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2015 (11) TMI 415 - ITAT AHMEDABAD

2015 (11) TMI 415 - ITAT AHMEDABAD - [2016] 46 ITR (Trib) 234 - Addition on account of suppression of profit by the assessee by way of client code modifications by the borkers in a large number of commodity transactions - CIT(A) deleted the addition - Assessment was framed u/s. 153A (1)(b) r.w.s. 143(3) - Held that:- CIT(A) while deleting the addition has noted that the A.O had calculated notional profits on the assumption as if Client Code Modifications were not carried out and the transactions .....

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URVEDI, ACCOUNTANT MEMBER 1. These two appeals filed by the Revenue are against the order of CIT(A)-I, Ahmedabad dated 22.11.2010 for A.Y. 2005-06 & 2007-08 respectively. 2. At the outset, before us, both the parties submitted that though the appeal of the Assessee relates to two different assessment years but the facts and circumstances of both the years are similar except for the assessment years and amounts involved and the submissions are also common for both the appeals and therefore bo .....

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and other things found were seized. The seized document also contained computer data belonging to assessee and accordingly, in view of the provisions of Section 153C r.w.s. 153A of the Act, proceedings u/s. 153C were initiated against the Assessee by issuing notice on 16.09.2009 and in response to which Assessee filed his return of income on 27.10.2009 declaring total income at ₹ 77,99,300/-. Thereafter the assessment was framed u/s. 153A (1)(b) r.w.s. 143(3) vide order dated 29.12.2009 an .....

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ay of client code modifications by the borkers in a large number of commodity transactions. 5. A.O has noted that Assessee was engaged in commodity transactions through its broker, Kunwarji Commodity Brokers Pvt. Ltd. He has noted that on enquiries conducted by Investigation Wing, it was revealed that Kunwarji Commodity Brokers Pvt. Ltd. had done Client Code Modifications unusually high number of times during financial year 2004-05 to 2006-07 and the modifications were resorted with malafide int .....

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client code modification, and the difference as worked out by him of ₹ 20,73,543/- was treated as suppressed profit of Assessee. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who deleted the addition made by the A.O by holding as under:- 5.2 I have considered the facts of the case and submissions of the appellant. The entire facts with regard to the adverse inferences drawn by the Assessing Officer on account of Client Code Modifications have been elaborate .....

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ooks of the concerned 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 ad .....

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l consideration to the various reasons given by the Assessing Officer for his conclusion that the client code modifications were deliberately and mala fide carried out with a view to transfer the profits so as to reduce the incidence of tax in the case of Kunwarji Group. I have also considered the detailed submissions made before me on behalf of the appellant Company and have also gone through the various judicial pronouncements cited before me. At the very outset, it may be stated that the huge .....

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There is no other material or evidence to support the additions made by the Assessing Officer and the Assessing Officer has drawn his own inferences from the client code modifications. Further, the additions made by the Assessing Officer are on the basis of certain assumptions. The main basis of the Assessing Officer for making the additions is that large number of client code modifications were carried out by KCBPL and such modifications during the four Assessment Years under appeal come to 36, .....

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e Commodity Exchanges to which they had access. Thus, the client code modifications carried out directly by the traders come to 45% of such modifications, which means that the percentage of modifications carried out by KCBPL would be around 0.5%. It was further explained with supporting evidence that one trading order normally comprises of more than one trade, which would further reduce the percentage of modifications to a negligent figure. This point has been explained at page - 35 of the State .....

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code modifications with a view to rectify punching errors is permissible to the extent of 1%. If such modifications are more than 1% but less than or equal to 5%, nominal penalty of ₹ 500 is leviable. In the present case, if all the facts are objectively analysed, it is seen that effectively the client code modifications can be said to.be around 0.5% for the Assessment Years under appeal. Therefore, I see no justification in the assumption of the Assessing Officer that large number of clie .....

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odifications have been carried out, the reasons for such modifications were thoroughly explained before the Assessing Officer as also before me. The assessee's explanation has been summarised under six points at pages - 42 to 43 of the Statement of Facts. These reasons are convincing and obviously, the client code modifications have been carried out to rectify genuine punching errors. If such genuine errors are not rectified, and the transactions allowed continuing in the name of wrong clien .....

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sued by him. (i) The Assessing Officer has calculated the alleged suppressed profits on a further assumption that the open position in all contracts to buy or sell are squared off at the expiry prices of the contract. In other words, the Assessing Officer assumed that the transactions would be finalised at the expiry date and accordingly, he calculated the assumed profit on the basis of the prices of the commodity prevailing at the expiry date. Apparently this is a hypothetical . (ii) The Assess .....

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on as to how relevant contract is assumed to be open till expiry date and how the expiry prices can be adopted for calculating the so called suppressed profits. (iv) The trading parties could not have been aware of the expiry price and, therefore, no motive can be imputed that the modifications were carried out with a view to avoid tax. There is no material whatsoever to support the conclusion drawn by the Assessing Officer that client code modifications were carried out mala fide with a view to .....

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t Company to avoid payment of tax of ₹ 30 to 35. The methodology adopted by the Assessing Officer for calculating notional and hypothetical profits gives rise to several crucial questions which remain unanswered and this point was thoroughly explained by the assessee at pages -14 to 19 of the reply dated-23rd November, 2009 filed before the Assessing Officer. These anomalies in the presumptions of the Assessing Officer have also been explained at pages - 45 to 50 of the Statement of Facts. .....

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assessment proceedings have been duly and properly replied-to by various letters filed by the assessee as enumerated at pages 57 to 66 of the Statement of Facts which have been reproduced supra. 4.14 Considering the entire facts and the legal position, I have no hesitation in holding that the additions made by the Assessing Officer in the four Assessment Years under appeal on account of client code modifications are without any basis and accordingly these additions are deleted." 5.3 Furthe .....

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notional income and made by assumptions. Considering the totality of the facts and the legal position I hold that the addition made by the Assessing Officer on the basis of Client Code Modifications is without any basis whatsoever and accordingly, these additions are deleted. 6. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us. 7. Before us, ld. D.R strongly supported the order of A.O. On the other hand ld. A.R. reiterated the submissions made before A.O and ld .....

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ach of making the additions because the A.O had not accepted the reduction in profit due to client modification in A.Y. 2005-06 & 2007-08 but when there was increase in profit due to Client Code Modifications in A.Y. 2006-07, the increase in profits was accepted by him. He further placed reliance on the decisions in the case of Sambhavnath Investment vs. ACIT 38 CCH 077, Ashok Goyal (HUF) vs. ACIT 37 CCH 543 and Alpha Commodities Pvt. Ltd. vs. ACIT ITA No. 2119/Mum/2010. He also placed on re .....

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. 2005-06 to 2008-09 he has held that the addition on the basis of Client Code Modifications was on the basis of assumption and surmises and was not on the basis of concept of real income. We further find that in the case of Kunwarji Finance Pvt. Ltd. (supra) against the order of ld. CIT(A), Revenue had preferred appeal before the Co-ordinate Bench of Tribunal which was dismissed by the Co-ordinate Bench by order dated 19.03.2015 and the relevant finding of the Co-ordinate Bench reads as under:- .....

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es with regard to the client code modification, which reads 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. .....

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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 2 Greater than 1 % but less than or equal to 5% 500 3 G .....

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re requested to take note of the FMC directives and ensure strict 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 ₹ 1 .....

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e by the broker i.e. KCBPL is unusually high. At page no.l6 on paragraph 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 hi .....

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s to 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 sa .....

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ient 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 Id. 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 consid .....

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