TMI Blog2019 (5) TMI 1794X X X X Extracts X X X X X X X X Extracts X X X X ..... code modification. AO has discussed the modus operandi of the broker for doing these activities. Nothing has been brought on record to show that the assessee has done anything wrong in respect of the claim of loss of ₹ 3,12,790/- whereas the assessee has declared a gross profit of more the ₹ 3.41 crores on account of share trading. Accordingly, following the earlier order of this Tribunal in the case of DCIT vs. Gyandeep Khemka [ 2018 (10) TMI 1626 - ITAT JAIPUR] the disallowance made by the AO is deleted. - Decided in favour of assessee. - ITA No. 223/JP/2019 - - - Dated:- 21-5-2019 - Shri Ramesh C. Sharma, AM And Shri Vijay Pal Rao, JM Assessee by : Shri P.C. Parwal (CA) Revenue by : Shri Ashok Khanna (JCIT) ORDER Vijay Pal Rao, This appeal by the assessee is directed against the order dated 8th January, 2019 of ld. CIT (A), Ajmer for the assessment year 2010-11. The assessee has raised the following grounds :- 1. The ld. CIT (A) has erred on facts and in law in upholding the validity of the order passed u/s 147 of IT Act, 1961. 2. The ld. CIT (A) has erred on facts and in law in confirming the addition of ₹ 3,12,790/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted that the client code modification is done by the broker and is not carried out by the assessee. Therefore, if some punching error happened during the course of trading on the part of the broker on various clients, then the Stock Exchange provides the facility to rectify the same by using the client code modification facility so that the transactions can be accounted in the right clients name which were wrongly punched in the name of some other client. Further, the stock exchange has also drawn a list of common violations committed and the applicable penalties 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 . Thus the ld. A/R has submitted that the error in the case of the assessee is about only 1% which is less than even 2% of the total trading turnover and, therefore, it is even less than the limit of 2% for which even the Stock Exchange is not penalized the stock broker. Even otherwise, a reasonable tolerance range of punching error is considered as 5% of the total trades executed. The ld. A/R has relied upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the parties which are the number of clients of a single broker to shift the profit or loss to one account to another account. A stray incident of broker involved in manipulating the facility for shifting the profit from one account to another account cannot be considered as a general practice when nothing is on record to show that the assessee as well as the other clients are actively involved in the practice of shifting the fictitious profit or loss from each other s account in the garb of client code modification facility provided by the Stock Exchange. In the case in hand, the gross profit declared by the assessee on account of share trading is more than ₹ 3.41 crores and, therefore, the loss on account of client code modification of ₹ 3,12,790/- is negligible in comparison to the volume of the trades executed by the assessee. We further noted that the Tribunal in a series of decisions has considered this issue and find that a normal amount of error in punching the trading orders during the course of trade hour is a regular feature and, therefore, the Stock Exchange also permits a modification of the client code on daily basis upto 2% of the number of order exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted parties as the time limit to modify the client code is very limited after execution of trade/transaction at the stock exchange. The meeting of three 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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial and circumstantial evidences which prove that assessee was indulged in misuse of CCM facility. All the material including trade data has been provided to the ld. A/R on 30/11/2016 itself. Thus, when the assessment order is based on the report of the Investigation Wing without any fresh and independent enquiry conducted by the Assessing Officer and the report of the investigation wing in turn is based on the statement of the brokers then without giving the opportunity to the assessee to cross examine the brokers whose statements were recorded by the Investigation Wing it would amount to violation of principles of natural justice. Though, the cross examination may not be an absolute right but once statement is recorded in the back of the assessee and is being used against the assessee then the order passed by the Assessing Officer based on such statement is not sustainable in absence of cross examination. The Hon'ble Supreme Court in the case of Amdaman Timber Industries Vs CCE 127 DTR 241, while dealing with the issue of non-grant of opportunity to cross examine the witness has held as under: 5. We have heard Mr. Kavin Gulati, learned senior counsel appearing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. 8. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice. Accordingly, the order of the Assessing Officer is not sustainable when the assessee was not granted an opportunity to cross examine the brokers. In the case in hand, the Assessing Officer has not given any finding that the assessee and the other parties in whose account, the transactions are treated as transfer of profit are in collusion alongwith the broker. There is nothing on record or any fact or finding by the Assessing Officer to suggest that the assessee and the other parties as well as the brokers are in collusion to carry out these transactions of transfer of profit from the account of the assessee in the accounts of other parties by misusing the client code modification fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a genuine mistake on the part of its staffs to have punched firm s code instead of its client s code. And that later on when such a mistake was noticed the same was deleted by deleting 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. Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he stock exchange has also drawn a list of the common violations 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same be deleted. 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 Clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering that 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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, 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 contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 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 the Assessing Officer has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue s appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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