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TMI Blog2019 (12) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... lient of registered broker M/s.Jaypee Capital Services Ltd. and Fututz Next Services Ltd. These companies are registered with NSE, MCX and NCDEX. These are also registered with the United Stock Exchange. During the course of search and post search proceedings, the evidences of Client Code Modifications done by these companies in their own account as well as in the accounts of client were found. The special auditors appointed u/s.142 (2A) was therefore directed to report on the aspect of client code modification (CCM) done by the company. Substantial client code modifications in the accounts of assessee company M/s.Jaypee Financial Services Ltd. was also found. Therefore, the special Auditor was directed to look into the aspect of client code modifications in the account of assessee company also. The AO referred to the relevant circulars, notifications and other rules and regulations with regard to client code modifications given by the concerned exchanges from time to time and thereafter asked the assessee to explain the genuineness of the client code modification the AO also confronted the report of the special auditor. 3. Rejecting the various explanations given by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / loss from one client to another. However, in appellate proceedings, it has been submitted CCM transactions, have been recorded in case of group concerns less than 1%, and no penal action has been taken by the exchange in this regard, meaning thereby there is no violation of rules and regulations prescribed in this regard by the Exchange. (iii) Further, appellant also submitted that these entries have been entered into normal course of business. These entries are duly recorded in the books of accounts and also forming part of the transactions reported to the exchange. No adverse inference has been drawn about these entries by the exchange or SEBI. In fact, even the information about these CCM, was obtained by the A.O. from the exchange. During assessment proceedings, the group concerns have given detailed explanation in this regard to the A.O. In the explanations, it has been clarified that these errors are part of the normal course business activities and permissible even as per the Circular issued by National securities Clearing Corporation Ltd. in circular no. NSCCL/SEC/2004/0464, dated 31.5.2004, where error upto 1% of the total number of transactions, is even permissible, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses, are included in total income declared in each of such case, which has been charged at the maximum marginal rate. Therefore, it is submitted that, there cannot be any allegation of intention to avoid taxes by shifting profit to loss by manipulating entries. The same A.O. has assessed all these entities in assessment proceedings u/s 153A/143(3) and no corresponding adjustments, have been made in the income of such entities. From the above, following facts emerged:- > Appellant is not a member of any exchange and cannot execute CCM. > The transactions on account of CCM done by group concerns, are genuine, > The volume of CCM occurred, are within the permissible limit allowed by the SEBI, and > The Exchange / SEBI, has not found any violation of rules and regulations relating to CCM, and the CCM transactions are falling within the prescribed limit. In view of the above, I agree with the arguments of the appellant and the CCM transactions, are found to be genuine. Accordingly, I hold that the A.O. was not justified in making addition on the above basis. Therefore, the addition of Rs. 1,90,71,392/- made by the A.O., is deleted. Accordingly, ground no. 12 and 14, are h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when a wrong code is punched in by the broker whilst executing the trade. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. However, over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. CCM especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. 4. It is pertinent to note that SEBI conducted a 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 NSE during Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. 5. It is pertinent to note that SEBI conducted a 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 NSE during March 2010. With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, the Indian markets were seeing client code modifications to the tune of Rs. 50,000 - Rs. 60,000 crore a month, which came down to just about Rs. 100 crore soon after SEBI's action. The probe also showed that the quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal client code and modified client code belong to a family. (Family for this purpose means spouse, dependent parents, dependent children and HUF)" 9. Thereafter, vide Circular no. NSE/INVG/2011/670 dated 26.08.2011, NSE has again clarified that "In the joint meeting held between SEBI and Exchanges, it was decided that the following clarifications be issued for client code modifications: The following would constitute genuine errors with regard to client code modifications: > Error due to communication and/or punching or typing such that the original client code/name and the modified client code/name are similar to each other. > Modification within relatives ('Relative for this purpose would mean "Relative" as defined under the Companies Act, 1956). 7. Referring to the decisions of the Hon'ble Supreme Court in the case of Durga Prasad More reported in 82 ITR 540 and Sumati Dayal reported in 214 ITR 801, he submitted that the surrounding circumstances and human probabilities should not be ignored by the taxing authority. Referring to the decision of the Hon'ble Supreme Court in the case of Mc Dowell and Company reported in 154 TIR 148, he submitted that the Hon'ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not held the transaction to be non-genuine. He submitted that there is no adverse material in this case although a search has taken place and nothing incriminating was found during the course of search. He submitted that assessee is not a party to any such transaction of non genuine of CCM. He submitted that the revenue has not gone to the broker to find out as to whom this amount got shifted. He further submitted that the stock exchange has accepted the reasonable error margin up to 5% and, therefore, since the percentage of trade which are rectified are not only within the range on the lower side of the range of error margin, therefore, no adverse view can be taken. He also relied on the following decisions :- 1. M/s. Coronation Agro Industries Ltd. Vs. DCIT [WP No.2627 of 2016 ] dated 23.11.2016 2. Prashant Agencies Pvt. Ltd. and PPN Properties PVt. Ltd. Vs. ITO ITA No.3059/Del/2018 3. ITO Vs. Abhishek Fincap Srvices Pvt. Ltd. ITA No.2750/Del/2017 4. Radiance Stock Traders Pvt. Ltd. Vs. ITO ITA No.4542/Del/2018 5. Sanjay Kumar Jain Vs. ITO in ITA No.825/Del/2019 6. DCIT Vs. Gyandeep Kehmka ITA No. 695/JP./2018 7. Mumbai ITAT in the case DCIT Vs. M/s. Comet Invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of search and the revenue even have not gone to the broker who has done the CCM. It is also his argument that it is not known as to whom the account has shifted. 11. We find some force in the argument of the Ld. Counsel for the assessee. We find force in the argument of the Ld. Counsel for the assessee that client code modification is the internal matter of the broker and assessee has no control over it. The AO in the instant case has not spelt out as to on which scrips the assessee has shifted the profit. We find the AO nowhere in the assessment order has mentioned of any statement of broker of the assessee regarding the admission of any client code modification. We find in the instant case the addition has been made by the AO despite assertions by the assessee that it was not a registered broker on the stock exchange. There is also nothing on record to suggest that the CCM was done at the behest of the assessee. Further, there is no addition or adverse view taken in the case of the other person with whose accounts presumption is being made that transaction has been shifted. Admittedly there is nothing on record that the revenue has gone to the broker to find out as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed nor lead any evidence in case of any single transaction, which he has added to the income of the assessee, being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee. 8. It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any assessee should compulsorily have the following ingredients i.e. i) A valid transaction must have been executed on the Stock Exchange. ii) The customer of the registered share broker should confirm & agree that the transaction entered into by the broker belongs to him. iii) The payment Ibr purchases and/or receipt of sale proceeds should have happened between the Bank Accounts of the broker & his customer. iv) The above transaction must have been accounted for in the hooks of account of the registered broker as well as his customer. v) The eventual profit/loss on the transactions executed on the Stock Exchange & exchange of monies having happened as well as getting accounted in the respective books of account would eventually result into taxable profit and/or loss in the hands of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder to controvert or rebut the findings so recorded by Ld CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed." 13. We find the Ahmedabad Bench of the Tribunal in the case of ACIT Vs. Kunvarji Finance (P) Ltd. reported in 401 ITR (T) 64 has held 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 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, By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded by the Id. 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. 14. The various other decisions relied on by the Ld. Counsel for the assessee also supports his case that no addition can be made by the AO where CCM is done by the broker. 15. Since in the instant case it is an admitted fact that the assessee is not a member of any exchange and cannot execute CCM and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any actio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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