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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
This appeal by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals) [in short learned CIT(A)] dated 15.5.2019 pertaining to A.Y. 2009-10.
The grounds of appeal
read as under :- “Being aggrieved by the orders of the Assessing Officer Ward 29(3)-3, Mumbai, and learned Commissioner of Income-tax (Appeal) - 40, Mumbai this appeal petition is filed on the following amongst other grounds of appeal, which it is prayed may be considered without prejudice to one another.
1. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in dismissing the appeal ex-parte without ensuring service of notice in paper form as opted while filing the appeal petition.
2. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in upholding action of the Assessing Officer in reopening the assessment under section 147 without making independent inquiry and without forming a proper reason to believe that income has escaped assessment.
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3. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in upholding action of the Assessing Officer in making addition of RS. 275,250 alleging artificial loss incurred by Your Appellant using Client Code Modification (CCM) facility extended by the stock exchange merely on information from I&Cl Wing without bringing any material or evidence on record to justify the allegation.”
Brief facts of the case are that the assessment order in this case was reopened upon information from Ahmedabad Investigating Directorate. Reasons recorded for reopening has been reproduced by the Assessing Officer as under:- 2. Assessment proceedings were reopened by issuance of notice u/s. 148 of the I.T Act, 1961 on 29.03.2016. Reasons recorded for the purpose of re- opening are as under :-
"In this case return of income was filed on 25/06/2009 declaring total loss at Rs.1,20,963/-, The same was processed u/s.U3(l) of the I.T Act, 1961.
The Principal Director of Income Tax (Inv.), Ahmedabad vide letter No. PDIT(Inv)/AHD/CCM/Dissemination/2015-16 dated 08.03.2016 has forwarded the information regarding fictitious profit and losses created by some brokers by misusing the Client Code Modification (CCM) facility in sale and purchase orders of securities after the trades are conducted.
The Ahmedabad Investigation Directorate, as an institutional response to the orchestrated misuse for client code modification for tax evasion, carried out coordinated limited purpose surveys U/S.133A of the Income Tax Act, 1961 at the premises of 12 brokers and few of their clients across India on 23.03.2015.
The survey report has been prepared by the ADIT(lnv), Unit-l(3), Ahmedabad on the basis of data received from National Stock Exchange (NSE). After analysis of data received from NSE and after considering the contention of brokers, it is concluded by the ADIT(lnv) Unit-1(3), that CCM has been used as a tool for tax evasion and various assesssees have availed contrived losses.
As per information the assesses M/s. Soumya Associates (PAN : ABIFS148QP), who is assessed in this ward has conducted business with broker, viz. M/s. Dharmshi Securities Pvt. Ltd. The assessee has adopted unfair practice of Client Code Modification (CCM) to his advantage resulting in the escapement of income. The details of the same are as under:-
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When OC When MC Net reduction in (Ascertained profit shifted (Ascertained losses income due to out) shifted in) CCM 0 -275250 -275250
In view of the above, I have reason to believe that the income to the extent of Rs.2,75,250/- chargeable to tax in the hands of the assessee has escaped assessment for the A.Yr. 2009-10 within the meaning of section 147 of the income Tax Act, 1961. Therefore, proceedings u/s.147 of the I.T Act are initiated in this case, to bring to tax the income that has escaped assessment for A.Yr. 2009-10."
Thereafter in the assessment order the Assessing Officer noted that the notices were issued under section 143(2) and 143(1) r.w.s. 129 of the I.T. Act. Thereafter he gave theoretical discussion what is client code, what is client code modification and misuse of the same. He did not mention anything about specifics about the case of the assessee. Nothing was mentioned how the loss is assed at except that from “on the basis of information received, the assessee had client code modification in respect of its transactions carried out through Dharam Singh Securities Pvt. Ltd. the net result of transaction is loss of Rs. 2,75,250/-.” Simply making theoretical discussion the Assessing Officer concluded as under :- “On the basis of information received, assessee had client code modification in respect of its transaction carried out through Dharamshi Securities Pvt Ltd. The net result of the transactions is loss of Rs. 2,75,250/-.
As discussed hereinabove, client code modification has to be used in a curative manner. It is a tool devised to correct a bonafide mistake committed while entering the transactions on a Stock Exchange. The mistake has to be a bonafide and it is a pre-condition. Moreover, as per various circulars and instructions issued by the controlling body, such a mistake should not be of a recurring in nature and only at limited instance. Any client code modification committed at a regular interval is viewed adversely and shall liable to be penalized by the concerned authority. In the present case, the assessee had resorted to client code modification at numerous time. It is further noticed that many of such a shifted transactions were carried out in the last quarter of the financial year. As such it is believed that the assessee had a malafide intention behind frequent client code modification carried out in the numerous transaction. The intention behind such act was to reduce the taxable income by adjustment of acquired capital loss. The Assessee, by resorting to client code modification had obtained accommodation entry in the form of share transaction on the recognized stock exchange which had ultimate result of capital loss. Such a loss was acquired/purchased by the 4 Soumya Associates assessee through the stock broker. The book results of the transactions wherein client code modification was resorted was nothing but a accommodation entry to facilitate reduction of taxable income. Whether transactions or the results arising out of Client Code Modification should be disregarded or ignored being fictitious in nature or in the nature of accommodation entry entered into to facilitate certain desired result The facts and circumstances of the case indicates that the method of client code modification adopted by the assessee is a colourable device to reduce tax burden, which is not permissible as per the decision of Hon'ble Supreme Court in the case of Me Dowell and Co. Ltd (1985)(154 ITR 148). In view of the above referred facts and circumstances of the case and in law, assessee's loss of Rs. 2,75,250/- attributed to client code modification transaction is treated as fictitious and non genuine. This loss is ignored and assessee's income as per Profit & Loss a/c is enhanced by ignoring artificial and non genuine loss of Rs.2,75,250/-. The assessee's income stands enhanced accordingly.”
Upon assessee’s appeal learned CIT(A) confirmed the addition.
Against the above the assessee is in appeal before the ITAT. I have heard learned Departmental Representative and perused the records. A question was put by the Bench, before learned Departmental Representative as to what are the details of the transaction which led to the loss and what examination and investigation has been done by the Assessing Officer himself, learned Departmental Representative submitted that there is no such findings in the orders of the authorities below. I note that except for observations that the Assessing Officer has received information from the investigation wing that the assessee has incurred loss of Rs. 2,75,250/- through client for modification there is no detail whatsoever brought on record. The assessee has submitted before learned CIT(A) in the statement of facts that despite request no detail was provided in this regard. The statement of facts declaration by the assessee may be gainfully referred as under :- “9. Your Appellant also asked for specific instances where the Assessing Officer was of the view that and was alleging that Your Appellant created loss of RS. 275,250. The Assessing Officer had no such information did not provide any such information. 10. In view of this your Appellant submitted to the Assessing Officer that, without knowing detail/documents or information as to which transactions related to client code modifications resulted into creation of alleged fictitious
5 Soumya Associates losses to the tune of Rs. 275,250, it is not possible reply on the allegations made by the Assessing Officer.
Your Appellant also submitted to the Assessing Officer that in case it has evidence in form of statement or other document of relevant brokers confirming the misuse of CCM facility where Your Appellant is involved, kindly furnish copy of the same, in order to submit explanation. The Assessing Officer did not accept this request also.
A step further, your Appellant also insisted on cross verification of the broker. The Assessing Officer did not consider this request also.
The Assessing Officer w as requested to seek information from the concerned broker under section 133(6)/131 of the Income-tax Act 1961.
The Assessing Officer declined to do so and chose to believe and depend on the investigation report of I and CI.
It was pointed out to the Assessing Officer that, NSE has listed limited conditions to establish the genuineness of rectifications. Many times two clients place similar buy/sell orders at the same time leading to confusion resulting in the dealer entering the wrong code. Similarly for speedy entry of high volume client s, the dealer enters such high volume client s code as the DEFAULT code. If the code is not changed once the high volume clients orders are completed, the code remains in the system. Subsequent orders of all clients are entered in the high volume client s code which has to be rectified.
The Assessing Officer was again requested to provide details of investigation against broker of Your Appellant. The Asses sing Officer stated that other brokers have done such manipulations, and thus he presumes that broker of Your Appellant must have done this manipulation.
Rather than making a reasoned order, he just mentioned that explanation offered by the Assessee is not found tenable, and he made addition of RS. 2,75,250 to income of Your Appellant/”
Hence it was apparent to the learned CIT(A) that the Assessing Officer has not made any examination. Still he proceeded to confirm the assessment order. By no stretch of imagination this action of learned CIT(A) is sustainable. Hence, I set aside the order of learned CIT(A) and decide the issue in favour of the assessee.
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In the result, the appeal stands allowed.
Pronounced in the open court on 3.11.2021.