TMI Blog2019 (3) TMI 1993X X X X Extracts X X X X X X X X Extracts X X X X ..... HELD THAT:- It is a clear that the ld. CIT(A) has applied correct rate as applicable for the year under consideration whereas the AO has applied amended rule which was not applicable for the year under consideration. Accordingly, in view of the facts that as per the formula given in Rule 8Dthe disallowance @ 0.5% of the average investment was to be calculated on account of administrative expenditure. Hence, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Reopening of assessment u/s 147 - HELD THAT:- The report of the investigation received by the AO in respect of the alleged misuse of client code modification facility for shifting of profit along with the order passed U/s 143(3) r.w.s. 147 for the assessment year 2009-10 constitute a tangible material for forming the belief that income assessable to tax has escaped assessment. We further note that the Assessing Officer had already passed the order U/s 143(3) r.w.s. 147 of the Act for the assessment year 2009-10 and concluded that the assessee has shifted profit in the garb of client code modification facility. Thus, the reassessment order passed for the A.Y. 2009-10 constitutes a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the CIT(A)-4, Jaipur, is justified in deleting the addition on account of commission pad for acquiring such accommodation entry of Rs. 1,25,016/- made by the AO. 3. Whether on the facts and in the circumstances of the case and in law, the CIT(A)-4, Jaipur, is justified in deleting the addition on account of u/s 14A of Rs. 2,57,264/- totaling for Rs. 65,04,443/- despite the amendment made to the Rule 8D w.e.f. 02.06.2016 made by the AO. 2. Ground no. 1 is regarding the addition made by the AO on account of Client Code punching error was deleted by the ld. CIT(A). The ld. DR has submitted that as per the investigation carried by Directorate I CI Mumbai and by Directorate of Investigation Ahmedabad it was found that fictitious profits and losses were created by some brokers by misusing the client code modification facility in F O segment on National Stock Exchange (NSE). The ld. DR has referred to the assessment order and submitted that the Investigation has revealed the modus apprendi as to how the client code modification is done by the brokers at Stock Exchange. He has further contended that some of the brokers are misusing the facility provided by the Stock Excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s facility is no doubt provided to the brokers to rectify the genuine mistakes committed in typing the wrong codes or the mistakes in punching the client codes at the time of trade transactions on the stock exchange. Thus, in simple words, the Client Code Modification facility allows the broker to correct the mistakes which are committed during the course of doing the trade on behalf of the various clients. There may be some instances of misusing this facility by the brokers but it cannot be done by the broker on regular basis as the broker is bound to carry out trading transactions as per the instructions of the client and therefore, until and unless all three parties are hand in gloves or in connivance, such misuse of Client Code Modification facility cannot be done by a broker. Therefore, all three parties are required to have common intention and design which in normal course is not possible when they are not related 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 anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to use the material so collected, the assessee must be informed about the material and given adequate opportunity to explain it... The statements were material on which the I.T. Authorities could act provided the material was disclosed and the assessee had an opportunity to render their explanation in that regard. Further, the Ld. A/R was made aware of Hon'ble Supreme Court decision in the case of Dhakeshwari Cotton Mill Ltd. Vs. CIT reported at 26 ITR 775 wherein Hon'ble Supreme Court held that right to cross examine is not absolute and that the requirement of law for valid assessment would be met if all the evidence collected which is to be used against the assessee while framing the assessment order is placed before Tie assessee and given opportunity to rebut the evidence. Here, it is also worth to state that the share brokers u/s 131(1A) in Mumbai is not sole basis for reopening the case, there is material 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 Investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted to cross-examine those dealers and what extraction the appellant wanted from them. 7. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of crossexamination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 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 testim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Intelligence Criminal Investigation) that the appellant had booked a loss of Rs. 27,63,104/- due to modification made by the assessee in F O segment to the third parties through the Client Code Modification facility. 4. That the AO had reopened the case u/s 148 of the Act by duly recording the reasons 5. That the detail of reopening was provided to the assessee on 17-04-2015. 6. That the assessee firm had raised objections to the reopening proceedings. The objections were duly considered by the AO and a written order disposing the petition of the assessee was passed and served to the assessee. 7. That it was found by the authorities that the firm was found using client code modification facility in F O segment on NSE during the year under consideration. By doing this, it is alleged that fictitious losses and profits were transferred to its clients. 8. That the appellant has claimed that it was 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court (ITR pp 200- 01) in the case of CIT vs. Sakarlal Balabhai (affirmed by the Supreme Court in CIT vs. Vadilal Lallubhai): (SCC 253-54, para 43) Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoid payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available foruse and enjoyment to the assessee's as in a case falling within Section 44-D or mask the true character of the income by disguising it as a capital receipt as in a case falling within Section 44-E or assume diverse other forms But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income-producing asset, so that the right to receive income arising 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 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. To rectify the error in punching of client code, a facility known as Client Code Modification (CCM) is provided by the stock exchange till 4:15 PM of the trade day itself. This can be done on only written request of the clients (Copies of letters enclosed at PB 39- 46). 2. It is submitted that in any given day, thousands of transactions are carried out by brokers. The CCM facility is provided by the National Stock Exchange to rectify the errors / mistakes made at the time of punching trades. The National Stock Exchange of India Limited has provided certain guidelines and penalties relating to the CCM Facility (PB 20-26). As per the stock exchange, CCM facility can be used to modify the client code on the trade day itself till 4:15 PM (PB 20). This is also stated 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 (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 val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion. In view of the above, the Ld. CIT(A) is not justified in confirming the addition made by the AO 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the assessee has changed the code to the concerned client's account at the end of the day has not been disproved. If at all any person comes with a request seeking profits, there will normally be time lag and hence the fact that the assessee has changed the codes at the end of the day only shows that the assessee has carried out the transactions on behalf of its clients only. Such kind of transactions shall usually be sporadic transactions, where as in the instant * case, the clients have carried out the transactions continuously. Further, it is pertinent to note that none of the clients, with whom the assessing officer has carried out the examination, has disowned the transactions. Further, 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 conclusions against the assessee without properly bringing any materials to support the view, i.e., the additions have been made on suspicion and surmises only. Accordingly, we uphold the order of Ld CIT(A) in both the years under consideration. Thus, in the said case, the modification carried out by the assessee were 3% of the total transaction, which was found by the Tribunal as within the permissible limit of error margin. The Ahmadabad Benches of the Tribunal in the case of ACIT Vs. M/s Kunvarjit Finance Pvt. Ltd. (supra) and others in bunch of appeals has analysed the issue in para 8 to 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 code modification fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (i.e. commodities traded upto 11:55 p.m.) Members are requested to take note of the FMC directives and ensure strict compliance. From the above, it is evident that client code modification is permitted intra-day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is Rs.500/-. If it is greater than 5% but less than 10%, penalty is Rs.1000/- and if it is greater than 10%, then penalty is Rs.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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination the profit/loss arising after the client code modification can be considered in the hands of the assessee. 11. The ld. CIT(A) in paragraph 4.13 of his order has also recorded the findings that all transactions at the Commodities Exchanges have 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have carefully considered the rival submissions and find that the Assessing Officer has applied Rule 8D(iii) r.w.s. 14A on average investment worked out by him. In this regard, I find that the disallowance made by the AO is as per the provisions of rule 8D(iii). However, I also find that rule 8D(iii) requires disallowance to be made @ 0.5% and not 1% as wrongly made by the AO. Accordingly, I direct the AO to recalculate disallowance and restrict the same to Rs. 1,28,632/- being mistake apparent from record. This ground is treated as partly allowed. Thus, it is a clear that the ld. CIT(A) has applied correct rate as applicable for the year under consideration whereas the AO has applied amended rule which was not applicable for the year under consideration. Accordingly, in view of the facts that as per the formula given in Rule 8Dthe disallowance @ 0.5% of the average investment was to be calculated on account of administrative expenditure. Hence, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. 8. In Cross Objection of the assessee has raised following grounds:- 1) In the facts and the circumstances of the case and in law, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fted profit in the garb of client code modification facility. Thus, the reassessment order passed for the A.Y. 2009-10 constitutes a tangible material for the AO to form the belief that the income assessable to tax has escaped assessment for the year under consideration and accordingly, the AO issued a notice U/s 148 of the Act on 15.03.2017. Hence, in view of the facts that reopening in the case of the assessee is after the reassessment order passed by the AO for the A.Y. 2009-10 the reopening cannot be held to be based on change of opinion or borrowed satisfaction. Further, the proviso to Section 147 of the Act cannot be invoked for the year under consideration when there is no original assessment U/s 143(3) of the Act. Accordingly, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. 13. Ground No. 2 is regarding disallowance made U/s 14A of the Act sustained by the ld. CIT(A). 14. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The assessee has submitted that the provisions of Section 14A of the Act do not apply when the AO has not given a finding that there are direct nexus between the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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