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2019 (7) TMI 295

off the objections - suppression of profit and obtaining fictitious loss by way of Client Code Modification (CCM) by the brokers in large number of commodity transaction - HELD THAT:- Subsequent to completion of assessment u/s 143(3), Ld. AO was clinched with tangible information from investigation wing which suggested possible escapement of income in the hands of the assessee. Nothing more was required and Ld. AO was not required to carry out detailed investigation so as to reach a conclusive finding that the income, in fact, escaped in the hands of the assessee. Therefore, we are not convinced with these submissions. Further. we find that there was no bar under law for issue of notice u/s 143(2) prior to disposal of assessee’s objections and the disposal-off of the objections was not pre-requisite for the issue of notice u/s 143(2). Fictitious loss by way of Client Code Modification (CCM) - unexplained expenditure - CCM is a facility granted by stock exchanges / SEBI to brokers so as to take care of the punching errors which take place during trading hours - HELD THAT:- The transactions of the assessee’s were duly supported by bills / contract notes. The assessee plac .....

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t have reason to believe that income has escaped assessment and he merely relied on information received from Investigation wing and further reopening is nothing but change of opinion and hence reopening is bad in law. 2. The learned CIT(A) failed to appreciate that A.O for justifying reopening relied on information not contained in recorded reasons and hence, reopening is bad in law. 3. The learned CIT(A) failed to appreciate that reopening of assessment is bad in law as notice u/s 143(2) was issued before disposing objections to reopening thereby violating the mandatory procedure laid down in GKN Drive-shafts (India) Ltd v ITO (2003) 259 ITR 19(SC) and hence reopening is bad in law. 4. The order of the learned CIT(A) deleting addition of ₹ 2,31,82,003/- is in accordance with law and justified. 2.1 Brief facts are that the assessee being resident individual stated to be engaged in share trading activities was assessed for impugned AY u/s 143(3) r.w.s. 147 of the Act on 22/03/2016 wherein the income of the assessee was determined at ₹ 622.61 Lacs after certain additions / disallowances as against assessed income of ₹ 383.83 Lacs determined u/s 143(3) r.w.s 154 on .....

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nd necessary modification / up-dation in the data. However, many brokers misused this facility for creating artificial losses / profits and provided such fictitious profits / losses to various clients by charging some commission. An expert opinion was obtained from NSE to indicate the existence of genuine and non-genuine client-code modification. 2.5 In the above background, Ld. AO formed an opinion that the assessee company was a beneficiary of such practice and has reduced its overall profit by taking fictitious losses to the extent of ₹ 231.82 Lacs from the concerned brokers. The assessee was asked to provide complete details of client-code modification done by the broker in his account. The assessee was also confronted with details of fictious loss alleged to taken by the assessee by way of client-code modification and the assessee was directed to prove that the said losses were genuine. The assessee defended the same by submitting that the modification was done by the broker as permitted by law and the assessee was not aware about the same. The assessee gave confirmations from few parties in whose name the trades were ultimately booked stating that CCM was done at their .....

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CCM was carried out by the broker on daily basis throughout the year and not at the year end. 6.3.2. The Assessing officer has not brought on record any material to show that the broker was in connivance and under the control of the Assessee and that the Assessee had given any instructions for CCM to be done in his name. 6.3.3. It has been explained by the Ld. AR that the Appellant had done a genuine business in trading in Derivative (F&O) through registered Share Brokers and all transactions are supported by bills/contracts and all transactions are recorded in the books of accounts. The Assessing officer has not found any defect in the books of accounts. 6.3.4. It has been explained by the Ld.AR that when the file was reopened by the AO on whatever information supplied to him by the I&CI, the AO was required to make verification from all the concerned parties and come to a logical conclusion after rebutting the submissions of the appellant made during the assessment proceedings. However, the Ld. AR has pointed out that the AO has not rebutted the detailed submissions of Assessee, which go to the root of the matter, made vide letter dated 7/3/2016, particularly the followi .....

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on by the assessee. As noticed, the stock exchange is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the Stock Exchange is also accepting the fact that such kind of client code modification is inevitable. The AO has not brought on record that in the relevant case the ratio between gross total transactions trades and the CCM trade were abnormally high. On the contrary, the Ld. AR has submitted that the ratio is quite small compared to the total transactions, otherwise the SEBI or the concerned stock exchange would have imposed penalty on the appellant or its brokers or both but the AO has not brought any such thing on record in the assessment order. 6.3.10. Further, the movement of prices of shares cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits / Losses consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions .....

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ned the file. However, the AO has not brought any material on record to prove that that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the appellant. No correlation between the appellant, on the one hand and the other parties, on the other hand, has been brought on record to correlate that these parties were in collusion with each other and were known to each other so that one party diverted its profit or loss to the other parties. There is nothing on record to suggest that the said losses were purchased and the other parties were given cash or cheque payment in view of such favours. Hence, the correlation of such transactions also, is not established in the assessment order. 6.3.14. Thus it may be seen that the assessment order does not bring out the following facts, namely, percentage of modified trade value being significantly higher than the total credit value of the appellant; number of modified trade being significant to total number of trades of the appellant; profit/loss arising on account of such modifications by the appellant being significant in comparison to the profit/loss in the trades were no modifica .....

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DR, relying upon the stand of Ld. AO, submitted that the assessee failed to establish the genuineness of the transactions and therefore the additions were justified. Reliance has been placed on the decision of Hon ble High Court of Calcutta rendered in Pr.CIT V/s India Finance Ltd. [81 Taxmann.com 135] & Hon ble Delhi High Court rendered in CIT V/s Vashishth Chay Vyapar Ltd. [66 Taxmann.com 371]. The Ld. DR also justified the validity of reassessment proceedings in view of the fact that Ld. AO was in receipt of tangible information which, prima-facie, indicated escapement of income. 4.2 The Ld. Sr. Counsel, Dr.K.Shivram, controverting the same, submitted that nothing on record would establish that the loss transactions were not genuine. Arguments have been made to submit that the assessee was not registered broker and could not do modification in the client code. Nothing has been brought on record by Ld. AO to establish that the modifications were done at assessee s behest and therefore, the assessee could not be held responsible for CCM done at broker s end. The attention was also drawn to the fact that persons whose names appear in the information have filed confirmations th .....

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its of the case, we find that client-code modification is a facility granted by stock exchanges / SEBI to brokers so as to take care of the punching errors which take place during trading hours. It is undisputed fact that the assessee was not a registered broker and could not carry out any modifications at his end. Another fact is that nothing on record establishes the fact that the said modifications were done at assessee s behest. The transactions of the assessee s were duly supported by bills / contract notes. The assessee placed on record confirmation of few parties whose name appear in the data provided to the assessee wherein they have confirmed the transactions as belonging to them only. No evidence has been brought on record to establish that any of the party disown the transactions. The assessee maintained that the data did not pertain to the assessee which has not been rebutted by Ld. AO. No nexus of the said data has been established with the losses suffered by the assessee. Nothing on record establishes any collusion / connivance of the assessee with the share broker. It is trite law that additions could not be made merely on the basis of presumption, conjectures or sur .....

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he fact that such kind of client code modification is inevitable. 12. Under these set of facts, the next question that arises is - Whether the client code modification 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 with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions in its own code, i.e. since the timing of entering the transactions is crucial in the online trading, the staffs of the assessee company found it convenient to punch its own code. Further, we notice that the fact tha .....

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e recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view. 15. The Ld CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% 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. 16. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the additions made in both the years under consideration. In our view also, the assessing officer has drawn adverse .....

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