TMI Blog2024 (1) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the CCM facility of NSE and engaged in providing non-genuine losses and profits. The reason does not specify whether the broker through whom the assessee had carried out the transaction of trading of shares and securities was involved in such malpractices. Infact during the course of re-assessment proceedings, the ld. AO even sought to examine the broker of the assessee M/s S S Corporate Securities Ltd u/s 133(6) of the Act and that the said broker had duly replied directly to the ld. AO confirming the fact of CCM being carried out by them for their clients due to punching errors committed by their staff but had never confirmed that their actions had enabled the assessee to shift the losses or profits. Dispute is squarely covered by the decision of Globus Power Generation Ltd [ 2023 (5) TMI 215 - ITAT DELHI] as held there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had derived income from business of financing activities and trading in shares and securities. The assessment of the assessee was sought to be reopened by the ld. AO on the ground that the assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. This fact got unearthed based on some information received from Assistant Director of Income Tax (Investigation), Ahmedabad. The reasons recorded for reopening the assessment are as under:- Reasons for issue of Notice u/s 148 for reopening of assessment u/s 147 of IT Act 1961 for the A.Y.2009-10 in the case of M/s Yayoo Nandan Finance Co. Pvt. Ltd A. The assessee is a company filed its return of income on 25.08.2009 declaring return Income of Rs. Nil. The details of the directors of the assessee company obtained from records are hereunder: (a) Shailly Rathi (b) Manit Jaju 2. Thereafter, the return was processed under 143(1) of the I.T. Act. Subsequent to the processing completed u/s 143(1), information through email was received on 14/03/2016 from Asstt. Director of Income Tax [Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified. I have examined the ITR and the assessment record of the assessee in respect of FY 2008-09 relevant to A.Y. 2009-10 and the following facts are noted: a) The return of the assessee shows that during the year it has undertaken transactions in sale/purchase of shares, and its turnover could have included the transactions contrived by way of CCM. In the relevant period, the assessee has filed return of Income of Rs. NIL. As per the ITR for the period 01.04.2008 to 31.03.2009, it has undertaken transactions through M/s. Multiplex Capital Ltd. The transactions which involved CCM, as per information received under the report of the Investigation Wing are as under: Name of the beneficiary Orient Address of Beneficiary Name of Broker When OC (Ascertained Profit Shifted Out) When MC (Ascertained Losses Shifted T-n) Net reduction in Income due to CCM M/s Yayoo Nandan Finance Co. Pvt. Ltd LB-6, Tolstoy House, Tolstoy Marg, New Delhi- 110001 (Now III, ESSEL House, 10 Asaf Ali Road Delhi- SS Corporate S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 19 (SC). The ld. AO issued notice u/s 143(2) of the Act on 28.11.2016 which was the same date of filing of return by the assessee in response to notice u/s 148 of the Act. I find that the ld. AO had initiated the re-assessment proceedings way back on 31.3.2016 itself and had been waiting for the assessee to file a return in response to notice u/s 148 of the Act by offering the alleged profit earned by the assessee due to CCM amounting to Rs 4,36,644/-. But since the return was filed vide letter dated 28.11.2016 disclosing Nil income, there was no need for any verification of the said return by the ld. AO. In our considered opinion, the ld. AO had already perused the original return of income filed on 25.9.2009 while recording the reasons itself. Since the same return is repeated by the assessee, the ld. AO had due satisfaction to proceed with the re-assessment proceedings on getting satisfied that some more details are required in the instant case for which purpose, he issued notice u/s 143(2) of the Act. Hence the reliance placed by the ld. AR on the decision of the Hon ble Jurisdictional High Court in the case of DIT vs Society for Worldwide Interbank Financial Telecommunicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details of Shares/Derivatives- Copy of contract notes attached as annexure-1 and copy ledger as annexure-2 6. Point no.-6 The transactions are under taken on NSE and BSE. 7. Point no.7,8 9 The details regarding client code modification error in punching/entering the client code came to our knowledge while reconciling the dient wise transactions as per the orders placed by them and on cross confirmation of the orders with them. The said data feeding mistake has been subsequently rectified by replacing the correct client code of Vayoo Nandan Finance Company Private in place of client code of other parties wrongly entered by our staff members at the time of order received on telephone from the client. The said clerical and data feeding errors was rectified after acceptance of the NSE as per the rule and regulations and such modification are duly informed to the NSE and it is further submitted that the final concluded transactions are Imported from the sauda/transaction file of NSE in our computer systern as provided by the NSE and all the trades were confirmed by the client. On the basis of purchase and sale transactions file and details received from the NSE data, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the reply letter dated 26.12.2016 filed by the assessee before the Id AO wherein, the assessee had categorically denied that the broker had carried out any client code modification in its case to book artificial losses. The assessee had also stated that it is not even aware as to how the figure of Rs. 46,07,275/- regarding alleged artificial loss booked through CCM mentioned in the show cause notice was even arrived at nor is there any information T regarding the broker who is alleged to have carried out client code modification. The assessee submitted that it had no details of transaction of Rs. 46,07,275/- in its records. None of these contentions were even sought to be addressed by the lower authorities. 9. We find that the reasons recorded by the Id AO for reopening of the assessment in the instant case are very without having any live link to form a reasonable belief that the income of the assessee had escaped assessment. The reasons recorded and the assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in MCC to Shift in loss of Rs. 4,420/-. The data clearly shows that the modification was not no grounds of feeding in erroneous data. He further submitted that finally while making the addition learned Assessing Officer at page 16 of order of Assessment, however, concluded that: In view of above, the profit of Rs. 6,47,201/- claimed by the assessee in the above mentioned transactions is treated as a contrived profit artificially generated through the misuse of the CCM. The profit is, therefore, liable to be taxed and added to the total income of the assessee as unexplained investment u/s 68 r.w.s. 115BBE of the Income-tax Act, 1961. 5.2 The Ld. Counsel accordingly, submitted that reasons recorded are thus factually incorrect too, or the learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. 5.3 He also submitted that there is no live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. The learned Counsel relied on decision of Hon'ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464 and following decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. 5.5.1 Further, the Tribunal in Radiance Stock Traders (P) Ltd. vs. ITO (supra), has held as under: 6.1 After perusing the aforesaid reasons recorded, I find that information was received on 21.3.2016 from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad without conducting any enquiry on the same by Assessing Officer and without considering the fact of the case of assessee in light of the issue is not a tangible and relevant material to form opinion that income has escaped assessment. It is noted that the proceedings u/s. 147 of the Act can be initiated only on the basis of the tangible material and not on the basis of assumptions and presumptions. The recondition u/s. 147 of the Act is reason to believe and, the expression is stronger than the word satisfied . The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, as aforesaid, 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 and without jurisdiction, hence, the reassessment is quashed. 5.5.2 Similarly, in the case of Kamal Kishoree Aggarwal vs. ACIT (supra), the Tribunal has observed as under: 7. I find that the reasons recorded for issuance of notice u/s 148 was as under: REASONS FOR BELIEF THAT THE INCOME HAS ESCAPEDASSESSMENT IN THE CASE OF SHRI GOPAL GUPTA FORTHE ASSESSMENT YEAR 2009-10 As Survey Report in R/o client code modification (CCM) has been received from ADIT (Inv.) U-1(3) Ahmadabad disseminating of beneficiary clients who have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011- 12.... 8. We find that in the case of M/s. Prashant Agencies Pvt. Ltd. And PPN Properties Pvt. Ltd. Vs ITO in ITA Nos. 3059 3060/Del/2018, order dated 16.01.2019, the Tribunal dealt with the similar issuance of notice u/s 148 of the Act by following the decision of the Hon'ble Bombay High Court in the case of Coronation 'Agro Industries Ltd. Vs. DCIT 390 ITR 464 (Bom.). I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses shifted old profits using Client Code Modification. 3. It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client code is unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. Client Code Modification means modification/change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-103, dated February 6, 2003 SEBI mandated that the slack exchanges shall not normally 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 or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code, the facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d after modification did not have enough margin money to trade in the F O segment. vii The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix. These brokers revised their computation for A.Y 2010-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted have accepted and withdrawn their claim of nun-genuine losses in F O segment in A.Y-2010-11. They have revised their computation for A.Y.-2010-11 and paid taxes accordingly. The report of I CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion. 6. An action was also undertaken by Ahmedabad Directorate of Investigation Wing. The wing had called for reports from different exchanges and the data was duty analysed. After analysis, 12Brokers and their related entities/main clients were identified for survey where the pre-survey analysis indicated more quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Orders for a given quantity of a given security then at the end id the trading session he has with him an ascertained loss/gain on this Buy Sell pair that he can shift during the CCM window. The analysis of the Investigation Wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders front a given Original Client Code (OCC) or to a given Modified Client Code (MCC) for a given Broker 10. The following steps were followed for analysis and computing the quantum of losses profits shifted due to the CCM: for computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2020 modified on 06.03.2010 to client Y(MCC), then in such case the difference in buy and sell trades is taken to be profit/loss shifted from X to Y. All other transactions say where 500 buy and 200 sell trades are shifted front X to Y have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee shows that it is involved in sale purchase in stock exchanges and its gross turnover could have included the transactions contrived by way of CCM. b) The transactions which involved CCM in case of assessee are as under i) The assessee's code was modified 44 times in OCC to Shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs 4.420/ The data clearly shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: To shift out profits. The Assessee's OCC of FSTP have been modified to new codes in MCC as under. Replaced Code Number of Times q I 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44 (ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke recourse to preponderance of evidence available. 14. A careful scrutiny of information received from the investigation wing and subsequent analysis of report of investigation wing, data of transactions and verification at ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained losses shift out profits of Rs. 6,47,201/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysts subsequent to the information, I have reason to believe that an amount at least of Rs. 6,47,201/- commission @ 2%, amounting to Rs. 12,944/- (@2%) has escaped assessment in case the of M/s Stratagem Portfolio P Ltd for the A.Y. 2010-11 within the meaning of Section 147/148 of Income-tax Act, 1961. 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries Ltd vs DCIT reported in 390 ITR 464 (Bom) wherein it was held as under:- 4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. 5. In the above view, prima facie, we are of the view that the impugned notice is without jurisdiction as it lacks reason to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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