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Income Tax Appellate Tribunal, MUMBAI BENCH “G” MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the Revenue. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-9, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) r.w.s. 147 of the Income Tax Act 1961, (the ‘Act’).
M/s. Setu Securities Private Limited 2 2. The ground of appeal filed by the revenue reads as under :
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made towards set off of fictitious losses through Client Code Modification.
Briefly stated the facts of the case are that the assessee-company filed its return of income for the A.Y. 2010-11 on 28.09.2010 declaring of total income of Rs.42,43,345/-. The assessee invests in shares and securities. The return was processed u/s.143(1) of the Act. Thereafter, on receipt of information from the Director of Income Tax (I&CI) [in short ’DIT’] that the assessee had taken loss adjustment entries worth of Rs.1,55,31,999/- in F&O and Cash Segment by way of Client Code Modification (CCM), the Assessing Officer (AO) after recording reasons, issued notice u/s.148 on 21.03.2015. In response to it, the assessee vide letter dated 26.03.2015 requested the AO to treat the return filed on 28.09.2010 as the return filed in response to notice u/s.148 of the Act.
During the course of reassessment proceedings, in response to notice issued u/s.143(2) and 142(1), the assessee filed the details before the AO. Further, the AO issued notice u/s.133(6) to National Stock Exchange (NSE) seeking information of the transactions entered into by assessee during the corresponding period. After receipt of the information from NSE, the AO forwarded a copy of it to the assessee and asked to explain why the amount of Rs.1,55,31,999/- should not be disallowed and added to the total income. In response to it, the assessee filed a reply stating:
M/s. Setu Securities Private Limited 3 “.......client code modification is not in the assessee’s hand and it is solely under the hands of the broker. Our client disowns any such client modification as alleged by your honour by which our client has received any undue benefit. We would like to submit that the details provided us do not provide any clarity on the nature of transaction and how our client has concealed the income. In the absence of self explanatory details no further submission can be made.”
However, the AO was not convinced with the above explanation of the assessee of the reason that (i) the DIT has not only conducted spot verification but also recorded statements of various brokers and clients, wherein they have admitted to have misused the CCM facility, (ii) generally the losses are shifted to the clients, the losses so transferred are used to claim set off against the profits and to neutralize the tax liability, likewise the profit is shifted to those parties which have suffered losses, thereby facing the problem of capital erosion, (iii) one beneficiary is the broker who does modification for the clients and second is the client in whose account modification is done, (iv) the broker charges certain percentage of commission in cash which ranges from 0.5% to 6% of the transaction value, the commission so earned in cash is not offered to tax, (v) second beneficiary is the ultimate beneficiary in whose accounts, profits or losses are shifted with an intention to reduce the tax liability.
The AO further noted that CCM was permissible within the limits prescribed by SEBI/Exchanges, but the same was to rectify the genuine mistakes which may occur while punching the trades in the system; there may be instances where due to some genuine reasons wrong M/s. Setu Securities Private Limited 4 numbers, names and scripts etc. have been punched in the system which need to be corrected. Thus, CCM was allowed with certain restrictions so as to ensure its genuine use for rectifying the mistakes which have taken place inadvertently.
Observing that the assessee failed to file the details called for and it had obtained these entries to cover up the profits and gains from the said segment, the AO disallowed the fictitious loss of Rs.1,55,31,999/-.
Aggrieved by the order of the AO, the assessee filed an appeal before the ld. CIT(A). We find that vide order dated 28.06.2017, the ld. CIT(A) observed that (i) the AO has made the addition solely on the basis of enquiries conducted by the DIT, (ii) the letter received from NSE in response to the notice u/s.133(6) issued by the AO only provides the details of CCM made in the assessee’s account; the said letter of NSE nowhere states that the loss derived by the assessee using CCM facility is fictitious or CCM is done in assessee’s account with malafide intention, (iii) NSE has specifically stated that it cannot provide the profit and loss account involved in the transaction wherein client codes are modified, (iv) the modification of client code is permissible by SEBI and is in the hands of the broker, the assessee as a client cannot do any modification in the client code, (v) at a time, it may happen that an order is punched in the code in which the previous was done, in order to rectify the error on the part of the broker, the same should have been corrected, the act of rectifying the error cannot be termed as CCM, (vi) the act of CCM is very much legal and had to be resorted to by the brokers to rectify the punching errors, both NSE and BSE closely monitor the transaction M/s. Setu Securities Private Limited 5 undertaken by the brokers and penalise them, if there is substantial alteration in the client code.
Observing as above, the ld. CIT(A) noted that the modification in client code is solely in the hand of the broker and the assessee cannot be penalized for acts of others. Further, it is noted by him that the AO in the assessment order has also not brought out any specific evidence from which it can be concluded that the modifications in the assessee’s client code were done with malafide intention.
Relying on the order of the ITAT, Ahmedabad in the case of ACIT v. Kunvarji Finance Pvt. Ltd on similar facts, the ld. CIT(A) deleted the addition of Rs.1,55,31,999/- made by the AO.
Before us, the ld. Departmental Representative (DR) submits that in the present case the DIT has not only conducted spot verification but also recorded statements of various brokers and of clients, wherein they have admitted to have misused the CCM facility. It is stating by him that the assessee obtained these entries to cover up the profit and gains from the same segments. Thus, it is argued by him that the order passed by the AO the restored.
On the other hands, the ld. counsel for the assessee files an application under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 (the Rules) and submits that the ld. CIT(A) failed to appreciate that reopening the assessment is bad in law as the AO had no reasons to believe that income has escaped assessment, as recorded reasons are vague and incorrect and reopening is done on the basis of borrowed M/s. Setu Securities Private Limited 6 satisfaction and without independent application of mind and hence reopening is bad in law.
The ld.counsel further submits that the assessee is not a registered broker on the Stock Exchange; only registered brokers can modify client code of their own clients and hence the allegation that the assessee having done or resorted to CCM is incorrect. It is stated that nothing has been brought on record by the AO to show that instruction for CCM was given by the assessee. It is further stated that there is no incriminating statement from brokers of the assessee i.e. Mansi Share & Stock Advisors Pvt. Ltd, Bonanza Portfolio Ltd and KM Jain Share Brokers Pvt. Ltd.
The ld. counsel for the assessee submits that no evidence has been brought on record by the AO of any action by SEBI on the assessee or its brokers for CCM; the data provided by NSE nowhere states that the loss suffered by the assessee is non-genuine. Further, it is stated that the table extracted in the assessment order was not provided to the assessee.
Finally the ld. counsel submits that there is a breach of principle of natural justice as the report of the investigation was not provided to the assessee in spite of repeated request and cross examination of the third parties on whose statements revenue relied upon was also not provided, in spite of repeated request made by the assessee. Relying on the decision in H.R. Mehta v. ACIT (2016) 387 ITR 561 (Bom.), Andaman Timber Industries v. CCE (2015) 281 CTR 241 (Bom) and Kishanchand Chellaram v. CIT(1980) 125 ITR 713 (SC), the ld. counsel submits that M/s. Setu Securities Private Limited 7 the assessee was bound to be provided with materials used against him apart from the opportunity to cross-examine the deponents and this not having been done, the addition is not sustainable.
We have heard the rival submissions and perused the relevant material available on record. As mentioned earlier, the return filed by the assessee-company was processed u/s. 143(1) of the Act. Thereafter, the AO on receipt of information from the DIT that the assessee had taken loss adjustment entries worth of Rs.1,55,31,999/- in F&O and Cash Segment by way of CCM, re-opened the assessment by issuing notice u/s. 148 of the Act. The assessee vide letter dated 15.10.2015 filed objection against the said notice u/s.148. The AO rejected the objection by an order dated 05.02.2016.
The Hon’ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 (SC) analyzed the distinction between the acceptance of a return u/s 143(1) and an assessment which is framed u/s 143(3) of the Act. In the former case, the AO would have much wider latitude to reopen the assessment. In the case of Avirat Star Homes Venture P. Ltd. v. ITO (2019) 411 ITR 321 (Bom), the Hon’ble Bombay High Court referring to the above decision has held :
“that the return had been accepted without scrutiny. The income-tax investigation had subsequently provided information about certain companies having bank accounts with a bank in Kolkata and who were involved in giving accommodation entries of various nature to several beneficiaries including the assessee. The information supplied by the Investigation Wing to the Assessing Officer formed a prima facie basis to enable the Assessing Officer to form a belief of income chargeable to tax M/s. Setu Securities Private Limited 8 having escaped assessment. The Assessing Officer perused the information supplied by the Investigation Wing and having formed the belief that income chargeable to tax had escaped assessment, could not be stated to have acted mechanically. Further, the mere fact that the assessee had asked for certain information from the Assessing Officer, which at this stage was not supplied, would not invalidate the reasons recorded by the Assessing Officer in issuing the notice. The notice was valid.”
Thus in the instant case, the AO has rightly issued notice u/s 148 for reopening the return of income processed u/s 143(1) of the Act. Accordingly we dismiss the grounds raised by the assessee against the re-opening done by the AO.
7.1 However, on merit we find that the assessee is not a registered broker on the Stock Exchange and only registered brokers can modify Client Code of their own clients. Hence, the observations by the AO that the assessee having done or resorted to CCM is incorrect. It is seen that nothing has been brought on record by the AO to show that instruction for CCM was given by the assessee. In fact, the assessee cannot be held responsible for CCM done at the end of the broker.
In the instant case, there is no incriminating statement from the brokers of the assessee i.e. Mansi Share & Stock Advisors Pvt. Ltd, Bonanza Portfolio Ltd and KM Jain Share Brokers Pvt. Ltd.
Further, no evidence is brought on record by the AO of any action by SEBI on assessee or its brokers for CCM. The data provided by NSE nowhere states that loss suffered by assessee is non-genuine.
M/s. Setu Securities Private Limited 9 In the assessment order dated 31.03.2016, the AO has stated the modus operandi of creation of fictitious profits and /or losses with a malafide intention of escaping taxes, but he has neither proved nor led any evidence in case of any single transaction, while making addition to the income of the assessee.
The above basic facts clearly indicate that the addition of Rs.1,55,31,999/- made by the AO is based on general propositions, which cannot be sustained.
Therefore, we confirm the order of the ld. CIT(A).
In the result, the appeal filed by the revenue is dismissed.