TMI Blog2022 (1) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... e up before the Tribunal in the case of group company, namely, M/s Jaypee Financial Services Ltd. [ 2019 (12) TMI 820 - ITAT DELHI] as held 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 action treating the transactions to be non genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI, therefore, we are of the considered opinion that there is no perversity in the order of the CIT(A) deleting the addition. Accordingly the same is upheld and the grounds raised by the revenue are dismissed. - Decided in favour of assessee. Addition u/s 36(1)(iii) on interest - Assessee could not establish that the interest bearing fund borrowed by it is wholly and exclusively used in business - assessee could not establish the diversion of interest bearing fund to Shri Gaurav Arora and M/s Arora Timber Ltd., free of interest - HELD THAT:- Since the facts of instant case are identical to the facts of the cases decided by the Tribunal in the case of sister concerns of the assessee [ 2020 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted against the order dated 17th March, 2016 of the CIT(A)-30, New Delhi, relating to the Assessment Year 2011-12. 2. Facts of the case, in brief, are that the assessee company is a member of recognized stock exchanges i.e., National Commodity and Derivates Exchange Ltd.(NCDEX) and Multi Commodity Exchange of India Ltd.(MCX) and providing trading services in commodity market through NCDEX and MCX. A search and seizure operation u/s 132 of the Income Tax Act, 1961 was initiated in the case of assessee company as part of search proceedings on Jaypee Group on 30.03.2012. In response to notice u/s 153A of the Act, the assessee filed the return of income on 02.09.2013 declaring the taxable income at ₹ 53,99,850/-. During the course of assessment proceedings, the AO observed that the assessee company is a member of Stock Exchanges and doing trading for the clients as well as in its own account. It is also a client with M/s Jaypee Capital Services Ltd., for trading in commodities. 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 Cod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of assessee. Therefore, no action lies for CCM in its code. (b) (i) The auditor in his report stated that as a result of CCM, during the year under consideration, client level shifting of profit amounting to ₹ 1,10,58,200/- and loss amounting to ₹ 2,42,400/- from one client to another client has been made by the assessee. As discussed above, it is apparent that the shifting of client code was not due to genuine reasons but for providing accommodation entries to some persons / concerns in lieu of consideration. One person has huge profit, he would like to take entry of loss, so that his profit may be reduced. Another person may have huge losses would like to take some profit, so that some capital is formed and same time he do not have to pay any taxes. This practice of providing profit and losses was very common in old days before advent of electronic exchanges. Even after introduction of online trade, the practice continues taking advantage of facility of CCM. The SEBI therefore continue to instructions with regard to regulating the CCM. At last now, the stock exchanges are required to inform Income Tax Department about the CCM done by each broker. (ii) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the commission @3.5% on the amount of ₹ 2,49,81,929/- (which is 20% less than the sum of profit and loss shifted out of group), which comes to ₹ 8,74,367/-. The same is added to the income of the assessee company. (Addition ₹ 8,74,367/-) . 4. The AO similarly made addition of ₹ 6,36,885/- on account of absence of documentary evidences to substantiate the claim of business expenditure. During the course of assessment proceedings, the AO noted that although the assessee has not received any exempt income, however, there are investments in the opening and closing balance of the accounts and the income likely to be received from such investment is exempt and interest and other expenses are claimed in the Profit Loss Account. Rejecting the various explanations given by the assessee, the AO made disallowance of ₹ 1,77,82,267/- to the total income of the assessee. 5. During the course of assessment proceedings, the AO noted that the assessee company has granted advances in the nature of loan during the year to Shri Gaurav Arora and to another group company M/s Jaypee Capital Services Ltd. and M/s Arora Timber Ltd., in which Shri Gaur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 8,74,367/- made by the AO on account of Client Code Modification is concerned, he deleted the same by observing as under:- 8.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant, are discussed as under:- (i) It has been stated by the A.O. in the assessment order, CCM were done by the assessee, for its clients (other than group concerns), vide which profit is transferred to the clients, who have losses and transferred losses to the clients, who have profit, to reduce tax liability of the clients and accordingly, accommodation entry is given, on which commission income is determined by the A.O. @ 3.5C: of profit/loss shifted. (ii) It has been further analyzed by the A.O., that 20% of such CCM transactions, has been considered as genuine errors. However, the CCM, have been done in order to provide accommodation entries and therefore, it has been held that the assessee has earned commission @ 3.5% of ₹ 874,367/-, for providing such accommodation entries of ₹ 2,49,81,929/- (20% less than the sum of profit or loss shifted out of group). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket (Cash Segment) is being revised. The new penalty structure is as follows: Percentage (%) of client codes changed to total orders (matched) on a daily basis Fine Less than or equal to 1% Nil Greater than 1% but less than or equal to 5% Fine of ₹ 500/- lump sum per day Greater than 5% but less than or equal to 10% Fine of ₹ 1,000/- lump sum per day Greater than 10% Fine of ₹ 10,000/- lump sum per day The above shall be effective from trade date June 01, 2004 Yours faithfully, For National Securities Clearing Corporation Ltd. Jaya Chatterjee Manager Therefore, it is submitted by the appellant that in their case, these errors are less than 1% of the total number of transactions entered into and the entries relating to CCM and have been accepted by both the parties. The A.O. has not brought any evidence to support the allegation apart from suspicion on the basis of SEBI guidelines. Hence, it is submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not been proved. (ii) In the appellate proceeding, it has been submitted by the e requirement u/s 37(1) of the Act, for documentary evidence. Further, it has been stated by the appellant that these payment are made through banking channel and are business expenses. From the above, it is clear that, appellant failed to produce the bills/vouchers for the payments made for the alleged expenses under the head hotel and staff welfare expenses. The payment made through banking channel, will not substantiate the allowability of the alleged expenses incurred wholly and exclusively for business purposes. In view of these facts, I do not find any infirmity in the findings of the A.O. in the assessment order and accordingly, the argument of the appellant is not acceptable. In view of the above, addition of ₹ 636,835/- on account of hotel and staff welfare expenses, is confirmed. Accordingly, ground no. 15, is hereby dismissed. 9. So far as the disallowance of ₹ 1,77,82,267/- by invoking the provisions of section 14A read with section 8D by the AO is concerned, the ld.CIT(A) deleted the same by observing as under:- 10.3 Findings: The findings are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) is concerned, the ld.CIT(A) deleted the same by observing as under:- 11.3 Findings: The findings are as under: 11.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:- (i) During the assessment proceedings, the A.O. alleged that on review of financial statement of assessee company, it can be observed that, it has paid interest amounting to ₹ 1,90,91,632 - on borrowed funds. Further, on perusal of accounts it is observed that the related person/ concerns of assessee company, has debit balances during the year under consideration. (i) As per A.O., in the assessment proceedings, it has been stated that the peak debit balance in case of Shri. Gaurav Arora is ₹ 11.15 crore. The assessee has not charged any interest on such alleged loan provided to him. (ii) During the appellate proceedings, it has been submitted by the appellant that chart showing the nexus between the borrowed funds used for business purposes and interest paid filed now, was also submitted during the assessment proceedings, vide which it can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring funds, has been diverted for non-business purposes, on which no interest has been charged. From the above, following facts emerge: The appellant is having business transactions with alleged client, and The transaction with these clients are, only business transactions and no loan transactions have taken place. In view of the above, I hold that, appellant is engaged in the business of share broking/trading activities with the clients and there is no loan transaction with the alleged client. Accordingly, I agree with the main argument of the appellant and therefore, findings of the A.O. for making alleged disallowance of interest, are erroneous. Therefore, the addition of ₹ 95,45,816/-, is deleted. Accordingly, ground no. 17, is hereby allowed. 11. So far as the addition of ₹ 19,34,21,760/- made by the AO on account of deemed dividend by invoking the provisions of section 2(22)(e) of the Act is concerned, the ld.CIT(A) deleted the same by observing as under:- 12.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he special auditor has worked out the peak balance of the same and treated it as deemed dividend in the hands of the appellant. The A.O., while recasting the account, has picked up the figure of payments made by JCPL during the year and the negative balance appearing after the payments. Lower of the two figures i.e. amount paid by the company and the negative balance appearing after the payment, has been taken as the deemed dividend by the A.O.. The A.O. has adopted pick and choose, whereby he picked up only the debit entries of the cheque payments, but has ignored the debit and credit side of the transactions relating to purchase and sale of share/currency/derivatives. (b) Both the above alleged accounts extracted by the special auditor and A.O., did not take into consideration, the business transactions entered into by the appellant/concern with this company. This fact is evident from the amount of ₹ 19,34,21,760/-, computed by the A.O. in the case of JCPL on the basis of alleged re-casted copy of account, as against the actual copy of account maintained in the books of accounts of this company. (c) It has been further submitted that the even alleged account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans/advances, as to cover the same within the provisions of section 2(22)(e). (b) The company JCPL is a registered stock, currency and derivative broker on NSE, BSE, USE and MCX Sx. The transactions entered by the said company with appellant and group concerns are related to its business only. The appellant and the group concerns, maintain client account with this company, where in large number of share/currency/derivatives trading transactions, has taken place in the year under consideration. These transactions are nowhere prohibited under any existing law and not covered u/s 2(22)(e) of the act. (c) The transactions entered into are in the regular course of business and it is not a case where it has been alleged by the A.O. that transactions of sale/purchase of share/currency/derivatives, are not genuine. In fact, these purchase and sale transactions, have not even doubted by the special auditor in the audit report as well as by the A.O. in assessment order. The special auditor and A.O. has re-casted the ledger account by not considering the business transaction of sale/purchase of share/currency/derivatives, which is not correct, since deemed dividend cannot be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely, this Court in the said judgment held as under : 10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A)in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. 10.4 Therefore, if the said background is kept in mind, it is clear that subclause (e) of section 2(22) of the Act, which is pari materia with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. 10.5 If this purpose is kept in mind then, in our view, the word advance has to be read in conj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) had erred in law and on facts in holding that the CCM done by the company is within permissible limit. (c) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding that the CCM done by assessee company is within permissible criteria, thus, ignoring the fact that the CCM was done in the code of certain entities only and the modified client code were not similar to the original client code, the values of client code was significant and other conditions laid down by stock exchanges. (d) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete disallowance u/s 36(i)(iii). (e) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete disallowance made u/s 14A. (f) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in arriving at the conclusion that the transaction in the client ledger account, are related to business activities. (g) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of punching of orders from them. He submitted that these errors are normal and routine errors accruing from the nature of business. The information regarding client code information is sought by the department from the exchange only. Therefore, there could be no doubt that the transactions executed were in accordance with the guidelines of exchange, otherwise the same would not have been allowed by the exchange. He submitted that the guidelines of exchange in this behalf also acknowledges the 1% of modifications as tolerable and genuine error. However beyond 1%, there are some minor penalty described by the exchange. He submitted that the ld.CIT(A) while deleting the addition has observed that the volume of Client Code Modification occurred, are within the permissible limit allowed by the SEBI and the Exchange/SEBI, has not found any violation of rules and regulations related to CCM, and the CCM transactions are falling within the prescribed limit of less than 1%. Referring to the decision of the Hon ble Mumbai High Court in the case of Pr. Commissioner of lncomtax-13 Vs. Pat Commodity Services Pvt. Ltd.; the decision of the Ahmedabad Bench of the Tribunal in case of ACIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CCM is by and large not for the genuine reasons and for extraneous consideration and that the assessee has suppressed its income to the extent of ₹ 1,90,71,392/-. We find the Ld. CIT(A) deleted the addition made by the AO on the ground that the assessee is not a member of any exchange and cannot execute CCM. Further the transactions on account of CCM done by group concerns are genuine and the volume of CCM occurred are within permissible limit allowed by SEBI. It is also the observations of the CIT(A) that the exchange or SEBI has not found any violation of rules and regulations relating to CCM and the CCM transactions are falling within the prescribed limit. It is the submission of the Ld. DR that it is not a genuine mistake and the transactions are not genuine. Further the CCM was done by the assessee through its sister concern M/s. Futurz Next Services Limited through which the profit of the assessee company was reduced by ₹ 1.90 crores. According to the Ld. DR the CCM is akin to penny stock. It is the submission of the Ld. Counsel for the assessee that the transactions entered into by the assessee are not found to be false or untrue and although SEBI is the regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing heard the counsels for both the parties at length and after having gone through the facts of the present case, we find from the records that the assessee is not a registered broker on the Stock Exchange. Only the registered brokers can modify Client code (CCM) of their own clients. Therefore in such circumstances, the allegations of assessee having done or restored to CCM is apparently not correct. The AO has not brought on record that even the instructions for CCM was ever given by the assessee. Hence, in these circumstances, the assessee can't be held responsible for CCM if any done at the end of the broker. The AO except for the fact of receiving information from the DIT (I Cl), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect i.e. receipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Pat Commodity Services P. Ltd. ITA Nos. 3498 and 3499/Mum/2012 dt. 7th Aug,2015 (Mum.)(Trib.), DCIT v Sunil J Anandpara ITA No. 3132/MUM/2015 Assessment Year: 2010-11 Bench I dated 15/9/2017 (Mum.)(Trib.) and ITO vs. M/s. M.N. Shares Stock Brokers Pvt. Ltd. IT No. 5399/M/2017, AN. 2009-10 Bench - SMC. 11. Even nothing has been placed on record by the AO to demonstrate that any proceedings were ever initiated against the assessee by the SEBI or any stock exchange. It was also clarified by the Ld. AR that the broker, through whom the assessee carried on share transactions, were also not imposed any penalty. No co- relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under: S.No. Percentage of Client Code changed to total orders (matched) on a daily basis Penalty(Rs.) 1 Less than or equal to 1 % Nil. 2 Greater than 1 % but less than or equal to 5% 500 3 Greater than 5% but less than or equal to 10% 1000 4 Greater than 10% 10000 f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped. With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. in international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Page | 18 Members are requested to take note of the FMC di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. When the client code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be malafide. 10. Moreover, the Id. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client code modification ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case are identical to the facts of the cases decided by the Tribunal in the case of sister concerns of the assessee, therefore, respectfully following the same, we uphold the order of the CIT(A) on this issue and the grounds raised by the Revenue are dismissed. 18. Ground of appeal (d) by the Revenue relates to the order of the CIT(A) in deleting the addition of ₹ 95,45,816/- made by the AO u/s 36(1)(iii) of the IT Act. 19. The ld. DR submitted that the AO has made the addition since the assessee could not establish that the interest bearing fund borrowed by it is wholly and exclusively used in business. He submitted that there is no commercial expediency in giving interest free loans to sister concern. Therefore, the ld.CIT(A) was not justified in deleting the addition. 20. The ld. Counsel for the assessee on the other hand while supporting the order of the CIT(A) submitted that the assessee is having business transactions with the clients and the transactions with these clients are only business transactions and no loan transaction has taken place. He submitted that the assessee during the impugned assessment year has incurred a sum of ₹ 1,90,91,63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee is sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. He accordingly submitted that the order of the ld.CIT(A) being in accordance with the law should be upheld and the ground raised by the Revenue should be dismissed. 21. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made disallowance of ₹ 95,45,816/- out of the total interest expenditure of ₹ 1,90,91,632/- on the ground that the assessee could not establish the diversion of interest bearing fund to Shri Gaurav Arora and M/s Arora Timber Ltd., free of interest. We find, the ld.CIT(A) deleted the disallowance the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of the CIT(A) on this issue. We find, the ld.CIT(A) while deleting the addition has given a finding that the assessee is having business transaction with Shri Gaurav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erns are in the nature of commercial transaction. The relevant observations of the Tribunal at para 5 of the order read as under:- 5. The Ld. CIT(A) has observed that the transactions in the ledger account of the assessee are in regular course of the business of purchase and sales of the shares/currency/derivatives/commodities etc. The Ld. DR could not controvert the above factual findings of the Ld. CIT(A) before us. In view of the above facts, the Ld. CIT(A) is justified in holding that the transactions between the assessee and those companies are in the nature of trading transactions which are beyond the ambit of deemed dividend in view of the decisions of the Hon ble Jurisdictional High Court in the case of CIT vs. Creative Dyeing Printing (P.) Ltd. (Supra). The Ld. CIT(A) has followed the above decision of the Hon ble Delhi High Court. In our opinion, the Ld. CIT(A) has not committed any error in following the above decision of the Hon'ble Delhi High Court. Accordingly, we uphold the same. The ground of appeal of the Revenue is dismissed. 23. In view of the above and in view of the detailed reasoning given by the ld.CIT(A) on this issue, we do not find any in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO u/s 2(22)(e) of the Act. 28.1 The ld. DR, while supporting the order of the AO submitted that the AO has made addition alleging that the negative balance indicates that the company has made payment to the assessee to receive that much amount from the assessee. On the other hand, positive balance shows that the company owes the amount to the assessee. He submitted that the ld.CIT(A) without considering the facts properly held that the addition is not justified. 28.2 The ld. Counsel for the assessee, on the other hand, while supporting the order of the CIT(A) submitted that the ld.CIT(A) deleted the same on the ground that the transactions in the client ledger account are transactions entered in the ordinary course of business and are relating to sale/purchase of shares, currency/derivatives only. He submitted that the amount which has been credited and debited in the account of the assessee is in association with the said party is on account of business transaction and transacted by the assessee being a client and shareholder of the company. He submitted that similar addition on account of deemed dividend was made in the case of Shri Gaurav Arora which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrency/derivatives/commodities etc. The Ld. DR could not controvert the above factual findings of the Ld. CIT(A) before us. In view of the above facts, the Ld. CIT(A) is justified in holding that the transactions between the assessee and those companies are in the nature of trading transactions which are beyond the ambit of deemed dividend in view of the decisions of the Hon ble Jurisdictional High Court in the case of CIT vs. Creative Dyeing Printing (P.) Ltd. (Supra). The Ld. CIT(A) has followed the above decision of the Hon ble Delhi High Court. In our opinion, the Ld. CIT(A) has not committed any error in following the above decision of the Hon'ble Delhi High Court. Accordingly, we uphold the same. The ground of appeal of the Revenue is dismissed. 29.1 We further find that the account of the assessee is a running account, i.e., on every day there are transactions of receipt and payment and, therefore, the payments made against the business transactions are outside the purview of section 2(22)(e) of the Act. We find, the CBDT vide Circular No.19/2017, dated 12th June, 2017 has clarified as under:- 3. In view of the above it is, a settled position that trade adv ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
