MRS RAJANI S.IYER,MUMBAI vs. ASSTT. COMMISSIONER OF INCOME TAX 20(3), MUMBAI

PER OM PRAKASH KANT, AM

These appeals by the assessee are directed against two separate orders, both dated 25.4.2023, passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2010- 11, against proceedings by the Assessing Officer for quantum assessment and penalty respectively.

Mrs. Rajani S Iyer 2 ITA Nos. 2239 & 2240/Mum/2023 ITA No

The Learned ACIT 20(3) has erred in disallowing loss in F& The Learned ACIT 20(3) has erred in disallowing loss in F& The Learned ACIT 20(3) has erred in disallowing loss in F&O amounted to Rs.37,28,681/ amounted to Rs.37,28,681/- due to change in client code due to change in client code modification done by broker. The Learned ACIT 20(3) has erred in modification done by broker. The Learned ACIT 20(3) has erred in modification done by broker. The Learned ACIT 20(3) has erred in addition of loss of Rs.37,28,681/ addition of loss of Rs.37,28,681/- due to change in client code due to change in client code modification done by broker to normal business income instead modification done by broker to normal business income instead modification done by broker to normal business income instead reducing the same from speculation loss of Rs.73,86, 173/ g the same from speculation loss of Rs.73,86, 173/ g the same from speculation loss of Rs.73,86, 173/- determined as per assessment order passed u/s 143(3). determined as per assessment order passed u/s 143(3). determined as per assessment order passed u/s 143(3). 3. Briefly stated facts of the case are that the assessee is engaged Briefly stated facts of the case are that the assessee is engaged Briefly stated facts of the case are that the assessee is engaged in trading activity of the shares including both delivery based in trading activity of the shares including both delivery based in trading activity of the shares including both delivery based transaction and non n-delivery based transactions. For the year delivery based transactions. For the year under consideration, the assessee filed return of income on under consideration, the assessee filed return of income on under consideration, the assessee filed return of income on 24.09.2010 declaring Rs. Nil. In the return of income, the assessee 24.09.2010 declaring Rs. Nil. In the return of income, the assessee 24.09.2010 declaring Rs. Nil. In the return of income, the assessee shown net income of Rs.72,18,534/ shown net income of Rs.72,18,534/- from the trading activity after from the trading activity after adjusting net of loss of Rs.49,76,807/ loss of Rs.49,76,807/- from non from non-delivery based transaction transaction future future and and options options (F&O) (F&O) against against profit profit of of Rs.1,21,95,341/- from delivery based transactions. For both these from delivery based transactions. For both these from delivery based transactions. For both these transactions, transactions, transactions, the the the assessee assessee assessee incurred incurred incurred BSE/NSE BSE/NSE BSE/NSE charges charges charges of of of Rs.26,19,632/- which was debited which was debited to the profit and loss account. In to the profit and loss account. In the case of the assessee assessment u/s 143(3) of the Income-tax the case of the assessee assessment u/s 143(3) of the Income the case of the assessee assessment u/s 143(3) of the Income Act, 1961 (in short ‘the Act’) was completed on 28.03.2013 Act, 1961 (in short ‘the Act’) was completed on 28.03.2013 Act, 1961 (in short ‘the Act’) was completed on 28.03.2013 determining total income at Rs.72,57,400/ determining total income at Rs.72,57,400/-. In said assessment . In said assessment order, the Assessing Officer disal order, the Assessing Officer disallowed the loss of Rs.49,76,807/ lowed the loss of Rs.49,76,807/- incurred on non-delivery based transaction to be set off against delivery based transaction to be set off against delivery based transaction to be set off against delivery based transactions trading delivery based transactions trading holding the same holding the same as speculation speculation speculation loss. loss. loss. The The The Assessing Assessing Assessing Officer Officer Officer also also also disallowed disallowed disallowed

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proportionate BSE/NSE charges by allocating the same in proportionate BSE/NSE charges by allocating t proportionate BSE/NSE charges by allocating t proportion of turnover of delivery proportion of turnover of delivery and and non non- -delivery based transaction which amounted to Rs.24,09,366/ transaction which amounted to Rs.24,09,366/-. In this manner, the . In this manner, the Assessing Officer made total disallowance of Rs.73,86,173/- (i.e. Assessing Officer made total disallowance of Rs.73,86,173/ Assessing Officer made total disallowance of Rs.73,86,173/ speculation loss of Rs.49,76,807/ speculation loss of Rs.49,76,807/- + BSE/NSE charges of + BSE/NSE charges of Rs.24,09,366/- incurred toward speculation transaction) incurred toward speculation transaction) incurred toward speculation transaction) and said loss of Rs.73,86,173/ loss of Rs.73,86,173/- was allowed to be carried forward for was allowed to be carried forward for subsequent years.

4.1 Subsequently, the Assessing Officer had received information Subsequently, the Assessing Officer had received information Subsequently, the Assessing Officer had received information from the office of the Director of the Incom from the office of the Director of the Income-tax, Mumbai tax, Mumbai that assessee was one of the beneficiary of tax evasion assessee was one of the beneficiary of tax evasion by way of by way of client code modification on stock exchange and on stock exchange and taking excess loss of taking excess loss of Rs.37,28,681/-. In view of the information, the Assessing Of . In view of the information, the Assessing Officer . In view of the information, the Assessing Of recorded reasons to believe recorded reasons to believe that income escaped assessment and that income escaped assessment and issued notice u/s 148 of the Act on 18.03.2015. The reassessment issued notice u/s 148 of the Act on 18.03.2015. The reassessment issued notice u/s 148 of the Act on 18.03.2015. The reassessment proceedings u/s 147 of the Act was completed on 23.03.2016 proceedings u/s 147 of the Act was completed on 23.03.2016 proceedings u/s 147 of the Act was completed on 23.03.2016 wherein the Assessing Officer disallowed the loss of Rs.37,28,681/- wherein the Assessing Officer disallowed the loss of Rs.37,28,681/ wherein the Assessing Officer disallowed the loss of Rs.37,28,681/ and also disallowed proporti and also disallowed proportionate brokerage charges which was onate brokerage charges which was worked out to 1,49,147/ worked out to 1,49,147/-. On further appeal, the Ld. CIT(A) upheld . On further appeal, the Ld. CIT(A) upheld disallowance of Rs.37,28,681/ disallowance of Rs.37,28,681/- observing as under:

“6.1 The appellant contended that the Learned ACIT20(3) 6.1 The appellant contended that the Learned ACIT20(3) 6.1 The appellant contended that the Learned ACIT20(3) has erred in addition of loss of Rs. 37,28,681/ has erred in addition of loss of Rs. 37,28,681/- due to due to change in client code modification done by broker to change in client code modification done by broker to change in client code modification done by broker to normal business income instead reducing the same from normal business income instead reducing the same from normal business income instead reducing the same from speculation loss of Rs. 73,86, 173/ speculation loss of Rs. 73,86, 173/- determined as per determined as per assessment order passed u/s 143(3). assessment order passed u/s 143(3).

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In support the appellant submitted in reference to In support the appellant submitted in reference to In support the appellant submitted in reference to loss of Rs.37,28,681/ loss of Rs.37,28,681/- through changes in client through changes in client code modification we would like to state that we code modification we would like to state that we code modification we would like to state that we have executed all the transactions through broker have executed all the transactions through broker have executed all the transactions through broker and it is not the duty of client to see what changes and it is not the duty of client to see what changes and it is not the duty of client to see what changes are done by broker in system of stock exchange as are done by broker in system of stock exchange as are done by broker in system of stock exchange as client have no access to system. All the entries in nt have no access to system. All the entries in nt have no access to system. All the entries in our client code were made as per the contracts our client code were made as per the contracts our client code were made as per the contracts and bills of our brokers and our client has no and bills of our brokers and our client has no and bills of our brokers and our client has no knowledge of the changes made and also our knowledge of the changes made and also our knowledge of the changes made and also our client had neither made payment nor received client had neither made payment nor received client had neither made payment nor received payments for the trade fro payments for the trade from the broker. From the records available it is observed that the From the records available it is observed that the From the records available it is observed that the Assessing Officer disallowed the loss of Rs. Assessing Officer disallowed the loss of Rs. Assessing Officer disallowed the loss of Rs. 37,28,681/ 37,28,681/- obtained by the appellant through obtained by the appellant through client code modification on by invoking the client code modification on by invoking the client code modification on by invoking the provision of section 69C of the Act. This facility of provision of section 69C of the Act. This facility of provision of section 69C of the Act. This facility of client code modification is approved by SEBI and ient code modification is approved by SEBI and ient code modification is approved by SEBI and provided by the exchanges to brokers is meant to provided by the exchanges to brokers is meant to provided by the exchanges to brokers is meant to rectify genuine mistakes of punching of order of a rectify genuine mistakes of punching of order of a rectify genuine mistakes of punching of order of a particular trade given by a particular trade from particular trade given by a particular trade from particular trade given by a particular trade from one account to another account during the trading one account to another account during the trading one account to another account during the trading hours and hours and time and time permitted by the stock time and time permitted by the stock exchange after the trading hours. exchange after the trading hours. Many broker Many broker misused this facility of CCM for creating artificial misused this facility of CCM for creating artificial misused this facility of CCM for creating artificial losses/profits losses/profits losses/profits and and and providing providing providing such such such fictitious fictitious fictitious profits/losses to various clients by charging some profits/losses to various clients by charging some profits/losses to various clients by charging some commission. In the subm commission. In the submission the appellant ission the appellant admitted the transaction not recorded in the books admitted the transaction not recorded in the books admitted the transaction not recorded in the books of account which means the financial impact of account which means the financial impact of account which means the financial impact involved in it is settled out of the resources not involved in it is settled out of the resources not involved in it is settled out of the resources not disclosed to Income Tax. The decision of the disclosed to Income Tax. The decision of the disclosed to Income Tax. The decision of the Assessing Officer of disallowed the loss of Rs. Assessing Officer of disallowed the loss of Assessing Officer of disallowed the loss of 37,28,681/ 37,28,681/- is right and legal and no need to is right and legal and no need to interfere. In view of the above the appeal is interfere. In view of the above the appeal is interfere. In view of the above the appeal is dismissed dismissed.” 4.2 Before us the Ld. Counsel the Ld. Counsel for the assessee submitted that the the assessee submitted that the Ld. Assessing Officer has reopened the case merely for the reason to Ld. Assessing Officer has reopened the case merely for the reason to Ld. Assessing Officer has reopened the case merely for the reason to suspect that client code modification has been done for client code modification has been done for client code modification has been done for non- genuine purpose but without any but without any evidence to support evidence to support and there

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was reason to believe reason to believe that income chargeable to tax that income chargeable to tax had escaped assessment. The Ld. Counsel submitted that in the reasons assessment. The Ld. Counsel submitted that in the reasons assessment. The Ld. Counsel submitted that in the reasons recorded details of tr recorded details of transaction of client code modification by the ansaction of client code modification by the broker has not been pointed out and th broker has not been pointed out and therefore entire reasons to erefore entire reasons to believe being based on the suspicion based on the suspicion , the reassessment reassessment is bad in law and need to quashed. to quashed. The Ld. Counsel for the assessee in the assessee in support of his conte support of his contention relied on the decision of the Hon’ble ntion relied on the decision of the Hon’ble Bombay High Court in the case of M/s Court in the case of M/s Coronation Agro Coronation Agro Industries Ltd. v. DCIT in WRIT WRIT PETITION NO. 2627 OF 2016 2016, wherein it is held the reason does not indicate basis for the Assessing Officer to the reason does not indicate basis for the Assessing Officer to the reason does not indicate basis for the Assessing Officer to make reasonable belief that there had been reasonable belief that there had been an escapement of the escapement of the income due to client code modification client code modification by the broker of the assessee by the broker of the assessee was on account of was on account of non-genuine error originally occurred while genuine error originally occurred while punching the trade.

5.1 As far as the ground of the assessee on m As far as the ground of the assessee on merit is concerned, erit is concerned, the ld Counsel of the assessee submitted ld Counsel of the assessee submitted that the Assessing Officer in that the Assessing Officer in the impugned order has provided detail note on the client code the impugned order has provided detail note on the client code the impugned order has provided detail note on the client code modification procedure but nowhere mentioned the list of the modification procedure but nowhere mentioned the list of the modification procedure but nowhere mentioned the list of the transaction in the case of the assessee wh in the case of the assessee where ere client code modification has been modification has been alleged carried out by the broker of the carried out by the broker of the assessee. The Assessing Officer has also nowhere mentioned that assessee. The Assessing Officer has also nowhere mentioned that assessee. The Assessing Officer has also nowhere mentioned that for what purpose client code modification was carried out by the for what purpose client code modification was carried out by the for what purpose client code modification was carried out by the broker and not substantiated with evidence that not substantiated with evidence that same was for same was for not rectifying genuine error for punching of the trade rectifying genuine error for punching of the trade but was for giving but was for giving

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benefit of losses to the assessee benefit of losses to the assessee. Before the Ld. CIT(A), the assessee . Before the Ld. CIT(A), the assessee submitted that all the transactions had been all the transactions had been executed executed by the broker and it was not the duty of th broker and it was not the duty of the client to make make changes on the stock exchange. The assessee had no access . The assessee had no access to the system to the system of stock exchange. All the entries in client code were made as per the . All the entries in client code were made as per the . All the entries in client code were made as per the contracts and bills of the broker and the assessee had no contracts and bills of the broker and the assessee had no contracts and bills of the broker and the assessee had no knowledge of the changes made. knowledge of the changes made. Therefore, the AO and Ld CIT(A) re, the AO and Ld CIT(A) are not justified in disallowing the loss to the assessee. are not justified in disallowing the loss to the assessee. are not justified in disallowing the loss to the assessee.

5.2 We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that dispute and perused the relevant material on record. We find that dispute and perused the relevant material on record. We find that the Assessing Officer has disallowed th the Assessing Officer has disallowed the loss of Rs.37,28,681/ e loss of Rs.37,28,681/- on the allegation of the client code modification the allegation of the client code modification on exchange exchange portal was carried out by the broker of the assessee the broker of the assessee for benefitting the for benefitting the assessee by way of loss provided assessee by way of loss provided . But the Ld. Assessing Officer has . But the Ld. Assessing Officer has nowhere provided details of the transactions where client code nowhere provided details of the transactions where client code nowhere provided details of the transactions where client code modification was carried out nor he given reasons as why the said modification was carried out nor he given reasons as why the said modification was carried out nor he given reasons as why the said client code modification was not for genuine purposes and for the client code modification was not for genuine purposes and for the client code modification was not for genuine purposes and for the purpose of the evasion of purpose of the evasion of the tax. In absence of providing any such the tax. In absence of providing any such material to the assessee, the addition by the Assessing Officer is to the assessee, the addition by the Assessing Officer is to the assessee, the addition by the Assessing Officer is against the principle against the principle of natural justice. The Ld. Assessing Officer natural justice. The Ld. Assessing Officer has neither called for the broker and made any inquiry and made has neither called for the broker and made any inquiry and made has neither called for the broker and made any inquiry and made addition simply on the basis of the report of the Director of the y on the basis of the report of the Director of the y on the basis of the report of the Director of the Investigation. Thus the addition made being on presumption that Investigation. Thus the addition made being on presumption that Investigation. Thus the addition made being on presumption that the client code modification carried out modification carried out was for non for non-genuine

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purposes. Accordingly, the addition made by the AO and upheld by purposes. Accordingly, the addition made by the AO and upheld by purposes. Accordingly, the addition made by the AO and upheld by the Ld. CIT(A) being based on the presumption and being based on the presumption and being based on the presumption and being without supporting any documentary evidence that assessee has evaded the supporting any documentary evidence that assessee has evaded the supporting any documentary evidence that assessee has evaded the tax on those transact tax on those transactions and shown fictitious loss, is deleted ions and shown fictitious loss, is deleted and the order of Ld CIT(A) is set aside. The order of Ld CIT(A) is set aside. The grounds of appeal of the grounds of appeal of the assessee are accordingly allowed. e are accordingly allowed.

“The Learned ACIT 20(3) has erred in levying penalty of Rs. The Learned ACIT 20(3) has erred in levying penalty of Rs. The Learned ACIT 20(3) has erred in levying penalty of Rs. 27,11,625/- levied on certain disallowances made while passing levied on certain disallowances made while passing levied on certain disallowances made while passing order u/s 143(3) order u/s 143(3).” 7. Before us, the Ld. Counsel of the assessee raised the Before us, the Ld. Counsel of the assessee raised the Before us, the Ld. Counsel of the assessee raised the additional ground challenging the validity additional ground challenging the validity of the penalty levied on of the penalty levied on the ground that relevant limb for levy of the penalty i.e. concealment the ground that relevant limb for levy of the penalty i.e. the ground that relevant limb for levy of the penalty i.e. of the particulars of income or of income or furnishing of inaccurate particulars of inaccurate particulars of the income, has not not been stricken off in the notice u/s 2 stricken off in the notice u/s 274 r.w.s. 271(1)(c) of the Act 271(1)(c) of the Act and thus penalty is not sustainable. and thus penalty is not sustainable. The additional ground raised being legal in nature and no investigation additional ground raised being legal in nature and no investigation additional ground raised being legal in nature and no investigation of the fresh facts required same of the fresh facts required same was admitted for adjudication. admitted for adjudication.

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28.03.2013 issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) 28.03.2013 issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) 28.03.2013 issued by the Assessing Officer u/s 274 r.w.s. 271(1)(c) of the Act. On perusal of the said notice, we find that the Assessing of the Act. On perusal of the said notice, we find that the Assessing of the Act. On perusal of the said notice, we find that the Assessing Officer has not stricken off the relevant limb for levy of the penalty ficer has not stricken off the relevant limb for levy of the penalty ficer has not stricken off the relevant limb for levy of the penalty and not specified whether the penalty has been initiated for and not specified whether the penalty has been initiated for and not specified whether the penalty has been initiated for concealment of particulars of income or furnishing inaccurate concealment of particulars of income or furnishing inaccurate concealment of particulars of income or furnishing inaccurate particulars of income. The Hon’ble Bombay High Court in the case particulars of income. The Hon’ble Bombay High Court in the case particulars of income. The Hon’ble Bombay High Court in the case of Mohd Farhan A Shaikh Vs DCIT in 125 taxmann.com 253 Mohd Farhan A Shaikh Vs DCIT in 125 taxmann.com 253 Mohd Farhan A Shaikh Vs DCIT in 125 taxmann.com 253 (Bom) held that where penalty notice has not specified for charges held that where penalty notice has not specified for charges held that where penalty notice has not specified for charges for levy of the penalty for levy of the penalty, whether it is for concealment of the whether it is for concealment of the particulars of the income or furnishing in particulars of the income or furnishing inaccurate particulars of accurate particulars of income, in such circumstances, levy of the penalty is bad in law n such circumstances, levy of the penalty is bad in law n such circumstances, levy of the penalty is bad in law and accordingly cancelled. and accordingly cancelled. The relevant finding of the Hon’ble High The relevant finding of the Hon’ble High Court is reproduced as under: Court is reproduced as under:

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Order pronounced in the open Court on Order pronounced in the open Court on 25/10/2023. 10/2023.

Sd/ Sd/- Sd/- (SANDEEP SINGH KARHAIL SANDEEP SINGH KARHAIL) (OM PRAKASH KANT PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 25/10/2023 Rahul Sharma, Sr. P.S.

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Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai