Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (8) TMI 973 - ITAT MUMBAI

2015 (8) TMI 973 - ITAT MUMBAI - TMI - Addition relating to shifting of profits made - trading activity at MCX - CIT(A) deleted addition - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee? - Held that:- 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ication 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.

None of the clients was shown as related to the assessee herein. Normally the question 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 fr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 the contentions of the assessee. CIT(A) was justif .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cal issues are agitated in these appeals, these appeals were heard together and they are being disposed of by this common order, for the sake of convenience. 2. The revenue is aggrieved by the decision of ld.CIT(A) in deleting the addition relating to shifting of profits made by the AO in both the years. 3. Facts relating to the above said issue are stated in brief. The assessee is a member of Multi Commodity Exchange of India Ltd (MCX) and National Commodity and Derivatives Exchange of India. T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rvey operations under section 133A of the Income Tax Act, 1961 (the Act) on 25.3.2008 at the business premises of the assessee. The survey team impounded many incriminating documents which indicated that the assessee was indulging in client code modification on a large-scale. The Investigation Wing recorded the statement from various clients of the assessee company, wherein they confirmed that the trade on their behalf were done either by Shri Prashant J Patel , Principal Officer of the Company .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

upon the assessee for carrying out client code modification. The Revenue sought details relating to client code modification carried out by the assessee from MCX and the same was provided by MCX, vide letter dated 22.12.2008. On examination of the details furnished by the MCX, it was observed that in many cases the trading was done initially on assessee s own code and subsequently they were shifted to various clients code. In some of the cases, the trading was done in the code belonging to one .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he same. Once the orders got executed, they were transferred to the concerned client code by the end of the day. It was also submitted that sometimes errors occurred due to punching of wrong client code and on noticing of the same, it was rectified latter. It was also submitted that such kind of modification of codes is quite normal in this trade. In this connection, the assessee relied upon a Circular dated 9th November, 2006 issued by MCX and submitted that the MCX was aware of the fact that t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he end of the day only if there is an open position in respect of any of the client. 5. The AO was not convinced with the explanations of the assessee and hence he took the view that the assessee has transferred its profits to various clients. Accordingly, the AO took the view that the profit arising out of the transactions, whose client code was modified later, should be considered as the profit of the assessee and hence the same should be assessed in its hands. During the course of assessment .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ase of Mc Dowell and Co. Ltd (1985)(154 ITR 148). 6. Accordingly, he assessed the sum of ₹ 44,80,376/- in the assessment year 2006-07 and ₹ 18,60,33,553/- in assessment year 2007-08 as income of the assessee. It is pertinent to note that the assessee had also shifted certain transactions, which had resulted in loss also to its clients, but the AO ignored the same. 7. The assessee preferred appeals challenging the assessment orders passed for AY 2006-07 and 2007-08. The ld CIT(A) pass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ly to these additional evidences also. The assessee also raised various types of objections before the Ld CIT(A) and the first appellate authority, after examining all of them, held that the impugned additions are not sustainable. 8. The ld. CIT(A) has given his decision in respect of the issue under consideration in para 6.3 to 7.2 of his order for the assessment year 2007-08. The gist of the reasoning given by the ld.CIT(A) to delete the impugned additions are summarized below : a) The assesse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sal report as forming part of the assessment order has weakened the case of the AO. b) Client code modification carried out by the assessee cannot said to be illegal. In this regard the ld. CIT(A) referred to the penalty levied by MCX for carrying out the client code modification which is given below : S.No. Percentage of Client Code changed to total orders (matches) on a daily basis Penalty 1 Less than or equal to 1 % Nil 2 Greater than 1% but less than or equal to 5% 500 3 Greater than 5% but .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that there existed a need for modification of client code was not found to be false by the AO. On the contrary, the AO has simply placed reliance on the appraisal report and drawn conclusion against the assessee. The AO was not right in drawing inference that the client code modification has resulted in the profit to client without having any other corroborative evidence. d) All the clients have complied with KYC norms, disclosed their PAN numbers and they are assessed to tax. All the clients h .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the assessee, the ld.CIT(A) observed that the same would depend upon the understanding reached between the clients and the Brokers. The Ld CIT(A) also referred to the Portfolio Management Scheme (PMS), which is gaining popularity in the recent days, and observed that the investment advisors also carry out purchase and sale of shares at their discretion without consulting the customers. Accordingly, the ld.CIT(A) has observed that no adverse inference can be drawn at this matter unless clients .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

.CIT(A) has listed out the details relating to 52 Major clients in para 6.6.6 of his order, where they have paid income tax on the profits generated from commodity trading. h) With regard to the observations regarding non-collection of margin, the ld. CIT(A) observed that the same would again depend upon the understanding between the clients and the assessee. Further, the default, if any, in this regard is required to be taken note of by the concerned regulatory body. i) In the assessment order, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ter concern and further the AO has not made out any case of shifting of profit against the receipt equivalent money in cash or money s worth. The AO had also placed reliance on the decision of Hon ble Supreme Court in the case of Associated Rubber Industries Ltd (1986) 157 ITR 77(SC) and CIT V/s Durga prasad More reported in 82 ITR 540 (SC). The ld. CIT(A) held that both the decisions are not applicable to the facts of the present case, since the documents produced by the assessee and surroundin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tement which could establish that the client code modification has resulted in the alleged shifting of profit and the assessee has received back equivalent amount of cash or anything of money s worth. Since there is no such finding, there cannot be a case that the income, which has already been taxed in the hands of clients, could be taxed in the hands of the assessee. m) In the case of Laxmipratap Singhania V/s CIT (72 ITR 291), the Hon ble Court held that it is the fundamental rule of law of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

another client and the profit pertaining to such kind of modification was ₹ 6.16 crores. The ld. CIT(A) observed that aggregate profit of both these items amounting to ₹ 9.48 crores does not warrant any addition, since they cannot be considered as shifting of profit of the assessee. However, the action of the AO in assessing the profit of ₹ 9.48 crores mentioned above only shows that the AO has failed to apply his mind and he was simply following appraisal report, which led hi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for tax in their hands and assessed. I also hold that there is nothing illegal discretionary trade carried out by the assessee on behalf of its client. The clients need not be aware of such client code modification. The requirement of collection margin is either not applicable and/or if applicable, and not collected, the same is the business understanding with the client and cannot be a basis for addition. The assessee has adequately explained the transaction and proved that income has already .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cer has not applied his mind independently in coming to the conclusion in the assessment order. The Assessing Officer could not bring anything on record which can prove that because of such shifting of profit from assessee to client, the assessee has received back the money either in cash or in other form as money's worth. Further the Assessing Officer could not point out that the client to whom profits were transferred has not accounted for such profits as their income. It was also remained .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ord. 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. As noticed by the Ld CIT(A), the MCX, the sto .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ation 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 w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. Further, we notice that the fact that the assessee has changed the code to the concerned client s account at the end of the day has not been disproved. If at all any person comes with a request seeking profits, there will normally be time lag and hence the fact that the assessee has changed the codes at the end of the day only shows that the assessee has carried out the transactions on behalf of its clients only. Such kind of transactions shall usually be sporadic transactions, where as in the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f 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. All 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version