Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax, ... vs Shri Gyandeep Khemka, Jaipur on 23 October, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 695/JP/2018
fu/kZkj.k o"kZ@Assessment Year : 2009-10
Dy. Commissioner of cuke Gyandeep Khemka,
Income Tax, Vs. 30, Khemka House, Kishan Nagar,
Central Circle-4, Jaipur. Shyam Nagar Extn., Janpath,
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGBPK 0640 F
vihykFkhZ@Appellant izR;FkhZ@Respondent
izR;k{[email protected]. No. 15/JP/2018
(Arising out of vk;dj vihy la-@ITA No. 695/JP/2018)
fu/kZkj.k o"kZ@Assessment Year 2009-10
Gyandeep Khemka, cuke Dy. Commissioner of
30, Khemka House, Kishan Nagar, Vs. Income Tax,
Shyam Nagar Extn., Janpath, Central Circle-4, Jaipur.
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGBPK 0640 F
izR;k{ksid@Objector izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Shri Varinder Mehta (CIT-DR)
fu/kZkfjrh dh vksj l@
s Assessee by : Shri Bhupendra Shah (CA).
lquokbZ dh rkjh[k@ Date of Hearing: 17/09/2018
mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 23/10/2018
vkns'k@ ORDER
PER: VIJAY PAL RAO, J.M.:
The appeal by the revenue and cross objection by the assessee are directed against the order dated 06/02/2018 of ld. CIT(A), Kota for the A.Y. 2009-10.2 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
2. First we take up the appeal filed by the department wherein the revenue has raised following grounds of appeal:
"Whether on the facts and in the circumstances of the case and in law the Ld. CIT (A) is justified is as under: -
1. "Whether on the facts and in the circumstances of the case, the CIT(A) was justified in quashing the reassessment order u/s 147 of the IT Act when the notice u/s 143(2) of the IT Act dated 14.06.2016 was duly issued and served and is available on record."
2. "Whether on the facts and circumstances of the case and in law', the CIT(A) is justified in deleting the additions of transfer out of ascertained profits amounting to Rs. 3,50,99,887/- and transfer in of ascertained losses amounting to Rs. 1,94,602/- and commission payment of Rs. 7,05,890/- for obtaining accommodation entries of transfer in and transfer out of losses and profits merely by observing that assessee himself was not a brokers."
3. "Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the additions by observing that the additions were not based on any sound footing but were based on theory & assumption when the transaction initially punched in the client code of the assessee were edited as many as 1354 times during the relevant financial year clearly ruling out the possibility of any genuine error,"
"The Appellant crave, leave or reserving the right to amend modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."
3. Ground No. 1 of the appeal is regarding quashing of reassessment for want of notice U/s 143(2) of the Income Tax Act, 1971 (in short the Act). The assessee is individual and filed his return of income on 26/09/2009 declaring total income of Rs. 1,24,88,210/-. The original assessment was completed U/s 143(3) of the Act on 24/11/2011 on a total income of Rs. 1,26,22,900/-. Subsequently, the Assessing Officer 3 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka reopened the assessment by issuing notice U/s 148 of the Act on 31/3/2016. In response to the notice U/s 148, the assessee filed return of income on 17/5/2016 declaring total income of Rs. 1,24,85,210/-. The assessment was finalized U/s 143(3) read with Section 147 of the Act on 16/12/2016 whereby the Assessing Officer made addition of Rs. 3,52,94,479/- on account of transfer of profits under Client Code Modification by brokers in respect of transactions carried out on National Stock Exchange (NSE). The Assessing Officer has also made an addition on account of commission @ 2% on the said amount, which comes to Rs. 7,05,890/-.
4. The assessee challenged the action of the Assessing Officer before the ld. CIT(A) and raised various grounds including the validity of the reopening as well as the reassessment framed by the Assessing Officer. The ld. CIT(A) held that the reassessment order passed by the Assessing Officer is invalid for want of notice U/s 143(2) of the Act.
5. Before us, the ld CIT-DR has submitted that the ld. CIT(A) has quashed the reassessment order on assumption of wrong facts without verification of the record. The ld. CIT(A) has not gone into the assessment record but has decided the issue merely on the basis that the assessment order does not mention the notice issued U/s 143(2) of the Act. The ld DR has produced the assessment record and submitted that a notice U/s 143(2) of the Act was duly issued by the Assessing Officer on 4 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka 14/6/2016 and therefore, there is no illegality in the reassessment order passed by the Assessing Officer so far as the notice issued U/s 143(2) of the Act is concerned.
6. On the other hand, the ld AR of the assessee has submitted that the assessment order does not mention issuance of notice U/s 143(2) of the Act and further the Assessing Officer issued a notice U/s 142(1) of the Act on 03/6/2016, a copy of which is placed at page No. 32 of the paper book. Then how the Assessing Officer can issue a notice U/s 143(2) of the Act subsequent to the notice U/s 142(1) of the Act. He has relied upon the decision of the Hon'ble Supreme Court in the case of ACIT Vs. Hotel Blue Moon 321 ITR 362. He has supported the order of the ld. CIT(A) on this issue.
7. We have considered the rival submissions as well as relevant material on record. There is no dispute that the order passed by the Assessing Officer without issuing notice U/s 143(2) of the Act is invalid as the same would amount to passing the assessment order without jurisdiction. Section 143(2) of the Act confers the jurisdiction to the Assessing Officer to pass the scrutiny assessment. Section 143(2) of the Act is an essential condition before completion of assessment U/s 143(3) of the Act. Therefore, once a return has been furnished by the assessee, the Assessing Officer, if considered it necessary or expedient to ensure that the assessee has not understated the income or has not computed 5 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka excessive loss or has not under paid the tax shall serve on the assessee a notice requiring him to attend the office of the Assessing Officer or to produce any evidence in support of the return. Therefore, before making an addition or disturbing the returned income, it is mandatory to serve a notice U/s 143(2) of the Act to given an opportunity to the assessee to appear before the Assessing Officer or to produce the evidence in support of the return. Thus, the service of notice U/s 143(2) is required only when the assessee files return of income. In the case in hand, though, the Assessing Officer has not mentioned in the reassessment order passed U/s 143(3) read with Section 147 of the Act about the notice issued U/s 143(2), however, on our direction, the ld DR has produced the assessment record which contains a notice issued U/s 143(2) of the Act on 14/6/2016 and in response to the said notice, the assessee made appearance before the Assessing Officer on 04/7/2017. There is no dispute that a notice U/s 142(1) of the Act was issued by the Assessing Officer on 03/6/2016, which is prior to the notice issued U/s 143(2). However, there is no precondition for issuing notice U/s 142(1) of the Act and a prior notice U/s 143(2) is to be issued. Even in case when the assessee has not filed the return of income within due date prescribed U/s139(1) of the Act, the Assessing Officer can issue a notice U/s 142(1) calling upon the assessee to file return of income. Even otherwise the notice issued U/s 142(1) of the Act on 03/6/2016 would 6 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka not render the notice issued U/s 143(2) on 14/6/2016 invalid. It may be a case of vice versa. Since the assessee filed return of income on 17/5/2016, therefore, the notice issued U/s 142(1) prior to U/s 143(2) of the Act is at the most an invalid notice U/s 142(1) but it will not affect the validity of notice issued by the Assessing Officer U/s 143(2) of the Act on 14/6/2016 when the said notice was within the period of limitation. We further note that after the issuance of notice U/s 143(2), the Assessing Officer again issued a notice U/s 142(1) of the Act on 22/11/2016, therefore, the requirement of the provisions of Section 143(3) of the Act are satisfied in this case so far as the assumption of jurisdiction by the Assessing Officer to initiate scrutiny assessment. We note that the ld. CIT(A) has not ascertained the fact of notice U/s 143(2) was issued or not but he has simply assumed the fact that no notice was issued as it was not mentioned in the assessment order. The relevant part of the ld. CIT(A)'s order is as under:
"In the course of the appellate proceedings, the A/R has also cited the case law in Hotel Blue Moon wherein Hon'ble Apex Court has held that no assessment could be made without issue of notice U/s 143(2). In the present appeal it is seen that although notice U/s 148 & 142(1) were issued, there is no mention of issue of notice U/s 143(2) any time before the completion of the reassessment proceedings.
Thus, in so far as the validity on the non issue of notice U/s 143(2) before the close of the reassessment proceedings is concerned, I am in agreement with the appellant that this constituted a fatal error towards upholding the validity of reassessment proceedings.7 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka This issue has been dealt by several highest judicial authorities and the opinion in this regard is summarized in a few orders ratios/extracts of which are quoted below:-
.........................................
On this ground, the reassessment cannot be considered as a valid one and is liable to be quashed."
Thus, apart from the above observation, the ld. CIT(A) has not given any finding of fact on this issue and quashed the reassessment by following the various decisions on legal issue. Once the notice U/s 143(2) of the Act was issued by the Assessing Officer as it is part of the assessment record then we do not find any defect or illegality in the reassessment order so far as the requirement of notice U/s 143(2) of the Act is concerned. Hence, we set aside the impugned order of ld. CIT(A) qua this issue. This ground of revenue's appeal is allowed.
8. Grounds No. 2 and 3 of the appeal are regarding the addition made by the Assessing Officer on account of Client Code Modification by the brokers in respect of the transactions carried out at stock exchange and commission on the said amount, which was deleted by the ld. CIT(A).
9. The ld. CIT-DR has submitted that as per the investigation done by the Directorate of I&CI, Mumbai as well as Directorate of Ahmadabad, it was found that fictitious profits and losses were created by some brokers 8 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka by misusing the Client Code Modification facility in F & O segment on NSE. The ld DR has referred to the assessment order and submitted that the Assessing Officer has given detailed commentary as to how the Client Code Modification is done by the brokers at the stock exchange. Client Code is a unique code which is assigned by the broker to its clients and one code is issued to each client, therefore, no client of a broker can have more than one code. The SEBI vide circular No. 39 of 2001 dated 18/07/2001 made it mandatory for all brokers to use unique client code for all clients. In case of any genuine mistakes, a client code is permitted to be changed after execution of trades, however, this permission is given only in exceptional cases of genuine mistakes to be rectified. Thus the purpose of Client Code Modification permission given to the broker is to rectify human error when a client inadvertently provides a wrong code or a wrong code is punched by the broker while executing trade. The broker is allowed to change the client code after trade is executed between 3.30 P.M. to 4.000 P.M. and this permission and facility to rectify a genuine error which might have occurred while entering the code. During the investigation, it was found that the certain brokers are misusing this facility for the purpose of other than genuine errors. The Client Code Modification facility was being misused and brokers transferred gain or loss from one person to another by changing the code in the garb of correcting the error. In the case of assessee, there 9 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka are multiple edits in the client code which has resulted shifting of profit of Rs. 3,52,94,489/- from the assessee's account. The ld DR has submitted that as many as 97 incidents of client code modification whereby the profits were shifted from assessee's account to these 97 parties in the garb of Client Code Modification after execution of trades and therefore, it cannot be a genuine mistake for which this facility is allowed by the SEBI and stock exchange. The Assessing Officer has given the details of all 97 persons in whose favor the profits were shifted total amounting to Rs. 3,50,99,887/-. Further the profit to the tune of Rs. 1,94,602/- was also shifted in respect of the three other persons. Thus, a total instances of shifting of profit is 100 in the case of the assessee. Thus, the Assessing Officer has established a case that the assessee has misused the facility of Client Code Modification and has shifted out of income of Rs. 3,50,99,887/- to various parties and also shifted in losses of Rs. 1,94,602/- from three parties and in this way it has reduced its taxable income of Rs. 3,52,94,489/-. The Assessing Officer has rightly considered 2% commission on all those transactions and computed the said amount of commission paid at Rs. 7,05,890/-. Hence, the ld DR has submitted that the modus operandi of involvement of misusing the Client Code Modification by the brokers from one client to another client to avoid the tax is clearly brought out by the Assessing Officer and the case of the assessee is nothing but shifting of profit by misusing the said 10 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka facility of Client Code Modification in connivance with the brokers and in some cases, the loss of the other parties were also shifted to the assessee. Thus, it is both ways the assessee has reduced its taxable income. He has relied upon the order of the Assessing Officer.
10. On the other hand, the ld AR of the assessee has submitted that the assessee has no direct excess to the stock exchange terminal and all transactions are being carried out by the brokers. For the year under consideration, even the KYC norms were not formulated and finalized. The KYC was not mandatory for the assessment year under consideration as it was made mandatory vide circular dated 29/07/2011, this cannot be applied for the year under consideration. Even otherwise as per the said circular it is only the broker who has got terminal and excess to the exchange mechanism and authorize to change the code in case of punching error. The changes are as per the exchange norms and SEBI circulars. The ld AR has submitted that as per the NSE/SEBI circular dated 29/07/2011, which has been issued in pursuant to the SEBI circular dated 05/7/2011 allows 5% error margin regarding modification of client code for non-institutional trades subject to penalty of 1% and if the error margin is more than 5% then the penalty is 2% of turnover value. Thus, the modification is permitted even after the said circular which allows 5% error and assessee's error percentage is only 0.47%. Though, prior to the said circular, there was no provision of penalty. 11 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka However, even under the provisions of the said circular it permits the modification of client code in respect of error up to 5%, thus the client code added in the case of the assessee is less than even ½% then the said cannot be considered a non-genuine mistake when the SEBI and NSE permits the error margin of 5% in wrong punching of codes. The Assessing Officer has not conducted any independent enquiry while making the addition in the reassessment but has solely relied upon the reports of the DIT(Inv.). Despite the specific request made by the assessee, the Assessing Officer refused to allow the cross examination of the brokers whose statements were allegedly recorded by the Investigation Wing and relied upon by the Assessing Officer. Even notice U/s 133(6) or 131 of the Act were not issued by the Assessing Officer despite the specific request made by the assessee. The ld AR has referred to the details of the correct figures of Client Code Modification in the case of assessee at 499 which is only 0.47%. Thus, once the error is within the limit of the reasonable margin as per the NSE/SEBI circular dated 05/7/2011 and 29/07/2011 and then such an error which is rectified by the brokers as per the facility of Client Code Modification cannot be held as misuse and bogus transactions. The ld AR has pointed out that the modification of client code is allowed which is to correct the mistakes and the transactions carried out on behalf of a particular client should not be recorded in the account of the other client and therefore it 12 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka is the rectification exercise which corrects the transaction in the hand of the client on whose behalf the trade is executed. In support of the contention he has relied upon the following case laws:
(1) ITA No. 911/JP/2016, M/s Noble Securities Vs ITO, order dated 23/03/2017.
(2) ITA Nos. 3498 & 3499/Mum/2012, ITO Vs M/s Pat Commodity Services P. Ltd., order dated 07/08/2015.
(3) IT(SS) Nos. 615 to 618/Ahd/2010 alongwith bunch of cases, ACIT Vs. M/s Kunvarji Finance Pvt. Ltd. & other assessees, order dated 19/03/2015.
(4) IT(SS)A No. 92 & 93/Ahd/2011, ACIT Vs Shri Amar Mukesh Shah, order dated 30/09/2015.
(5) ITA No. 2750/Del/2017, ITO Vs M/s Abhishek Fincap, order dated 13/09/2017
11. We have considered the rival submissions as well as relevant material on record. We note that the Assessing Officer has reopened the assessment on the basis of the information in the shape of the report of the Investigation Wing of Mumbai and Ahmadabad. There is no dispute that the assessee has done trade at stock exchange through the stock broker M/s C.M. Goyenka Stock Brokers Pvt. Ltd. and during the year under consideration, there were various instances of Client Code Modification whereby certain transactions were executed in the name of the assessee, were subsequently modified as to the other clients of the said broker. This modification was done as per the norms of the stock exchange which allows the brokers to carry out necessary Client Code 13 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka Modification after execution of the trade but in a limited period of ½ hour. This facility is no doubt provided to the brokers to rectify the genuine mistakes committed in typing the wrong codes or the mistakes in punching the client codes at the time of trade transactions on the stock exchange. Thus, in simple words, the Client Code Modification facility allows the broker to correct the mistakes which are committed during the course of doing the trade on behalf of the various clients. There may be some instances of misusing this facility by the brokers but it cannot be done by the broker on regular basis as the broker is bound to carry out trading transactions as per the instructions of the client and therefore, until and unless all three parties are hand in gloves or in connivance, such misuse of Client Code Modification facility cannot be done by a broker. Therefore, all three parties are required to have common intention and design which in normal course is not possible when they are not related parties as the time limit to modify the client code is very limited after execution of trade/transaction at the stock exchange. The meeting of three minds is essential for misusing this facility and doing this mischievous transfer of profits from one hand to another hand. Until and unless two clients and broker are on the same page and involved in doing this mischievous act by misusing the facility of Client Code Modification such transactions are not possible when the parties are not related to each other party and are independent clients of 14 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of ½ hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and are closely related party. These transactions are even otherwise cannot be predesigned or planned as it can be done only after transaction is executed on the stock exchange and subsequently once the result and outcome of the transaction is known to the parties, the same can be shifted from one client to another client to serve the interest of parties. Prior to the execution of the transaction, it is not possible to conceive or preconceive the transfer of the transaction from one account to another account. We note that the Assessing Officer has not conducted any enquiry in this matter but has passed the assessment order based on the report of the Investigation Wing. The assessee has specifically raised objection and demanded cross examination which was denied by the Assessing Officer in para 4.8 of the assessment order as under:
"4.8 The Ld. A/R also contended for cjcross examination of brokers u/s 131 by placing reliance upon certain case laws and requested for providing relied upon documents viz. statements etc. The relied upon details 15 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka were provided from time to time to the Ld. A/R during the course of hearing and the modus operandi was discussed in detail. The Ld. A/R was also made aware of the Hon'ble Supreme Court judgment in the case C Vasantlal & Co. V/s CIT 45 ITR 206(SC) (3 Judge Bench) wherein the Apex court had observed that "...the ITO is not bound by any technical rules of the law of evidence. It is open to him to collect material to facilitate assessment even by private enquiry. But, if he desires to use the material so collected, the assessee must be informed about the material and given adequate opportunity to explain it..." The statements were material on which the I.T. Authorities could act provided the material was disclosed and the assessee had an opportunity to render their explanation in that regard.
Further, the Ld. A/R was made aware of Hon'ble Supreme Court decision in the case of Dhakeshwari Cotton Mill Ltd. Vs. CIT reported at 26 ITR 775 wherein Hon'ble Supreme Court held that right to cross examine is not absolute and that the requirement of law for valid assessment would be met if all the evidence collected which is to be used against the assessee while framing the assessment order is placed before Tie assessee and given opportunity to rebut the evidence. Here, it is also worth to state that the share brokers u/s 131(1A) in Mumbai is not sole basis for reopening the case, there is material and circumstantial evidences which prove that assessee was indulged in misuse of CCM facility. All the material including trade data has been provided to the ld. A/R on 30/11/2016 itself."
Thus, when the assessment order is based on the report of the Investigation Wing without any fresh and independent enquiry conducted by the Assessing Officer and the report of the investigation wing in turn is based on the statement of the brokers then without giving the opportunity to the assessee to cross examine the brokers whose 16 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka statements were recorded by the Investigation Wing it would amount to violation of principles of natural justice. Though, the cross examination may not be an absolute right but once statement is recorded in the back of the assessee and is being used against the assessee then the order passed by the Assessing Officer based on such statement is not sustainable in absence of cross examination. The Hon'ble Supreme Court in the case of Amdaman Timber Industries Vs CCE 127 DTR 241, while dealing with the issue of non-grant of opportunity to cross examine the witness has held as under:
"5. We have heard Mr. Kavin Gulati, learned senior counsel appearing for the assessee, and Mr. K. Radhakrishnan, learned senior counsel who appeared for the Revenue.
6. According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex- factory prices remain static. It was not for the Tribunal to have guess 17 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.
7. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross- examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions.
8. In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice."
Accordingly, the order of the Assessing Officer is not sustainable when the assessee was not granted an opportunity to cross examine the brokers. In the case in hand, the Assessing Officer has not given any finding that the assessee and the other parties in whose account, the transactions are treated as transfer of profit are in collusion alongwith the broker. There is nothing on record or any fact or finding by the Assessing Officer to suggest that the assessee and the other parties as well as the brokers are in collusion to carry out these transactions of transfer of profit from the account of the assessee in the accounts of 18 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka other parties by misusing the client code modification facility. Therefore, even if the broker might have involved in such mischievous practice but to make such addition in the hands of the assessee it is necessary to establish that the assessee and the other parties alongwith brokers are in collusion. Further there should also be exchange of money between the parties as a consideration for such a transfer of profit. Even otherwise when it is not found that originally these trades were carried out by the broker as per the instructions of the assessee and subsequently these were transferred in the account of the other persons to shift the profit. 11.1 We note that this issue of rectification of the error by using the Client Code Modification facility has been considered and decided by this Tribunal in the series of decisions as relied by the assessee. The Coordinate Bench of this Tribunal in the case of Nobel Securities Vs ITO (supra) has also considered an identical issue in para 3.1 to 3.4 as under:
"3.1 Apropos Ground No. 2 and 2.1 of the assessee, the facts as emerges from the order of the ld. CIT(A) is as under:-
5.3.1. I have gone through the assessment order as well as submissions made by the appellant. Following facts have emerged.
1. That the appellant is a partnership firm engaged in the business of trading in share.
2. That the firm is doing trading on its own behalf and on behalf of its clients.
3. That on the basis of an information received from Directorate of Income Tax (Intelligence & Criminal Investigation) that the appellant had booked a loss of Rs. 27,63,104/- due to modification made by the assessee in F& O segment to the third parties through the Client Code Modification facility.19 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
4. That the AO had reopened the case u/s 148 of the Act by duly recording the reasons
5. That the detail of reopening was provided to the assessee on 17-04- 2015.
6. That the assessee firm had raised objections to the reopening proceedings. The objections were duly considered by the AO and a written order disposing the petition of the assessee was passed and served to the assessee.
7. That it was found by the authorities that the firm was found using client code modification facility in F&O segment on NSE during the year under consideration. By doing this, it is alleged that fictitious losses and profits were transferred to its clients.
8. That the appellant has claimed that it was a genuine mistake on the part of its staffs to have punched firm's code instead of its client's code. And that later on when such a mistake was noticed the same was deleted by deleting the trading from the firm's code and credited to the client's code.
9. That the appellant has further submitted that the mistake was done at the broker's level and the firm should not be held responsible for mistake committed by the brokers.
10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session.
5.3.2 I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artistic Finance (P) Ltd. to modify the client code and book it in the name of the other clients of M/s. Noble Securities. Thus, the transactions which were earlier made in the name of the appellant were transferred to third parties. The appellant has claimed that the purchases were wrongly done in the name of M/s. Noble Securities inadvertently punching its client code and that subsequently it was rectified by the brokers within time allowed by the exchange. So the whole submission of the appellant is hinged upon the inadvertent mistake of the staff in punching the wrong client code i.e. client code of the appellant instead of client code of its clients. However, the appellant's claim, to my mind, is hollow as clearly made out by the AO in the assessment order that such modifications are done 2380 times involving 55 clients over a period of 197 days during the year under consideration. Mistake cannot be repeated so brazenly 20 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka over such a number of times. Even if the end of the session, still the facility cannot be allowed to be manipulated for undue gains and create a situation where the income/loss can be diverted. In this regard, I have also taken into account the Apex court judgement in the case of Mcdowell & Co. Ltd. It is worthwhile to quote from the landmark judgement as under:-
''Misra,J. who delivered judgement on behalf of himself and three other Judges (other than Reddy. J.) extracted the following observation from the judgement of Gujarat High Court (ITR pp 200- 01) in the case of CIT vs. Sakarlal Balabhai (affirmed by the Supreme Court in CIT vs. Vadilal Lallubhai): (SCC 253-54, para 43) ''Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoid payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available foruse and enjoyment to the assessee's as in a case falling within Section 44-D or mask the true character of the income by disguising it as a capital receipt as in a case falling within Section 44-E or assume diverse other forms... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income-producing asset, so that the right to receive income arising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability: no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise''.
Then, Misra. J. responded: (SCC pp. 254-55, para 45)''45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'' In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F& O segment where loss and even income can be booked in clients favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such transaction can be transferred to client's account depending upon the client's requirement and thus real income from such transactions can be suitably compromised. Therefore, in view of the regularity with which such transactions have been effected, the AO is justified in rejecting the claim of the appellant and added such transaction in the hand of the appellant's income. Accordingly, the addition of Rs. 27,63,104/- is sustained. Appellant's ground of appeal on the issue is dismissed.'' 21 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka 3.2 During the course of hearing, the ld. AR of the assessee prayed for deletion of addition by filing the following written submission.
''1. It is submitted that the assessee is a trading in share business not in the capacity of broker but on its own account and for it clients. The assessee, itself, is a client of M/s Artistic Finance Pvt. Ltd which carried out transactions on behalf of the assessee and the clients of the assessee. Every client is assigned a unique client code which is punched in at the time of transactions. The AO issued notice u/s 131 to M/s Artistic Finance Pvt. Ltd. who vide letter dated 05.03.2016 (PB 37-38) explained that the assessee is its major client and provides them with a huge volume of transactions. The operating staff who are not well qualified, to save time had prefixed the client code of the assessee in the system as default which led to error in punching of client codes at the time of transactions. To rectify the error in punching of client code, a facility known as 'Client Code Modification (CCM)' is provided by the stock exchange till 4:15 PM of the trade day itself. This can be done on only written request of the clients (Copies of letters enclosed at PB 39- 46).
2. It is submitted that in any given day, thousands of transactions are carried out by brokers. The CCM facility is provided by the National Stock Exchange to rectify the errors / mistakes made at the time of punching trades. The National Stock Exchange of India Limited has provided certain guidelines and penalties relating to the CCM Facility (PB 20-26). As per the stock exchange, CCM facility can be used to modify the client code on the trade day itself till 4:15 PM (PB 20). This is also stated in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable".
3. The broker on an average executes more than 5000 trades in a day. As is calculated by the AO, the exchange is operative only 260 days in a year. Thus, in a year approximately 13 lakhs trades are carried out by the broker. Therefore, the fact that during the year, the broker had carried out 2380 modifications by using CCM facility is irrelevant as it is only 0.18% of the total trades carried out by the broker during the year. Also, the fact the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code.
4. A statement showing the details of modified client names and the profit/loss to the modified client due to CCM is at PB 27-32. Also by reply dated 15.02.2016 (PB 33-34), the assessee had submitted the confirmations of its parties in whose case modifications have been carried out. This shows that the profit/loss are of the clients of M/s 22 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka Artistic Finance Pvt. Ltd. which is wrongly punched by it to the account of the assessee and when pointed out, it was transferred to the respective client account who have shown the same in their return of income. Thus, assessee has nothing to do with this loss and therefore, there does not arise any question to disallow the same.
5. The Ld. CIT(A) only on surmises and conjectures observed that these transactions are of the assessee ignoring that M/s Artistic Finance Pvt. Ltd. has admitted that these transactions are not of the assessee. The reliance placed by him in case of McDowell & Co. Ltd. is thus misplaced and not applicable.
6. Reliance in this connection is placed in the case of ACIT Vs. Kunvarji Finance Pvt. Ltd. 119 DTR 1 (Ahd.) (Trib.) where it was held that as per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intra-day i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.
In view of the above, the Ld. CIT(A) is not justified in confirming the addition made by the AO and the same be deleted.'' 3.3 During the course of hearing, the ld. DR relied on the orders of the authorities below.
3.4 I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a 23 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable". It is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. It may be noted that ITAT Ahemdabad Bench in the case of ACIT vs. Kunvarji Finance (P) Ltd. 119 ld. DR 1 had observed that the client code modification is permitted intra day i.e. on the same day. The relevant portion of the decision is as under:-
''As per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the 24 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.'' Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed."
Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under:
"11. We have heard rival contentions and perused the record. A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee. As noticed by the Ld CIT(A), the MCX, the stock 25 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable.
12. Under these set of facts, the next question that arises is - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee. It is a fact that the assessee company has started its operations only in July, 2005 by converting individual membership into corporate membership. Further, the commodity exchange was about 3-4 years old only at the relevant point of time. Hence, the assessee cannot be considered to be an established player in the years under consideration. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions in its own code, i.e. since the timing of entering the transactions is crucial in the online trading, the staffs of the assessee company found it convenient to punch its own code. Further, we notice that the fact that the assessee has changed the code to the concerned client's account at the end of the day has not been disproved. If at all any person comes with a request seeking profits, there will normally be time lag and hence the fact that the assessee has changed the codes at the end of the day only shows that the assessee has carried out the transactions on behalf of its clients only. Such kind of transactions shall usually be sporadic transactions, where as in the instant * case, the clients have carried out the transactions continuously. Further, it is pertinent to note that none of the clients, with whom the assessing 26 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka officer has carried out the examination, has disowned the transactions. Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. Though the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The Ld CIT(A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. Ali these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially.
13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of Rs.3.31 crores and further there was change of code from one client to another client to the tune of Rs.6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The action of the AO in assessing the above said profits in the hands of the assessee only show that there was no proper application of mind on the part of the assessing officer.
14. Another important point that is relevant here is that none of the clients was shown as related to the assessee herein. Normally the question of shifting of profit would arise between the related parties only. If the assessee had really shifted the profits to an outsider, then the human probabilities would suggest that the assessee would have received back corresponding amount from the recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view.27 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
15. The Ld CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% of the total transactions only and in our view, the said volume, in fact, vindicates the explanation of the assessee. Further none of the clients has been found to be bogus and all of them have complied with KYC norms, meaning thereby the identity of all the clients stand proved. None of them has disowned the transactions and all of them have also declared the income in their respective returns of income. All these factors, in our view, support the contentions of the assessee.
16. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the additions made in both the years under consideration. In our view also, the assessing officer has drawn adverse conclusions against the assessee without properly bringing any materials to support the view, i.e., the additions have been made on suspicion and surmises only. Accordingly, we uphold the order of Ld CIT(A) in both the years under consideration."
Thus, in the said case, the modification carried out by the assessee were 3% of the total transaction, which was found by the Tribunal as within the permissible limit of error margin. The Ahmadabad Benches of the Tribunal in the case of ACIT Vs. M/s Kunvarjit Finance Pvt. Ltd. (supra) and others in bunch of appeals has analysed the issue in para 8 to 11 as under:
"8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer believed the client code modification to be malafide because in his opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client 28 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T&S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:-
"Circular no. MCX/T&S/032/2007 January 22, 2007
Client Code Modifications
In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under:
Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-II (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under.
a. The facility of client code modifications intra-day are allowed. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays and on Saturdays the same shall be allowed between 2:00 p.m. to 2:15 p.m. c. However, on the days when trading in commodities takes place till 11:55 p.m. the client code modification will be allowed only upto 12:00 p.m. d. At all times, Proprietary trades shall not be allowed to be modified as client trades and client trades shall not be allowed to be modified as proprietary trades.
e. In order to ensure that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under:
S. Percentage of Client Code changed Penalty (Rs.) No to total orders (matched) on a daily basis 1 Less than or equal to 1% Nil Nil 2 Greater than 1% but less than or 500 equal to 5% 3 Greater than 5% but less than or 1000 equal to 10% 4 Greater than 10% 10000 f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped.
With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. in 29 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Members are requested to take note of the FMC directives and ensure strict compliance."
From the above, it is evident that client code modification is permitted intra-day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is Rs.500/-. If it is greater than 5% but less than 10%, penalty is Rs.1000/- and if it is greater than 10%, then penalty is Rs.10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs.500/-. In the context of the circular issued by Commodity Exchange, let us examine whether the client code modification done by the broker i.e. KCBPL is unusually high. At page No.16 on paragraph No.4.3, the CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. That the Assessing Officer has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX 30 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer.
9. The Assessing Officer held the client code modifications to be malafide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the Commodity Exchange, it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. When the client code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be malafide.
10. Moreover, the ld. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client code modification can be considered in the hands of the assessee.
11. The ld. CIT(A) in paragraph 4.13 of his order has also recorded the findings that "all transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been 31 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees." These findings of fact recorded by the ld. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts, we do not find any justification to interfere with the order of the CIT(A) in this regard and the same is sustained; and Ground Nos. 1 and 3 of the Revenue's appeal are rejected.
Thus in the said case, it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue's appeal are dismissed. 32 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
12. Now we take the cross objection of the assessee, wherein the assessee has raised following grounds:
"1. In the facts and circumstances of the case and in law, the learned Assessing Officer erred in stating that alleged notice u/s 143(2) dated 14/06/2016 was issued and duly served upon the appellant even though no such notice was actually served upon the Appellant and thereby also raising erroneous ground of appeal even though the said order of reopening was rightly quashed by the Commissioner of Income Tax(A)-Kota.
2. In the facts and circumstances of the case and in law, the learned Assessing Officer erred in not appreciating the fact that the learned Commissioner of Income Tax(A)-Kota had deleted the addition of Rs. 3,50,99,887/- on account of profits due to alleged client code modification and loss amounting to Rs. 1,94,602/- as well as alleged commission of Rs. 7,05,890/- on account of losses due to alleged client code modification, only on the basis of assumption and presumptions, by overlooking the confirmations of the respective brokers and without issuing notice U/S 133(6) and/or U/S 131 and thereby denying the opportunity of cross-examination of the said brokers.
3. In the facts and circumstances of the case and in law, the learned Assessing Officer erred in mentioning that transactions initially punched in the Appellant's client code were edited as many as 1354 times during this Financial Year, even though the correct figure is 499 times and thereby raising a misleading ground before the Hon'ble ITAT and without appreciating the Appellate Order passed by the Commissioner of Income Tax(A) Kota after duly verifying the facts of the case in detail.
4. In the facts and circumstances of the case and in law, the ld.
Assessing Officer erred in issuing the notice U/s 148 on 31/3/2016 and the CIT(A) also erred in confirming the same even though the notice was issued.
a) 4 years after the end of the F.Y. and
b) on the basis of borrowed satisfaction and
33
ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
c) after passing original order U/s 143(3) on 24/11/2011 thereby amounting to change of opinion."
13. Ground No. 1 of the C.O. is common to ground No. 1 of the revenue's appeal and our finding on this issue in the revenue's appeal shall apply mutatis mutandis. Accordingly, ground No. 1 of the assessee's C.O. is dismissed.
14. Ground Nos. 2 and 3 of the assessee's C.O. are also in support of the order of the ld. CIT(A) in deleting the addition made by the Assessing Officer. Therefore, in view of our finding on this issue in the matter of revenue's appeal, grounds No. 2 and 3 of the C.O. become infructuous.
15. Ground No. 4 of the C.O. is regarding validity of reopening. The ld AR of the assessee has submitted that the original assessment was completed U/s 143(3) of the Act and the Assessing Officer has reopened the assessment after expiry of four years from the end of the assessment year, therefore, in absence of failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment, the reopening after four years is not permissible. He has referred to the proviso to Section 147 of the Act and submitted that the reopening is hit by the proviso to Section 147. The ld AR has contended that the assessee has disclosed all the relevant facts in the original return of income and the assessment was completed U/s 143(3) of the Act then the case of the assessee does not fall in the category of failure on the 34 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka part of the assessee to disclose fully and truly all relevant facts and material necessary for assessment. He has referred to the reasons recorded by the Assessing Officer at page 35 of the paper book and submitted that the o has not applied his mind independently but reopened the assessment on the basis of the report of the Investigation Wing. In support of his contention, he has relied upon the decision of the Hon'ble Bombay High Court in the case of Pr.CIT-5, Vs Shodiman Investments (P) Ltd. 93 taxmann.com 153 (Bom) and submitted that an identical issue was considered by the Hon'ble Bombay High Court and held that reopening of the assessment by the Assessing Officer without application of his mind to the information received by him from the DDIT(Inv) is not valid as based on borrowed satisfaction. He has relied upon the decision of the Hon'ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd. 320 ITR 561 (SC) and submitted that when the original assessment was completed U/s 143(3) of the Act then the reopening on basis of change of opinion is not permissible. The ld AR then referred to the decision of the Hon'ble Jurisdictional High court in the case of Sandeep Stocks Pvt. Ltd. Vs ACIT in S.B. Civil Writ petition No. 16705/2016 judgment dated 07/03/2018 and submitted that the Hon'ble High Court has quashed the reopening based on report of Investigation Wing.
35ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka
16. On the other hand, the ld CIT-DR has submitted that the report of the investigation wing, a afresh tangible material on the basis of which the Assessing Officer has formed the belief that the income assessable to tax has escaped assessment. Thus, when this material cearly reveals the modus operandi of shifting the profits by misusing the Client Code Modification then it cannot be said that the assessee had disclosed all material facts fully and truly which are necessary for the assessment. He has relied upon the order of the ld. CIT(A) on this issue.
17. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the original assessment was completed U/s 143(3) of the Act on 24/11/2011. Subsequently the Assessing Officer issued notice U/s 148 of the Act on 31/3/2016 which is after expiry of four years from the end of the assessment year under consideration. The reasons recorded by the Assessing Officer for reopening of the assessment are as under:
"On perusal of information in possession, it is revealed the fictitious profits and losses were created by some brokers by misusing the Client Code Modification facility in derivatives transactions on NSE during March, 2010. In some cases of brokers as well as clients, survey U/s 133A was carried out by the Department and it has admittedly being confirmed having misused the facility of client code modification to create fictitious losses/profits and further admittedly explained in the case of assessee also to receive commission at the rate varying from 0.5% to 2% on this account."36 ITA No. 695/JP/2018 & CO 15/JP/2018
DCIT Vs. Gyandeep Khemka The Assessing Officer has referred to the information in possession, which was gathered during the survey U/s 133A carried out by the department at Mumbai and Ahmadabad. Thus, the Assessing Officer himself was not involved in the survey proceedings, which is the basis for reopening of the assessment as per the reasons recorded by the Assessing Officer. The facts recorded by the Assessing Officer that the assessee has fictitiously transferred the profits in respect of trading of derivatives through broker C.M. Goyenka Stock brokers is not a new fact but the transactions were duly part of the assessee's book of account and the assessee has offered the income from these transactions which were done on behalf of the assessee by the said broker. The dispute is only regarding the certain transactions which were rectified by using the Client code Modification facility on the part of the broker as those transactions were not intended to be done on behalf of the assessee but due to mistake in punching client code, those were carried out on behalf of the assessee and therefore, subsequently the broker has made necessary rectification. Once the original assessment was completed U/s 143(3) of the Act then the reopening of the assessment after four years is not permissible until and unless it is a case of failure on the part of the assessee to disclose fully and truly all material facts relevant for the assessment. The Assessing Officer has not spelled out which facts were not disclosed by the assessee in his return of income or which could not 37 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka be discovered by the Assessing Officer during the original assessment completed U/s 143(3) of the Act. The Hon'ble Bombay High court in the case of Pr.CIT Vs. Shodiman Investments (P) Ltd. (supra) while examining the validity of reopening based on the report of the DDIT (Inv.) has observed and held in para 9 to 14 as under:
"9. We find that at the time of re-opening of the Assessment, the Assessing Officer did not provide the reasons recorded in support of the re-opening notice in its entirety, to the Respondent-Assessee. This was contrary to and in defiance of the decision of the Apex Court in GKN Driveshafts v. ITO [2002] 125 Taxman 963/[2003] 259 ITR 19. The entire objects of reasons for re- opening notice as recorded being made available to an Assessee, is to enable the Assessing Officer to have a second look at his reasons recorded before he proceeds to assess the income, which according to him, has escaped Assessment. In fact, non furnishing of reasons would make an Assessment Order bad as held by this Court in CIT v. Videsh Sanchar Nigam Ltd. [2012] 21 taxmann.com 53/340 ITR 66. In fact, partial furnishing of reasons will also necessarily meet the same fate i.e. render the Assessment Order on re- opening notice bad. Therefore, on the above ground itself, the question as proposed does not give rise to any substantial question of law as it is covered by the decision of this Court in Videsh Sanchar Nigam Ltd.'s, case (supra) against the Revenue in the present facts.
10. Besides, the submissions made on behalf of the Revenue that in view of the decision of the Apex Court in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), the Assessing Officer is entitled to re-open the Assessment for whatever reasons and the same cannot be subjected to jurisdictional review, is preposterous. First of all, taking out a word or sentence from the entire judgment, divorced from the context and relying upon it, is not permissible (see CIT v. Sun Engg. Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297 (SC)). It may be useful to reproduce the context in which the sentence in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s case (supra) being relied upon by the Revenue to support its case, was made. The context, is as under:--
"The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitutions. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed to confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly the Assessing Officer must have reason to believe that income, profits or 38 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices."
Therefore, the sentence being relied upon was made in the context of the change in law that under the amended provision 'reason to believe' that in case of escaped assessment, is sufficient to re-open the assessment. This unlike the earlier provision of Section 147(a) of the Act which required two conditions i.e. failure to disclose fully and truly all facts necessary for assessment and reason to believe that income has escaped assessment. Thus, the observations being relied upon must be read in the context in which it was rendered. On so reading the submission, will not survive.
11. Further, a reading of the entire decision, it is clear that the reasonable belief on the basis of tangible material could be, prima facie, formed to conclude that income chargeable to tax has escaped assessment. Mr. Mohanty, learned Counsel is ignoring the fact that the words 'whatever reasons' is qualified by the words 'having reasons to believe that income has escaped assessment'. The words whatever reasons only means any tangible material which would on application to the facts on record lead to reasonable belief that income chargeable to tax has escaped assessment. This material which forms the basis, is not restricted, but the material must lead to the formation of reason to believe that income chargeable to tax has escaped Assessment. Mere obtaining of material by itself does not result in reason to believe that income has escaped assessment. In fact, this would be evident from the fact that in para 16 of the decision in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), it is observed that the word 'reason' in the .... 'reason to believe' would mean cause or justification. Therefore, it can only be the basis of forming the belief However, the belief must be independently formed in the context of the material obtained that there is an escapement of income. Otherwise, no meaning is being given to the words 'to believe' as found in Section 147 of the Act. Therefore, the words 'whatever reasons' in Rajesh Jhaveri Stock Brokers (P.) Ltd.'s, case (supra), only means whatever the material, the reasons recorded must indicate the reasons to believe that income has escaped assessment. This is so as reasons as recorded alone give the Assessing Officer power to re-open an assessment, if it reveals/indicate, reasons to believe that income chargeable to tax has escaped assessment.
12. The re-opening of an Assessment is an exercise of extra-ordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before re- opening notice, is issued. These reasons, must indicate the material 39 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka (whatever reasons) which form the basis of re-opening Assessment and its reasons which would evidence the linkage/nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as observed by the Supreme Court in S. Narayanappa v. CIT [1967] 63 ITR 219, that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in ITO v. Lakhmani Merwal Das [1976] 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re-opening of Assessment and assuming jurisdiction on the part of the Assessing Officer.
13. In this case, the reasons as made available to the Respondent- Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the Assessing Officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment.
14. Further, the reasons clearly shows that the Assessing Officer has not applied his mind to the information received by him from the DDIT (Inv.). The Assessing Officer has merely issued a re-opening notice on the basis of intimation regarding re-opening notice from the DDIT (Inv.) This is clearly in breach of the settled position in law that re- opening notice has to be issued by the Assessing Office on his own satisfaction and not on borrowed satisfaction."
Thus, the Hon'ble High Court has held that the reasonable belief must be based on tangible material and could be prima facie formed to conclude that the income chargeable to tax has escaped assessment. Therefore, the reopening on borrowed satisfaction is not permissible under the law. The Hon'ble Jurisdictional High Court in the case of Sandeep Stocks Pvt. Ltd. Vs ACIT (supra) had occasion to consider the issue of reopening of the assessment based on the same information received from ADIT 40 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka relating to fictitious profit and losses created by some brokers by misusing Client Code Modification facility in F&O Segment on NSE and held as under:
"Having heard both the; counsel, this court finds that the petitioner had submitted initial return on 27th September, 2009. The case was assessed under Section 143(3) on 23.11.11 at total income of Rs.23,54,40,980/- and assessment order was passed and the same attained finality. The petitioner was issued a notice on 29th March, 2016 under Section 148 quoting that the income chargeable to tax for assessment, 2009-2010 has escaped. On having asked by the petitioner to provide reasons for reassessment, the respondents provided reasons as noted above. A look at the said reasons shows that the Department has gathered information received from their ADIT relating to fictitious profits and losses created by some brokers by misusing the Client Code Modification Facility in F&O segment on NSE during the financial year 2008-2009 and on the basis thereto and on the basis of some raids carried out wherein the said brokers having misused the Client Code Modification and presumption has been drawn that the petitioner have during the said year under consideration shifted out certain profits to the tune of Rs. 19865635.37, but the fact remains as to how the said figure has been arrived at, has neither been shown in the reason nor in answer to the objection. It is also not reflected in reply to the present writ petition. The submission of the respondent with regard to not providing details, is not satisfactory.
It is to be noted that the reasons as required to be recorded in the proceedings under Section 148 of the Act cannot be vague. This Court is of the firm view that if the reassessment is required to be made, the vested right also created in favour of the assessee after assessment is sought to be taken away and therefore detailed reasons must be given out by the Revenue for reassessment in a given case. In the case of Sabh 41 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka Infrastructure Ltd.(supra). The Delhi High Court has while relying on judgment of Supreme Court observed as under:
11. Thus, it is also now well settled that the reasons to believe have to be self explanatory. The reasons cannot be thereafter supported by any extraneous material. The order disposing of the objections cannot act as a substitute for the reasons to believe and neither can any counter affidavit filed before this court in writ proceedings.
Similar situation arose in the present case. The basis for arriving at the conclusions are not to be found factually on record as has been noted in the aforesaid judgments. The basis for the reasons to believe including evidence collected was required to be provided at this stage. The judgment as cited by learned counsel for the Revenue in "GNK Driveshafts (India) Ltd. Vs Income Tax Officer" as at the stage when the assessee had not submitted any objection to the issuance of notice and it is in the circumstances and facts of the case chat Supreme Court observed as under:
11. Therefore, at this stage in the present facts, we are satisfied that the Assessing Officer on the basis of reasons recorded to issue impugned notice dated 30th March, 2016, had reasonable belief to come to the conclusion that income chargeable to tax has escaped assessment.
The Petitioner can during the assessment proceedings establish that no amount has escaped assessment. However, we do not find this to be a fit case to interdict the reassessment proceedings. In the present case however, this Court finds that the assessee has first raised objections arid after reply to the objections, has approached this. Court challenging both the reasons provided initially as well as in reply and the objections. This Court agrees to the submission of the learned counsel for the petitioner that even in the reply and the objection, there is no specific averment that the petitioner was having any knowledge relating to the conduct of the said brokers and therefore, presumption of shifting of certain profits at the level of assessee is not made out prima facie and in the circumstances therefore, the detailed reasons as has been observed 42 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka in the judgment passed by Delhi High Court ought to have been made available to the petitioner.
In view thereof, the action of reopening of assessment on the basis of the reasons as provided letter dated 3.8.2016 is not made out. The assumption of jurisdiction of reassessment under Section 148 was therefore not justified and the petitioner cannot be said to have failed to disclose fully and truly all the material facts. The proceedings are therefore set aside and the order of reassessment and the notice dated 29.3.2016 is quashed and set aside."` Therefore, the Hon'ble High Court has held that the reopening of the assessment on the basis of the report of DIT (Inv.) is not valid. Following the decisions of the Hon'ble Bombay High Court in the case of Pr.CIT Vs. Shodiman Investments (P) Ltd. (supra) as well as the decision of Hon'ble Jurisdictional High Court in the case of Sandeep Stocks Pvt. Ltd. Vs ACIT (supra), we hold that the reopening of the assessment based on the report of DIT (Inv) is not valid when the case is hit by the proviso to Section 147 of the Act. It is pertinent to note that the assessee is not expected to disclose the fact that he has indulged in transaction of fictitious transfer of profits but what is required to be disclosed is the transactions carried out by the assessee thorugh the broker. Hence, once the transactions carried out by the assessee are matter of record then the case does not fall in the category of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The assessee is not supposed to do what ought to have 43 ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka been done by the Assessing Officer during the scrutiny assessment. Accordingly, the reopening is bad in law and liable to be quashed.
18. In the result, the appeal of the revenue as well as the C.O. of the assessee are partly allowed.
Order pronounced in the open court on 23/10/2018.
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vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- The D.C.I.T., Central Circle-4, Jaipur.
2. izR;FkhZ@ The Respondent- Shri Gyandeep Khemka, Jaipur.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k]t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 695/JP/2018 & C.O. 15/JP/2018) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar