SMT. SHITAL S.BAVISHI,KOLKATA vs. D.C.I.T.-CIR-54, KOLKATA, KOLKATA

The only issue that arises for consideration in this appeal is as to whether the revenue authorities were justified in treating the share trading loss of Rs.8,98,857/- being loss on sale and purchase of 21500 Nos. of nifty futures, as not a loss attributable to transactions of sale and purchase carried out by the Assessee.

The Assessee is an individual. She derives income from acting as an agent of LIC policies. She also does dealing in shares and making investments in shares. For A.Y.2006-07 the assessee filed return of income on 31.10.2006 declaring a total income of Rs.54,34,680/-. The assesse had declared income under the head “income from ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 2 business” a sum of Rs.45,63,140/-. In arriving at the aforesaid income the assessee had set off losses on purchase and sale of shares to the tune of Rs.10,21,650/-. The break-up of the aforesaid loss which is on account of dealing in derivatives is given as Annexure to this order. Out of the above we are concerned in this appeal with loss of Rs.8,98,860/- which is claimed to have been incurred by the assessee in the matter of dealing in 21,500 numbers of Nifty Futures.

The Assessee had first sold 21500 nifty futures on 30.3.2006 as is evident from the contract note dated 30.3.2006 issued by the Assessee’s broker one M/S.Guiness Securities Ltd. The Assessee thereafter purchased 21500 nifty futures on 31.3.2006 as is evident from the contract note dated 31.3.2006 issued by the very same broker M/S.Guiness Securities Ltd. Both the contract note contain the trade number i.e., the trade number assigned for the transaction by the National Stock Exchange (NSE) in which the above transactions were claimed to have been carried out by the Assessee. As and when the transactions of purchase and sale are carried out in NSE against each trade number the code number of the person on whose behalf each trade is being carried out is also reflected. This is to ensure identity of the person on whose behalf the transaction is carried out in the NSE.

Any person who wants to carry out transactions in shares and stocks (capital market) has to do it only through a stock exchange for which he has to contact a broker or a sub broker registered with SEBI for carrying out your transactions pertaining to the capital market. A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange. For the purpose of engaging a broker to execute trades on behalf of client from time to time a client broker agreement is signed. Under this agreement the client agrees (is desirous) to trade/invest in the securities listed on the concerned ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 3 Exchange through the broker after being satisfied of brokers capabilities to deal in securities. The member, on the other hand agrees to be satisfied by the genuineness and financial soundness of the client and making client aware of his (broker’s) liability for the business to be conducted. In order to facilitate maintaining database of their clients and to strengthen the know your client (KYC) norms; all brokers have been mandated to use unique client code linked to the PAN details of the respective client which will act as an exclusive identification for the client. Trading member i.e., brokers would allot a Unique Client Code to the investor. The investor should place orders and ensure his trades are executed only in the Unique Client Code assigned to him. A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange.

In the present case, the AO wanted to verify whether the transactions of sale and purchase of 21500 nifty futures were in fact carried out on behalf of the Assessee. The AO made a reference to NSE for getting a confirmation regarding trading claimed to have been carried out by the assessee on the relevant dates. The information received from NSE was to the effect that in so far as 21,500 quantity of Nifty futures which were sold by the assessee on 30.03.2006 and corresponding purchase was made by the assessee on 31.03.2006, the client code reflected against the trade number of the above transactions were in fact not the client code of the Assessee but that of four entities namely True Sure Merchant Pvt. Ltd, Nishi Gambhir, Guiness Commodities Pvt. Ltd., and Guiness Securities Ltd. The letter of NSE dated 28..8.2013 in this regard is at page-23 & 24 of the Assessee’s paper book. The above facts are not in dispute before us. The plea of the Assessee is that she has no control over what client code is given by the broker when he executes the contract at the instance of the Assessee and that no conclusion can be drawn that the Assessee did not carry out transactions just because those transactions are carried out with the client code of someone else and not the Assessee’s client code.

The above plea of the Assessee was rejected by the AO for the following reasons: -Smt. Shital S.Bavishi A.Y.2006-07 4 “As regards the assessee's claim of loss purported to have been made through sale contracts of 21500 quantity of Nifty on 30th march, 2006 with corresponding 'buy' contract of made on 31.03.2006, the same cannot be allowed as the said contracts were never made on behalf of the assessee as per the information received from National Stock Exchange of India Ltd. In this connection the assessee vide her letter dated 31.12.2008 contended that she made bonafide transaction through her broker with whom only she had interaction and not directly with NSE. She was, therefore, not to be made liable “for any mistake in the back office of the broker, if at all”. On this submission of the assessee, I have, without making any comments on the bonafides of the actions of the parties involved, only to say that the assessee's remedy lies in taking up the matter with the supervising agencies of stock market transactions. The department of revenue would have only to follow the prescribed procedure in computing the profit or loss or in allowing a claim in respect of stock market transactions. A claim in respect of transactions which have now been established to have never been made at all cannot be allowed in computing the profit or loss of the assessee by the department of revenue. Therefore the loss claimed at Rs. 918082/- in respect of transactions in Nifty is being restricted to 32443/- only as discussed in the preceding paragraph.”

For the above reasons the AO refused to allow the claim of loss on derivative trading in Nifty Futures as loss of the Assessee.

Aggrieved by the order of the CIT(A), the Assessee preferred appeal before CIT(A). The CIT(A) was of the view that the Assessee has obtained loss in connivance with the Stock Broker, Guiness Securities Ltd to reduce her taxable income. The CIT(A) was also of the view that to give legitimacy to the transactions payments have been shown to have been made through banking channels and that cash was returned back by the broker, after keeping their commission, which is the normal modus-operandi in any sham transaction. It was the plea of the Assessee before CIT(A) that she has been regularly doing transactions in shares whether it be delivery based or in Derivatives. That maximum of transactions of shares and derivatives were done through M/s. Guiness Securities Ltd. a reputed share broker. That the broker has issued contract notes wherein the transaction under s scanner are duly reflected and the contract notes reflect all particulars as required by SEBI. That since the broker has complied with all the formalities and the transactions are duly reflected through the contract notes the assessee has believed that the transactions are duly reported to the Stock Exchange. The assessee does not have access ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 5 to the Stock Exchange and it is even not possible to verify each and every transaction with the stock exchange. That the transaction of loss in derivative is not the only transaction by the assessee and that too with the broker with whom regular transaction of share and derivatives are carried out. Moreover the payment was duly made by cheque and is duly reflected in the ledger of the assessee. The transactions are not isolated transactions. The departmental Inspector has visited the office of broker and has verified the transactions carried out by the assessee with the broker as evident from the report dated 12.7.2011 and has verified that the book entries of the transactions in question exist in the brokers books of accounts as well. That the broker has certified all contract notes and also issued a certificate for genuinity of the transactions and confirming that the transactions are duly reflected in National Stock Exchange. That the assessee has complied with all formalities on her part so as to claim the loss in transactions of derivatives being carried out in a Notified Stock Exchange as per section 43(5} (d) of the Income Tax Act,1961(Act). That a member of stock exchange, acting as a broker is responsible for documentation between stock exchange about transactions carried and executed by him on behalf of its clients. The client who purchase or sell securities through broker generally does not have any direct responsibility to stock exchange. That if there is any discrepancy in documents or reports submitted by stock broker to stock exchange, the client cannot be held responsible and any adverse inference should not be drawn against her. That in case a stock broker fails to comply with documentation requirement with stock exchange, his client cannot be held responsible. That was a matter between the stock exchange and its member. For failure of member of NSE in any manner about documentation or reporting a client of broker cannot be penalized. That the chain of transaction entered into by the assessee have been proved, accounted for, documented and supported by evidence It cannot be said that the assessee has obtained the loss in connivance with the stock broker. If that be so than all the transactions of the derivatives would not have matched in the stock exchange. This is a case of gross negligence on the part of the broker for passing exact information to the exchange. -Smt. Shital S.Bavishi A.Y.2006-07 6

The CIT(A) however did not agree with the submissions made by the assessee. He held that if the assessee claims loss on account of transaction, the onus is on her to show it was an eligible transaction carried out through stock broker on a recognized stock exchange supported by the documents in which unique client identification number tallies with the transaction as recorded in the stock exchange and that of the contract note issued by the broker. According to the CIT(A) this was the requirement for claiming a loss on trading in derivatives as a normal business loss under the provision of section 43(5)(d) of the Act. The CIT(A) was of the view that in the light of the reply received from NSE taking a stand that the client code as reflected in the contract note issued by the broker and client code as available with the exchange were different, the CIT(A) was of the view that the transactions which resulted in loss cannot said to be carried out by the broker on behalf of the assessee. According to him these transactions were carried on by the broker on behalf of some other person and the assessee cannot claim such loss as assessee’s loss. The CIT(A) further made reference to Securities and Exchange Board of India (Prohibition of Fraudulent & Unfair Trade Practices relating to securities market) Regulations 2003 and expressed the view that false contract notes issued by the broker can only mean that the transaction allegedly to have been carried out in the contract note was a fraudulent transaction. The assessee had placed reliance on the decision of ITAT, Kolkata Bench in the case of Kedar Nath Agarwal in order dated 9.4.2010. The CIT(A) held that the facts of the aforesaid case were different from the case of the Assessee for the following reasons :- “The facts on which the Hon’ble ITAT relied upon while dismissing the department's appeal in the cited case were as under: (i) In this case the shares were purchased and were entered in the Demat account of the appellant. In the present case there is no dispute of the fact that the futures and options trading were not carried out in the name of the appellant. Being a F&O transaction it could not be entered in DEMAT account. (ii) Unlike in the cited case the connivance of the assessee with the broker is evident from the fact that even after being aware of the fraudulent transaction for last several years, the appellant has taken no steps for recovering his money from the broker. On the other hand, the assessee had gone on to defend the conduct of the broker by raising several legal arguments which could only be disproved by making repeated enquiry from NSE, ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 7

Aggrieved by the order of CIT(A) the assesse has preferred the present appeal before the Tribunal.

We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. Counsel for the assessee reiterated the submission as were made before CIT(A). He also made submissions that there can be no motive for the assessee to claim loss in trading of the derivatives because the assessee was declaring positive income and paying taxes thereon. The ld. Counsel for the assessee also made submissions that in the remand proceedings before the AO pursuant to the directions of CIT(A), the AO has himself given a clean chit to the assessee. In this regard our attention was drawn to the remand report of the AO filed before CIT(A) which is as follows :- “Necessary investigation was also made from the office of the Stock Broker – M/s. Guiness Securities Ltd. Register for ‘Contract Notes ‘ and relevant ‘Sauda Register' were verified by the ITI, deputed for the purpose (copy enclosed as Annexure- A). Nothing unusual or irregularities has been noticed by the ITI, The Authorities of M/s. Guiness Securities Limited had not only confirmed the Share future transactions, involving the assessee, but also confirmed that the relevant 'Contract Notes' doted 31.03.2006 were generated through the 'Systems' of the NSE. It has been gathered that a 'Buy' and 'Sale' transactions (involving Share future derivatives) in the record of the NSE is automatically squared off on the last day of the trading session, in case, no reverse transaction is done. In that event resulting log entries are accounted for against the concerned Share Broker. The Broker con get the print out of the transaction details from the 'Systems' of the NSE and subsequently assign the transactions to their different clients. Verification was separately mode from the Notional Stock Exchange of India Limited (kindly refer Annexure-B) The Vice- President, NSE had replied on 28.09.2011 and nod commented on the queries made to the NSE (kindly refer Annexure-C) Vide point No. 3 & ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 8

According to him therefore the loss in question ought to have been allowed by CIT(A) as a genuine business loss. The ld. Counsel filed before us a copy of the order of the Hon’ble Bombay High Court in WP No.2627 of 2016 order dated 23.11.2016 in the case of M/s. Coronation Agro Industries Ltd. Vs DCIT wherein the Hon’ble Bombay High Court took a view that variation in the client code in the contract note of the broker and that available with the exchange at the time of trading cannot form the basis to conclude that there was any escapement of income. The ld. DR relied on the order of CIT(A).

We have given a very careful consideration to the rival submissions. It is not in dispute before us the client code of the assessee is S016 and the client code as recorded in the Stock Exchange in respect of the transaction sale and purchase of 21500 Nos. of the derivatives of Nifty Futures in respect of which the assessee claimed loss, contained a different client code which relates to four entities namely True Sure Merchant Pvt. Ltd, Nishi Gambhir , Guiness Commodities Pvt. Ltd and Guiness Securities Ltd.. Therefore as per the client code available with the exchange it is only these four entities/persons who had carried out the transactions which had resulted in loss of Rs.8,98,860/- claimed by the assessee as loss on her own trading in Nifty Futures.

As we have already seen the plea of the assessee that the brokers have wrongly punched a different client code instead of a bona fide assessee’s client code and therefore no adverse view should be taken against the assessee. In this regard as rightly pointed out by the ld. DR that there is a procedure devised by the NSE whereby after the conclusion of the trading session on a particular day to rectify any error in the client code. The ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 9 concerned broker has to intimate the exchange about any change in the client code. Such modification is permitted only when there are bona fide errors. In such an event the exchange also carries out the correction in the client code as per his records. The procedure is designed to ensure the identity of the persons on whose behalf transactions are carried out in the stock exchange. Admittedly such a course had not been adopted in the present case. In such circumstances the conclusion of the revenue authorities that the assessee did not establish that the loss in sale of Nifty fortunes derivatives had in fact not been incurred by the assessee is a correct conclusion.

Client code modification means modification of client code after the execution of trade. The stock exchange provides a facility to modify the client code to rectify an error. Further only the genuine errors will be modify and after being transferred to ‘Error Account’. The modification should be done within the Stock Exchange guidelines. The modification of client code is to be done only in exceptional cases and not in routine case. The following trades shall be modified/ allowed to be modified and shall be treated as genuine error and transferred to Error Account. I. Punching error / typing error of client codes due to any genuine error or mistake in order entry, while punching the order, by any of dealer. II. Trade entered for wrong client due to any miscommunication from the client /authorized representative of the client. III. Client code/name and modified client code/name are similar to each other but such Modifications are not repetitive. IV. Family Code (spouse, dependent parents, dependent children and HUF) V. Institutional trades modified to broker error/pro account. Example of Genuine Error: The criteria for determining the genuineness of client code modification are as follows: Client code FA 1234 wrongly entered MN5678 would be constructed as intentionally¬ committed whereas FA1234 entered as AF 1234 or FA 2341 may be a genuine punching error. -Smt. Shital S.Bavishi A.Y.2006-07 10

The learned DR submitted before us that the Central Board of Direct Taxes (CBDT) had issued a circular alerting the exchanges about tax evasion through change in client codes. CBDT has also asked the exchanges to furnish data of changes to client accounts in the recent past and in futures. Following, CBDT’s concern, the Securities and Exchange Board of India (SEBI) too decided to impose penalty on brokers who indulged in unnecessary changing of client codes. In this regard it is also noticed that SEBI has issued a circular dated 05.07.2011 in which modification is allowed in the client code number after following strict objective criteria besides levying penalty on the trading member who commits such mistakes. Later on the SEBI vide Circular No.21.10.2014 has discontinued the practice of allowing modification of client code number in proprietory trades. It is also pertinent to mention that the guidelines for modification of client code number after the conclusion of the trading was made keeping in mind the practice of the brokers by modifying the client code ultimately shifted the profit or loss in trading transaction from x to y. Keeping in mind all the above facts we are of the view that the assessee has failed to establish that the transactions resulting in loss which was claimed as a business loss resulting in trading opened on behalf of the assessee.

We however wish to add that the CIT(A) has alleged fraud on the part of the assessee in making the aforesaid claim of loss. In our view this conclusion of CIT(A) is baseless. The assessee has all along been contending that it was a mistake of the broker for which he should not be penalized. There is no material or evidence to show that the assessee had fraudulently claimed the loss in question as her loss. In other words the assessee has not proved that the transactions in question were transactions carried out by her nor has the revenue proved by positive material that these transactions were in fact carried out by some other persons and by merely changing the client code the loss in question has been attributed as that of the assessee. It is a case where the factum with regard to the loss in question is neither “been proved” nor “disproved” but remained “unproved”. With these observations, we uphold the order of CIT(A) and dismiss the appeal of the assessee. We may also add that since the loss in question has been held to be not the loss of the ITA No.2875/Kol/2013-Smt. Shital S.Bavishi A.Y.2006-07 11 assessee, the question of the trading said loss as speculative loss does not arise for consideration at all.

In the result the appeal of the assessee is dismissed.