TMI Blog2019 (7) TMI 1411X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs initiated by invoking the provisions of section 147 by the AO and upheld by the CIT(A) are nonest in law, without jurisdiction and without applying his mind. Hence, the reassessment is quashed and accordingly, allow the legal grounds raised by the assessee. No other ground has been adjudicated as the same has not been argued by the Ld. Counsel for the assessee. - ITA No.825/Del/2019 - - - Dated:- 25-7-2019 - Sh. H.S. Sidhu, Judicial Membe For the Appellant : Sh. Rajat Jain, FCA Sh. Akshat Jain, FCA For the Respondent : Sh. S.L. Anuragi, Sr. DR. ORDER This appeal filed by the assessee is directed against the order dated 26.11.2018 of the CIT(A)-20, New Delhi relating to A. Y. 2009-10 on the following grounds:- i) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in ignoring that reopening assessment proceedings under section 147 of the Act was merely on the basis of reason to suspect instead of definite reason to believe , is bad in law and without jurisdiction thus assessment order passed, is nullity and liable to be quashed. ii) That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out any specific defect or shortcoming on the same. vii) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on fact in confirming addition of ₹ 5,08,116/- being alleged profit from F O transaction made by the AO on the basis of his own assumption and presumption without brining any cogent evidence on record that the appellant has actually reduced his profit from F O transactions through Client Code Modification (CCM) through the alleged broker. 2. At the time of hearing, Ld. Counsel for the assessee has only argued the legal grounds on assumption of jurisdiction and stated that on similar facts and circumstances and on exactly similar legal issues involved in the present appeal have been decided and adjudicated by the ITAT, Delhi SMC in its decision dated 31.1.2019 in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10). He has filed the copy of the same decision before the Bench as well as the copy of the impugned order of the Ld. CIT(A). He also filed a Paper Book containing the case laws compilation of pages 1-95 by which decisions the case of the assessee is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t loan transactions of assessee with a finance company were bogus as said company was engaged in providing accommodation entries, it being a fresh information, he was justified in initiating reassessment proceeding in case of assessee. 2. Raymond Woollen Mills Ltd. v. ITO And Others [236 ITR 341 (Copy Enclosed) where Hon ble Supreme Court held that in determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. 3. Yuvraj v. Union of India Bombay High Court [20091 315 ITR 84 (Bombay)/r20091 225 CTR 283 (Bombay) Points not decided while passing assessment order under section 143(3) not a case of change of opinion. Assessment reopened validly. 4. ACIT Vs Rajesh Jhaveri Stock Brokers (P.) Ltd (2007) 161 Taxman 316 (SC)/r20071 291 ITR 500 (SC)/[2007] 210 CTR 30 (SC) So long as the conditions of section 147 are fulfilled, the Assessing Officer is free to initiate proceedings under section 147 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount from shell companies working as an accommodation entry provider, reassessment could not be held unjustified. 11. Aaspas Multimedia Ltd. Vs PCIT Gujarat High Court T20171 83 taxmann.com 82 (Gujarat) Where reassessment was made on basis of information received from Principal DIT (Investigation) that assessee was beneficiary of accommodation entries by way of share application provided by a third party, same was justified. 12. Murlibhai Fatandas Sawlani Vs ITO Gujarat High Court 2016-TIQL-370-HC- AHM-IT It is not open to the assessee to object to the reopening by asking the AO to produce the source from where the AO has gathered the information for forming a belief that income chargeable to tax has escaped assessment. 13. Ankit Aqrochem (P.) Ltd. Vs JCIT Rajasthan High Court T20181 89 taxmann.com 45 (Rajasthan) Where DIT informed that assessee-company had received share application money from several entities which were only engaged in business of providing bogus accommodation entries to beneficiary concerns, reassessment on basis of said information was justified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pahari Dhiraj, Delhi- 110006 for the A.Y. 2009-10. In this case, a report from the ADIT(Inv.), Unit 1(3), Ahmedabad has been received vide letter F.No. ADIT(Inv.)1(3)/AHD/CCM/Disseminations/e-mail/2015-16 dated 18.03.2015, stating that Modification of the client codes is a practice under which brokers change the client codes in sale and purchase orders of securities after the trades are conducted. While it is legally permitted to rectify inadvertent errors in punching the orders, there were concerns that such modifications could be misused for manipulative activities in the market. SEBI conducted an probe into 'modification of client codes' by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the National Stock Exchange during March, 2010. The Ahmedabad Investigation Directorate, as an institutional response to the orchestrated misuse for client code modification for tax evasion, carried out coordinated limited purpose surveys uls 133A of the Income Tax Act, 1961 at the premises of 12 brokers and few of their clients across I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AY. 2009-10. In view of the above, I have reasons to believe and I am satisfied that income above ₹ 1 lac chargeable to tax has escaped assessment for A Y. 2009-10 by reasons of the failure on the part of the assessee to disclose truly fully all material facts necessary for his assessment for AY. 2009-10, and he case is fit for reopening the assessment u/s 147 by issuance of notice u/s. 148 of the I. T.Act, 1961. 6.1 After perusing the aforesaid reasons recorded, I find that information was received from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad and the AO has only relied on the said information and has not made any independent inquiry before recording his reasons to belive for opening assessment under section 147 of the Act which is also corroborated from the fact that he himself mentioned that, the name and details of the assessee has been mentioned in the data of CD sent by the ADIT(Inv.) Unit 1(3), Ahmedabad and believed that income of the assessee has escaped assessment. It is further noted that the AO merely on the basis of conclusion made by the ADIT (Inv.) Unit1(3), Ahamedabad as mentioned in the reasons record, sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proceedings has called for certain information from the said broker who has replied to the queries raised by the Assessing Officer in response to notice u/s 133 (6) of the IT Act and there is no allegation by the Assessing Officer in his findings that there was any connivance between the assessee and the broker. 10.1 I find that the Jaipur Bench of the Tribunal in the case of DCIT Vs. Gyandeep Khemka (supra) under identical circumstances has observed as under:- 11. We have considered the rival submissions as well as relevant material on record. We note that the Assessing Officer has reopened the assessment on the basis of the information in the shape of the report of the Investigation Wing of Mumbai and Ahmadabad. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation 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 the transaction is known to the parties, the same can be shifted from one client to another client to serve the interest of parties. Prior to the execution of the transaction, it is not possible to conceive or preconceive the transfer of the transaction from one account to another account. . 11.1 We note that this issue of rectification of the error by using the Client Code Modification facility has been considered and decided by this Tribunal in the series of decisions as relied by the assessee. The Coordinate Bench of this Tribunal in the case of Nobel Securities Vs ITO (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earlier made in the name of the appellant were transferred to third parties. The appellant has claimed that the purchases were wrongly done in the name of M/s. Noble Securities inadvertently punching its client code and that subsequently it was rectified by the brokers within time allowed by the exchange. So the whole submission of the appellant is hinged upon the inadvertent mistake of the staff in punching the wrong client code i.e. client code of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 client's requirement and thus real income from such transactions can be suitably compromised. Therefore, in view of the regularity with which such transactions have been effected, the AO is justified in rejecting the claim of the appellant and added such transaction in the hand of the appellant's income. Accordingly, the addition of ₹ 27,63,104/- is sustained. Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 modifications have been carried out. This shows that the profit/loss are of the clients of M/s Artistic Finance Pvt. Ltd. which is wrongly punched by it to the account of the assessee and when pointed out, it was transferred to the respective client account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable 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 for its Futures Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the clients examined by the tax authorities has disowned the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 action of the AO in assessing the above said pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 11 as under: 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 intraday are allowed. b. The members ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ₹ 10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees. These findings of fact recorded by the ld. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction 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 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote that the action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must 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 ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has escaped which has not been conformed to the assesssee company, in the course of assessment proceedings, though in view of the judgment of Hon'ble Delhi High Court in the case of Sabh Infrastructure Ltd. Vs. ACIT reported in 398 ITR 198 the same was to be confronted alongwith reasons wherein it has been held as under: (iii) where the reasons make a reference to another document, whether as a letter or report, such document and / or relevant portions of such report should be enclosed alongwith the reasons. 6.3.1 Hence in the absence of such material, the allegation and assumptions are 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 mechanicall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer, For these reasons, the Court is satisfied that the findings by the ITAT cannot be disturbed. (B) . Hon'ble High Court of Madhya Pradesh in the case of CIT vs. S. Goyanka Lime Chemicals Ltd. reported in (2015) 56 taxmann.com 390 (MP) has held as under:- 7. We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO did not accept the objections so filed, he shall not proceed further in the matter with in a very short period of service of order disposing off objection, however, he has made the order of assessment u/s. 147/143(3) of the Act on 8.12.2017, which is not in accordance with law and not permissible. This view is fortified by the following decisions :- i) ITA NO. 5780/D/2014 DATED 6.4.2018 Meta Plast Engineering (P) Ltd. v. ITO 9. Further, in view of the decision of the Hon'ble Bombay High Court in the case of Bharat Jayant Patel (supra), learned AO held should have allowed four weeks' time to the assessee to seek their legal remedies after rejection of the objections of the assessee. In view of the fact that the AO has disposed of the objections of the assessee on and passed the assessment order on it is clear that no such time was granted 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 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal challenging the addition on merit become academic in nature for which these are not being adjudicated. 6.2 Keeping in view of the facts and circumstances of the present case and case laws relied upon by both the parties. The judicial decisions relied upon by the Ld. DR have been duly considered. In my considered view, I do not find any parity in the facts of the decisions relied upon by him with the peculiar facts of the case in hand. However, the case law cited by the Ld. Counsel for the assessee are exactly on similar facts and circumstances of the present case, hence, respectfully following the precedent in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10), I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law, without jurisdiction and without applying his mind. Hence, the reassessment is quashed and accordingly, I allow the legal grounds raised by the assessee. No other ground has been adjudicated as the same has not been argued by the Ld. Counsel for the assessee. 7. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
