ITO,WD-12(3), KOLKATA, KOLKATA vs. AMRABATHI INVESTRA PVT. LTD., KOLKATA

This appeal by the Revenue as well as Cross Objection (CO) by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 27.01.2014. Assessment was framed by ITO & CO 17/Kol/2017 A.Y. 2009-10 ITO Wd. 12(3), Kol. Vs. Amrabathi Inveestra Pvt. Ltd. Page 2 Ward-12(3), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.12.2011 for assessment year 2009-10. Shri Sallong Yaden, Ld. Departmental Representative represented on behalf of Revenue and Shri N.K. Poddar, Ld. Senior Advocate appeared on behalf of assessee.

Only issue raised by the Revenue in this appeal is whether the ld CIT(A) is right in allowing the loss of Rs.20,17,97,265/- on account of derivative activities.

Briefly stated facts are that the assessee is a private Limited company and engaged in trading in shares, investments and granting of loans. The assessee, in the year under consideration has claimed losses under derivative activities for the amount of Rs.20,17,97,265/-. The Assessing Officer during the course of assessment proceedings found that the following brokers were involved in the derivative transactions. S.No. Name of the company Amount of loss 1. M/s India Capital Markets Pvt. Ltd. (-) 20,14,86,105/- 2. M/s Alchemy Shares and Stock Brokers Pvt.Ltd. (-) 3,11,160/- The AO confirmed the aforesaid loss from National Stock Exchange (for short NSE) u/s 133(6) of the Act and found that several modifications were carried out by these brokers in the codes of the client. In view of above, the AO issued notices u/s 133(6) of the Act to aforesaid brokers to ascertain the reason for the modifications in the client codes. In compliance thereto of the M/s India Capital Markets Pvt. Ltd. (ICMPL for short) submitted that the client codes were modified due to the typographical human errors and these changes were made online during the trading hours which were accepted by NSE. Similarly the M/s Alchemy Shares and Stock Brokers Pvt. Ltd. (ASSBPL for short) submitted that no changes were carried out in the back office. The AO also issued commission u/s 131(1)(d) of the Act to the Directorate of Investigation, Mumbai to verify the transactions of the assessee with the & CO 17/Kol/2017 A.Y. 2009-10 ITO Wd. 12(3), Kol. Vs. Amrabathi Inveestra Pvt. Ltd. Page 3 aforesaid brokers. In compliance thereto the statements u/s 131 of the Act of the directors of both the broker companies were recorded. ICMPL submitted that the client codes were modified due to the typographical human errors whereas the ASSBPL submitted that changes were carried out in the client code as per the instructions of assessee company. In view of above, the AO called upon the assessee to clarify the reasons for the change of client codes. The assessee in response thereto submitted that ICMPL has admitted that the modification in client code was carried out due to typographical errors whereas the ASSBPL has not submitted any correspondence from the assessee suggesting for client code. All the changes made in the client code were in the knowledge of the NSE and all the entire transactions were matching between the brokers and assessee-company. However, the AO disregarded the contention of the assessee and disallowed the impugned loss by adding it to the total income of the assessee.

Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld CIT(A) submitted that there were 3,11,866 transactions with ICMPL whereas the transactions with ASSBPL were 211 only in the year under consideration. Therefore, it was very much possible that the staff while punching the data can make some mistakes in the client code. Moreover, all the changes in the client code were modified within the time given by the NSE and all the details for the modification in client code were available with the NSE. The ld. CIT(A) during appellate proceedings made the following observations :

The ld DR before us submitted that it is mandatory for all the brokers to keep the records in respect of all the client codes which have been modified as per the Notification No. 14/2011 issued by the CBDT dated 09.03.2011. It is also important to note that the broker has been dealing with various clients but the client code was modified only in respect of the assessee. Therefore, the genuineness of the transactions cannot be relied upon. He heavily relied on the order of AO. On the other hand, the ld. AR before us filed a paper book comprising of pages from 1 to 157 and submitted that there was no discrepancy between the date supplied by the NSE and the assessee. Indeed the clients codes were modified and this action was carried out and updated in the stock exchange. The issue of disallowance of the loss arises where there is mismatch in the records of the assessee and that of the stock exchange. The ld. AR also drew our attention on pages 49 to 103 where scripts purchased by the assessee were shown by the ICMPL, though the same were never entered in the books of the assessee. Similarly the ld. AR drew our attention where the code of the assessee was modified by the ICMPL in respect of buy and sell transactions which are placed on pages 104 and 151 of the paper book. The no. of changes in the code were negligible in comparison to the total no. of transactions carried out by the assessee. Similarly the modification in the code of the client was negligible no. of times with ASSBPL. The necessary details are placed on pages 152 and 155 in the paper book.

We have carefully considered the arguments of both the sides and perused the material placed before us. The issue in the instant case relates to the disallowances made by the lower authorities for the amount of the losses claimed by the assessee. The reason for the disallowances of the losses was due to the modification of the client code. The AO believed the client code modification to be mala fide to escape the tax liability. However, on perusal of & CO 17/Kol/2017 A.Y. 2009-10 ITO Wd. 12(3), Kol. Vs. Amrabathi Inveestra Pvt. Ltd. Page 6 the records we find that client code modification was done negligible nos. of times whereas the total number of trade transactions are 3,11,866 only. Thus the client code modification is less than 1 per cent of the total trading transactions. The AO held the client code modifications to be mala fide with the intention to transfer the profit to other persons by modifying the client code so as to avoid the payment of tax. It is undisputed fact that the client code was modified fewer number of times and this fact was very much in the knowledge of the stock exchange. It is because that the information for the modification of the client code was gathered by the AO from the NSE which proves beyond doubt that the assessee has not modified any client code without informing to the NSE. Had there been mismatch in the code between the report submitted by the broker of the assessee and that of the NSE, the question/doubt on the genuineness of the transaction arise? Therefore, we are unable to find out any justification for the allegation of the AO that the client code modification was with the mala fids intention. When the client code was modified on the stock exchange without informing the same day then it can be inferred there is some mala fide 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 online on the stock exchange, in our opinion, there was no basis or justification to hold the transaction to be bogus.

In the result, appeal of Revenue stands dismissed and that of assessee’s CO is allowed.