SUKSHAM FINLEASE & INVESTMENT P.LTD,NEW DELHI vs. ITO, WARD-24(3), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘G’: NEW DELHI BEFORE, SHRI SAKTIJIT DEY, VICE PRESIDENT AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER

ITA No.8321/Del/2018 (ASSESSMENT YEAR 2009-10)

Income Tax Officer M/s Suksham Finlease & Ward-24(3) Investment (P) Ltd. Vs. New Delhi 95, Apan Ghar Society Pitampura New Delhi-110 034 PAN-AABCS 0125J (Appellant) (Respondent) Appellant by Sh. Gautam Jain, Adv. Respondent by Sh. Anuj Garg, Sr. DR

Date of Hearing 04/01/2024 Date of Pronouncement 08/01/2024

ORDER PER M. BALAGANESH AM: This appeal of the Assessee arises out of the order of the

Learned Commissioner of Income Tax (Appeals)-28, New Delhi,

[hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.37/2017-18

dated 30/10/2018 against the order passed by Income Tax Officer,

Ward-24(3), New Delhi (hereinafter referred to as the ‘Ld. AO’) u/s

Page 1 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 143(3) r.w.s 147 of the Income Tax Act, 1961 (hereinafter referred

to as ‘the Act’) on 28/12/2016 for the Assessment Year 2009-10.

“1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding the initiation of proceedings under section 147 of the Act and, completion of assessment under section 147/143(3) of the Act without appreciating that the same were without jurisdiction and hence deserved to be quashed as such.

1.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that there was no specific relevant, reliable and tangible material on record to form a "reason to believe that income of the appellant had escaped assessment and in view thereof the proceedings initiated are illegal, untenable and therefore unsustainable.

1.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that reasons recorded mechanically without application of mind do not constitute valid reasons to believe for assumption of jurisdiction u/s 147 of the Act.

1.3 That in absence of any valid approval obtained under section 151 of the Act, initiation of proceedings u/s 147 of the Act and assessment framed us 147/143(3) of the Act are invalid and deserve to be quashed as such.

2.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the loss incurred is supported by documentary evidence in the shape of contract notes, and payment of applicable taxes. In such circumstances, disallowances made on the basis of surmises, conjectures and d suspicion and without bringing on record any specific evidence establishing that loss incurred is not genuine and therefore not allowable is highly arbitrary, unjustified and untenable.

2.2 That finding of learned Commissioner of Income Tax (Appeals) that, "in the light of the principles laid down by the Hon'ble Supreme Court and

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO also by the Hon'ble Karnataka high Court, I have no hesitation to hold that the transactions entered into by appellant by misusing the facility of client code modification are for the sole purpose of taking the benefit of contrived loss in order to reduce the tax liability and, therefore, liable to be treated bogus and artificial and to be added back to the income of the appellant" is perverse and not tenable.

2.3 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that assessee has never directed the brokers namely M/s. Trans Asia Securities Ltd. and M/s K K Securities Ltd. carry out any transaction on their account with client code modification facility during the instant year.

2.4 That further more the learned Commissioner of Income Tax (Appeals) has sustained the addition on mere speculation, generalized statements, theoretical assumptions and allegations and assertions, without there being any supporting evidence and is therefore not in accordance with law. 2.5 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in failing to appreciate the written submissions furnished by the appellant and overlooking the judicial pronouncements relied upon by the appellant.

2.6 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in recording various adverse inferences which are unsupported by any material or otherwise irrelevant consideration and, contrary to facts and material placed on record and therefore, addition so confirmed is absolutely unwarranted.

Prayer

It is therefore, prayed that it be held that assessment made by the learned Assessing Officer and sustained by the learned Commissioner of Income Tax (Appeals) deserves to be quashed as such. It be further held that additions made and upheld by the learned Commissioner of Income Tax (Appeals) alongwith interest levied be deleted and appeal of the appellant company be allowed.” Page 3 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO

dated 13/12/2022 which is reproduced as under:-

“That since the learned Assessing Officer did not dispose of the objection by a speaking order in accordance with the judgment of G.K.N Driveshafts (India) Ltd. vs. ITO reported in 259 ITR 19, the assessment so made is invalid.”

available on record. We deem it fit to admit the additional ground

raised (supra) as it goes to the root of the matter and facts relevant

for the adjudication of the same are already on record. Hence, in

view of the decision of the Hon’ble Supreme Court in the case of

NTPC Ltd. vs. CIT reported in 229 ITR 383, the said additional

ground is admitted.

return of income on 29/09/2009 for AY 2009-10 declaring total

income of Rs. Nil after adjustment of brought forward losses of

Rs.3,39,455/-. Subsequently, based on information received by the

Ld. AO from Income Tax Investigation Wing of Ahmedabad that the

assessee is one of the beneficiary clients who had taken contrived

losses amounting to Rs.3,57,95,948/- by using Client Code

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO Modification (CCM), the assessment of the assessee was sought to

be reopened vide issuance of notice u/s 148 of the Act dated

30.03.2015. In response to the said notice, the assessee filed a

letter dated 21/09/2016 stating that the original return filed u/s

139(1) of the act on 29/09/2009 may be treated as return in

response to notice issued u/s 148 of the Act. The assessee in this

letter dated 21/09/2016 also sought for copy of the reasons

recorded for reopening the assessment. The assessee was directed

by the Ld. AO to file a fresh return in response to notice u/s 148 of

the Act. Accordingly, the assessee filed a fresh return on

22/10/2016 in response to notice u/s 148 of the Act. The assessee

vide letter dated 25/10/2016 sought for furnishing the reasons

recorded for reopening the assessment together with copy of

approval obtained u/s 151 of the Act from the competent authority.

The Ld. AO without complying with the same directed the assessee

to file a balance sheet, profit and loss account and computation of

income and adjourned the matter to 04/11/2016. A Reply letter

dated 04/11/2016 was filed by the assessee on 24/11/2016 before

the Ld. AO by furnishing the requisite details and again requesting

for copy of reasons recorded for reopening of the assessment Page 5 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO together with the copy of the approval obtained u/s 151 of the Act

for reopening the assessment. On 24.11.2016, the reasons recorded

were supplied to the assessee. Vide letter dated 04.12.2016 filed on

06/12/2016, the assessee sought for evidences that are in

possession of the Ld. AO to form a belief that income of the

assessee had escaped assessment. The Ld. AO supplied the

evidences partly to the assessee on 06/12/2016. The assessee filed

the objections to the reasons recorded on 26/12/2016 before the

Ld. AO. The Ld. AO without passing a separate speaking order

disposing of the objections proceeded directly to complete the re-

assessment proceedings on 28/12/2016 by disallowing the loss of

Rs.3,57,45,948/- on alleged misuse of CCM and further making an

addition of unexplained expenditure u/s 69C of the Act in respect of

alleged commission expenditure of Rs.7,15,909/-.

AO for reopening the assessment are reproduced herein:-

“1. The assessee is a company filed its return of income on 29.09 2009 declaring Nil income after setting off brought forward losses & paying tax u/s 115JB. The details of the directors of the assessee company obtained from records are hereunder: (a) Sanjeev Kumar Sharma (b) Sunil Kumar Gupta (c) Sushil Kumar Sharda

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO The return has been verified & digitally signed by Shri Sushil Kumar Sharda Kumar Sharda. 2. Thereafter, the return was processed under 143(1) of the IT. Act. However, the case was not selected for scrutiny Subsequent to the processing of the return of income u/s 143(1), information through email was received on 11/03/2016 from Asstt. Director of Income Tax [Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted out profits using Client Code Modification. 3. It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client Code is a unique code which is assigned by a broker to its chents. A broker can issue just one code te a client. Client Code Modification means modification/change of the client codes after execution of trades Vide Circular no SMD/POLICY/Cir/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3 30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade.

Over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error These gain or loss-book entries were then used to evade taxes. 4. Non genuine CCM were carried out to book contrived losses In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact tax liabilities. It is generally done by buying or selling stocks intra- day so as to say consciously incur a loss and use that as a tax offset. Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 5 Enquiries were conducted by DIT (I&C1] Mumbar On the spot verification u/s 131(1A) of the Act was conducted in the cases of few brokers The brokers admitted misuse of Client code modification & receipt of commission of 0.5 to 2%. In addition, following patterns were observed in the I&CI report 1. Number and percentage of modified trades/traded value is significantly higher in the total number of trades/ traded value of particular client indulging into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. in Trades have been modified to unrelated parties indicating that they are non-genuine. iv. Both buy and sell log of different trades have been modified to most of the client v. Number of trade client code modifications substantially increased during the closing months of the financial year.

vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F&O segment. vii. The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix These brokers revised their computation for AY 2016-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted aw accepted and withdrawn their claim of non genuine losses F&O segment in A.Y. 2010-11 They have revised their computation for A.Y. 2010-11 and paid taxes accordingly The report of I&CI clearly established that the racket of brokers and beneficiary foul played and misused CCM for tax evasion. 6. An action was also undertaken by Alunedabad Directorate of Investigation Wing The wing had called for reports from different exchanges, and the data was duly analysed. After analysis, 12 Brokers and their related entities / main clients were identified for survey where the pre-survey analysis indicated more quantum of tax evasion. Based upon data analysis, co-ordinated surveys u/s 1336 of the Income Tax Act, 1961 were carried out at the premises of 12 brokers across India on 23.03.2018 7. Income Tax (First Amendment) Rules, 2011 were amended vide Notification No. 14/2011 [F. No. 142/25/2008 So (TPL)], Dated 9-3-2011. The amendment came into force on the 1st day of April, 2011. The amendment required the stock exchanges to ensure that the transactions in respect of cash and derivative market once registered in the system are modified only in cases of genuine error and maintain data regarding all Page 8 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO transactions (in respect of cash and derivative market) registered in the system which have been modified and submit a monthly statement in Form No. 388 the Director General of Income tax (Intelligence), New Delhi within fifteen days from the last day of each month to which such statement relates. 8. SEBI conducted a probe into modification of client codes by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2010. With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full stop to such manipulations Before tightening of the norms, the Indian markets were seeing client code modifications to the tune of Rs 50,000 Rs 60,000 crore a month, which came down to just about Rs 100 crore soon after SEIN's action Quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing genuine errors in April 2012, SEBI passed an order against NSE for being negligent in discharge of its duties in case of modification of client codes. 9. The report of Ahmedabad Investigation Wing las teen compiled after taking into account the findings of SEBI, DG INCI, Data available with department in form of Form no 3BB and information collected by way of surveys. The report points out that the essence of tax evasion through CCM is that if the Broker has punched in both Buy and Sell Orders for a given quantity of a given security then at the end of the trading session he has with him an ascertained loss / gain on this Buy Bell pair that he can shift during the CCM window. The analysis of the Investigation wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders from a given Original Client Code (OCC) or to a given Modified Client Code (MCC) given Broker. 10. The following steps were followed for analysis and computing the quantum of losses/profits shifted due to the CCM: o For computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted infin case of MCC)/shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC)transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2010 modified on 06.03.2010 to client Y(MCC) then in such case the difference in buy and sell trades is taken to be profit/loss shifted from X to Y. All other transactions say where 500 buy and 200 sell trades are shifted from X to Y have been ignored.

Page 9 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO o The transactions where exact buy and sell transaction were transferred from one client to another NO PRICE RISK EVER was borne by the client who received the transactions through CCM Thus such ASCERTAINED LOSSES shifted through CCM for which no price risk ever was borne by a client are non genuine losses shifted with the motive of tax evasion by setting of such selectively shifted losses against other income o Working on the said logic has been made in both scenarios, se when a given client was original client (OCC) and when the client was modified client (MCC) o It has been seen with regard to all the clients, so identified to have obtained losses/profits consequent to such working on the NSE data, that when a client has received losses as MCC it has shifted out profits when it was OCC and its code was modified Thus, the total losses obtained by the chent through CCM would be the sum of the losses received as MCC and profits shifted out to other clients as OCC. o As per the said working, year wise and client-wise losses computed for all the clients of different brokers is enclosed at Annexure B, to this report. o The final figures of the profits and losses shifted due to CCM are at Annexure B to this report. 11. The submissions were requested from the brokers by the Investigation Wing and were duly considered. In case the submission had merits, these were duly honoured. The final set of beneficiaries as compiled contained only such beneficiaries for whom no tenable contention remains standing. To counter the contention of the Brokers that the Department has not taken into account the open positions shifted from one client to another as a result of CCM as the shifting of one leg of trade (i.e. buy or sell open position) from one client to another only CCMs wherein equal number of buy and sell trades between two clients have been shifted have been taken for computation of the losses/profits shifted due to CCM. To be more specific and in simple terms, modifications which appear to be genuine or resemble of being genuine were ignored and not considered in this report. Such benefit has already been given by the department. 12. I have gone through the report as well as the basic data of transactions in respect of my assessee which was supplied with the report. My findings on the issue are as under

a) The return of the assessee shows that it is involved in sale purchase in stock exchanges and its turnover could have included the transactions contrived by way of CCM b) The transactions which involved CCM in case of assessee are as under: (i) The assessee's code was modified 125 times in OCC to Shift out profits Rs 52,24,285. The data clearly shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: The Assessee's OCC of 1377, C137 and S184 have been modified 72, 8 & 45 times respectively to MCC as 100, 1009, 1027, etc. The details are as under: Page 10 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 1377 72 100 18 1009 2 1027 2 1310 11 1397 3 436 1 693 3 694 26 8 1 850 3 866 2

C137 8 B115 1 156 2 M113 2 V138 3

5184 45 1021 1 2585 1 437 2 GH 19 K071 11 RENU 1 RK03 2 SF01 3 Z1232 2 Z1436 2 Z3420 1

(blank) The only justified modification is when code was changed to Suksham Finlase 3 times in which profit of Rs 14,347 was shifted from assessee's PAN to assesssee's PAN only. It is further observed that in OCC modification in 17 transactions in December end to first week of January wherein Expiry date was 29/01/2009 the assessee gathered loss transactions whereas in all other transactions ie. 108 transactions profit was shifted out (ii) Now let us examine the the situation in MCC Le when some other's OCC was modified to the assessee's code. The assessee did 85 transactions in which he got OCC of someone else modified to its Code to gather losses. The details are as under: Page 11 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO

1377 68 100 65 1310 1 694 2 C137 2 M166 1 P1 1 5184 1 2462 3 DL22 1 J582 1 595 9 53 9 SF01 3 S184 3

The table shows the number of time the assessee’s code of 1377, c137, s184, s95 & SF01 was in Modified Column and against which codes. The maximum times the assessee’s code has been modified against the OCC of 100. c) Levenshtein Distance or edit distance is that it gives a clear indication as to whether the code is wrongly typed or is completely replaced. If the number of digits changed from original code to modified code is 1, then it can be reasonably argued that the OCC (Original Client Code) may have been typed wrongly by mistake. But if the number of digits changed is more, surely it cannot be a genuine typing mistake but a deliberate change. To this extent, Levenshtein Distance Analysis or digit edit analysis acts as a clear indicator for genuineness in client code modification. The longer the distance (i.e., number of digits changed), the lesser the chances of genuineness. The analysis of Levenshtein Distance or digit edit analysis, when clubbed with the parameters mentioned in this report establishes the non-genuineness and contrived nature of the code change. Levenshtein Distance Analysis or digit edit analysis in case of the assessee when the assessee's original code was modified is as under: OCC MCC Modified times Levenshtein Distance 3 1377 100 18 1377 1009 2 3 1377 1027 2 2 1377 1310 11 2 1377 1397 3 1 1377 436 1 3 Page 12 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 1377 693 3 4 1377 694 26 4 1377 1 8 8 1377 850 3 4 4 1377 866 2 C137 B115 1 3 C137 L56 2 4 C137 Ml 13 2 3 C137 V138 3 2 SI 84 4 1021 1 SI 84 2585 1 3 SI 84 437 . 2 4 GH j S184 19 4 K071 j S184 11 4 SI 84 4 1 RENU SI 84 4 2 RK03 SI 84 3 3 SF)1 j S184 4 2 Z1232 j S184 4 2 Z1436 5 S184 1 Z3420

In the above analysis we can give benefit of doubt to the assessee in change of code from 1377 to 1397 as the Levenshtein Distance of this change is one. The net effect of these transactions is loss of Rs -2355. If we remove this transaction then the net effect of CCM from OCC to MCC increases to Rs 52,26,640.

Levenshtein Distance Analysis or digit edit analysis in case of the assessee when the assessee’s code was put in modified code column is as under :

MCC OCC Modified times Levenshtein Distance 1377 100 65 3

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 1377 1310 1 2 1377 694 2 4 C137 M166 1 3 Cl 37 PI 1 3 SI 84 2462 1 4 SI 84 DL22 1 4 S184 J582 1 3 S95 S3 9 2 SF01 S184 3 3 Since SF01 & SI84 are both client codes of assessee therefore the change has also resulted in transfer of profit of Rs 14347 therefore net loss transferred in due to MCC gets increased to Rs - 30568858.

d) Beneficiaries who shift out their profits and at the same time, they have also take losses from others. These tactics are generally resorted to by the persons who already have taxable income in their books and they want to set it off against contrived losses through CCM.

An important finding of the survey is trend analysis. The trend analysis show that the profits are shifted out when the person is original client and losses are shifted in, when the client is modified client. This trend who that the CCM has been carried out for non-genuine purposes, in the case of assessee. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for a purpose other than genuine punching errors.

In case of assessee profits of Rs 32,20,640 have been shifted when it was original client, this happened 107 transactions out of 122 transactions. (if we leave out three transactions with Leweshtrin Distance of 1) and have been shitted in 82 transactions when the assessee was a modified client. 13 It should also be kept in mind that Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not be accepted as evidence in a court of law. In clandestine transactions, like that of CCM, impossible to have direct evidence or demonstrative proof more, the AO has no choice but to take recourse to preponderance of evidence available 14. A careful scrutiny of information received from the investigation wing and subsequent analyses of report investigation wing, data of transactions and verification of ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift out Page 14 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO ascertained profits amounting Rs.52,26,640 and shift in ascertained bases of Rs- 30568858. Thus the net reduction in income due to CCM was Rs.3,57,95,498/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysis subsequent to the information, I have reasons to belief that an amount at least of rs.3,57,95,498 & commission of Rs.7,15,909 @ 2%) has escaped assessment in case the of M/s Sukham Finlease & investment Pvt. Ltd. for the A.Y. 2009-10 within the meaning of Section 147/148 of Income tax Act 1961 16. Since more than 4 years of the relevant years have passed and the information received from the investigation wing is that transactions are in the nature of accommodation entries, are non disclosure of material facts pertaining to such transactions which has not been disclosed by the assessee in the return of income or during the assessment proceedings of this relevant year. Thus, this specific condition reopening is hereby hilly killed in the instant case as assessee has failed to disclose such material facts on its own earlier. The case is squarely covered under provisions of section 147 of income tax Act, 1961. Moreover, as the case pertains to a period beyond four years from the end of relevant assessment year at the time of issue of notice, necessary sanction has to be obtained from Pr. Chief Commissioner of Income Tax or Pr. Commissioner of Income Tax or Commissioner of Income Tax, in view of the amended provision of section 151 w.e.f 01.06.2015. The necessary sanction in this regard is being obtained separately from Pr. Commissioner of Income tax-08, Delhi before the issue of notice u/s. 148 for reopening of assessment under section 147 in the case of assessee company.”

Ld. AO had merely made a general observations on the principle of

CCM. In fact in para 13 of the reasons recorded, the Ld. AO admits

that there is no direct evidence against the assessee to demonstrate

that assessee had indulged in connivance in order to buy contrived

loss on account of CCM. While this is so, how the said reasons

could enable the Ld. AO to form of reasonable belief that income of

the assessee has escaped assessment. In fact, this issue is no Page 15 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO longer res integra in view of the decision of Co-ordinate Bench of

Delhi Tribunal in the case of Globus Power Generation Ltd. vs. ACIT

in 6438/Del/2019 dated 03/05/2023 reported in (2023) 68 CCH

007 (DelTrib) authored by undersigned, wherein the reopening of

assessment was quashed under the identical circumstances. For

the sake of convenience, the relevant operative portion of the order

is reproduced herein under:

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 2. In this case information dissipated by the Pr. DIT(Inv.), Ahmedabad that in survey u/s 133A it was found that some brokers by misusing the client code modification facility of NSE, have indulged in creating non- genuine losses and profits. Thereafter, by misusing client code modification these brokers have indulged in transferring the fictitious losses / profits to and after different clients. After analysis of data received from NSE and after considering the contention of brokers, it was established that the brokers had misused client code modification as a tool for tax evasion and created non-genuine losses and profits. It was revealed that these losses and profits were given to different client/ beneficiaries and the beneficiaries had taken fictitious losses to set off against their profits with a view to reduce their tax liability. The client also took fictitious profits to cover up their undisclosed income or to set off these profits against huge losses. 3. As per the above information and list of beneficiaries provided therein, it is seen that the assessee company is one such beneficiary who has availed of such non-genuine client code modification services from brokers and booked net non-genuine losses to the tune of Rs.46,07,275/- for AY 2009-10." 6. After recording the aforesaid reasons and obtaining requisite approval u/s 151 of the Act, the ld. AO issued notice u/s 148 of the Act on 30.03.2016 to the assessee. The assessee vide submission dated 12.04.2016 stated that the return filed on 30.09.2009 be treated as return filed in response to notice u/s 148 of the Act and requested for furnishing the reasons recorded for reopening of the assessment. The reasons recorded for reopening of the assessment were provided by the ld. AO to the assessee vide letter dated 29.09.2016. The assessee filed Page | 3 ITA No. 6438/Del/2019 Globus Power Generation Ltd objection to the said reasons recorded and the ld. AO disposed of those objections by way of a speaking order dated 23.11.2016 and thereafter proceeded with the reassessment proceedings. In the reassessment proceedings, the ld AO made disallowance of Rs. 46,07,275/- representing losses claimed by the assessee due to client code modification. 7. This action of the ld AO was upheld by the ld CIT(A). From the perusal of the reasons recorded it is very clear that: a. there is no information provided in the reasons as to in whose hands, a survey u/s 133A of the Act was conducted by Investigation Wing of Ahmedabad ; b. the reasons only speaks that some survey in Ahmedabad conducted revealed that some broker was involved by misusing the client code modification facility of NSE and engaged in providing non-genuine losses and profits. The reason does not specify whether the broker through whom the assessee had carried out the transaction of trading of derivatives was involved in such malpractices;

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 8. We find that the assessee have been objecting right from the beginning that it is not aware as to how the figure of loss of Rs. 46,07,275/- of income escaping assessment mentioned in the reasons, was even arrived at. This is evident from the reply letter dated 26.12.2016 filed by the assessee before the ld AO wherein, the assessee had categorically denied that the broker had carried out any client code modification in its case to book artificial losses. The assessee had also stated that it is not even aware as to how the figure of Rs. 46,07,275/- regarding alleged artificial loss booked through CCM mentioned in the show cause notice was even arrived at nor is there any information regarding the broker who is alleged to have carried out client code modification. The assessee submitted that it had no details of transaction Page | 4 ITA No. 6438/Del/2019 Globus Power Generation Ltd of Rs. 46,07,275/- in its records. None of these contentions were even sought to be addressed by the lower authorities. 9. We find that the reasons recorded by the ld AO for reopening of the assessment in the instant case are very vague without having any live link to form a reasonable belief that the income of the assessee had escaped assessment. The reasons recorded and the assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reasons recorded only gives way to 'reason to suspect' and not 'reason to believe'. The very same issue was even subject matter of adjudication of this tribunal in the case of Stratagem Portfolio (P) Ltd Vs. DCIT in ITA No. 7878/Del/2019 dated 15.09.2020 and the operative portion of the said tribunal order is reproduced hereunder:- "4. The ground No. 1 to 1.4 of the appeal relates to validity of the reassessment proceeding. In the ground No. 1.1, the assessee has challenged "reason to believe" on the ground that same are not specific and lacking reliable and tangible material. 5. In support of the ground, the Learned Counsel of the assessee referred to the reasons recorded, which has been reproduced by the Assessing Officer in the impugned assessment order. He submitted that in the reasons recorded, the Assessing Officer has recorded about process of Client Code Modification (CCM) by the brokers under the facility provided by the stock exchanges for rectification of error in punching of the client code while carrying out transaction of purchase and sale of the shares. He further referred to para-12 of the said reasons and submitted that the Assessing Officer has reproduced number of events, where assessee‟s code was modified by the broker. The learned Counsel submitted that the Assessing Officer on the basis of modification in the client code of the assessee, has jumped to believe that it had been done for shifting of profit of � 6,42,781/- and shifting of loss of � 4,420/-. According to Learned Counsel, this belief of the Assessing Officer is without any tangible material to support that such client code modification has been done for evasion of the tax. Further, he submitted that the Learned Assessing Officer is not justified in making the belief that profit or loss shifted

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO to other persons by way of client code modification by the broker has resulted into any income to the assessee, which could be assessed under section 68 as cash credit. 5.1. He submitted that learned Assessing Officer acted only on the basis of suspicion and it could not be said that it was based on belief that income chargeable to tax had escaped assessment. He referred to page 5 of reasons recorded where the learned Assessing Officer noted that: "The assessee‟s code was modified 44 times in OCC to shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs.4,420/-. The data clearly shows that the modification was not no grounds of feeding in erroneous data." He further submitted that finally while making the addition learned Assessing Officer at page 16 of order of Assessment, however, concluded that : "In view of above, the profit of Rs. 6,47,201/- claimed by the assessee in the above mentioned transactions is treated as a contrived profit artificially generated through the misuse of the CCM. The profit is, therefore, liable to be taxed and added to the total income of the assessee as unexplained investment u/s 68 r.w.s. 115BBE of the Income-tax Act, 1961." 5.2. The Ld. Counsel accordingly, submitted that reasons recorded are thus factually incorrect too, or the learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. 5.3. He also submitted that there is no live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. The learned Counsel relied on decision of Hon‟ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464 and following decisions of the Tribunal to support his contentions: 1. ITA No. 6809/D/2018 dated 22.10.2019 Simmi Sethi vs. ITO (pages 53-56 of JPB) 2. ITA No. 4542/D/2018 dated 29.11.2018 Radiance Stock Traders (P) Ltd. vs. ITO (pages 1-25 of JPB) 3. ITA No. 6628/D/2018 dated 12.4.2019 Kamal Kishoree Aggarwal vs. ACIT (pages 92-111 of JPB) 4. ITA No. 4395/D/2019 dated 27.2.2020 AKG Securities & Consulting Ltd. vs. ITO (pages 112-127 of JPB) Page | 6 ITA No. 6438/Del/2019 Globus Power Generation Ltd

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 5. ITA No. 825/D/2019 dated 25.7.2019 Sanjay Kumar Jain vs. ITO (pages 57-91 of JPB) 5.4. The Learned DR, on the other hand, submitted that the reasons have been recorded on the information received from the Director of Income Tax (Investigation), Ahmadabad, which is a credible source of the information. He further relied on the order of the lower authorities to support that reasons have been recorded validly. 5.5. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In the instant case, the dispute is whether there is any tangible material to infer that by way of the client code modification, the assessee has escaped the income and evaded the Income-tax. The Learned Counsel of the assessee has referred to the various decisions mentioned above, wherein cases were reopened on the basis of the information of client code modification. In the case of M/s. Coronation Agro Industries Ltd. vs. DCIT (supra), the Hon‟ble Bombay High Court quashed reopening of assessment on identical issue. It has been held in the said judgment as under: "4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and/or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee‟s broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment." 5.5.1 Further, the Tribunal in Radiance Stock Traders (P) Ltd. vs. ITO (supra), has held as under: "6.1 After perusing the aforesaid reasons recorded, I find that „information‟ was received on 21.3.2016 from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad without conducting any enquiry on the same by Assessing Officer and without considering the fact of the case of assessee in light of the issue is not a tangible and relevant material to form Page | 7 ITA No. 6438/Del/2019 Globus Power Generation Ltd opinion that income has escaped assessment. It

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO is noted that the proceedings u/s. 147 of the Act can be initiated only on the basis of the tangible material and not on the basis of assumptions and presumptions. The recondition u/s. 147 of the Act is "reason to believe" and, the expression is stronger than the word "satisfied". The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for assuming jurisdiction, as has been held in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC) and ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 (SC). Hence, in this case the proceedings have been initiated on the basis of no material much less any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiating proceedings u/s 147 of the Act. It is a case of reason to suspect' and not „reason to believe." 6.2. I further note that the action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind....... 6.3. I further note that in the reasons recorded assessee has relied upon the information by the Investigation Wing, Ahmedabad, the AO has stated that having perused and considered the information received from Investigation Wing he has reason to believe that income of the assessee has escaped which has not been conformed to the assesssee company, in the course of assessment proceedings, though in view of the judgment of Hon‟ble Delhi High Court in the case of Sabh Infrastructure Ltd. Vs. ACIT reported in 398 ITR 198 the same was to be confronted alongwith reasons wherein it has been held as under: "(iii) where the reasons make a reference to another document, whether as a letter or report, such document and / or relevant portions of such report should be enclosed alongwith the reasons." 6.3.1. Hence in the absence of such material, the allegation and assumptions are nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis. Page 21 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO

4.8. In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction, hence, the reassessment is quashed." 5.5.2. Similarly, in the case of Kamal Kishoree Aggarwal vs. ACIT (supra), the Tribunal has observed as under: "7. I find that the reasons recorded for issuance of notice u/s 148 was as under: "REASONS FOR BELIEF THAT THE INCOME HAS ESCAPED ASSESSMENT IN THE CASE OF SHRI GOPAL GUPTA FORTHE ASSESSMENT YEAR 2009-10

As Survey Report in R/o client code modification (CCM) has been received from ADIT (Inv.) U-1(3) Ahmadabad disseminating of beneficiary clients who have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011-12. 8. We find that in the case of M/s. Prashant Agencies Pvt. Ltd. And PPN Properties Pvt. Ltd. Vs ITO in ITA Nos. 3059 & 3060/Del/2018,order dated 16.01.2019, the Tribunal dealt with the similar issuance of notice u/s 148 of the Act by following the decision of the Hon‟ble Bombay High Court in the case of Coronation „Agro Industries Ltd. Vs. DCIT 390 ITR 464 (Bom.). In that case, the reasons recorded were asunder: 10. A perusal of the above, shows that Client Code Modification is legally permissible in case of mistake. In the instant case, the observation of the Assessing Officer is to the effect that due to Client Code Modification in two transactions, the assessee‟s income was reduced by Rs.5,96,176/-.

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO alone and nothing can be added thereto. The recording should be self- contained to withstand the validity of the reopening made. 13. In the circumstances, respectfully following the decision of the Hon‟ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs DCIT (supra) and the above quoted decision of the Tribunal, in our considered opinion, the reasons recorded in the instant case does not satisfy the requirement of law and the same does not constitute the reason to believe for escapement of any income from tax. Therefore, the reason is not valid. The consequential order of reassessment passed in pursuance thereto cannot be sustained. We, therefore, set aside the impugned order of reassessment passed u/s 147 of the Act and allow this ground of appeal of the assessee." 5.3. In the instant case, though the Assessing Officer has reproduced the reasons recorded, for ready reference same are reproduced here as under: "1. The assessee is a company filed its return of income on 27.09.2010 declaring Rs.5,06,454/- income. The details of the directors of the assessee company obtained from recants are hereunder:- (a) Alul Sethi (b) Gautam Jagga The return has been verified A digitally signed by Shri Atul Sethi. 2. Thereafter, the return was processed under 143(1) of the IT Act. However, the case was not selected for scrutiny/or scrutinized us 143(3) of the Act. Subsequently, information through email was received on 11/03/2016 from Asstt. Director of Income Tax (Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted old profits using Client Code Modification. 3. It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client code is unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. Client Code Modification means modification/change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03, dated February 6, 2003 SEBI mandated that the slack exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code, the facility ensures smooth Page 23 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade. 3.1 Over a period of time, some persons, in connivance with brokers started using Client Code Modification for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes. 4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact lax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset. 4.1 Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified. 5. Enquiries were conducted by DIT (I&CI) Mumbai: On the spot verification u/s 131 (IA) of the Act was conducted in the cases of few brokers. The brokers admitted misuse of Client code modification & receipt of commission of 0.5 to 2%. In addition, following patterns were observed in the I&CI report: i. Number and percentage of modified trades traded value is significantly higher in the total number of trades/traded value of particular client indulging into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-genuine

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO iv. Both buy and sell log of different trades have been modified to most of the client. v. Number of trade client code modifications substantially increased during the closing months of the financial year. vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F & O segment. vii The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix. These brokers revised their computation for A.Y 2010-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted have accepted and withdrawn their claim of nun-genuine losses in F&O segment in A.Y-2010-11. They have revised their computation for A.Y.- 2010-11 and paid taxes accordingly. The report of I&CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion. 6. An action was also undertaken by Ahmedabad Directorate of Investigation Wing. The wing had called for reports from different exchanges and the data was duty analysed. After analysis, 12Brokers and their related entities/main clients were identified for survey where the pre-survey analysis indicated more quantum of tax-evasion. Based upon data analysis coordinated surveys u/s 133A of the Income Tax Act, 1961 were carried out at-the premises of 12 brokers across India on 23.03.2015. 7. Income-Tax (First Amendment) Rules. 2011 were amended vide Notification No. 14/2011 [F. No. 142/25/2008-So(TPL)], Dated 9-3- 2011. The amendment came into force on the 1st day of April, 2011. The amendment required the stock exchanges to ensure that the transactions (in respect of cash and derivative market) once registered in the system are modified only in cases of genuine error and maintain data regarding all transactions tin respect of cash and derivative Page 25 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO market) registered in the system which have been modified and submit a monthly statement in Form No. 3BB to the Director General of Income-tax (Intelligence), New Delhi within fifteen days from the last day of each month to which such statement relates. 8. SEBI conducted a probe into 'modification of client ended by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2011). With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, the Indian markets were seeing diem code modifications to the tune of Rs.50,000 - Rs. 60,000 crore a month, which came down to just about Rs.100 crore soon after SEBI action. Quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing „genuine errors‟ In April 2012, SEB1 passed an order against NSE for being "negligent in discharge of its duties" in a case of modification of client codes. 9. The report of Ahmedabad Investigation Wing has been compiled after taking into account the findings of SEBI, DG I&CI. Data available with department in form of Form no. 3BB and the information collected by way of surveys. The report points out that the essence of lax evasion through CCM is that if the Broker has punched in both Buy and Sell Orders for a given quantity of a given security then at the end id the trading session he has with him an ascertained loss/gain on this Buy Sell pair that he can shift during the CCM window. The analysis of the Investigation Wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders front a given Original Client Code (OCC) or to a given Modified Client Code (MCC) for a given Broker 10. The following steps were followed for analysis and computing the quantum of losses profits shifted due to the CCM: for computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2020 modified on 06.03.2010 to client Y(MCC), then in such case the difference in buy and sell trades is taken Page 26 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO to be profit/loss shifted from X to Y. All other transactions say where 500 buy and 200 sell trades are shifted front X to Y have been ignored.”

� The transactions where exact buy and sell transaction were transferred from one client to another NO PRICE RISK EVER was borne by the client who received the transactions through CCM. Thus such ASCERTAINED LOSSES shifted through CCM for which no price risk ever was borne by a client are nongenuine losses shifted with the motive of tax evasion by setting of such selectively shifted losses against other income � Working on the said logic has been made in both scenarios, i.e., when a given client was original client (OCC) and when the client was modified client (MCC).

� It has been seen with regard to all the clients, so identified to have obtained losses/profits consequent to such working on the NSE data, that when a client has received losses as MCC. It has shifted out profits when it was OCC and its code was modified. Thus, the total losses obtained by the client through CCM would be the sum of the losses received as MCC and profits shifted out to other clients as OCC. . � As per the said working, year-wise and client-wise lasses computed for all the diems of different brokers is enclosed al Annexure B, to this report � The final figures of the profits and losses shifted due to CCM are at Annexure B to this report 11. The submissions were requested from the brokers by the Investigation Wing and were duty considered. In case the submission had merits, these were duly honoured. The final set of beneficiaries as compiled contained only such beneficiaries for whom no tenable contention remains standing. To counter the contention of the Brokers that the Department has not taken into account the open positions shifted from one client to another as a result of CCM as the shifting of one leg of trade (i.e. buy or sell open position) from one client to another only CCM wherein equal number of Page | 14 ITA No. 6438/Del/2019 Globus Power Generation Ltd buy and sell trades between two clients have been shifted have been taken for computation of the losses profits shifted due to CCM. To be more specific and in simple terms, modifications which appear Page 27 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO to be genuine or resemble at being germane were ignored and not considered in this report. Such benefit has already been given by the department. 12. I have gone through the report as well as the basic data of transaction in respect of my assessee which was supplied with the report. My findings on the issue arc as under: a) The return of the assessee shows that it is involved in sale purchase in stock exchanges and its gross turnover could have included the transactions contrived by way of CCM. b) The transactions which involved CCM in case of assessee are as under i) The assessee�s code was modified 44 times in OCC to Shift out profits Rs.6,42,781 and one time in MCC to Shift in loss of Rs 4.420/ - The data clearly shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: To shift out profits. The Assessee�s OCC of FSTP have been modified to new codes in MCC as under.

Replaced Code Numbe Of Times 1 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44

(ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one transaction in which he got OCC of someone else modified to its Code to gather losses. The original codes of 99 were replaced by assesses�s codes of FSTP. This resulted in shifting in of losses of Rs.4,420/- c) Levenshtein Distance or edit distance is that it gives a clear indication as to whether the code is wrongly typed or is completely replaced. If the number of digits changed from original code to modified code is I. then it can be reasonably argued that the OCC (Original Client Cade) may have been typed wrongly by mistake But if the number of digits changed is more surely it Page 28 of 33

ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO cannot be a genuine typing mistake but a deliberate change.To this extent Levenshtein Distance Analysis or digit edit analysis acts as a clear indicator for genuineness in client code modification. The longer the distance (i.e. number of digits changed), the lesser the chances at genuineness. The analysis of Levenshtein Distance or digit edit analysis, when clubbed with the parameters mentioned in this report establishes the non- genuineness and contrived nature at the code change. Levenshtein Distance Analysis or digit edit analysis in case of the assessee shows that in all transactions the value was 2 or more. (d) Beneficiaries who shift out their profits and at the same time, they have also taken losses from others. These tactics are generally resorted to by the persons who already have taxable income in their books and they want to set it off against contrived losses through CCM. An important finding of the survey is trend analysis The trend analysis show that the profits are shifted out when the person is original client and losses are shifted in when the client is modified client. This trend show that the CCM has been carried out for nongenuine purposes in the case of assessees. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for a purpose other than genuine punching errors. 13. It should also be kept in mind that Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not he accepted as evidence in a court of law. In clandestine transactions, like that of CCM, it is impossible to have direct evidence or demonstrative proof of every move, the AO has no choice but to take recourse to preponderance of evidence available. 14. A careful scrutiny of information received from the investigation wing and subsequent analysis of report of Page | 16 ITA No. 6438/Del/2019 Globus Power Generation Ltd investigation wing, data of transactions and verification at ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained losses & shift out profits of Rs.6,47,201/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysts subsequent to the information, I have reason to believe that an amount at least of Rs.6,47,201/- & commission @ 2%, amounting to Rs.12,944/- (@ 2%) has escaped assessment in case the of M/s Stratagem Portfolio P Ltd for the A.Y. 2010-11 within the meaning of Section 147/148 of Income-tax Act, 1961."

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purchase and sale on behalf of the customers. The Learned Assessing Officer, however has alleged in the reasons recorded that client code modification has been done for shifting of the profit or loss by the assessee. But there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. The Hon�ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 has held that for validity of reason recorded it is essential that there should be a relevant material on which a reasonable person could make requisite belief. In the circumstances, in view of the above decision of the Hon�ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. (supra) and decisions of the Tribunal (supra), we are of the opinion that the assessment cannot be reopened validly on the basis of the above reasons recorded in absence of any tangible material to infer that income escaped in the case of the assessee. We, accordingly, quash the reassessment proceedings and set aside the order of the Learned CIT(A) on the issue in dispute. The ground No. 1.1 of the appeal is accordingly allowed. 5.5 Since we have already quashed the reassessment proceeding, we are not adjudicating other ground of the appeal challenging validity of the reassessment as well as on the merit of the additions." 9. In view of the aforesaid observations and respectfully following the judicial precedent relied upon by the assessee hereinabove, we have no hesitation in quashing the reassessment proceedings as they are not sustainable in the eyes of law. Since, reopening is quashed on technical ground there is no need to adjudicate the grounds raised by the assessee on merits and they are left open. The grounds raised by the assessee are allowed. 10. In the result, appeal of the assessee is allowed.

Omega Finhold Pvt. Ltd. vs. ACIT in 1286/Del/2018 dated

27/07/2023 authored by the undersigned wherein the re-

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO assessment was quashed under identical circumstances. Moreover,

we find that CCM done by an assessee’s broker could not be a

ground to believe that income of the assessee had escaped

assessment. CCM is facility provided to the brokers to carry out

rectifications that had occurred due to punching and typographical

errors by providing a leeway of 30 minutes after closing of the stock

market on a particular date. When this type of modification is

carried out by the broker to rectify the error committed by that

broker, how can the assessee be attributed to have involved in

connivance with the brokers or any other third parties. This aspect

has been duly considered by the Hon’ble Bombay High Court in the

case of Coronation Agro Industrial Ltd. vs. DCIT reported in 390 ITR

464 (Bom) wherein it was held as under:- 4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment.

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO 5. In the above view, prima facie, we are of the view that the impugned notice is without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment.

the various judicial precedents relied upon herein above, we have

no hesitation to quash the reopening proceedings in the facts and

circumstances of the instant case. Since relief is granted to the

assessee on technical ground the adjudication of other grounds

raised by the assessee on merits need not be gone into and they are

left open.

Order pronounced in the open court on 8th January, 2024.

Sd/- Sd/- (SAKTIJIT DEY) (M. BALAGANESH) VICE PRESIDENT ACCOUNTANT MEMBER Dated:08/01/2024. Pk/sps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI

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ITA No.8321/Del/2018 M/s Suksham Finlease & Investment (P) Ltd. vs. ITO

Draft dictated Draft placed before author Approved Draft comes to the Sr.PS/PS Order signed and pronounced on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order. Date of uploading on the website

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