Income Tax Appellate Tribunal - Ahmedabad
Amitkumar Amulakhrai Shah, Huf, ... vs The Dy. Cit, Circle-2,, Bhavnagar on 18 December, 2019
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'B' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SMT. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./I.T.A. Nos. 708 & 709/Ahd/2018 ( नधा रण वष / Assessment Year : 2011-12)
(i) Amitkumar बनाम/ The Deputy Amulakhrai Shah HUF Commissioner of Vs. Income-tax & Circle-2, Bhavnagar
(ii) Amitkumar Amulakhrai Shah 2130/A/2, 3 r d Floor, Vrajraj, Atabhai Road, Bhavnagar - 364001 था यी ले खा सं . /जी आ इआ र सं . / P AN/ GI R No .: AAFHA9902A & AJ BPS3135N (अपीलाथ /Appellant) .. ( यथ / Respondent) & आयकर अपील सं./I.T.A. Nos. 705 & 706/Ahd/2018 ( नधा रण वष / Assessment Years : 2010-11 & 2011-12) Monaben Amitkumar बनाम/ The Deputy Shah Commissioner of Vs. 1526/A, Pushpak, B/h. Income-tax Theosophical Lodge, Circle-, Bhavnagar Rupani Circle, Bhavnagar
- 364001 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : APUPS4332J (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से /Appellant by Shri B. R. Popat & Shri :
Rohan Popat, A.Rs.
यथ क ओर से/Respondent by : Shri Dileep Kumar, Sr.D.R. I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 2 -
सन ु वाई क तार ख / Date of 05/12/2019 Hearing घोषणा क तार ख /Date of 18/12/2019 Pronouncement आदे श/O R D E R PER PRADIP KUMAR KEDIA - AM:
The captioned appeals directed at the instance of assessee arise from the respective orders of the Commissioner of Income Tax (Appeals) ('C IT(A)') against different assessment years as tabulated below:
I T A No s. Na me o f AY CI T ( A) ' s AO ' s AO ' s o r d e r
as se s see o r d er o r d er u nd er S ect io n
d ated d ated
7 0 8 / Ahd /1 8 A mi t k u mar 2 0 1 1 -1 2 2 2 .0 2 .1 8 1 3 .1 1 .1 7 1 4 3 ( 3 ) r . w. s.
A. S ha h 1 4 7 o f t he
HU F I nco me T a x Act,
1 9 6 1 ( i n s ho r t
' t he Act ' )
7 0 9 / Ahd /1 8 A mi t k u mar 2 0 1 1 -1 2 22.02.18 06.12.17 1 4 3 ( 3 ) r . w. s.
A. S ha h 1 4 8 o f t he Ac t
7 0 5 / Ahd /1 8 Mo n ab e n 2 0 1 0 -1 1 21.02.18 24.11.2017 1 4 3 ( 3 ) r . w. s.
A. S ha h 1 4 7 o f t he Ac t
7 0 6 / Ahd /1 8 Mo n ab e n 2 0 1 1 -1 2 2 2 .0 2 .1 8 14.11.2017 1 4 3 ( 3 ) r . w. s.
A. S ha h 1 4 7 o f t he Ac t
2. At the beginning of the hearing, it was stated on behalf of the assessee that all the four matters captioned above are inter-connected and involves common issue. Accordingl y, all the four matters were heard together for adjudication purposes.
3. We shall take assessee's appeal in ITA No. 708/Ahd/2018 pertaining to Amitkumar A. Shah HUF concerning AY 2011-12 as a lead case for adjudication.ITA No. 708/Ahd/2018 - AY- 2011-12 (in case of Amitkumar A. Shah
HUF)
4. The ground of appeal raised by assessee reads as under:
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"1. Confirming the action of the AO in re-opening the assess ment for the reasons as recor ded and conveyed in due course of time to the Appellant; and
2. Confirming the action of the AO in making disallowance of Rs.1,16,078/- and thereby making addition of the said amount to the returned income, for t he reasons as stated i n the body of the order."
5. The assessee filed its return of the income declaring total profit at Rs.10,64,380/- for AY 2011-12. The return so filed included profit/loss resulting from trades carried out on the platform of stock exchange through registered broker. The return filed b y the assessee was processed under s.143(1) of the Act. Thereafter, the case was reopened under s.147 of the Act on 30.03.2016 on the basis of certain information from the Investigation Wing of the Income Tax Department. The reasons recorded for reopening the case was provided to the assessee and objection raised b y the assessee. The objections on reopening were disposed of in the course of re-assessment proceedings. The AO thereafter observed that Investigation Directorate, Ahmedabad has conducted survey under s.133A of the Act on the premises of several brokers. It was found b y the Investigation Wing that Client Code Modification (CCM) facilit y permitted to the brokers by the Exchanges/SEBI to set out bonafide errors is being misused for tax evasion b y reallocation of profits from one client to another in connivance with the brokers. List of such persons who have used CCM and took benefit b y shifting out profit/shifting in losses to reduce their taxable income was also shared b y the Investigation Wing with the AO. This list inter alia included the name of the captioned assessees. The trade date related to all transactions entered into b y the assessee in cash or derivative segment of the stock exchange have been analysed b y the AO and thereafter a satisfaction was formed towards 'escapement of income' and the case was consequentl y reopened. As stated, on anal ysis of trade data of the stock ex change, it was found b y the AO that the assessee (client) has misused CCM facility available to broker to obtain contrived losses by modification of client code to the tune of Rs.1,16,078/- during the year.
I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 4 - 5.1 The AO issued a detailed show cause notice under s.142 (1) of the
Act dated 04.09.2017 in this regard as reproduced in assessment order and considered the written replies of the assessee in this regard. Admittedl y, 'data in soft form' as received b y the AO from the Investigation Wing was supplied to the assessee. Having regard to extent and magnitude of modifications in client code resulting in reduction of taxable profits, the AO ultimatel y observed that the CCM in the assessee's case were not bonafide but done with malafide intention. The AO accordingl y denied the claim in respect of alleged contrives losses owing to code modification and increased the assessed income to the tune of Rs.1,16,078/-. The assessed income was accordingl y computed at Rs.11,80,460/-.
6. Aggrieved b y the action of the AO, the assessee preferred appeal before the C IT(A). The CIT(A) however did not find merit in the appeal of the assessee and observed that the assessee failed to refute the allegations of the AO which was based on concrete information and scientific anal ysis of data obtained from the stock exchange. The CIT(A) accordingl y refused an y indulgence in the conclusion drawn b y the AO. The relevant para of the appellate order of C IT(A) dealing with the merits of the case is reproduced hereunder:
"5.3 After considering findings of the AO and submissions of the appellant, this ground is adjudicated as under.
It is seen that the AO had information that the appellant in connivance with his broker Mangal Keshav Securities had indulged in Client Code Modification (CCM ) to shift in losses and the same was set off against taxable income of the appellant. The AO had infor mation that there were 33 transactions of the appell ant in which CCM had been done. By doing CCM i n these 33 transactions, there was shifting out of profit of and shifting in of losses. Thus, by resorting to CCM, in total the income was reduced by Rs.1,16,078/- by the appellant. Accordi ngly, the AO added Rs.1,16,078/- to the income of the appellant. The pr esent appeal is against the above action of the AO.
It is seen that the appellant carried out large number of transactions in stock exchange through broker Mangal Keshav Securities Limited, Investigation Wing of the Income Tax Department at Ahmedabad had carri ed out surveys u/s 133A of the Act on brokers in Ahmedabad and had analysed data from different stock exchanges from I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 5 -
F.Y. 2009-10 to 2010- 11. Analysis of this data indicated that there was systemic shifting of huge crystallized losses using CCM in the F & O segment at the National Stock Exchange. This analysis indicated that CCM was used for purpose other than for rectifying genuine errors. Name of the appellant figured in the list of persons who had used CCM to shift out profit/shift in losses.
In survey u/s 133A of the Act on Mangal Keshav Securities, broker of the appellant, it was found that t he broker indulged in large scale Client Code Modifications so as to f acilitate shifting of losses and profits to its clients as per requirements. The AO had infor mation that in the year under consideration, there were 33 transactions pertaining to the appellant where CCM was used to shift losses and profits. Details are as follows:-
F.Y. Transactions No. of Ascertained
Transactions Profit/Loss
shifted out/
shifted in
(R s . )
As 2009-10 Transactions where 8 128678/-
Original ascertained Losses shifted out (P r o f i t
Client shifted out)
Transactions resulting in no 1
profit no loss
Transactions where 23
ascertained Profit shifted out
As 2009-10 Transactions where Losses 0 -12600/-
Modified shifted in (P r o f i t
Client shifted in )
Transactions resulting in no 0
profit no loss
Transactions where Profit 1
shifted in
Net reduction in Income due 33 116078/-
to CCM
Further, the AO had information that Client Code Modification in case of appellant were carried out agains t a fixed set of PANs only. All modified transactions were carried out between the appellant and a fixed set of clients. Both when the appellant was the original client and the modified client , the counterparties wer e common. This cannot be a sheer coincidence. If the client code modifi cation is done to rect ify a genuine error, the corresponding client code could be any. But here, there is a set of client codes with which the modifications are done to the transactions of the appellant.
Further, the AO has carried out the Levenshtein Distance Analysis or digit edit analysis which helps to know the minimum number of edits required to change one code to another. This analysis indicates whether the code is wrongly typed or is completely replaced. In the case of the appellant, for 33 CCMs on average 1 edit happened for each CCM. This establishes that CCMs were not carried out to rectify any genuine er ror rather to complet ely replace one client code with other.
Further, based on sur vey u/s 133A of the Act in the case of the broker Mangal Keshav Securities, it was found that the broker had indulged in large scale CCMs to facilitate losses and profits as pr requirements of its clients. The AO had information that Keshav I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 6 -
Mangal had carried out very high number of CCMs on the NSE F & 0 segment as follows:-
F.Y. Total CCM
2008-09 33501
2009-10 48358
2010-11 32021
2011-12 243
The appellant failed to refute the allegations of the AO which were based on concrete information and scientific analysis of the s ame.
During the appellate proceedings the appellant reiterated what it had submitted before the AO. The main thr ust of the argument of the appellant is that most of the client code modifications done have taken place between the appellant and its karta, Since the client codes are similar to each other, CCMs could be due to inadvertent typing error. Any mistake committed by the broker cannot be considered the basis to doubt genuineness of bona fide transactions .
A perusal of submissions of the appellant shows that the submissions are very general in nature and lack substance. The appellant has tried t o explain the large number of CCMs done in a simplistic way by s aying that this could be due to inadvertent error since the code of appellant and its karta were almost similar. The appellant has not been able to refute the allegations of the AO which are specific and which are based on scient ific analysis. Merely saying that it has not asked its broker to carry out any modifications, does not help the cause of the appellant. The AO has given specific transactions where profit and loss has been shifted in by Client Code Modification. The appellant has failed to adduce any evidence to show that it has not benefited by these transactions. The appellant has not given any evidence to establish that once it came to know about the Client Code Modifications, it objected to the broker about the same. This becomes paramount since in the case of the appellant CCMs carried out by the broker caused huge l oss to the appellant. Also, it is seen that large number of CCMs have been done in case of appellant, its karta and wife of karta year after year. How can anyone not object to and continue with a br oker who commits such huge number of mistakes that too resulting in loss to the client. Thus it can be safely assumed that CCMs could not have been done without consent of the appellant.
SEBI permits Client Code Modification to rectify genuine error in entry of Client Code at the time of placing/modifying the related order. This facility has been misused by brokers and their clients for diverting profit/losses across clients in or der to evade tax on stock exchange transactions. The appellant is one of several of such beneficiaries who in connivance with their brokers have benefitted from CCMs. Ratio of decisions relied on by the appellant is not applicable to the present case as these are distinguished on facts. Further, the SEBI Circular relied on by the appellant is not applicable since 19.08.2016 and here the period is F.Y.10-11.
In view of discussion above, it is held that the AO was justified in making addition of Rs.1,16,078/- Accordingly, addition of Rs.1,16,078/- is upheld. This gr ound of appeal is rejected.
7. In the result, the appeal is dismissed."
I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 7 -
7. Further aggrieved b y the denial of relief claimed before the CIT(A), the assessee preferred appeal before the Tribunal.
8. Before the Tribunal, the learned AR for the assessee raised two fold objections; (i) challenged the jurisdiction assumed under s.147 of the Act and (ii) claimed that the Revenue authorities have misdirected themselves on facts and law on the aspects of merits of the addition. We would quote the arguments advanced on behalf of the assessee while dealing with the respective points.
9. The learned DR for the Revenue, on the other hand, relied upon the lower authorities and submitted on merits that it is highl y improbable that so man y transactions will require modification of client code assigned to assessee with altogether different characters in a routine manner and as a regular feature except for purchasing sham losses to reduce taxable income. It was thus contended that the large scale modification in client code leading to reduction of tax liability does not pass the test of preponderance of probabilities. The modification in client code is meant onl y to rectify a genuine punching error in trade and is an exception b y nature. Learned DR accordingl y submitted that no interference with the order of the C IT(A) is called for.
10. We have carefull y considered the rival submissions and perused the assessment order and the appellate order of C IT(A). We have also perused the material placed on record in keeping with Rule 18(6) of the Income Tax (Appellate Tribunal) Rules, 1963.
10.1 The first and foremost issue relates to validit y of assumption of jurisdiction under s.147 of the Act. It is the case on behalf of the assessee that the AO could not have formed 'reason to belief' contemplated under s.147 of the Act but has merel y acted on the basis of some abstract information received from the Investigation Wing of the department. The decision of the Hon'ble Gujarat High Court in the case of Varshaben Sanatbhai Patel v. ITO [2015] 64 taxmann.com 179 I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 8 -
(Gujarat) was referred to and relied in this regard. The decision rendered b y the Hon'ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs. DCIT reported in (2017) 390 ITR 464 (Bom.) was also referred for the proposition that CCM done b y the broker of assessee could not be ground to believe that there had been an y escapement of income in the hands of assessee.
10.2 Before we proceed to examine the jurisdictional issue raised on behalf of the assessee, it will be relevant to reproduce the reasons recorded b y the AO under s.148(2) of the Act in this regard:
"In this case the trade data related to all t he transactions entered by the assessee in the cash, derivative and F&O segment has been called for from the exchanges. The data was called for along with the details of all the modified trade data by using client code modificati on ie. modified trade in whi ch the assessee was original client as well as the modified trade in which the assessee was modified client. In respect of the modified trade transaction by using client code modification (CCM ) it is pertinent to mention that Client Code Modification means modification / change of the client codes, after execution of tr ades. Vide Circular no. SM D/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. Every client is given a code which is registered with the s tock exchanges. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wr ong code is punched in by the br oker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The f acility ensures smooth funct ioning of the system and is to be used as an exception rather than routine.
Over a period of time, some persons, in connivance with br okers st arted using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility being misused and brokers transferred gains or l osses from one pers on to another by changi ng the code, in the garb of correcting an error. These gain or loss- book entries were then us ed to evade taxes.
SEBI conducted a probe into 'modification of client codes' by br okers, pursuant to observati ons by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2010. With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms , the Indian markets were seeing client code modifications to the tune of Rs 50,000 - Rs 60,000 crore a month, which came down to just about Rs 100 crore I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 9 -
soon after SEBI's act ion. The probe also s howed that the quantum of such modifications was much higher during March, compared r e-the other months , which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large- scale manipulation was taki ng place where brokers were making changes in the client details after execution of trades citing 'genuine errors'. In April 2012, SEBI pass ed an order against NSE for being "negligent in discharge of its duties" in case of modification of client codes. SEBI, in this order directed NSE to be more cautious and perceptive in discharge of its regulatory duties, stating it was "convinced that NSE has been negligent i n discharge of its duties...". It was establ ished beyond doubt that the element of malafide intention was present in the process of CCM.
SEBI had in July 2011 imposed a stricter penalty on such modifications to further strengthen the system. SEBI inst ructed bourses to impose a monetary penalty of 1% of the value of the t ransaction where the client codes were modified. According to brokers, the penalty is 50 times the yield in the F &O s egment. The average yield in the derivatives segment is 0.02 %, SEBI als o directed the exchanges to conduct s pecial inspection of trading members to check whether such modifications are being carried on as per the criteria.
Therefore, in order to investigate the gamut behind the CCM the Directorate, Ahmedabad Investigation Wing has collected all India data of CCM from different exchanges and analyzed the data, The preliminary analysis of this data indicates towards the systemic shi fting of huge crystallized losses using CCM. The results of the analysis indicate that the finding of SEBI that CCM was used f or purpose "other than for rect ifying the genuine errors" was nothing but a euphem ism for Tax Evasion.
In view of the above, this office has also analyzed the trade data in which CCM was resorted. On analysis of the trade data for the year under consideration, i t is seen that in this case the assessee has s hifted out total profit of Rs.128678/- and shifted i n the losses of Rs.12600/-. Thus, by resorting t he CCM, the assessee has reduced the t axable income to the tune of Rs.116078/-.
Further, in order to ascertain the total no. of edits in both type of modification i,e. when the assessee was original client (OCC) and when the assessee was modified client (MCC), analysis of the modified transaction has also been done with the help of levenstine table. The Levenshtein Distance Analysis or digit edit analysis helps us know the minim um num ber of edits required from changing one code to another. The Levens htein Distance analysis established that client code modification in t his case has been done to reduce the tax liability by shifting out the ascertained profit and shi fting in the contrived l oss.
Further, It is also necessary to mention that a survey u/s.133A of Act was carried out in the case of the assessee's broker i.e. Mangal Keshav Securities. During the course of the survey it is seen that this broker was indulged in lar ge scale client codes modifications so as to facilitate losses and profits to the clients as per the requirement.
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Hence, in view of the above it can be concl uded that, by resorting the CCM, the assessee had reduced the taxable income to the tune of Rs. 116078/- and failed to disclose the full and true all necessary material facts before the revenue. Therefore, after application of mind I have strong reasons to believe that income chargeable to tax to the tune of Rs. 116078/- has been escaped assess ment within the meaning of provisions of section 147 of the act, and this case is fit for issue of Notice U/s. 148 of the Income-tax Act."
10.3 On perusal of the reasons recorded, it is clear that the AO has obtained objective details towards modifications occurred in client codes in relation to the assessee whereb y the quantum of profit/losses allegedl y shifted was recorded. The AO has not merel y acted only upon the information simplicitor received from the Investigation Wing as alleged but has also obtained client specific data showing s ystemati c modifications in client code resulting in reduction of taxable income. A soft cop y of such data were also provided to the assessee. In these circumstances, we do not see merit in the legal objection towards reopening the assessment of the assessee.
10.4 It is trite that the belief of the AO under s.147 of the Act need onl y to be prima facie and need not be infallible and conclusive so long as it is based on persuasive and relevant material. The AO has not acted upon some extraneous material in the instant case. The AO at the time of reopening an assessment is not expected to build a full proof case against the assessee and is not required to hold conclusivel y against the assessee. The test of jurisdiction under s.147 of the Act is not the ultimate result of the inquiry but whether the AO entertained a 'bonafide' belief upon the definite information presented before him. Power under this Section, of course, cannot be exercised on mere rumors or suspicions. If there is tangible material showing escapement of income, that would be sufficient to reopen the assessment. In our view, the AO was in possession of the relevant information and material germane to the allegation to enable him to hold prima facie belief towards escapement of income. The report of the investigation win g would constitute relevant material unless such report or information is absolutel y vague or based on unspecific information. However, whether I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 11 -
material available before AO would conclusivel y prove the escapement is not the concern at the stage of reopening. The information available with the AO in the instant case provides specific estimate of diversion of profits due to modifications and is thus reliable in character. Such specific nature of information is capable to grant cause or justification or a supposition that income has escaped assessment and consequentl y would confer jurisdiction on the AO to reopen assessment.
10.5 The reliance placed on the decision of the Hon'ble Bombay High Court in Coronation Agro Industries Ltd. (supra) on behalf of th e assessee is misplaced. In that case, the reason did not indicate the basis for the AO to come to a reasonable belief towards escapement and the AO had no material to prove link that modification was done to escape assessment of a part of its income and modification was not on account of genuine error. In the instant case, a live link between CCM and the assessee as a beneficiary thereof is discernable from the record before the AO at the time of usurpation of jurisdiction under s.147 of the Act. The magnitude and regularit y of modification in client code to the advantage of assessee renders the modification to be non-genuine. Therefore, the ratio in Coronation Agro Industries Ltd. (supra) would not appl y. The decision of Hon'ble Gujarat High Court in Varshaben Sanatbhai Patel (supra) in favour of the assessee is on the footing that mere information towards escapement would not be sufficient to justify formation of the belief in the absence of specific details available on record. The fact situation in the present case is entirel y different. The AO has acted upon credible information coupled with underl ying material to initiate the action under s.147 of the Act. The reasons recorded were based on prima facie material which, in turn, clearl y indicated the relationship between the formation of belief and the reasons for such belief. The belief entertained b y AO is, in our view, not arbitrary or irrational. We thus see no error on the part of the AO to exercise the powers under s.147 of the Act.
I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 12 - 11. Ground No.1 of assessee's appeal concerning validit y of
jurisdiction under s.147 of the Act is accordingl y dismissed.
12. We shall now deal with the merits of the additions made on account of losses shifted in/ profit shifted out from the hands of the assessee owing to modification carried out b y the broker in the client code assigned to assessee and other corresponding client. This issue is essentiall y factual in nature. As exhaustivel y pointed out on behalf of the assessee, the losses resulting from CCM can be classified in different categories as tabulated on behalf of the assessee. It will be relevant to reproduce the tabulated statement for a bird eye view of the classification:
Distance-wise breakdown of CCM figures (*) Am it Shah HUF Mona Shah Am it Shah A.Y. 2011-12 A.Y. 2010-11 A.Y. 2011-12 A.Y. 2011-12 ITA No.708/A/18 ITA N0.705/A/18 ITA N0.706/A/18 ITA N0.709/A/18 DOH:03/12/19 Bench: 'B' Distance '1'.
Profit 153,133 2,350 - 12,900
switched out
Loss switched 1,858 116,140 71,375
in
Profit 12,600 11,040 - 153,133
switched in
Loss switched 71,375
out
Sub-total (69,158) 6,832 (116,140) 68,858
Distance '2'
Profit 525 731,192 42,016 1,501,772
switched out
Loss switched - 1,552,986 1,195,951 169,117
in
Profit - 2,089,409 - 261,031
switched in
Loss switched - 84,859 24,517 1,391,957
out
Sub-total (525) (109,910) (1,213,450) (17,901)
Distance '3':
Profit 46,395 - 862,025 4,439,900
switched out
Loss switched - - 20,976
in
Profit - - 280,550
switched in
Loss switched - - - 485,603
out
I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8
[ Am i t k u m a r A. S h a h H U F & O r s . ] - 13 -
Sub-total (46,395) - (862,025} (3,694,723)
Distance '4':
Profit - - - 220,169
switched out
Loss switched - - -
in
Profit - - - 1,584
switched in
Loss switched - -
out
Sub-total - - - (218,585)
Distance '5':
Profit - -
switched out
Loss switched - - - -
in
Profit - - - -
switched in
Loss switched - - -
out
Sub-total - - -
Total (116,078) (103,078) (2,191,615) (3,862,350)
Am ount of 116,078 103,078 2,191,615 3,862,350
addition
Difference, if - -
any
(*) Compiled on the basis of and to the extent of the soft format data supplied by the AO (**) Distance-wise breakdown not available since the AO did not supply transaction-specific details.
12.1 In the tabulated statement noted above, the assesse has segregated the extent and magnitude of modification in client code at five different levels. 'Distance 1' level denotes the involvement of client codes of two parties to be broadl y the same except one digit difference. For instance, the client code BHA-1 and BHA-2 has onl y one difference i.e. in numerical number and will fall in 'Distance 1'. Likewise, BHA-1 and BHB-1 will also fall in 'Distance 1' category being onl y one difference in alphabet. 'Distance 1'is also stated to include modifications client code of relatives inter se. As regards modification falling in 'Distance 1' category, it is the case of assessee that error owing to wrong punching of client code bearing similar character are required to be ignored being bonafide punching errors. 'Distance 2' denotes distance wise break down in modification to the extent of two digits between two client codes where the modification has purportedl y happened, resulting in I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 14 -
shifting in of loss or shifting out of profit from one client account to another. 'Distance 3' reflects three digit modifications to record the trade in purportedly correct client code. 'Distance 4' transaction occurred at Stock Exchange similarl y reflects vast difference of four digits between one client code qua another.
12.2 It is the case of the assessee that inadvertent error in punching the client code can happen at the time of recording the trade order b y the broker to be executed on the platform of the stock exchange. For instance, instead of putting the trade order under the client code BHA-1, it might possibl y have been wrongl y punched as BHB-1 or BHA-2 on the part of the broker. Such human errors are normal incidents of trade and are suitabl y rectified b y the end of the day and Contracts notes are issued for the correct client code and settled as per the terms of the contract. It is further case of the assessee that most of the CCMs falling under 'Distance 1' category are among the relatives bearing similar clients codes. It was thus submitted that no adverse inference in respect of such modifications should be drawn more so in the light of express SEBI circular dated 19 t h August, 2016 where modifications of client codes post execution of trades on national exchanges were classified as genuine errors on account of punching or t yping original client code qua the modified client code bearing closel y similar character. Modifications within the relatives were also regarded as genuine errors b y SEBI as per the aforesaid circular. The shifting of trade in the correct client code falling in the 'Distance 1' category, thus, cannot be regarded as an y kind of alleged misuse of CCM facilit y. We find considerable force in the aforesaid plea of the assessee. It is quite plausible that error of such t ype b y way of wrong punch of client code could occur as normal incident of business while entering the orders on behalf of the client b y the broker. Such errors are to be recognized as genuine error even in the light of SEBI Circular. Such error in punching of trade does not call for an y adverse inference. Consequently, the AO is directed to delete the losses shifted in or profits shifted out owing to I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 15 -
modifications in client code falling in 'Distance 1' category as tabulated above with regard to all captioned assessees.
12.3 Adverting to purported shifting in of losses or shifting out of profits falling in 'Distance 2' category, it is the case on behalf of the assessee that such modification up to two alphabet or numeric in the client code also requires a benign consideration, more so, when such modification in the client code is resulted in both shifting in of losses as well as shifting out of losses and similarly shifting out of profits as well as shifting in profits covering different months. It is further case of the assessee (with reference to tabulated month-wise anal ysis of the data as provided b y the department in soft cop y) that such shifting in of losses or shifting out of profits has happened every month in both ways. For instance, the assessee has shifted in loss of Rs.46,808/- in April 2010 itself when he cannot predict the resultant profits at the end of the year from such trade. Noticeabl y, as per the anal ysis of data, the assessee has actuall y shifted out losses to the extent of Rs.22,281/- in Jul y 2010 which, on the contrary, is detrimental to the assessee. Having regard to the facts, in our understanding, a benign view is required to be taken in case of shifting of losses etc. falling in 'Distance 2' category as pleaded. Having regard to the peculiar facts that losses have not been purchased in last few months of financial year (December 2010 to March 2011) but the losses have arisen in the very beginning of the financial year, benefit of doubt, if an y, would surel y lean towards the assessee in such facts. The AO is thus directed to delete the adjustment in the assessed income to the extent of amount attributable to trade transactions falling in 'Distance 2' category of CCM.
12.4 Similar is the explanation of the assessee in respect of losses arising due to CCM falling in 'Distance 3' category. The assessee (Amitkumar A. Shah HUF) has statedl y switched out profit of Rs.46,395/- falling in 'Distance 3' category. In this regard, it is the case of the assessee that the original client code was BHA-2 assigned to assessee 'Amitkumar A. Shah HUF'. The modified client code is BHB-
I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 16 - 51 assigned to one 'Bhautik R. Gnadhi HUF'. The transaction has
happened in the beginning of the financial year i.e. on 29.04.2010. It is the case of the assessee that when seen from the point of view of mistake in original client code, the punching error is in last two digits i.e. A-2 in BHA-2 and therefore the mistake is only in two digits instead of three digits as read b y the Levenshtein Distance Theory applied b y the AO. We do not however see an y substance in the plea of the assessee for excluding additions to the extent of modifications fall in 'Distance 3' category. Not only the client code i.e. BHA-2 and BHB-51 are materiall y and substantiall y different and belongs to two altogether different clients, said punching errors are not plausible. Such so called error, if permitted in the Office of the member broker as normal incident, would create transactional chaos. The Market Regulator SEBI has also frowned hard on such modifications. Such substantial modification in client code would naturall y involve some indulgence of mind with set purpose to shift in losses/shift out profit in the hands of an interested client. Such modifications in client code, in our view, do not fall within the league of bonafide error when seen on the touchstone of preponderance of probabilities. The concerted and s ystematic modification in client code to the advantage of assessee is an orchestrated affair to suppress profits generated on trades. We thus decline to interfere with the action of AO with reference to losses falling in 'Distance 3' category.
12.5 Losses resulting from client code modification falling in 'Distance 4' category would automaticall y fall in highl y doubtful category as a near impossibilit y. The client code of one client stands substituted b y an altogether modified client code. Losses resulting in the hands of the assessee from such revamp in the client code, if permitted, will obfuscate ground realit y of tax escapement arising from such modifications. Such fundamental modification in the client code lacks an y tangible purpose but to accommodate a willing client b y the broker in wrongful indulgence. Thus, the plea of the assessee in respect of losses from modification calling in 'Distance 4'category requires to be I T A N o . 7 0 8 - 7 0 9 & 7 0 5 - 7 0 6 / Ah d / 1 8 [ Am i t k u m a r A. S h a h H U F & O r s . ] - 17 -
rejected outrightl y. We thus decline to interfere with the action of Revenue in respect of losses falling in 'Distance 4' category.
12.6 Having anal ysed the extent of modification distance-wise, the AO is directed to grant relief to the assessee in all captioned appeals in respect of losses attributable to 'Distance 1' and 'Distance 2' category. To this extent, the relief sought b y the assessee is allowed.
13. In the result, the appeal of the assessee and all other captioned appeals are partl y allowed.
This Order pronounced in Open Court on 18/12/2019 Sd/- Sd/-
(MADHUMITA ROY) (PRADIP KUMAR KEDIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: Dated 18/12/2019
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं*धत आयकर आयु,त / Concerned CIT
4. आयकर आय,
ु त- अपील / CIT (A)
5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड9 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ*धकरण, अहमदाबाद ।