PLAZA SECURITIES LTD,MUMBAI vs. DCIT CIR 10(3) (20, MUMBAI

ORDER

PER VIKAS AWASTHY, JM:

2. The solitary ground raised by the assessee in appeal is against the addition made on account of client code modification.

3. Shri N.R. Agarwal appearing on behalf of the assessee submits that assessment for Assessment Year 2010-11 in the case of assessee was reopened on the ground that the assessee has indulged in unauthorized client code modification. The ld. Authorized Representative for the assessee submitted that the assessee is engaged in trading of shares and securities at Stock Exchange through brokers. The assessee is not a broker. The Assessing Officer in reassessment proceedings made addition of Rs.40,75,369/- on account of client code modifications allegedly made to transfer fictitious profits and losses. The ld. Authorized Representative for the assessee submitted that a perusal of the assessment order would show that the Assessing Officer has made addition merely on suspicion without there being any evidence to substantiate that the assessee has indulged in shifting profits or losses through client code modifications. The ld. Authorized Representative for the assessee pointed that in para-4 of the assessment order the Assessing Officer has wrongly recorded the fact that the broker has admitted to have earned commission income from 0.5% to 2% on the amount of such fictitious profit and losses. There is no statement of admission by broker or assessee on record. If there is any such admission, the copy of the same has not been provided to the assessee. The ld. Authorized Representative for the assessee submits that there was no search or survey action by the Department either on the assessee or the broker of the assessee. The ld. Authorized Representative for the assessee admitted that during the period relevant to assessment year under appeal, in the months of April to September the broker of assessee had carried out client code modifications on the instructions of the assessee. The total numbers of client code modifications during the relevant period were 519. The total number of transactions were approximately 6,00,000. The client code modifications was carried out merely on 0.099% of total transactions. Therefore, the number of client code modification transactions is miniscule part of the total number of transactions. The ld. Authorized Representative for the assessee pointed that as per the observations of Assessing Officer client code modifications results in shifting of profits, whereas in the case of assessee the transaction of client code modifications have been done in the case of losses as well. All the clients have accepted client code modifications and have filed confirmations. The ld. Authorized Representative for the assessee referred to the confirmations at page 1 to 26 of the Paper Book. The ld. Authorized Representative for the assessee further submitted that client code modifications are permitted by the SEBI and BSE provided client code modifications are carried out within the time limit. Where the client code modifications are carried out with ulterior motive,the brokers are subject to penal provisions in accordance with SEBI circular. In the case of assessee no penalty has ever been levied on broker for carrying out client code modifications. The ld. Authorized Representative for the assessee submitted that observations made by the Assessing Officer and the CIT(A) with respect to client code modifications in their respective orders are not specific to the case of the assessee. They have made general remarks on the modus operandi for unauthorized client code modifications. The ld. Authorized Representative for the assessee in support of his submissions placed reliance on the following decisions:

(i) DCIT vs. Vipul D Shah in for A.Y. 2010-11 decided on 03/07/2019 (ii) DCIT vs. S.B. Securities Pvt. Ltd. in ITA No.7346/Mum/2017 for A.Y. 2009-10 decided on 30/07/2019.

4. Per contra, Shri R.A. Dhyani representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld. Departmental Representative submits that the assessee has indulged in carrying out client code modifications with an objective to transfer fictitious losses and profits. The SEBI has issued specific guidelines and purposes for which client code modifications can be carried out. The reason given by the assessee for carrying out client code modifications does not fall within the specified SEBI guidelines. The ld. Departmental Representative further pointed that during assessment proceedings the assessee had admitted that the transaction of client code modifications were not genuine and were actually manipulated.

5. Rebutting the submissions made on behalf of the Revenue, the ld. Authorized Representative for the assessee submitted that during the course of reassessment proceedings the assessee vide letter dated 30/03/2016 (at page 521 of the Paper Book) the assessee had conveyed that client code modifications were undertaken to the extent of Rs.40,75,639/- and had submitted the xerox copies of client code modification sheets. However, in the last line of the said communication it was erroneously mentioned that addition of Rs.40,75,639/- can be done. Inadvertently, the word “if” was missed to qualify the remaining part of the sentence. The intention of the assessee was never to admit the addition proposed by the Assessing Officer. If that be so, the assessee would have never filed appeal before the CIT(A) and thereafter, before the Tribunal.

“ Objective To frame the guidelines for modification to client codes post trade execution and reporting of such Client Code Modifications.

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 dealers 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 Stock Exchanges levy penalty / fine for all non-institutional client code modifications.

This policy covers all the Client Code Modifications carried out / to be carried out in any of the client accounts controlled by DFSL, subject to the guidelines issued by the SEBI / Stock Exchanges from time to time, in any segment of any exchange for which DFSL is a member broker.

In case of NSE (NOTE: no consistent pattern in such modifications): i. client code/name and modified client code/name are similar to each other but such modifications are not repetitive, ii. Relative Code (spouse, dependent parents, dependent children and HUF) as defined under the Companies Act, 1956.

In Case of BSE: i. Punching error / typing error of client codes due to any genuine error or mistake in order entry, while punching the order, by any of dealer, ii. Trade entered for wrong client due to any miscommunication from the client / authorized representative of the client, iii. Modification within family members iv. Institutional trades modified to broker error/pro account In Case of MCX-SX i. Punching error / typing error of client codes due to any genuine error or mistake in order entry, while punching the order, by any of dealer. ii. Trade entered for wrong client due to any miscommunication from the client / authorized representative of the client.

6. Place for Client Code Modification: Any Client Code Modification shall, subject to compliance of this policy, be carried out by RMS at HO of all the Error Trades happened on NSE,BSE and MCX-SX.

7. Penalty In case of the Client Code Modification will be done by shifting of the trade(institutional or non-institutional) to the error account of DFSL and arising cost of the trades in error account will be subsequently liquidated / closed out in the market and in no case will be shifted to some other client code. In case of any violation resulting in penalty same will be recovered from the Sub Broker/ Authorized Person and/ or client. All are requested to take notice of SEBI circular no. CIR/DNPD/6/2011 and communication issued by exchanges from time to time in this regard.”

From bare perusal of the above policy it is evident that client code modification is permissible in case of genuine error in punching/placing orders. It has to be used in exceptional circumstances and not in routine manner. To prevent the misuse of client code modification facility, Stock Exchange levy penalty.