TMI Blog2017 (7) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Income arising from the business of an assessee is taxed under the head business and profession. So, all the expenses have to be considered while computing the business income. On the other hand, if the securities are held as investment and an assessee earns exempt income, same can be subjected to disallowance as envisaged by the provisions of section 14A. Non compliance of order u/s 144A - Disallowance of loss claimed as F & O trading loss - client code modifications undertaken in the month of March 2010 - loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes - as per CIT-A AO did not conducted enquiry as per directions of the Addl. CIT and disallowed the said loss merely on presumption that these transactions were sham transactions - Held that:- We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent that it has made the order of learned CIT(A) enter the arena of perversity and this order of learned CIT(A) cannot be sustained in the eyes of law and is liable to be set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re that the assessee company is engaged in the business of trading in shares, securities and F O transactions. In this appeal, the Revenue is aggrieved by two disallowances, one is disallowance u/s 14A read with Rule 8D of the Income-tax Rules, 1962 and second one is disallowance on artificial loss incurred through client code modifications. During assessment proceedings u/s 143(3) r.w.s. 143(2), the A.O. observed that the assessee had earned exempt income and further the assessee had shown dividend income amounting to ₹ 15,97,859/- and had claimed the said amount as exempt. The assessee was asked to show cause as to why the disallowance u/s 14A of the Act should not be made in the case of the assessee. In reply, the assessee submitted as under:- Justification for disallowance for expenses incurred for dividend: During the year there is no expenses incurred by the company for earning the dividend which has been claimed as exempt in computation of income. The expenses incurred for payment of interest on loans are for the loans which have been taken for the purpose of giving margin money to the broker for the future and options transactions. The expenses other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r:- Particulars Amount (Rs) Amount (Rs) i) Director expenditure relating to exempt income being STT D-Mat charges paid -- ii) Amount computed as per Rule 8D(2)(ii) [AXB/C] 8,63,137 A = Interest expenses 876268 B = Average Investment including shares in closing and opening inventories 106428532 C = Average total asset 108047609 iii) 0.5% of average investment (0.5% x ₹ 106428532) 5,32,143/- Total disallowance as per Rule 8D(i+iii+iii) ₹ 13,95,280/- Thus, the A.O. worked out an amount of ₹ 13,95,280/- towards disallowance u/s 14A of the Act, vide assessment order dated 28-03-2013 passed by the AO u/s 143(3) of the 1961 Act. 4. The second issue is with regard to disallowance of loss of ₹ 3,67,83,145/- incurred th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned A.O. i.e. ITO 9(2), Mumbai. The A.O. has submitted a report vide letter dated 20.3.2013. A hearing was also fixed with the assessee in the matter on 21/3/2013. Shri Sunul Shah, CA and AR appeared. He was asked if he had any further submissions to make on the basis of report made by the Assessing Officer, However, AR has reiterated the submission made earlier:- The brief facts of the case are as follows:-. ( a) In the month of the March 2010, the assessee has shown modified transition in his F O. ( b) These transactions are entered by brokers. M/s Anugrah Stock Broking Pvt Ltd, M/s Labdhi Finance Corporation and M/s Wellworth Share Stock Braking Ltd. and shown as modified in the assessee company s name. ( c) It was also reported by the Assessing Officer that the assessee has entered and settled the transactions on the same day and it has resulted in loss of ₹ 1,55,89,067/- (i.e. 28,19,798 ₹ 1,83,98,865/-). It was further reported that the assessee s F O transactions entered during the F.Y. 2009-10 has resulted in net profit of ₹ 1,51,17,420/-/- (i.e. 2,04,97,205 ₹ 53,79,785/-). ( d) The assessee has adjusted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 22- 03-2013 u/s 144A of the Act observed that from the report of various financial newspapers indicated that the NSE had allowed its member brokers to make clients modifications to the tune of ₹ 55,000 crores in March, 2010 against which investigation had been started by DIT (I CI), Mumbai after obtaining approval from CBDT and the results and findings of the said inquiries with reference to the assessee s transactions had been forwarded to the A.O. Notices were issued to the NSE calling for relevant data includes the following:- (i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. (ii) Details of trade time stamp for each transaction where modifications have been carried out. ( iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: ( iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies from the NSE is as under:- The number and value of modifications in the client code have gone up dramatic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above. ( vi) Code changed can legitimately occur in some circumstances. For example, the broker may wrongly feed the client code of the husband when the shares are actually held by the wife. Similarly, there may be confusion between a HUF and individual having the same name. It is also observed that mutual funds follow a practice of purchasing shares under the code and then allotting to different schemes at the end of the day. ( vii) Other than the above, it is difficult to understand how a code change can legitimately occur. ( viii) Code changes reported by the Exchange have been made to set off a trade made in normal trading hours though screen based trading in some earlier trading session. To clarify, a code change cannot take place from a static position it is always done to set off a trade which has already taken place. ( ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation and M/s Wellworth Share Stock Broking Ltd. and shown as modified in the assessee company s name. ( c ) It. is seen from the details availed from NSE that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs.l,55,89,067/- (i.e. ₹ 28,19,798- Rs. l,83,98,865). ( d) It has also observed from the assessee's F O Transactions entered during the F.Y. 2009-1O has resulted in net profit of ₹ 1,51,17,420/- (i.e. ₹ 2,04,97,205- ₹ 53.,79,785). ( e) It is observed from the details that the assessee has adjusted the loss on sale of shares of other companies against the profit of the assessee company and resulted into low profit offered for taxation. ( f) There are total of 1113 transaction on sale side involving transaction value of ₹ 40,51,75,893/- and 1353 transaction on buy side involving transactions value of ₹ 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th, 11th, 15th, 22nd,23rd and 25th of March., 2010. ( g) This is absolutely very strange on part of any bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of trading in shares, securities and F O transaction with surplus fund, there is share trading investment of ₹ 12,50,94,940/-. Since there is a common activities related to share trading and also involvement in investment capable of dividend, the part of expenditure debited in profit and loss account is definitely attributable to the investment activities. There cannot be any denial that some part of the administrative expenses, office, salary and wages and other related expenses is not at all related to investment in shares. Therefore, the arguments of the ld. A.R. that no expenditure has been incurred for earning dividend of ₹ 15,97,859/-, is not tenable. However, the argument that interest expenditure is not related to investment as same was incurred in connection with loan taken for giving margin money to the broker for F O transaction, therefore, the interest expenditure of ₹ 8,76,268/- is not directly or indirectly related to earning of dividend, is convincing one. Further, it is pertinent to mention that Assessing Officer has not clarified as to how such interest expenditure debited in profit and loss account is related to earning of dividend. Obviously, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct facts on the basis of information so gathered afterwards from various sources which was not done by the AO. The learned CIT(A) observed that the AO was also directed by learned Addl. CIT to determine whether client code change which has appeared in large number in the month of March 2010, had the effect of reducing the tax payable by the assessee and to see whether the same was adopted as an device for tax avoidance. It was observed by learned CIT(A) that the AO has not made any further investigation or enquiry nor caused any verification from the brokers namely Anugrah Stock and Broking Private Limited, Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Ltd or from Vice President Investigation, NSE or from General Manager, SEBI. The finding was recorded by learned CIT(A) that when no further investigation or proper verification has been made by the AO, there is no compliance of order u/s 144A dated 22-03-2013 of the Addl. CIT and hence it was observed by the learned CIT(A) that contentions of the assessee cannot be ignored or brushed aside and hence it was observed that assessment order of the AO cannot be sustained on legal footing. After recording the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 crores were undertaken and NSE had itself stated that there is tax evasion It was submitted that investigation in the matter had been started by the DIT(I CI),Mumbai after obtaining the approval of CBDT and the outcome of the inquiries with reference to the assessee was intimated to the A.O. and accordingly the disallowances were made. 8. The ld. counsel for the assessee submitted that the Mumbai Tribunal in assessee s own case in ITA No. 4847/Mum/2016 for A.Y. 2012-13 vide orders dated 7th March, 2017 whereby the Tribunal has considered the disallowance u/s 14A r.w.s. Rule 8D and held that the no disallowance can be made u/s 14A r.w. Rule 8D for the securities held as stock-in-trade. The ld. counsel for the assessee drew our attention to the page 9 of the paper book filed with the tribunal whereby the copy of P L account for the year ended March, 2010 is placed and submitted that the assessee s income mainly consists of brokerage and share trading income and the shares were held as stock-in-trade. He submitted that the assessee s own capital consisting of share capital and reserves was ₹ 7,98,75,873/- and investments as on 31-03-2010 was only ₹ 3,78,000/- hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate order dated 05-08-2014 passed by the learned CIT(A).We have observed that Revenue is aggrieved in this case by deletion of addition of Rs..8,63,137/- by learned CIT(A) which addition was made by the AO by applying Rule 8D(2)(ii) r.w.s. 14A w.r.t. interest expenditure incurred by the assessee The assessee did earn dividend income of ₹ 15,97,859/- which was claimed as exempt under the 1961 Act. We have observed from the perusal of audited financial statements which are placed in paper book filed with the tribunal by the assessee that the assessee has made investments in shares to the tune of ₹ 3,78,000/- (Previous Year ₹ 3,78,000/- as on 31- 03-2009) which were held as Investments in its books of accounts as on 31- 03-2010, while investments in shares and securities as on 31-03-2010 were ₹ 12,50,94,940 which were held as stock-in-trade (previous year as on 31- 03-2009 of ₹ 8,70,06,123/-) ref. pb/page 3-18). We have also observed that the assessee s own funds are to the tune of ₹ 7,98,02,973/- (consisting of share capital + reserves-miscellaneous expenditure(debit)). We have observed that the Mumbai-tribunal has decided this issue in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lient code modification by the three brokers of National Stock Exchange namely M/s Anugrah Stock Broking Private Limited , M/s Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Limited and said F O transaction were shown as assessee s transaction post modification to reflect loss in the hands of the assessee to the tune of ₹ 3,67,83,145/-, the said loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes. The AO observed that there were reports in various financial newspapers that the NSE had allowed its members brokers to make client modifications to the tune of ₹ 55,000 crores in March 2010. Investigations in the matter was carried by DIT(I CI), Mumbai after obtaining the approval of the CBDT. The notices were issued to NSE calling for relevant details as under : ( i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. ( ii) Details of trade time stamp for each transaction where modifications have been carried out. ( iii) Details of all done in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trading in derivative referred to in clause (act) of section 2 of the Securities Contracts Regulation Act, 1956 (42 of 1956) carried out in a recognized stock exchange) shall not be deemed to be a speculative transaction. An eligible transaction is one which is carried out. electronically on screen based systems and supported by a time stamped contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above. ( vi) Code changed can legitimately occur in some circumstances. For example, the broker may wrongly feed the client code of the husband when the shares are actually held by the wife. Similarly, there may be confusion between a HUF and individual having the same name. It is also observed that mutual funds follow a practice of purchasing shares under the code and then allotting to different schemes at the end of the day. ( vii) Other than the above, it is difficult to understand how a code change can legitimately occur. ( viii) Code changes reported by the Exchange have been made to set off a trade made in normal trading hours though scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change. The A.O. after analyzing the facts and modus operandi of the above illustrations, observed as under: ( a) it is seen that in the month of the March, 2010 the assessee has shown modified transaction in F O segment. ( b) These transactions are entered by broker M/s Anugrah Stock Broking Pvt. Ltd., M/s Labadhi Finance Corporation and M/s Wellworth Share Stock Broking Ltd. and shown as modified in the assessee company s name. ( c ) It. is seen from the details availed from NSE that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs.l,55,89,067/- (i.e. ₹ 28,19,798- Rs. l,83,98,865). ( d) It has also observed from the assessee's F O Transactions entered during the F.Y. 2009-1O has resulted in net profit of ₹ 1,51,17,420/- (i.e. ₹ 2,04,97,205- ₹ 53.,79,785). ( e) It is observed from the details that the assessee has adjusted the loss on sale of shares of other companies against the profit of the assessee company and resulted into low profit offered for taxation. ( f) There are total of 1113 transaction on sale side involving transaction value of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the AO , approached the learned Addl. CIT vide letter dated 20-03-2013 seeking direction to the AO. The learned Addl. CIT after calling from report from the AO and granting opportunity of heard to the assessee, issue directions to the AO u/s 144A on 22-03-2013.The assessment were getting time barred on 31-03-2013 as provided u/s 153 of the 1961 Act. The AO passed assessment order on 28-03-2013 u/s 143(3) of the 1961 Act. Thus, the A.O. doubted the genuineness of the transaction of losses of ₹ 3,67,83,145/- as in the opinion of the AO these transactions are structured pre-planned to generate a loss arising as business loss and these transaction were entered to avoid taxes and is a fiscal nullity being colorable device to evade taxes, as held by the AO. The AO observed that there is a nexus between the broker and the assessee in entering into these transactions which are preplanned and premeditated with object to generate losses to offset the profits made previously made or to be made in future with a view to avoid and evade taxes. The AO observed that the onus lies on the assessee to prove that these transactions are genuine. The A.O. finally concluded that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... punching errors in the office of the broker were done during normal trading hours and were as per exchange norms and SEBI circulars. It was observed that there are in few cases similarity in clients codes which were modified such as client code modification from code ANC 21 to PNL 21 as also from 31951 to 31953 are similar and hence there is a genuine possibility of punching errors. The learned CIT(A) observed that when share trading income of ₹ 1,83,53,985/- is brought to tax by the AO , it is contradictory on the part of the AO to have disallowed transactional loss of ₹ 3,67,83,146/-. It was thus, held by learned CIT(A) that it was wrong on the part of the AO to disallow the loss by treating it as sham transaction more-so when no action has been taken by SEBI and NSE against the assessee. Thus the disallowance of loss of ₹ 3,67,83,146/- as was made by the AO was deleted by learned CIT(A) vide appellate order dated 05-08-2014. We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent that it has made the order of learned CIT(A) enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions involving value of ₹ 48,794 crores, which again fell to 1.62 lacs modifications with corresponding value to the tune of ₹ 11882 crores in April 2010. Similarly there was a sudden spurt in the client code modifications in currency derivatives. The NSE has itself stated that it is directed towards large scale tax evasion. The NSE itself stated that these transactions were modified beyond normal trading hours and reflect violation of proviso (d) to Section 43(5) of the 1961 Act. The relevant extract of NSE replies are as under: The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non-institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs). Month No. of modifications Value of modifications in crore of rupees December, 2009 2.75 lakhs 21,896 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions in the case of the assessee happened in the month of March 2010 in just 9 trading sessions with three brokers namely Anugrah Stock Broking Private Limited, Wellworth Share Stock Broking Limited and Labdhi Finance Corporation wherein large number of sale and purchase transactions were entered in the name of the assessee through modified client codes in just 9 trading session. The relevant extract of the AO findings are as under: ( f) There are total of 1113 transaction on sale side involving transaction value of ₹ 40,51,75,893/- and 1353 transaction on buy side involving transactions value of ₹ 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th , 11th, 15th, 22nd,23rd and 25th of March., 2010. ( g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. The finding of learned CIT(A) that SEBI and NSE has not taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end to bring it to logical conclusions or ought to have directed the AO to complete the enquiries and verifications as are necessary for the said purposes and submit remand report to learned CIT(A). The intent being to compute correct taxes in the hands of the assesse as per mandate of the 1961 Act instead of entering into blame game. If such powers are not used by learned CIT(A) to achieve the mandate of the 1961 Act to compute correct tax liability of the tax-payer, then the power of learned CIT(A) being co-terminus with the powers of AO will be reduced to dead words, which is not the intention of the legislature in granting such powers as there has to be effective use of powers by authorities who are vested with said powers directed to achieve the mandate of the 1961 ACT. In our considered view, the appellate order of learned CIT(A) is perverse and cannot be sustained keeping in view factual matrix of the case. The AO based on material on record on the touchstone of preponderance of human probabilities surrounding the case has come to conclusion that these losses are not genuine and are sham and collusive to evade taxes. The AO based hus decision on large number of judicial pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Brokers Limited on 08-03-2010(pb/page 50), client code changed from 61495 to 8428 by Wellworth Share and Stock Brokers Limited on 10-03- 2010(pb/51), client code changed from 61495 to 7744 by Wellworth Share and Stock Brokers Limited on 10-03-2010(pb/page 52), client code changed from 61495 to 74561 by Wellworth Share and Stock Brokers Limited on 11- 03-2010 (pb/53) , client code is changed from 61495 to 8014 on 11-03-2010 by Wellworth Share and Stock Brokers Limited(pb/page 54 , client code is changed from 61495 to 74652 on 11-03-2010 by Wellworth Share and Stock Brokers Limited(pb/page 55 , client code is changed from 61495 to 7015 on 15-03-2010 by Wellworth Share and Stock Brokers Limited(pb/page 56)))etc.. The above is not exhaustive list but few instances quoted above to reflect that there is vast difference between the wrong codes from where the transactions were shifted to a correct code and possibility of punching error with such differential codes and that too in only 9 trading sessions which happened to be the month of March 2010(last month of previous year) in large magnitude of transactions was not mere coincidence and is a strong pointer to manipulation and collusive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to unearth scheme of tax evasion and avoidance adopted by persons acting in concert including entering into synchronized transactions simultaneously of purchase and sale of the same securities at same time to neutralize the collective profit/loss to zero but at the same time distribute profits/loss separately arising from each of the squared transactions. These requires coordinated enquiries by various agencies to reach to the bottom of the truth. To term all such inconsistencies as are pointed out as mere suspicion shall not be correct as collectively they are pointing towards a collusive and manipulative action on part of certain persons acting in concert to avoid taxation. We are fully aware that suspicion howsoever strong cannot take place of proof but these inconsistencies collectively are on higher pedestal than merely being a suspicions which requires deeper probe to unearth the collusive action on behalf of certain parties acting in concert to manipulate the system to evade and avoid taxes. The assessee has placed reliance on decision of the tribunal in the case of Pat Commodity Services Private Limited(supra) which was decided on its own facts and there were small fracti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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