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Income Tax Appellate Tribunal, ‘’ A’’ BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeals have been filed at the instance of the different Assessee against the separate orders of the Learned Commissioner of Income Tax (Appeals)-6, Ahmedabad, of even date 11/10/2017 (in short “Ld. CIT(A)”) arising
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in the matter of assessment order passed under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2009-2010.
First, we take up ITA No. 2576/AHD/2017 for AY 2009-10. The assessee has raised the following grounds of appeal: The learned CIT(A)-6, Ahmedabad has erred in law and on facts in - 1. Confirming the action of the AO in re-opening the assessment for the reasons as recorded and conveyed in due course of time to the Appellant; 2. Holding that the ratio of the judgment of Hon'ble Supreme Court in the case of GKN Driveshaft (India) Ltd. as reported at 259 ITR 19 (2003), was followed by the AO. Considering the facts of the case, she ought to have held that the same has not been followed in its letter and spirit, thus rendering the consequential re-assessment order liable to be quashed even on this ground; 3. Confirming the action of the AO in making disallowance of Rs.29,66,471/- and thereby making addition of the same amount to the returned income, for the reasons as stated in the body of the order. The assessee craves leave to add, amend, delete or alter one or more grounds of appeal.
The 2nd issue raised by the assessee is that the learned CIT (A) erred in 3. confirming the order of the AO by sustaining the addition of Rs. 29,66,471/- on account of client code modification done by the broker to shift the profit.
The facts in brief are that the assessee in the present case is an individual and filed return of income declaring total income of Rs. 23,31,470.00 only. The AO in the present case received the information from investigation wing Ahmadabad i.e. ADIT(inv), Unit-3 wherein it was found that the broker M/s Mangal Keshav Securities Pvt. Ltd., was engaged in client code modifications activity in various segments such as equity, derivatives etc. On analyzing the information/data received from the investigation wing, it was revealed that the broker has shifted the aggregate profit amounting to Rs. 3,31,462.10 belonging to the assessee on 80 occasion when assessee was the original client. Similarly, there was shifted in aggregate loss of Rs. 26,35,009.10 on 22 occasion when assessee was modified
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client. Accordingly the AO made the addition of Rs. 29,66,471.20 to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) contended that the AO has made the addition on account of client code modification in arbitrary manner. As such the AO has alleged that total 138 times code was modified whereas the profit shifted out or loss shifted in was only 102 time. As such, there was no finding about code modified for remaining 36 times. Likewise, the AO has not provided specific transaction wise breakup of the modification.
It was also submitted that the AO has clearly admitted that the code was modified by the broker. Therefore no adverse inference can be drawn against assessee for the mistake committed by the staff member of broker, especially in a condition when assessee is not related to the broker in any manner.
As per the detail provided by the AO, most of the time the code of the assessee was modified with code of the assessee’s husband and her husband’s HUF. As such the codes of all these parties are similar, therefore it is quite possible that mistake was committed by the staff member of the broker while punching the transactions which were ratified later on by modifying the codes.
However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: It is seen that the AO had information that the appellant in connivance with his broket Mangal Kehav Securities had indulged in client code Modification (CCM) to shift in losses and the same was set off against taxable income of the appellant. The AO had information that there were 138 transactions of the appellant in which CCM had been done. By doing CCM in these 138 transactions, there was shifting out of profit of Rs. 3,31,462/- and shifting in of losses of Rs. 26,35,009/- Thus, by resorting to CCM, in total the income was reduced by Rs.29,66,471/- by the appellant. Accordingly, the AO added Rs.29,66,471/- to the income of the appellant. The present appeal is against the above action of the AO.
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It is seen that the appellant carried out large number of transctions in stock exchange through broker Mangal Keshav Securities Limited. Investigation Wing of the Income Tax Department at Ahmedabad had carried out surveys u/s 133A of the Act on brokers in Ahmedabad and had analysed data from different stock exchanges from F.Y. 2009 to 2010-11. Analysis of this data indicated that there was systemic shifting of huge crystallized losses using CCM in the F & O segment at the National Stock Exchange. This analysis indicated that CCM was used for purpose other than for rectifying genuine errors.
In survey u/s 133A of the Act on Mangal Keshav Securities, broker of the appellant, it was found that the broker indulged in large scale Client Code Modifications so as to facilitate shifting of losses and profits to it's clients as per requirements, The AO had information that in the year under consideration, there.were 138 transactions pertaining to the appellant where CCM was used to shift losses and profits. Details are as follows:- F-Y. Transactions No. of Ascertained Transactions Profit/Loss shifted out/ shifted in (Rs.)
As Original 2008-09 Transactions where ascertained Losses 35 3,31,4627- Client shifted out (Profit shifted out) Transactions resulting in no profit no loss 0
Transactions where ascertained Profit shifted 80 out
As 2008-09 Transactions where Losses shifted in 22 -26,35,0097- Modified {Loss shifted in ) Client Transactions resulting in no profit no loss 0
Transactions where Profit shifted in 1
Net reduction in Income due to CCM 138 29,66,4717-
Further, the AO ha^ information that Client Code Modification in case of appellant were carried out against a fixed set of PANs only. All modified transactions were carried out between the appellant and a fixed set of clients. Both when the appellant was the original client and the modified client , the counterparties were common. This cannot be a sheer coincidence. If the client code modification is done to rectify a genuine error, the corresponding client code could be any. But here, there is a set of client codes with which the modifications are done to the transactions of the appellant.
Further, the AO has carried out the Levenshtein Distance Analysis or digit edit analysis which helps to know the minimum number of edits required to change one code to another. This analysis indicates whether the code is wrongly typed or is completely replaced. In the case of the appellant, for 115 CCMs when the appellant was the original client, total 222 edits had taken place showing that on average 2 edits happened for each CCM. Similarly, for 23 CCMs when the appellant was the modified client, total 46 edits had taken place showing that on average 2 edits happened for each CCM. This establishes that CCMs were not carried out to rectify any genuine error rather to completely replace one client code with other.
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Further, based on survey u/s 133A of the Act in the case of the broker Mangal Keshav Securities, it was found that the broker had indulged in large scale CCMs to facilitate losses and profits as pr requirements of its clients. The AO had information that Keshav Mangal had carried out very high number of CCMs on the.NSE F & 0 segment as follows:-
F.Y. Total CCM
2008-09 138501
2009-10 48358
2010-11 32021
2011-12 243
The appellant failed to refute the allegations of the AO which were based on concrete information and scientific analysis of the same.
During the appellate proceedings the appellant reiterated what it had submitted before the AO. The main thrust of the argument of the appellant is that most of the client code modifications done have taken place between the appellant and the her husband. Since the client codes are similar to each other, CCMs could be due to inadvertent typing error. Any mistake committed by the broker cannot be considered the basis to doubt genuineness of bona fide transactions. A perusal of submissions of the appellant shows that the submissions are very general in nature and lack substance. The appellant has tried to explain the large number of CCMs done in a simplistic way by saying that this could be due to inadvertent error since the code of appellant and its karta were almost similar. The appellant has not been able to refute the allegations of the AO which are specific and which are based on scientific analysis. Merely saying that it has not asked its broker to carry out any modifications, does not help the cause of the appellant. The AO has given specific transactions where profit and loss has been shifted in by Client Code Modification. The appellant has failed to adduce any evidence to show that it has not benefited by these transactions. The appellant has not given any evidence to establish that once it came to know about the Client Code Modifications, it objected to the broker about the same. This becomes paramount since in the case of the appellant CCMs carried out by the broker caused huge loss to the appellant. How can anyone not object to and continue with a broker who commits such huge number of mistakes that too resulting in loss to the client. Thus it can be safely assumed that CCMs could not have been done without consent of the appellant.
SEBI permits Client Code Modification to rectify genuine error in entry of Client Code at the time of placing/modifying the related order. This facility has been misused by brokers and their clients for diverting profit/losses across clients in order to evade tax on stock exchange transactions. The appellant is one of several of such beneficiaries who in connivance with their brokers have benefitted from CCMs. Ratio of decisions relied on by the appellant is not applicable to the present case as these are distinguished on facts. In view of discussion above, it is held that the AO was justified in making addition of Rs.29,66,641/-. Accordingly, addition of Rs.29,66,471/- is upheld. This ground of appeal is rejected.
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Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 48 and various case laws and submitted that the assessee has not shifted out any profit or shifted in any loss by changing his code maintained with the broker.
On the other hand, the learned DR before us vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee was alleged to have diverted his profit amounting to Rs. 29,66,471/- on account of client code modification by shifting in losses and shifting out profit. Accordingly, the AO made the addition of Rs. 29,66,471/- to the total income of the assessee. The view taken by the AO was subsequently confirmed by the learned CIT (A).
13.1 Client Code Modification means modification / change of the client codes after execution of trades. Stock Exchanges provide a facility to modify any client code after the trade has been executed to rectify any error or wrong data entry done by the brokers at the time of punching orders. However, such Client Code modification is subject to certain guidelines as to the time limit within which the client code modification is to be carried out, terminal / system on which such modifications can be done etc. The facility is mainly to provide a system for modification of client codes in case genuine errors in punching / placing the orders. It is to be used as an exception and not a routine. To prevent misuse of the facility, the Stock Exchanges levy penalty / fine in certain circumstances.
13.2 Coming to the facts of the present case, admittedly client codes were modified of the assessee as per the information received from the investigation
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wing. However, the first question that arises whether such client codes were modified at the instance of the assessee or there was some punching error at the end of the share broker. It is because the stock exchange permits the share broker to rectify the mistakes occurred while punching the data. If that be so, then there cannot be any fault which can be attributed to the assessee for the mistakes committed by the share broker.
13.3 Furthermore, the client code modifications give rise to the doubt/ suspicion which requires detailed investigations from the parties concerned to reveal the truth. Merely, there were client codes modifications carried out by the broker cannot the basis to draw an inference against the assessee. In fact, in the case of client code modification the code of the other party is entered at the place of the assessee. Thus, the other party also required to be investigated whether the other party was involved in such transaction. Besides this other corroborative evidence has to be brought on record suggesting that there was the exchange of cash among the parties involved in such client code modification transaction. But we note that no such exercise has been carried out by the authorities below. As such there is no whisper in the order of the authorities below that there was the cash transfer between the parties for transferring the income of the assessee to the other party or shifting in the losses. Furthermore, in majority of the cases, the client code medication was carried out by the broker with the relative of the assessee and thus it is very unlikely that the assessee shall manipulate the income/loss with them for the reason that there would be consequential effect on their income too. Meaning thereby, as a whole, there would not any effect on the income of the assessee and her associates unless some contrary evidence are brought on record. Thus in the absence of such verification/examination carried out by the authorities below, we are not inclined to uphold their findings.
13.4 In view of the above and after considering the facts in totality, we are not inclined to uphold the findings of the authorities below. Accordingly we set aside
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the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
The assessee in the 1st issue has challenged the validity of the assessment 14. order framed under section 147 of the Act.
At the outset, we note the issue raised by the assessee on merit has been decided in her favour vide Paragraph No. 13 of this order. Accordingly, we refrain ourselves from deciding the issue raised by the assessee on the validity of assessment order framed under section 147 of the Act. As such the technical issue raised by the assessee becomes infructuous. Hence, we dismiss the same as infructuous.
In the result the appeal filed by the assessee is partly allowed.
Coming to ITA No. 2577/Ahd/2017 by Amitkumar A Shah (HUF) for A.Y. 2009-10.
The assessee has raised following grounds of appeal:
The learned CIT(A)-6, Ahmedabad has erred in law and on facts in: 1. Confirming the action of the AO in re-opening the assessment for the reasons as recorded and conveyed in due course of time to the Appellant; 2. Holding that the ratio of the judgment of Hon'ble Supreme Court in the case GKN Driveshaft (India) Ltd. as reported at 259 ITR 19 (2003), 'was followed by the AO. Considering the facts of the case, she ought to have held that the same has not been followed in its letter and spirit, thus rendering the consequential re-assessment order liable to be quashed even on this ground; 3. Confirming the action of the AO in making disallowance of Rs.67,22,384/- and thereby making addition of the same amount to the returned income, for the reasons as stated in the body of the order. The assessee craves leave to add, amend, delete or alter one or more grounds of appeal.
At the outset, we note that the identical issue was raised in ITA No. 2576/Ahd/2017 in the case of Smt. Monaben Amitkumar Shah for A.Y
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2008-09 wherein the issue has been partly allowed in favour of assessee. For detailed discussion please refer to paragraph No13 of this order. Accordingly we hold that finding given in above paragraphs with respect to ITA No. 2576/AHD/2017 will mutatis mutandis apply here in this case also.
The appeal filed by the assessee is party allowed.
In the combined result, both the appeals filed by the different assessee are partly allowed.
Order pronounced in the Court on 08/11/2021 at Ahmedabad.
-Sd- -Sd- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 8/11/2021 manish
आदेश क� ��त�ल�प �े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER,
//True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad