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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & AMARJIT SINGH, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee company against the order of the Ld. CIT(A)/NFAC, Delhi dated 26.03.2023 for AY. 2012- 13.
The main grievance of the assessee is against the action of the Ld. CIT(A) sustaining the addition of Rs.99,73,650/- on account of speculation profit made by the AO. 3. Brief facts are that the assessee company was engaged in the business of manufacturing & trading of Agro products and other commodities. The assessee filed its return of income on 29.09.2012 declaring loss of Rs.2,85,374/-. Later, the case of the assessee was selected for scrutiny. And the AO noted that the assessee has claimed carry forward of speculation loss of Rs.2,85,374/-. The AO asked the assessee about the details of the commodity transaction vide order sheet noting dated 13.01.2015. The AO notes that the assessee submitted ledger account of speculation loss wherein it was found 2 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. inter-alia that assessee earned profit of Rs.11,10,43,769/- from M/s. Anand Rathi Commodities, and loss of Rs.9,96,73,748/- from M/s. Masitla Commodities Pvt. Ltd (hereinafter “M/s. Masitla”). 4. The AO directed assessee on 06.03.2015 to produce the broker note, contract notes, confirmation from M/s. Masitla. And pursuant thereto the assessee complied by filing the same on 09.03.2015, wherein the assessee filed PAN the contract notes, confirmed ledger account copies issued by the M/s. Masitla (broker) as well as the bank statement of the assessee company showing payments of Rs.4,00,00,000/-, and Rs.3,03,00,000/- and Rs.2,97,00,000/- to the broker on 20.03.2012 and 22.03.2012 respectively and the screen-shot of National Spot Exchange Ltd. (NSE) which shows Client Code of the assessee as MS-196. On the strength of the aforesaid relevant documents the assessee asserted that the transaction in question are genuine. The AO in order to verify the genuineness about these transactions issued notices u/s 133(6) of the Income Tax Act, 1961 (hereinafter “the Act”) to NSE on 09.03.2015 and asked the details/documents of all transactions undertaken by assessee company (Client Code MS-196) through broker M/s. Masitla. Pursuant thereto, NSE filed reply dated 13.03.2015 wherein it submitted data in three (3) annexures (Annexure-1, Annexure-2 and Annexure-3) as under: - “1. All trade details during the period from 01.04.2011 to 31.03.2012 (Annexure-1) 2. Client Code Modification from MS-196 to other client codes (Annexure-2) 3. Client Code Modification from other client codes to MS-196 (Annexure-3).
3 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd.
The AO vide order-sheet noting dated 16.03.2015 provided copy of the aforesaid annexures received from M/s. NSE and asked assessee to explain why adverse inference should not be drawn against assessee due to the Client Code Modification (CCM) which resulted in assessee suffering losses which increased by Rs.44,35,650/- and Rs.55,38,000/- (refer annexure-2 and annexure-3 supra). Pursuant thereto, the assessee filed reply dated 19.03.2015 wherein it objected to the proposal of the AO to make addition of Rs.44,35,650/- + Rs.55,38,000/- (total of Rs.99,73,650/-). It was brought to the notice of the AO that the transactions are genuine and had been carried out at the Exchange Platform as per exchange Rules & Regulations through recognized NSE Broker Masitla; and to support the genuiness of the transaction assessee had filed all the relevant details/documents viz ledger account, bank statement, contract notes in respect of transaction carried out during the year with NSE broker M/s. Masitla. And also pointed out that NSE has not found any defect in the contract notes which were as per exchange regulation and contented that contracts are genuine. Further it was pointed out that the assessee have not received/paid any additional amount from/to M/s. Masitla on account of the CCM. It was reiterated that the broker (M/s. Masitla) was registered broker/member of the exchange and the NSE was recognized exchange for commodity trading and all the transactions in question were carried out in the normal course of business. It was also pointed out to the AO regarding the addition proposed on account of CCM i.e, assessee’s claim to others (Annexure-2), the assessee submitted that it has not carried out any such transaction with the broker and that broker has not issued any bill/contract notes in respect of such transactions and assessee has not 4 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. received any amount as profit from such transactions. In regard, Annexure-3 i.e. CCM from other client codes to MS-196 (assessee), it was submitted that the transactions were valid contract notes for the valid transaction made by the assessee and the assessee have paid the loss through regular bank account (RTGS). And it was pointed out that the disputed transaction are supported by valid contract notes which has been confirmed by both the parties (buyer and seller); and that the NSE has not found any fault regarding the transaction. Assessee also contended that the proposed addition would tantamount to double taxation. And the assessee also requested for cross-examination of the broker in the event AO disbelieve the genuineness of the transactions. However, the AO, rejected the explanation/contention of the assessee and was of the opinion that the assessee company was in collusion with the broker had manipulated the CCM facility which was meant for rectifying mistakes due to erroneous entries within a particular group of clients or error due to similar names of clients; and that being not the case of the assessee company, according to him, the assessee company failed to show that transfer took place between same group concerns or there was some client with similar name of the assessee company. According to the AO, there is a pattern emerging from the transaction that client code modification resulted in increase of loss of the assessee company either by transfer of profit to some other client code or by transfer of loss from some other client code. Thus, AO concluded that the assessee has shown total increase in loss by CCM which was treated as non-genuine and he reduced the loss as under: - 5 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. Computed increase in loss due CCM Rs.99,73,650/- (As per Annexure 2 & 3 of NSEL reply) Less: Speculation loss in return Rs.2,75,820/- Speculation profit taxable Rs.96,97,830/-
And thereafter AO held that speculation profit of Rs.96,97,830/- needs to be taxed and observed that no adjustment of ordinary loss to be allowed against speculation losses. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the same. Aggrieved by the aforesaid action of the Ld. CIT(A)/NFAC, the assessee is before us.
We have heard both the parties and perused the records. The AO while scrutinizing the return of income filed by the assessee noted that the assessee has claimed carry forward loss of Rs.2,85,374/-. And also he noted inter-alia that the assessee earned profit of Rs.11,10,43,769/- from M/s. Anand Rathi Commodities and suffered loss of Rs.9,96,73,748/- from M/s. Masitla Commodities Pvt. Ltd. The AO after perusal of the details of the transaction by assessee with M/s. Masitla acknowledged that assessee had filed contract notes and confirmation ledger account copies issued by the broker. The AO noted that Client Code of assessee is MS-196 and in order to verify the transaction of assessee with M/s. Masitla enquired from National Spot Exchange Ltd (NSE) and Pursuant to which they filed all the trade details carried out by assessee through M/s. Masitla from 01.04.2012 to 31.03.2012 (Annexure-1) and CCM from MS-196 (assessee) to other client codes (Annexure-2) and CCM from other client codes to MS-196 (assessee) (Annexure-3). After perusal of the reply from NSE Ltd, the AO confronted the assessee and proposed the addition in respect of loss suffered as shown by client code modification to the 6 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. tune of Rs.99,73,650/-. The assessee’s objection against the proposed addition was not accepted by the AO who was of the opinion that the assessee was in collusion with the broker and manipulated the client code modification facility. And therefore, he held the same as non- genuine and enhanced the assessee’s income by disallowing the loss by Rs.99,73,650/- and after adjusting the speculation loss in return of Rs.2,75,820/-, he computed the total income of assessee at Rs.96,97,830/-. On appeal, the Ld. CIT(A) confirmed the same by observing that during the year the client code modification was carried out by the broker for diverting profit and he confirmed the action of AO without assigning any reasons of his own. This impugned action of the Ld. CIT(A) has been assailed before us. 8. It was pointed out by the Ld. AR that the assessee had carried out two hundred and fifty five (255) transactions, and out of which the CCM was only regarding twenty eight (28) transactions. According to him, when AO accepted two hundred and twenty seven (227) transactions, he wondered as to how AO disbelieves only twenty eight (28) transaction. According to him, there was no material on the basis of which the AO/Ld. CIT(A) could draw adverse inference against the assessee on account of assessee’s broker punching incorrect code which resulted in erroneous twenty eight (28) transactions out of two hundred and fifty five (255) transactions. According to him, the Rules of exchange allowed ten minute time to rectify such mistake on the same day of the transaction (refer Circular of the Commodity Exchange). According to the Ld. AR, when the assessee had provided all relevant documents to substantiate the genuineness of the transaction, and the AO had verified the veracity of the claim by 7 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. issuing notice u/s 133(6) of the Act to NSE albeit at the fag end on 09.03.2015, and after collecting the information from NSE confronted the assessee with the material collected from NSE on 16.03.2015, which was replied by assessee, but the AO rejected assessee’s reply as well as declined the request for cross-examination of the broker (M/s. Masitla) and has resorted to the addition by order passed on 26.03.2015 which action of the AO itself reeks of arbitrariness. According to the Ld. AR, the AO has not conducted any enquiry from the broker (M/s. Masitla) which is a recognized broker before holding the transaction viz CCM was done in accordance to rule, and which resulted in loss of Rs.99,76,650/- as non-genuine. According to the assessee, the AO on the basis of surmises and conjectures has concluded that the transaction to be in-genuine and submitted that suspicion cannot take the place of proof. And in this regard cited the decision of the Hon’ble Supreme Court in the case of Omacharan Shaw & Bros. Vs. CIT (1959) 37 ITR 271 (SC). And therefore, according to the Ld. AR, the addition based on surmises and conjectures should be deleted. And for such a preposition inter-alia relied on the decision of the Hon’ble Bombay High Court in Coronation Agro Industries Vs. DCIT 97 CCH 372 and Hon’ble Rajasthan High Court in the case of PCIT Vs. Gyandeep Khemka (Income Tax Appeal No.38/2019 dated 29.08.2019).
Per contra, the Ld. DR submitted that the client codes facility is meant for rectification of bonafide mistakes due to erroneous entries being made due to similarity in the name of clients etc. According to the Ld. DR, from the pattern of transactions (Annexure-2 and Annexure-3) it can be seen that all the client codes resulted in increase 8 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. of the losses of the assessee company either by transfer of profit of some other client codes or by transfer of loss from some other client codes. According to the Ld. DR, the Investigation Wing of the revenue has found that fictitious profit and loss are created by some brokers by misusing the client code modification while doing sale and purchase of securities after the trade are conducted. According to the Ld. DR, this erroneous misuse of client code modification has resulted in tax evasion carried out by coordinated activity with the active conveyance of assessee, broker and the beneficiary. According to the Ld. DR, client code modification has been misused for tax evasion and assessee have availed losses to offset the profit. Therefore, according to him, the AO has not accepted the client code modification carried out by broker M/s. Masitla on behalf of assessee as genuine CCM and disallowed the loss which action of AO/Ld. CIT(A) does not require any interference from our part.
We note from perusal of the Paper Book (PB) page no. 194 to 201 which reveals the trade details carried out by assessee through broker M/s. Masitla during the period from 01.04.2011 to 31.03.2012 which we note to be pertaining to two hundred and fifty five (255) transactions, out of which fifteen (15) transactions are client code modification from other client codes to assessee (MS-196) i.e. Annexure-3; and thirteen (13) transactions are client code modification from assessee (MS-196) to other client codes (Annexure-2). Thus, it reveals that out of 255 transactions undertaken by assessee through broker M/s. Masitla there were twenty eight (28) transactions wherein mistake happened due to punching of wrong client code by broker which has been rectified by the broker on the same day within ten (10)
9 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. minutes/time as allowed by the commodities exchange. That being the case, i.e. rectification of client code on the same day within the time permitted by the circular of Commodity Exchange cannot be held to be non-genuine unless the AO had brought on record relevant material to suggest that assessee in collusion with broker and beneficiary has indulged in fictitious transaction. For that AO was bond to undertake enquiry by summoning the purported key players in the transaction involved i.e. the broker M/s. Masitla which is a recognized broker of the NSE, the beneficiary. In this regard, it is noted that AO had issued notice u/s 133(6) of the Act to Commodity Exchange (NSE) and they have furnished all details sought by AO and the AO thereafter confronted the assessee with the details collected from NSE and AO thereafter couldn’t return any finding of fact which exposes any illegal act/omission on part of assessee, or broker regarding the transaction in question. It is not the case of the AO that the broker of assessee M/s. Masitla was confronted with any adverse material and it failed to give any explanation or it was found by AO after enquiry that transaction in question resulted in creation of fictitious loss due to collusion on the part of the assessee/broker and the beneficiary. In the present case, we note that no enquiry has been undertaken by the AO to find out as to whether the broker as per the instruction of the assessee has indulged in shifting the profits. According to the Ld. DR, the client code modification was not a bonafide action to correct a genuine error. However, we do not find any material to support such a finding of fact. We note that the client code modification is permitted intraday i.e. on the same day within the stipulated 10/30 minute time. It is noted that out of two hundred fifty five (255) transactions, the client code 10 A.Y. 2012-13 Gajshakti Agrotech Pvt. Ltd. modification has been carried out of twenty eight (28) transactions within the stipulated time allowed by the circular of the commodity exchange. Merely because, the broker rectified the error based on the erroneous punching of wrong client code by broker cannot be ground to saddle the assessee with the addition of Rs.99,73,650/- by holding it as non-genuine. Further, it is noted that the AO has not granted an opportunity to assessee to cross-examine the broker. There is no evidence/material to suggest that the assessee as well as the broker or any other party/beneficially wherein the collusion to carry out the transaction of transfer of profit from the account of the assessee in the accounts of the other party by misusing the client code modification facility. Without any shred of evidences against the assessee to be part of any mischief to transfer the profit as alleged by the AO, merely based on surmises and conjectures, the addition cannot be sustained. This is the case wherein no enquiry worth its name was conducted by the AO, therefore, the addition made is directed to be deleted.