TMI Blog2019 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment u/s 153A/ 143 (3) on the basis of report of the Investigation Wing and the Assessing Officer has not conducted any enquiry on the same, therefore, hold that reassessment proceedings initiated in the instant case are not in accordance with law. Accordingly the same is quashed. Since the assessee succeeds on the legal ground, the grounds of appeal challenging the addition on merit become academic in nature for which these are not being adjudicated. - Decided in favour of assessee. - ITA No.2497/Del/2018 - - - Dated:- 31-1-2019 - SH. R.K PANDA, ACCOUNTANT MEMBER For The Appellant : Sh. Gautam Jain, Advocate Sh. Peeyush Kumar Karnal, Advocate For The Respondent : Sh. P. S. Thuingaleng, Sr DR ORDER PER R.K. PANDA, AM: 1. This appeal filed by the assessee is directed against the order dated 09.02.2018 of the CIT(A)-26, New Delhi relating to A. Y. 2009-10. 2. Facts of the case, in brief, are that the assessee is an individual and derives income from salary, house property, capital gain and income from other sources. He filed his return of income on 07.07.2009 declaring total income of ₹ 9,84,190/-. The said return was proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff has left the services they expressed their inability to comment on the conditions prevailing in the trading room at that time. They also submitted that no set pattern of punching errors can be assumed/ ascertained now. In view of the above and rejecting the various explanations given by the assessee the Assessing Officer made addition of ₹ 39,90,855/- to the total income of the assessee as his undisclosed income. 3.1 Before CIT(A) the assessee apart from challenging the addition on merit challenged the validity of the reassessment proceedings. However, the Ld. CIT (A) upheld the validity of reassessment proceedings and also sustained the addition on merit. 4. Aggrieved, with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising following grounds of appeal :- 1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding the initiation of proceedings under section 147 of the Act and, completion of assessment under section 147/143(3) of the Act without appreciating that the same were without jurisdiction and hence deserved to be quashed as such. 1.1 That the learned Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) has erred both in law and on facts in failing to appreciate the written submissions furnished by the appellant and overlooking the judicial pronouncements relied upon by the appellant. 2.5 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in recording various adverse inferences which are contrary to the facts on record, material placed on record and, are otherwise unsustainable in law and therefore, addition so confirmed is absolutely unwarranted. 3. That the learned Commissioner Income Tax (Appeals) has further erred both in law and on facts in upholding the levy of interest of ₹ 10,30,161/- u/s 234B of the Act, and ₹ 1,887/- u/s 234C of the Act which are not leviable on the facts of the instant case It is therefore, prayed that it be held that assessment made by the learned Assessing Officer and sustained by the learned Commissioner of Income Tax (Appeals) deserves to be quashed as such. It be further held addition made of ₹ 31,90,855/- and upheld by the learned Commissioner of Income Tax (Appeals) alongwith interest levied be deleted and appeal of the appellant be allowed. 5. The Ld. Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 order dated 23.10.2018 and cross objection No.15/JP/2018 for assessment order 2009-10, he submitted that the issue stands fully covered in favour of the assessee by the above decisions. He accordingly submitted that the order of the CIT(A) be set aside and the grounds raised by the assessee be allowed. 9. The Ld. DR on the other hand heavily relied on the order of the Assessing Officer and CIT(A). 10. We have considered the rival arguments made by both the sides and perused the material available on record. We have also considered the various decisions cited before us. We find the Assessing Officer, on the basis of the information received in the shape of the report of the Investigation Wing of Ahemdabad, reopened the assessment u/s 147 of the IT Act on the ground that assessee has misused the facility of client code modification provided to stock brokers to avail contrived loss of ₹ 31,90,855/- There is no dispute to the fact that the assessee in the instant case has traded at the stock exchange through the broker M/s. Gaurav Investment and Consultancy Private Limited. There is also no dispute to the fact that the Assessing Officer during the course of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minds is essential for misusing this facility and doing this mischievous transfer of profits from one hand to another hand. Until and unless two clients and broker are on the same page and involved in doing this mischievous act by misusing the facility of Client Code Modification such transactions are not possible when the parties are not related to each other party and are independent clients of a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of 1/2 hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and are closely related party. These transactions are even otherwise cannot be predesigned or planned as it can be done only after transaction is executed on the stock exchange and subsequently once the result and outcome of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleting the trading from the firm's code and credited to the client's code. 9. That the appellant has further submitted that the mistake was done at the broker's level and the firm should not be held responsible for mistake committed by the brokers. 10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session. 5.3.2 I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artistic Finance (P) Ltd. to modify the client code and book it in the name of the other clients of M/s. Noble Securities. Thus, the transactions which were earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance of tax liability: no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise''. Then, Misra. J. responded: (SCC pp. 254-55, para 45)''45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'' In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F O segment where loss and even income can be booked in clients favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such transaction can be transferred to client's account depending upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iolations committed and the applicable penalties (PB 21-24) where it is stated that if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable . 3. The broker on an average executes more than 5000 trades in a day. As is calculated by the AO, the exchange is operative only 260 days in a year. Thus, in a year approximately 13 lakhs trades are carried out by the broker. Therefore, the fact that during the year, the broker had carried out 2380 modifications by using CCM facility is irrelevant as it is only 0.18% of the total trades carried out by the broker during the year. Also, the fact the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. 4. A statement showing the details of modified client names and the profit/loss to the modified client due to CCM is at PB 27-32. Also by reply dated 15.02.2016 (PB 33-34), the assessee had submitted the confirmations of its parties in whose case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.3 During the course of hearing, the ld. DR relied on the orders of the authorities below. 3.4 I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t profit/loss in the case of the assessee on the basis of mere presumption or suspicion.'' Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed. Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under: 11. We have heard rival contentions and perused the record. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the examination, has disowned the transactions. Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. Though the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of 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. Ali 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 the code of the assessee initially. 13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of ₹ 3.31 crores and further there was change of code from one client to another client to the tune of ₹ 6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer believed the client code modification to be malafide because in his opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client ITA No. 695/JP/2018 CO 15/JP/2018 DCIT Vs. Gyandeep Khemka code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T S/032/2007 dated 22.01.2007, issued guidelines 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. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of ₹ 500/-. In the context of the circular issued by Commodity Exchange, let us examine whether the client code modification done by the broker i.e. KCBPL is unusually high. At page No.16 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 high, but if we look it at in terms of total transactions, it is only 0.94%. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 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; and Ground Nos. 1 and 3 of the Revenue's appeal are rejected. Thus in the said case, it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind. This view is fortified by the decision of the Hon'ble Delhi High Court in the case of Pr. CIT v. G G Pharma India Ltd. reported at 384 ITR 147 (Del), wherein it has been held as under:- Today when the case was called out, Mr. Sawhney produced before the Court the very same letter of the AO dated 15th September 2010 which has been reproduced in its entirely in the impugned order of the ITAT. He submitted that the AO was himself present in the Court and further efforts would be made to locate the materials on the basis of which the AO formed his opinion regarding reopening of the assessment. The Court was not prepared to grant further time for this purpose since it was not clear that the materials were, in fact, available with the Department. 12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis. 6.3 It is further noted that the approval granted by the competent authority is a mechanical approval and action has been taken mechanically because on perusing the reasons recorded, it demonstrates that Pr. CIT has written Yes, I am satisfied. which establishes that the competent authority has not recorded proper satisfaction / approval, before issue of notice u/s. 148 of the I.T. Act. Thereafter, the AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the (Inv.)), Unit 1(3), Ahmedabad. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, I am of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. My aforesaid view is fortified by the following decisions:- (A) Hon'ble Delhi High Court in the case of Pr. CIT vs. M/s NC Cables Ltd. in ITA No. 335/2015 has held as under:- 11. Section 151 of the Act clearly stipulates that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only recorded so Yes, I am Satisfied . In the case of ARjun Singh vs. Asstt. DIT (2000) 246 ITR 363 (MP), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:- The Commissioner acted, of course, mechanically in order to discharge his statutory obligation property in the matter of recording sanction as he merely wrote on the format Yes, I am satisfied which indicates as if he was to sign only on the dotted line. Even otherwise also, the exercise is shown to have been performed in less than 24 hours of time which also goes to indicate that the Commisisoner did not apply his mind at all while granting sanction. The satisfaction has to be with objectivity on objective material 8. If the case in hand is analysed on the basis of the aforesaid principle, the mechanical way of recording satisfaction by the Joint Commissioner, which accords sanction for issuing notice under section 148, is clearly unsustainable and we find that on such consideration both the appellate authorities have interfered into the matter. In doing so, no error has been committed warranting reconsideration. (C.) Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to the assessee. Further, the reasons recorded at the time of assumption of jurisdiction by the AO that the assessee has received an accommodation entry of ₹ 15 lacs whereas at the time of framing of assessment, the assessee was assessed the share application money to the tune of ₹ 2.15 crores. We find reason in the submission of learned AR that in view of the decision in PCIT vs. RMG Polyvinyl (I) Ltd.386 ITR 5 (Bom), such an error indicates non application of mind by the learned AO. ii) 296 ITR 90 (Bom) Asian Paints Ltd. vs. DCIT 3. The learned senior counsel for the petitioner pointed out that in some of the cases as soon as the objections were rejected by the concerned Income- tax Officer, even the assessment order has been passed within a very short time whereby the assessee is left without any remedy to challenge such an order of rejection. 4. Hence we make it clear that if the Assessing Officer does not accept the objections so filed, he shall not proceed further in the matter within a period of four weeks from the date of receipt of service of the said order on objections, on the assessee. 5. Accordingly, rule is made absolute. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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