recorded by the three authorities, i.e. the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal, the assessee failed to show that U was an individual person, who was also doing the money lending business and thereafter the affidavit .....

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this view of the matter, it was not necessary to examine U on his affidavit. The statement given by U was on oath after the raid was on record and thereafter it appeared that U wanted to change his stand in order to oblige the assessee. The Tribunal was right in arriving at the conclusion that the money-lending business carried on by U belonged to the assessee-firm. 20. In the case of Kailashben Manharlal Chokshi vs. CIT, (2010) 328 ITR 411 (Guj), the Hon ble Jurisdictional High Court held as un .....

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ase of CIT vs. K. Bhuvanendran and Others, (2008) 303 ITR 235 (Mad.), the Hon ble Madras High Court has held as under:- dismissing the appeal, that the Tribunal had found that there was non evidence or material found during the course of search operations. The statement recorded from the assessee was subsequently retracted and rebutted. Furthermore, the statement was not relatable to any seized material. Therefore, even the statement could not be the basis for making any addition. When the sale .....

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as under:- As noticed hereinbefore, the Tribunal has observed that, in light of the retraction by Shri Pravinbhai Rupawala from the statement, it was the duty of the Assessing Officer to make further inquiry in respect of shop owners. In the Assessment Order, in paragraph No.6(1), while referring to the explanation tendered by the assessee, the Assessing Officer has referred to one of the loose papers seized during the search and seizure operation under section 132 of the Act and recorded that .....

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et Project. In these circumstances, it is not possible to accept the contention raised on behalf of the appellant that the Tribunal had omitted to consider other material. 23. In the case of CIT vs. Radhe Associates, (2013) 37 taxmann.com 336 (Guj.), the Hon ble Jurisdictional High Court held as under:- 3. We have heard Ms. Paurami Sheth, learned counsel for the Revenue and considered the impugned judgment and order passed by the learned ITAT as well as the order of assessment passed by the AO. .....

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ith respect to the office-cum-shop as well as the shops in Ganesh Plaza . It appears that while passing the order of assessment, the AO has solely relied upon the statement of the assessee which has been subsequently retracted and the question answers recorded while recording the statement of the working partner on 01.05.1996. 3.1 The issue involved in the present appeal is squarely covered by the decision of the Madras High Court in the case of K. Bhuvanendran (supra); the decision of the Delhi .....

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on of the ITAT is on appreciation of material on record and on facts. No substantial question of law arise in the present appeal. Hence, present Tax Appeal deserves to be dismissed and is, accordingly, dismissed. 24. Now we revert back to the facts of the assessee s case under the appeal before us so as to reach to the conclusion that the ratio of which of the above decisions would be applicable to the facts of the assessee s case. Xerox copy of the statement of Shri Nayan Thakkar is placed at p .....

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ded on the early hours of 26th March 2008. In the case of Kailashben Manharlal Chokshi (supra), the Hon ble Jurisdictional High Court held that if a statement is recorded at midnight, much credence cannot be given to such statement because the person would not be in a position to make any correct or conscious disclosure in a statement recorded at odd hours. The ratio of the above decision of the jurisdictional High Court would be squarely applicable to the facts of the assessee s case because th .....

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by your company. You are requested to explain the same. I am particularly showing A-6, Kachha books serialled from A-18 to A-29. You are requested to go through seized documents /papers and explain the same? Ans. I have carefully gone through the seized documents /papers shown to be by you and understood the contents. These are related to my trading as well as clients, whose complete details are maintained in my office situated at 310, Shyamak Complex, Ambawadi, Ahmedabad & Kunwarji House, A .....

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ar. I further request you to grant me sometime to pay the aforesaid tax. I further promise you that the aforesaid tax will be paid without fail. This disclosure and additional income of ₹ 12 crores is made after consulting Mr. Kunal S. Shah, Mrs. Jayanaben N. Thakkar and Smt. Rujuta D. Sheth, who are Directors of Kunvarji Commodities Brokers Pvt. Ltd. The admitted unaccounted income pertains to Kunvarji Commodities Brokers Pvt. Ltd., Kunvarji Finstock Pvt. Ltd., Kunvarji Finance Pvt. Ltd., .....

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come of ₹ 12 crores. The statement has to be read as a whole; the unaccounted income was offered in response to the information given by the authorized officer that various defects and discrepancies were observed in the seized documents. Now the question remains whether there were any defect and discrepancy in the seized documents as per Annexure-1. It was stated by the ld. Counsel that there was no Annexure-1 at all, and in response to the assessee s letter during the assessment proceedin .....

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you in the affidavit filed alongwith return of income of A.Y.2002-03 to 2008- 09 -reg. Ref: 1. Affidavit alongwith returns filed by you for A.Y.2002-03 to 2008-09 2. Your letter dated 27.03.2009 filed on 30.03.2009 You have claimed in the affidavit filed with the return of income that you have not been provided with the copies of Annexure-1, which has been mentioned in Question No.21 of statement of Shri Nayan Thakkar recorded in the course of his statement at 310, Shyamak Complex, Ahmedabad on .....

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Annexure-1. If any document / papers is made part of statement then the question of seizing the same does not arise at all. It becomes part of the statement. In the statement it is specifically referred as seized Annexure. The question posed to the assessee was based on the seized documents / books as per Annexure-A. If it were to be part of the statement then the question of same being referred as seized Annexure-1 does not arise at all. Hence, it is clarified that the seized Annexure-1 is not .....

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y defects or discrepancies in the seized papers and documents as mentioned by the Officer recording the statement vide question no.21. In the assessment order, the Assessing Officer has not pointed out any defect or discrepancy in any of the seized documents from the business premises of the assessee. The addition made by the Assessing Officer is on account of client code modification which has also been computed on the basis of information collected from the Commodity Exchange in post search en .....

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discrepancy or defect in any of the seized documents but made a general statement that there were defects and discrepancies in the various documents seized from the assessee s premises. Such assertion by the authorize officer is found to be factually incorrect. In the affidavit of Shri Nayan Thakkar furnished before the Assessing Officer these facts have been clarified. He stated that after getting the photocopy of the seized documents and their verification with reference to the books of accoun .....

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r explanation for investment in various properties, the addition cannot be made on the basis of statement made at odd hours. Similarly, in the case of Ratan Corporation (supra), the Hon ble jurisdictional High Court reiterated that when the statement made during the course of search has been retracted, then it is duty of the Assessing Officer to make further inquiries. Similar view is expressed by their Lordships of Hon ble Jurisdictional High Court in the case of Radhe Associates (supra), where .....

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were not specified. In view of the above, we are of the opinion that on the facts of the assessee s case the decisions of the Hon ble Jurisdictional High Court in the cases of Kailashben Manharlal Chokshi, Ratan Corporation and Radhe Associates would be squarely applicable. The facts in the other cases relied upon by the ld. DR are altogether different. Moreover, when there is a decision of Hon ble Jurisdictional High Court, it would be binding upon the ITAT functioning within the jurisdiction .....

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006-07, and Ground no.2 in the Asstt.Year 2007-08 is directed against the order of the CIT(A) deleting the addition of ₹ 2,03,270/- made on account of suppressed profit due to client code modification. 12. The AO made addition of ₹ 2,03,270/- in the Asstt.Year 2006-07 and 2007-08 on the basis of client code modification specific to the case of the assessee as done by the broker KCBPL. 13. On appeal, the CIT(A) observed that the facts of the case were identical as in the case of KFPL .....

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