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Income Tax Appellate Tribunal, “A”
Before: SHRI PAWAN SINGH, JM & SHRI S. RIFAUR RAHMAN, AM
M/s Arpita Enterprises, ITO 24(1)(2), 306/307, Sagar Avenue, Room No. 604, Piramal बिधम/ S. V. Road, Near Chambers, lalbaug, Parel, Vs. Shoppers Stop, Andheri Mumbai-400 058 West, Mumbai-400 058 स्थायीलेखासं./जीआइआरसं./PAN No. AANFA0775D (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Michael Jerald, DR by प्रत्यथीकीओरसे/Respondentby : Shri M Subramanian, AR सुनवाईकीतारीख/ : 24.07.2020 Date of Hearing घोषणाकीतारीख / : 27.07.2020 Date of Pronouncement आदेश / O R D E R
Per S. Rifaur Rahman, Accountant Member:
1. The present Appeal has been filed by the revenue against the order of Ld. Commissioner of Income Tax (Appeals) – 36 in short referred as ‘Ld. CIT(A)’, Mumbai, dated 28.02.18 for Assessment Year (in short AY) 2009-10.
M/s Arpita Enterprises 2. Brief facts of the case are, assessee filed its return of income for AY 2009 – 10 on 29.08.2009 declaring total loss of ₹ 9,06,040/–. The case was selected for scrutiny and order under section 143(3) was passed on 27.12.2011 by accepting the loss declared by the assessee. Further, the order under section 263 was passed on 28.01.2014 by accepting the loss declared by the assessee in the original assessment order. Subsequently assessing officer received information from ADIT (Inv) that the certain assessees were engaged in tax evasion through client code modification (CCM). Accordingly the case was reopened by recording the reasons by the assessing officer. In the reasons recorded, assessing officer referred to the information received from Director of Income Tax- Investigation, Ahmedabad and informed the assessee that assessee has made fictitious profit and loss by creating/misusing client code modification. The brokers were alleged to indulging in transferring the fictitious losses to different clients to reduce the tax liability and also fictitious profits to the client. AO informed the assessee that it has taken fictitious loss of Rs. 1,51,93,791/– to set off the profit to reduce the taxability and it has taken fictitious losses with the help of the M/s Arpita Enterprises broker. Therefore the income is escaped within the meaning of section 147 of the Act.
Subsequently notice under section 148 of the Act was issued and served on the assessee on 29.03.2016. In response, assessee submitted that the return of income filed by the assessee on 29.08.2009 to be considered as return of income filed in response to notice under section 148 of the Act. The assessee also requested the AO to provide reasons for reopening the assessment, Accordingly the same was provided to the assessee. Subsequently notice under section 143(2) and 142(1) of the act were issued and served on the assessee. The assessee has raised objections for reopening the assessment and the assessing officer has addressed the objection raised by the assessee and communicated the same. In the assessment order, the assessing officer discussed the various aspects of client code modification and details of investigations carried by the investigation Department and also discussed that it is accorded survey under section 133A of the Act at the premises of 12 brokers and few of their clients across India. The assessing officer discussed the findings made by the investigation Department in the case of M/s Haven Financial Services Private M/s Arpita Enterprises limited and as per the investigation the above said party has taken advantage of the client code modification. In the list of clients who were verified, it also contains the name of the assessee. However there is no discussion of the findings relating to assessee but assessing officer proceeded to make addition in the case of assessee also, without there being any findings that assessee also indulged in such activities, AO proceeded to make addition since assessee has recorded a loss during the year.
Aggrieved with the above order, assessee preferred an appeal before Ld. CIT(A) objecting the above addition on client code modification and also reopening of the assessment. Assessee also filed a detailed submission relating to the above grounds. After considering the submissions of the assessee, Ld CIT(A) rejected the contention of the assessee with regard to reopening of the assessment and with regard to merit of the case, Ld CIT(A) deleted the addition made by the assessing officer with the following observation, for the sake of brevity it is reproduced below:
4.2.3 After considering the totality of facts, rival submissions, the applicable law and on the basis of M/s Arpita Enterprises discussion mentioned above, I have come to the conclusion that the AO has made the addition solely on the basis of enquiries conducted by the Investigation Wing of the Income Tax Department. The modification of client code is permissible by SEBI and is in the hands of the Broker. The appellant as a client cannot do any modification in the client code. The act of client code modification is very much legal and is resorted to be the brokers to rectify basic punching errors . It is seen that both NSE and BSE closely monitor the transactions undertaken by the Brokers and penalised them if there is substantial alteration in the client code. In the assessment order the AO has produced the trade analysis and held that the appellant had availed fictitious loss using client code modification facility. However, the AO has not brought any evidence in support of the same.
4.2.4 The information received from the investigation wing was the lead which required further in-depth investigation by the AO to arrive at the logical conclusion. It was not to be taken as the final report of tax evasion figures which the AO only had to collect. The AO in the assessment order has also not brought out any specific evidence from which it can be concluded that the modification in the appellant's client code was done with the mala fide intention. The M/s Arpita Enterprises addition is made solely on the basis of suspicion and presumptions of the AO that the appellant has assailed fictitious losses. Suspicion, however strong cannot take the form of evidence. The appellant has also referred to various judicial pronouncements wherein under the similar facts judicial authorities have deleted similar additions made.
4.2.5 The Hon’ble Bombay High Court judgement in Writ Petition 2627 of 2016 in case of M/s Coronation Agro Industries Ltd Vrs DCIT Circle 6 (2) (I), Mumbal (390 ITR 464 Bombay High Court) pronounced on 05th December 2016 clearly mentioned that with available material of client code modification, there is no link to conclude that there is escapement of income.
4.2.6 The Hon'ble Ahmedabad ITAT's decision in case of ACIT Vrs Kunvarji Finance Pvt Ltdd. wherein it was held by the Hon'ble tribunal that the modification in client code when done on the same day cannot be held as done with malafide intention. The Hon'ble ITAT has observed as under:
"The AO held the client code modifications to the malafide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the M/s Arpita Enterprises Commodity Exchange, it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegationof the of the Assessing Officer that the client code modification was with the malafide intention. When the client code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion. there was no basis or justification to hold the same to be malafide.
4.2.7 Hence, in view of the observations above, I believe that the addition has been made by the AO merely on the basis of suspicion, presumptions, surmises and conjectures. The modification in the client code is in the hands of the broker and the appellant cannot be made responsible for the act of others. The payments for the losses were made by the appellant to the broker through banking transactions. The AO has not disputed the said fact and has also not brought out any evidence of cash coming back to the appellant. Moreover, all the M/s Arpita Enterprises modifications were made on the same day which further substantiates that the same cannot be made with malafide intention. Accordingly, I direct the AO to delete the said addition of Rs 1,51,93,791/-. In the result, the appeal on this ground is hereby Allowed.
Aggrieved with the above order, revenue is in appeal raising following grounds of appeal, which is reproduced below:
1. "Whether on facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 1,51,93,791/- without considering the fact that although modification of client code is in the hands of the broker and not the assessee, but the broker would only carry out transactions as directed by his clients."
2. "Whether on facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the assessee would have colluded with the broker to book the bogus losses which are not allowable as per Income Tax Act."
The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer be restored.
M/s Arpita Enterprises The appellant craves leave to amend or alter any ground and/or add new grounds which may be necessary.
Against the appeal of the revenue, assessee also filed application under rule 27 of the ITAT rules 1963 and accordingly raised following issues during the course of hearing before us. The issue raised by the assessee are reproduced below:
In this case the assessee respondent intends to defend the CIT(A)'s order by raising the following issues during the course of hearing proceedings before the Hon'ble Tribunal.
On the facts and in the circumstances of the and in law, whether the learned C.I.T.(A) was right in holding that the A.O. did not err in re-opening the case by issuing notice u/ 148 of the Act.
On the facts and in the circumstances of the case and in law, the assessment order passed u/s 143(3) r.w.s. 147 is invalid and bad in law.
It is requested that the above issues may kindly be permitted to be raised in the course of hearing proceedings before the Hon'ble Tribunal in defense of the C.I.T.(A)'s order.
M/s Arpita Enterprises It is also requested that this application may kindly be placed before the Hon'ble members for favor of their orders and direction.
At the time of hearing, Ld DR brought to our notice findings of the Ld CIT(A) and submitted that no doubt the client code modification can be made by the broker and however without the permission of the client the broker cannot make any changes. He also brought to our notice para 6.2 and 6.3 of the assessment order to highlight that the various clients have taken advantage of the client code modification and transferred the profit or loss to other clients and in this regard, he relied in the case of Delhi SMC, in the case of Vijay Kumar Goel & sons (HUF) versus ITO, in this case the broker gave a statement that it has modified the client code with the permission of the assessee and assessee contended that the broker must have given the statement under duress and assessee could not substantiate its submission and also it is proved that assessee is the beneficiary in whose case the loss was recorded by modifying the client code, thereby, reducing the taxable income.
M/s Arpita Enterprises 8. On the other hand Ld AR brought to our notice the findings of the Ld CIT(A) and supported the findings of Ld CIT(A). He further submitted that the assessment was reopened by issue of notice beyond 4 years and further he submitted that the assessment was reopened after the regular assessment order u/s 143(3) read with section 263 and he submitted that the books of accounts of the assessee are verified during original assessment as well as during 263 proceedings. He also brought to our notice page 1 to 4 of paper book and reasons recorded for reopening of the assessment. He submitted that the reasons recorded by the assessing officer is general and there is no direct finding by the investigation wing and also by the assessing officer in his order that assessee has involved anyway in the client code modification. He placed on record that the reopening of the assessment is bad in law by relying on the case Coronation Agro Industries Ltd vs DCIT (2017) 390 ITR 464 (Bombay) and 3499/Mumbai/2012.
In the rejoinder, learned DR submitted that the assessment was reopened with the proper approval of the higher authority and assessing officer has followed proper procedure in reopening of M/s Arpita Enterprises the assessment and he supported the findings of the Ld CIT(A) in this regard.
Considered the rival submissions and material placed on record. Since the main appeal is by the revenue, therefore we will first decide on the merit of the case. We notice that assessee is dealing in the business of investment/trading in shares, stocks, securities, commodities, finance and finance instruments. During this year, assessee has recorded a loss in F&O transaction to the extent of ₹ 1,51,93,791/– and the assessing officer came to know through the investigation wing of the Department that brokers have indulged in misusing the client code modification procedure. The investigation wing has carried on survey operation under section 133A in the premises of brokers and certain clients. Based on the above information the assessment of the assessee was reopened even though there is no connection with the findings of the investigation wing and even in the assessment order assessing officer gave a reference to the case of M/s Haven financial services private limited and in that case Department has found substantial evidence indicating client code modification has led to reduction of taxable income. With regard to assessee, no such findings in M/s Arpita Enterprises the records. The Ld CIT(A) gave a clear finding that the addition was made by the assessing officer merely on the basis of suspicion, presumptions, surmises and conjectures. The modification in the client code is in the hands of the broker and the assessee cannot be made responsible for the act of others and he also observed that the payments for the losses were made by the assessee to the broker through banking channel and the assessing officer has not disputed the above fact and has also not brought out any evidence of cash coming back to the assessee. Further he observed that all the modifications were made on the same day of the transaction which further substantiates that the same cannot be made with malafied intention.
Even the revenue is in appeal raising grounds that the modification of the client code is in the hands of the broker and not with the assessee, but the broker would only carry out transactions as directed by his clients. Further they raise the ground that the broker must have colluded with the assessee to carry out the client code modification. In our considered view, the client code modification can be made on the request of the client or suo moto by the broker before the close of the day. When the M/s Arpita Enterprises broker makes the modification on the behest of the client, as per the BSE procedure, he has to take the request in writing. With regard to suo moto modification it need not. Since the transaction was made through banking channel and settlement was already made for this transaction, that means the transaction must be completed subsequent to the completion of this transaction. So the broker cannot make modification after closure of the trading for the particular day. Since there is no factual submission coming from revenue and the addition was made by the assessing officer based on presumptions without any cogent material against the assessee. Therefore we are inclined to accept the findings of the Ld CIT(A) and accordingly grounds raised by the revenue is dismissed.
Since we dismissed the appeal of the revenue and assessee has raised objections by invoking rule 27 of the ITAT rules, we do not see any reason to interfere with the order of Ld CIT(A) as it would lead to only academic purposes. Therefore, the objection raised by the assessee also dismissed.
M/s Arpita Enterprises 13. In the result appeal filed by the revenue is dismissed.