Bogus F&O Loss: Unusual & sudden spurt in client code modifications undertaken by brokers was with an intention to evade taxes.

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Bogus F&O Loss: Unusual & sudden spurt in client code modifications undertaken by brokers was with an intention to evade taxes.

IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI

BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER

आयकर अपीऱ सं./I.T.A. No.6534/Mum/2017
(नििाारण वर्ा / Assessment Year: 2010 -11)
Time Media & बिाम/ Income Tax Officer-
Entertainment LLP (Earli er 16(1)(5)
Time Media & v. R.No. 439, 4 t h Floor,
Entertainment Private Aayakar Bhavan,
Ltd.) M.K Marg,
104, Rachna, V.P Road, Mumbai-400020
Vile Parle (W),
Mumbai-400056
स्थायी ऱेखा सं ./ PAN: AAACT1581C

(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)

Assessee by: Shri. Reepal G. Tralshawala
Revenue by: Shri. D.G. Pansari (DR)

सन
ु वाई की तारीख /Date of Hearing : 28.03.2019
घोषणा की तारीख /Date of Pronouncement : 18.06.2019
आदे श / O R D E R

PER RAMIT KOCHAR, Accountant Member:

This appeal, filed by assessee, being ITA No. 6534/Mum/2017, is
directed against appellate order dated 31.07.2017, passed by learned

Commissioner of Income Tax (Appeals)-4, Mumbai (hereinafter called
“the CIT(A)”) in Appeal No. CIT(A)-4/IT-89/ITO-16(1)(5)/2016-17, for
assessment year 2010-11, the appellate proceedings had arisen before
learned CIT(A) from the assessment order dated 30.03.2016 passed by
learned Assessing Officer (hereinafter called “the AO”) u/s 143(3)
r.w.s. 147 of the Income-tax Act, 1961 (hereinafter called “the Act”) for
AY 2010-11.
I.T.A. No.6534/Mum/2017

  1. The grounds of appeal raised by assessee in the memo of appeal
    filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter
    called “the tribunal”) read as under:-

―A) Re-opening is bad in law and reassessment
order passed is liable to be quashed
1. The Ld. CIT(A) erred in confirming the reopening of
the assessment without appreciating that the reopening of
the assessment is bad in law, invalid and liable to be
quashed in as much as-
a) reasons recorded for reopening of the assessment are
reason to suspect and not reason to believe.
b) reopening is upon direction of third party and therefore
borrowed reasons;
c) without any tangible material available; and
d) without any proper application of mind and even the
amount referred in the reasons recorded is incorrect.

Without prejudice to the above, on merits:
B) Disallowance of part of F & O Loss –
Rs.31,98,597/-
2. The learned CIT(A) erred in confirming the
disallowance of F & O loss of Rs,31,98,597/- only on the
reason that there was Client Code Modification (CCM) done

by the broker in respect of the transactions where loss of
Rs.31,98,597/ is incurred and hence, only on assumption
and presumption the disallowance of loss of
Rs.31,98,597/- is without any justification and liable to be
deleted.
3. The learned CIT(A) failed to appreciate that the
broker through whom the transactions were carried out
gave response to the summons issued by the AO and
confirmed the transaction as genuine and that CCM was
genuine mistake and hence, the disallowance of loss of
Rs.31,98.597/- is unjustified and liable to be deleted.

  1. The Ld. CIT(A) further failed to appreciate that if
    the AO was not satisfied with the reply of the broker, the
    AO could have issued notice once again, however, the

appellant could not be made to suffer due to fault /
mistake on the part of the broker for punching error
committed and hence, the disallowance of loss merely on
the basis of allegations and without any material to prove
otherwise is unjustified and liable to be deleted.

  1. C) Addition of Rs. 31,986/- as unexplained
    expenditure

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I.T.A. No.6534/Mum/2017

  1. The Ld. CIT(A) erred in confirming addition to the
    extent of Rs. 31,986/- as commission paid to the broker for
    carrying out CCM / obtaining loss without appreciating the
    fact that the appellant transaction giving rise to loss of
    Rs.31,98,597/- is genuine transaction and genuine loss
    and not fictitious and thus, the question of making
    payment of commission to the broker does not arise.
  2. The Ld. CIT(A) further failed to appreciate that
    there was no evidence whatsoever that the appellant has
    made any such payment to the broker and neither there is
    any such claim made in the profit and loss account and
    hence, the addition confirmed to the extent of Rs. 31,986/-
    is without any justification and liable to be deleted.
  3. The appellant craves leave to add, amend, alter or
    delete all or any of the aforesaid grounds of appeal.‖
  4. The brief facts of the case are that the assessee is engaged in
    the business of TV serials telecast, advertising, film distribution etc.
    and had income from sale of pre-recorded CD/DVD , royalty,
    commission and income from investment in shares. The assessee filed
    its return of income with Revenue for the impugned assessment year
    on 07.09.2010, which was processed by Revenue u/s. 143(1) of the
    Act. Thus, no scrutiny assessment as is contemplated u/s. 143(3)
    read with Section 143(2) of the 1961 Act was originally framed by
    Revenue against the assessee.

3.2 The AO received information from the office of DIT(I&CI) Mumbai,
vide letter no. DIT(I&CI)/CCM/2014-15 dated 27.02.2015 through
learned PCIT that some brokers were misusing the Client Code
Modification facility in the F&O segments on NSE and had created
non-genuine profit and loss. It was observed by the AO that these
Loses and Profits were given by these brokers to their different
clients/beneficiaries according to their requirements. The AO observed
that clients had taken fictitious loses to set off against their profits
with a view to reduce their tax liability. As per information received by
the AO, the assessee was one of the beneficiary of the Client Code
Modification as the name of the assessee also appeared in the

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I.T.A. No.6534/Mum/2017

beneficiaries list who had taken fictitious F&O Loses through the
broker Inventure Growth & Securities Ltd. (hereinafter called
“Inventure”) , during the financial year 2009-10 relevant to AY 2010-
11, to the tune of Rs. 31,98,597.50, which income as per AO had
escaped taxation , the details of which are as hereunder:-

Original PAN Profit Modified PAN loss to
Client Name to original client name modified
client client because
because of client
of client code
code modification
modification
G F L AABCG0597Q 31,98,597.50 TIME MEDIA AAACT1581C 31,98,597.50
FINANCIALS AND
INDIA ENTERTAINMENT
PVT. LTD

3.3 The assessee case was reopened by the AO by invoking provisions
of Section 147 of the 1961 Act for framing reassessment after
obtaining due approvals for which notice dated 23.03.2015 u/s. 148
was issued by the AO to the assessee which was duly served on the
assessee.

3.4 The assessee in response to aforesaid notice dated 23.03.2015
issued by the AO u/s. 148 filed its return of income on 15.04.2015,
requesting AO to treat the return of income originally filed on
07.09.2010 as return of income filed in response to the notice issued
u/s 148 of the 1961 Act.

3.5 Thus, undisputedly no original assessment was framed by
Revenue u/s. 143(3) read with Section 143(2) of the 1961 Act and
further reopening of the concluded assessment was done by Revenue
u/s. 147 of the Act for framing reassessment within four years from
the end of the assessment year and hence first proviso to Section 147
of the 1961 Act shall have no applicability.

3.6 Based on information received from learned Director of Income
Tax (I and CI) , Mumbai , the notices u/s. 133(6) of the 1961 Act were

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I.T.A. No.6534/Mum/2017

issued by the AO to the Brokers through which the assessee has done
business in F&O segment on the NSE including the Broker Inventure,
wherein there was an allegation on the assessee that it has obtained
fictitious F&O Loss by way of change in client code modification by
paying the brokerage to the brokers for off-setting huge profits against
these fictitious losses. In response to the said notice, Inventure vide
its reply dated 15.03.2015 submitted in nut-shell as under:-

“We are SEBI registered Stock Broker having more than
40000 clients and more than 1000 trading location. We
have given the right to operate the trading terminal
functions such as entering the order modifying the order,
cancelling the order etc. to our Sub Broker/Authorized
Person /Dealers, who are executing the trades on behalf of
our clients. Some clients have family account with us and
execute large order in one code in order to get the trading
opportunity during the market volatility. During the market
trading or post-market closing, the NSE provides the facility
to modify the trade within the same family/group of clients
to rectify the errors made in entering the client code.
Because of this reasons, some client code were modified as
per the guidelines issued by the Exchange. We further
submit to your honor that during the financial year 2009-
10, we have more than Rs. 97,000 crore trading volume in
NSE F&O segment Where as the total client code
modification is less than 1% of the total trading volume.”

3.7. The AO considered the aforesaid reply of the Broker Inventure
and observed that they have not answered the specific question
despite specifically asked to explain reasons and nature for such
client code modifications in respect of the F&O transactions entered
into by the assessee with them. The AO was of the view that the reply
of the broker Inventure is evasive and general wherein specific replies
were not given by Inventure.It is pertinent to mention that the
enquiries with Brokers including Inventure was made by the AO after
receipt of aforesaid information from learned DIT(I & CI) received
through learned PCIT but before issuance of notice u/s 148 of the
1961 Act.

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I.T.A. No.6534/Mum/2017

3.8 The AO also observed that spot verifications u/s 131(1A) of the
1961 Act was carried out by Revenue on brokers who were indulging
in client code modifications and they have confirmed that they
misused the facility of client code modification in order to create
fictitious loses/profits.

3.9 The assessee was asked by the AO during the course of
reassessment proceedings u/s 147/148 of the 1961 Act to prove the
genuineness of these F&O Loses . The assessee in response filed
ledger account of the brokers through which the assessee has taken
F&O Loses. In view of the AO , the assessee had failed to prove
genuineness of the losses on derivative transaction to the tune of Rs.
31,98,579.50.

3.10 During course of reassessment proceedings, the notices were
issued by the AO to National Stock Exchange(in Short “NSE”) u/s.
133(6) of the 1961 Act which sent reply dated 18.03.2016 , which
clearly indicated that the assessee has undertaken client code
modification through the brokers.

3.11 The AO show caused the assessee vide order sheet noting dated
22.03.2016 as to why the bogus losses claimed by the assessee with
respect to F&O transaction through brokers which has resulted in
wrong claim of losses on F&O should not be added to the income of
the assessee. The assessee filed reply dated 28.03.2016 to justify its
claim that the F&O loses are genuine but the AO was not satisfied
with the reply filed by the assessee and additions were made to the
income of the assessee by the AO to the tune of Rs. 31,98,597.50 u/s.
68 of the Act, vide reassessment order dated 30.03.2016 passed by
the AO u/s 143(3) read with Section 147 of the 1961 Act .

3.12 Further additions as undisclosed income of the assessee to the
tune of Rs. 1,59,930/- being @5% of alleged bogus F&O losses to the
tune of Rs. 31,98,597.50 were made by the AO towards commissions
allegedly paid to the broker Inventure by assessee from undisclosed

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I.T.A. No.6534/Mum/2017

sources for obtaining these bogus F&O losses were made by the AO as
the assessee had failed to prove the genuineness of these F&O losses
and further the brokers had confirmed in an enquiry made by
Revenue u/s 131(1A) having received brokerages on these bogus F&O
Losses, , vide reassessment order dated 30.03.2016 passed by the AO
u/s. 143(3) r.w.s. 147 of the Act.

  1. The matter reached Ld. CIT(A) at the behest of the assessee
    wherein assessee filed first appeal with learned CIT(A) as the assessee
    was aggrieved by reassessment order dated 30.03.2016 passed by the
    AO u/s 143(3) read with Section 147 of the 1961 Act. The assessee
    reiterated before learned CIT(A) that these F&O losses are genuine but
    it did not found favour with Ld. CIT(A) , who was pleased to dismiss
    the appeal of the assessee on merits as well challenge raised by the
    assessee to the reopening of the concluded assessment by AO u/s 147
    of the 1961 Act, but while so far as alleged commissions paid to
    broker Inventure on alleged bogus F&O Losses which were added as
    undisclosed income of the assessee by the AO to the tune of 5% of
    alleged bogus F&O Less, the learned CIT(A) was pleased to reduce the
    additions to the tune of 1% of the alleged bogus F&O Losses as
    against additions to the tune of 5% of alleged bogus F&O Losses made
    earlier by the AO in reassessment order, vide appellate order dated
    31.07.2017 passed by learned CIT(A) , wherein learned CIT(A) held on
    merits as under:-

―3.2 I have considered the finding of the Assessing Officer,
rival submission of appellant and perused the evidence on
record. I find that assessee has shown loss under Futures
and Options of Rs. 97,44,423/- out of which loss of Rs.
31,98,597/- has been shown by way of Client Code
Modification without any valid reason. The information
received from the office of the DIT(I&CI) , Mumbai by letter
dated 27.02.2015 demonstrated the modus operandi of
such brokers, misusing Client Code Modification facility of
NSE and thereby giving entry of profit or losses in F&O
trading. In this case Assessing Officer has made the
enquiry from the broker who has not given proper answer
as to why there was Client Code Modification. He has

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I.T.A. No.6534/Mum/2017

given general information avoiding the revelation of true
facts. When question was client specific, broker was to
give proper reply. Further, when spot verification was
made, broker have confirmed such bogus Client Code
Modification, hence the conclusion drawn by the Assessing
Officer that fictitious loss was procured by parting
commission is found to be worth approval.

3.3 In the course of appellate proceedings the Ld.
Authorised Representative has given only general
explanation without pointing out as to why there was a
Client Code Modification and what was the propriety of
obtaining business loss from a broker. Thus in such
circumstances , the result of investigation done by
DIT(I&CI) cannot be brush aside.Thus, the finding of
Assessing Officer based on various facts are approved and
disallowance of claim of loss of Rs. 31,98,597/- is
sustained.‖

***
*** 4.2 I have considered the finding of Assessing Officer, rival submission of assessee carefully. I find that for doing such Client Code Modification assessee might have definitely incurred some commission expenses. It can be seen from Balance Sheet that assessee is in entertainment business having income from sale of CD, DVD & income from TV serials. Assessee has not shown any commission expenditure in P&L account except brokerage of Rs. 14,226/-. Since such entry has been obtain for claiming loss, hence element of commission expenditure cannot be ruled out. For obtaining such entry one has to incurred some expenditure, therefore the finding of Assessing Officer deserve approval. However estimation of expenditure @5% of loss is not found reasonable, rather found to be excess, hence in the fitness of thing a reasonable estimate of expenditure is to be made.

Normally in such transaction, 1% commission is charged and not 3% to 6%. There are so many cases reflecting commission in brokerage sector @1% , thus from this point of view , and also considering the circumstances, 1% of such procurement of entry of Rs. 31,98,597/- is found to be most reasonable for making addition of unrecorded expenditure. Thus addition of expenditure of Rs. 31,986/- is sustained and balance amount of Rs. 1,27,944/- is deleted.‖ Page | 8 I.T.A. No.6534/Mum/2017 4.2 The assessee during the course of appellate proceedings before learned CIT(A) had also challenged reopening of the concluded assessment by the AO u/s 147 of the 1961 Act by raising additional grounds, which legal challenge to reopening of concluded assessment by the AO u/s 147 of the 1961 Act raised by the assessee also stood dismissed by learned CIT(A) , vide appellate order dated 31.07.2017 passed by learned CIT(A), wherein learned CIT(A) was pleased to hold as under:

―5.5. I have considered reason for reopening for assessment, counter representation of Ld. Assessing Officer and Ld. Authorised Representative, carefully. I find that in this case there was no regular assessment u/s 143(3), but Return of Income was simply processed u/s 143(1) of the IT. Act. , hence no scrutiny was made nor was any disclosure of income of Client Code Modification. Subsequently information obtained by the then DIT(I&CI), Mumbai through investigation was communicated to Assessing Officer through Pr.CIT-16. On the basis of specific information that brokers were misusing Client Code Modification facility to provide entry of profit or losses to such assesses willing to obtain such entries and assessee had procured such benefit from the broker, so as to suppress its taxable income, hence it is very obvious that while recording the reason the Assessing Officer was having tangible material to believe that there was escapement of assessment. It can be seen from tax audit report in form no 3CD that assessee’s business is entertainment related. It derives income from sale of CD’S, DVD & TV serials, hence no such active F&O business is there. Thus, it is very evident from P&L account that in this year only such loss of Rs. 97,43,632/- has been shown and out of this, an amount of Rs. 31,98,597/- is on account of Client Code Modification for which no proper explanation is there, hence while recording the reason, Assessing Officer was having basic material, reliable information and reason to believe that there was escapement assessment , hence he has rightly proceeded to exercise power under section 148 and has made the escapement assessment. Because of these facts, none of the case laws relied upon by Ld. Authorised Representative is applicable or favor to the appellant.‖
5. Aggrieved by an appellate order dated 31.07.2017 passed by learned CIT(A), the assessee has filed an appeal with tribunal. It is Page | 9 I.T.A. No.6534/Mum/2017 pertinent to mention that the Revenue has not come in an appeal before tribunal against part relief granted by learned CIT(A) to the assessee as neither learned DR nor learned counsel for the assessee has brought to our notice factum of filing appeal by Revenue with tribunal against part relief granted by learned CIT(A) to the assessee. So, we shall be proceeding to adjudicate this appeal based on the belief that part relief granted by learned CIT(A) to the assessee has attained finality.

5.2 The Ld. Counsel for the assessee submitted before the Bench that the AO has recorded reasons for reopening of the concluded assessment u/s. 147 for framing reassessment which are placed in paper book filed with tribunal at page no. 19-20. It was submitted by learned counsel for the assessee that reasons recorded by the AO for reopening of the concluded assessment u/s 147 for framing fresh assessment were not sufficient as there was no material before AO to come to the conclusion that income of the assessee had escaped assessment. It was fairly submitted by learned counsel for the assessee that originally assessment was not framed by Revenue u/s. 143(3) read with Section 143(2) of the 1961 Act but the return of income was originally processed by Revenue u/s. 143(1) of the Act . It was submitted by learned counsel for the assessee that impugned assessment year under consideration before the tribunal is AY 2010- 11 and notice dated 23.03.2015 was issued by the AO to the assessee u/s. 148 of the Act, for reopening of the concluded assessment which is within four years from the end of the assessment year. The learned counsel for the assessee relied upon the decision of Hon‟ble Bombay High Court in the case of Coronation Agro Industries Limited v. DCIT reported in (2017) 390 ITR 464(Bom. HC). It was submitted by learned counsel for the assessee that all trades in F&O were done in the month of March 2010. The learned counsel for the assessee also relied upon the decision of Ahmadabad-tribunal in the case of Smt. Sunita Jain & Ors. v. ITO in ITA no. 501 & 502/Ahd./2016 vide orders dated Page | 10 I.T.A. No.6534/Mum/2017 09.03.2017. It was submitted by learned counsel for the assessee that complete details were given to the AO as to the total F&O losses incurred by the assessee. It was submitted by ld. Counsel for the assessee that the AO made enquiries with brokers and there is no incriminating material before the AO to come to conclusion that these F&O losses were bogus. It was submitted by learned counsel for the assessee that reopening of the concluded assessment u/s 147 of the 1961 Act was done by the AO based on suspicion which is not permitted within mandate of Section 147/148 of the 1961 Act as there was no material before the AO to come to prima facie belief that income of the assessee had escaped assessment. The learned counsel for the assessee brought our attention to paper book /page no. 143 filed with tribunal which is an ledger account of Inventure in the books of accounts of the assessee . The learned counsel for the assessee relied upon the decision of Jaipur-tribunal in the case of DCIT v. Gyandeep Khemka in ITA no. 695/JP/2018 vide orders dated 23.10.2018. It was submitted by learned counsel for the assessee that the Revenue has not recorded statement of the Broker namely Inventure. It was submitted by learned counsel for the assessee that additions were made on account of client code modification based on allegation that these F&O loses are bogus while there is no evidence in possession of Revenue that these F&O losses are bogus . It was submitted by learned counsel for the assessee that total F&O loss of the assessee was Rs. 97,44,423/- out of which F&O loss with the broker Inventure was Rs. 34,67,657.96 . It was submitted by learned counsel for the assessee that out of the aforesaid loss with respect to F&O transactions entered into through Inventure to the tune of Rs. 34,67,657.96 , F & O loss to the tune of Rs. 31,98,579.50 was only disallowed by the AO and rest of the F&O loss was allowed by the AO itself. It was fairly submitted by learned counsel for the assessee that the F&O loss of Rs. 31,98,579.50 was subject to client code modifications undertaken by the brokers with stock exchanges. It was submitted by learned counsel for the assessee that the broker Page | 11 I.T.A. No.6534/Mum/2017 Inventure is a big broker having turnover of Rs. 97,000/- crores and client code modification undertaken by this broker was less than 1% of the total trading volume , thus it could not be said that this F&O loss was bogus. It was explained by learned counsel for the assessee that there were punching errors done by the broker staff while executing trade orders which were later rectified through client code modifications with stock exchanges which can be done only within 30 minutes of the trade and there is no possibility of perpetrating any fraud on Revenue as the window for client code modification is available only for 30 minutes from the time of trade.

5.3. The Ld. DR submitted that assessee had indulged in F&O transactions wherein there were client code modification undertaken by the assessee in collusion with Brokers namely Inventure , with a view to defraud revenue wherein bogus fictitious loss in F&O to the tune of 31,98,579.50 was claimed as set off against other income‟s of the assessee. It was submitted by learned DR that the information was received from Director of Income-tax ( Intelligence & Criminal Investigations), Mumbai that the assessee is beneficiary of bogus F&O loss through client code modifications undertaken in F&O trades. It was submitted that reasons for reopening of the concluded assessment were recorded by the AO based on incriminating information received from Director of Income-tax ( Intelligence & Criminal Investigations), Mumbai and after making enquiries . It was submitted by learned DR that originally no scrutiny assessment was framed by Revenue u/s 143(3) read with Section 143(2) of the 1961 Act and the return of income was originally processed u/s. 143(1) of the 1961 Act . Thus , it was claimed that there could not be thus any change of opinion as scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act was never framed by Revenue against the assessee. It was submitted by learned DR that reopening of the concluded assessment u/s 147 of the 1961 Act was done within four years from the end of the assessment year and first proviso to Section 147 of the 1961 Act is Page | 12 I.T.A. No.6534/Mum/2017 clearly not applicable. It was submitted by learned DR that the assessee is beneficiary of client code modification through which bogus F&O losses were generated and income of the assessee had escaped assessment. It was pointed out by learned DR that specific incriminating tangible information was received by AO that the assessee is beneficiary of manipulations through client code modification wherein fictitious F&O loss of Rs. 31,98,597.50 was claimed as set off against other income‟s of the assessee to defraud Revenue. It was submitted by learned DR that the AO has recorded his prima facie belief based on incriminating tangible information received from Director of Income-tax ( Intelligence & Criminal Investigations), Mumbai as well by enquiries made prior to issuance of notice u/s 148 that the income of the assessee has escaped assessment which is indication of an independent application of mind by the AO. It was submitted by learned DR that it is a case wherein no scrutiny assessment was originally framed by AO u/s 143(3) read with Section 143(2) of the 1961 Act and the return of income was only processed originally u/s. 143(1) of the 1961 Act and hence there is no change of opinion by the AO. It was submitted that the AO has rightly reopened the concluded assessment for framing reassessment by invoking provisions of Section 147 of the 1961 Act. It was submitted that many brokers who were indulging in manipulation in client code modifications investigated by Department surrendered the amount of commission income received by them on these fictitious losses/profits generated for clients through modus operandi by client code modifications in trades through stock exchange and paid taxes to Revenue on these undisclosed income from brokerages . Our attention was drawn by learned DR to page 144 of the paper book filed with tribunal wherein judgment of Hon‟ble Bombay High Court in the case of Coronation Agro Industries Limited(supra) is placed and it was submitted by learned DR that Coronation Agro India Ltd.(supra) was a case wherein original assessment was framed by Revenue u/s. 143(3) while in the instant case the return was originally processed u/s Page | 13 I.T.A. No.6534/Mum/2017 143(1) of the 1961 Act wherein no scrutiny assessment was framed by Revenue u/s 143(3) of the 1961 Act in the instant appeal before the tribunal. It was submitted by learned DR that in case of Coronation Agro(supra) the notice u/s 148 was issued beyond four years from the end of assessment year and the first proviso to Section 147 was applicable. It was submitted by learned DR that in the case of Smt. Sunita Jain(supra) relied upon by learned counsel for the assessee reopening of the concluded assessment by invoking provisions of Section 147 was not done with respect to client code modification and hence this case is also distinguishable. It was submitted by learned DR by referring to page 143 of paper book which is ledger account of Inventure in the books of accounts of the assessee that all transaction took place in the month of March 2010. It was submitted that inquiries were made by AO from NSE which also revealed that there was a misuse of client code modification . The learned DR made prayers for confirming the additions as were made by the AO vide assessment order which were later confirmed by learned CIT(A).

5.4 The Ld. counsel for the assessee in rejoinder drew our attention to page 19-20 of the paper book wherein reasons for reopening of the concluded assessment u/s 147 of the 1961 Act were recorded . It was submitted that while recording reasons allegation of income escaping assessment to the tune of Rs. 1,19,69,919/- from fictitious F&O Losses were made by the AO in the hands of the assessee owing to client code modifications , while the assessee only had losses from F&O to the tune of Rs. 97,43,632/- and the financial statements of the assessee were before the AO , which reflected lack of application of mind by the AO. It was submitted that finally additions were made by AO for alleged bogus F&O loss to the tune of Rs. 31,98,597.50 by the AO vide reassessment order passed u/s 143(3) read with Section 147 of the 1961 Act.

  1. We have considered rival contentions and perused the material on record including cited case laws. We have observed that the Page | 14 I.T.A. No.6534/Mum/2017 assessee is engaged in the business of TV serials telecast, advertising, film distribution etc. and had income from sale of pre-recorded CD/DVD , royalty, commission and income from investment in shares. The assessee filed its return of income for the impugned assessment year on 07.09.2010 which was processed by Revenue u/s. 143(1) of the Act. Thus, admittedly no scrutiny assessment as is contemplated u/s. 143(3) read with Section 143(2) of the 1961 Act was originally framed by Revenue against the assessee. The AO received information from Director of Income-tax (Intelligence & Criminal Investigation) vide letter No. DIT(I&CI)/CCM/2014-15 dated 27.02.2015 through learned PCIT,Mumbai that some brokers were misusing the Client Code Modification facility in the F&O segment on NSE and had created non- genuine profit/losses which were then extended to various clients/beneficiaries according to their requirements. The assessee was listed as one of beneficiaries of the said client code modification in the aforesaid information received by the AO who has availed fictitious F&O Loss through the broker Inventure during the financial year 2009-10 relevant to impugned assessment year 2010-11. On receipt of information from learned DIT(I&CI), Mumbai through learned PCIT and prior to issuance of notice u/s 148 to the assessee, the AO conducted enquiries with broker Inventure by issuing notices u/s 133(6) of the 1961 Act asking as to client code modification entered in the F&O trade entered into by the assessee in financial year 2009-10 relevant to impugned assessment year 2010-11. The said broker gave reply vide letter dated 15.03.2015 which as per the AO the said reply filed by Broker Inventure was a general and evasive reply wherein specific query asked by the AO vis-a-vis client code modification entered into with reference to trade by assessee through the said broker was not answered by Inventure. The reply of the said broker Inventure vide letter dated 15.03.2015 is reproduced hereunder:

“We are SEBI registered Stock Broker having more than 40000 clients and more than 1000 trading location. We have given the right to operate the trading terminal Page | 15 I.T.A. No.6534/Mum/2017 functions such as entering the order modifying the order, cancelling the order etc. to our Sub Broker/Authorized Person /Dealers, who are executing the trades on behalf of our clients. Some clients have family account with us and execute large order in one code in order to get the trading opportunity during the market volatility. During the market trading or post-market closing, the NSE provides the facility to modify the trade within the same family/group of clients to rectify the errors made in entering the client code. Because of this reasons, some client code were modified as per the guidelines issued by the Exchange. We further submit to your honor that during the financial year 2009- 10, we have more than Rs. 97,000 crore trading volume in NSE F&O segment Where as the total client code modification is less than 1% of the total trading volume.”
It was also observed by the AO that spot verifications u/s 131(1A) of the 1961 Act were carried out by Revenue on brokers who were indulging in client code modifications with stock exchanges to manipulate F&O Losses/Profits and these brokers confirmed that they have misused the facility of client code modification in order to create fictitious losses/ profits. The said brokers then surrendered commission income to income-tax which they had earned on these manipulations perpetrated through client code modifications in trade on stock exchanges. The AO reopened the concluded assessment after recording reasons for reopening of concluded assessment u/s 147 of the 1961 Act and after seeking required approvals from appropriate authorities, which led to issuance of notice dated 23.03.2015 by the AO to the assessee u/s 148 of the 1961 Act . We are presently concerned with AY 2010-11 and thus the said notice dated 23.03.2015 issued by the AO u/s 148 was issued within four years from the end of the assessment and hence first proviso to Section 147 of the 1961 Act is not applicable. It is also undisputed that originally no assessment u/s 143(3) read with Section 143(2) was framed and return was originally processed u/s 143(1) of the 1961 Act. Thus, it could not be said that the AO had formed any opinion as to claim of set off of F&O Loss with other incomes filed by the assessee originally when the return of income was processed u/s 143(1) of the 1961 Act and hence Page | 16 I.T.A. No.6534/Mum/2017 it is not a case of change of opinion. The decision of Hon‟ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd(2007) 291 ITR 500(SC) is relevant. At the stage of issuance of notice u/s 148 what is required is a prima-facie belief that based on incriminating tangible information received by the AO that income has escaped assessment. There is a requirement of live link between the tangible incriminating material received by the AO and the formation of belief that the income of the assessee has escaped assessment before invoking provisions of Section 148 of the 1961 Act. There is also requirement of independent application of mind of the AO before reopening of the concluded assessment u/s 147 of the 1961 Act. In the instant case, the AO received information from learned DIT(I&CI), Mumbai through learned PCIT, Mumbai that the assessee is beneficiary of obtaining fictitious F&O Loss from broker which was manipulated losses by modifying client code modifications. It had come to notice that many brokers were indulging in the tax evasions through modification in client code modifications in FY 2009-10 wherein fictitious profit/losses were created which was given by these brokers to their clients/beneficiaries in consideration of brokerage income which was also not disclosed to Revenue but when enquiry was conducted u/s 131(1A), these brokers surrendered these brokerage income from undisclosed sources. Further, the AO itself conducted enquiries prior to issuance of notice u/s 148 of the 1961 Act by issuing notice u/s 133(6) to Broker Inventure and the said broker never gave specific replies but gave general and evasive replies. Thus, the AO also applied independent mind before reopening of concluded assessment u/s 147 of the 1961 Act. Thus, to contend that figure of fictitious F&O losses claimed by the assessee as was received by the AO from learned CIT(I & CI), Mumbai through learned PCIt,Mumbai was in variance with actual F&O loss claimed by the assessee or what was finally disallowed by the AO has no relevance as at this stage only a prima facie belief is required of the AO before reopening of concluded assessment u/s 147 that income has escaped assessment and not a Page | 17 I.T.A. No.6534/Mum/2017 fool proof conclusive case that income had infact escaped assessment. Thus, in our considered view, reopening of the concluded assessment by the AO by invoking provisions of Section 147 is valid and we sustain the same.

The assessee in response thereof to the notice issued by the AO u/s 148 of the 1961 Act submitted vide letter dated 08.04.2015 to treat return of income filed on 07.09.2010 as return filed in response to notice issued by the AO u/s 148 of the 1961 Act. Before, we proceed further , it will be profitable at this stage to reproduce reasons recorded by the AO for reopening of the concluded assessment u/s 147 of the 1961 Act which are placed in paper book filed by the assessee at page 19-20, which reads as under:

― In this case the assessee has filed return of income on 07-09-2010 declaring total income of Rs. 1,14,58,689/-. The same has been processed u/s 143(1) on 27-02-2012 accepting the returned income.
The Client code modification facility (CCM) as approved by SEBI and provided by the Exchanges regarding share transactions to brokers is meant to rectify genuine mistakes of punching share transactions to brokers is meant to rectify genuine mistakes of punching of orders of a particular trade given by a particular client in its particular account maintained with the broker. In this facility the broker can change the client code of a particular trade and transfer the trade from one account to another account during the trading hours and time permitted by the Stock Exchange after the trading hours. After the modification of client code is made, it is submitted to the Stock Exchange to modify the client code in the exchange data. The Stock Exchange then records this data as client code modification data.
As per letter received from Pr. CIT-16, Mumbai No. PCIT-16/CCM/2014- 15 dated 10-03-2015 along with a copy of letter No. DIT(I&CI)/CCM/2014-15 dated 27.02.2015 of Director of Income- tax(Intell. & CR INV.), Mumbai , it has emerged that many assesses have engaged in Tax evasion through client code modification during F.Y.2009-10 , with the help of brokers who have misused this facility of CCM for creating artificial losses/profits and providing such fictitious profit/losses to various clients by charging some commission. Since the clients have used the fictitious losses for the purpose of reducing their taxable income, the claim of losses needs to be included in their income.
As per the details received, M/s Time Media & Entertainment Pvt. Ltd. (PAN AAACT1581C) is one of the Beneficiary of CCM as per the List of Page | 18 I.T.A. No.6534/Mum/2017 Beneficiaries under the Jurisdiction of Pr. CIT-16, Mumbai, whose PAN is under this jurisdiction.
Therefore , in view of the above, the amount of Rs. 1,19,69,919/-
(Rs.5,98,49,597-Rs.4,78,79,678)have escaped from assessment.‖ (Emphasis supplied by us) Thus, as could be seen from the reasons recorded that it came to notice of the Revenue that in FY 2009-10 many brokers had misused this facility of client code modifications to artificially create profits/losses which were passed on various clients/ beneficiaries with a view to defraud revenue. These brokers also benefitted by charging commission incomes for arranging these fictitious losses/profits for clients/beneficiaries. This also led to invocation of provisions of Section 131(1A) of the 1961 Act by Revenue against these brokers wherein these brokers admitted to be engaged in manipulations vide client code modifications in trade entered through stock exchanges wherein fictitious losses/profits were created which were passed on clients/beneficiaries to defraud Revenue. These brokers surrendered income by way of brokerage income earned by them on these fictitious profits/losses passed on to various clients/beneficiaries. As we will see later in this order , the genesis to these client code modifications manipulations in FY 2009-10 lies to a sudden spurt in client code modifications in the month of March 2010 to the tune of Rs. 48,794 crores undertaken by brokers in NSE with an intent to defraud Revenue . This sudden spurt in client code modifications undertaken by Brokers in the month of March 2010 was subject to probe by SEBI and NSE as well by Income-tax Department. As we will see later in this order, there is mention of this sudden spurt in client code modifications in the month of March 2010 in various judicial orders pronounced by Courts/tribunal. It is also pertinent to mention here about the client code modification facility allowed by Stock Exchanges which is permitted in accordance with framework of SEBI/Stock Exchanges rules/regulations and circulars which are issued from time to time. We are reproducing herewith SEBI circular of 05TH July 2011 Page | 19 I.T.A. No.6534/Mum/2017 for the benefit of understanding the concept of client code modification undertaken by Brokers with Stock Exchanges, which is reproduced hereunder:

Page | 20 I.T.A. No.6534/Mum/2017 Page | 21 I.T.A. No.6534/Mum/2017 These client code modifications are allowed by SEBI/Stock Exchanges only to rectify genuine errors. These errors are considered genuine which occurred due to punching errors committed by the staff of brokers while executing trade orders or shift is contemplated within relatives . The stock exchanges have also laid down the criteria‟s based on which client code modification are allowed . It is noted from the policy laid down by Bombay Stock Exchange that these client code modifications are allowed till 4 PM of the same day (NSE till 4.15 PM) in which securities trade is executed i.e. 30 minutes till after closure of trading hours. There is an further longer time extended for client code modifications with respect to currency derivatives with which we are not presently concerned. Say, if trade is executed on 01.01.2019 at 10.0 AM on stock exchange by Mr. A in buying 100 share of Company „X‟ through Broker „L‟ and the staff of the broker punches the client code of Mr. B while buying 100 shares of Company „X‟ , the client code Page | 22 I.T.A. No.6534/Mum/2017 modifications are allowed for genuine errors by BSE till 4 PM i.e. 30 minutes after closure of trading session of the same day which closes at 3.30 PM in securities market, wherein it was allowed to modify the trade to reflect 100 shares of Company „X‟ being bought by Mr. A by modifying client code of Mr. B to that of Mr. A. Thus, contention of the assessee that client code modification are allowed within 30 minutes of the executing of the trade on stock exchange is not correct rather the same is allowed till 30 minutes of the closure of trading session of the stock exchange. Thus, to claim that there is no possibility of fraud being perpetrated through client code modifications owing to limited window of 30 minutes available to effect the aforesaid modification is not correct and rejected as there is an extended window for client code modifications available till 30 minutes from the end of trading session.

Now , coming back to the instant appeal before us, we have observed that the assessee has incurred total F&O loss to the tune of Rs. 97,44,423/- which was debited to P&L account out of which loss of Rs. 31,98,597/- was shown as loss arising out of client code modifications which stood disallowed by the AO. The said addition was later confirmed by learned CIT(A) The assessee had incurred F&O Loss while dealing through Broker Inventure of Rs. 34,67,657.96 , out of which F&O loss to the tune of Rs. 31,98,597.50 was held to be fictitious loss by the AO as was inflicted with client code modifications undertaken by broker with stock exchange. It is pertinent to mention that a massive spurt in client code modifications took place in the month of March 2010 to the tune of Rs. 48,794 crores and NSE had confirmed that this spurt was with an intention to evade taxes. The said sudden spurt in the month of March 2010 in client code modification was probed by SEBI, NSE and IT Department. The assessee incidentally also opened new account with said broker Inventure for undertaking F&O transactions in the month of March 2010 and the entire transactions for F&O trade executed by the assessee with Broker Inventure also took place in the month of March Page | 23 I.T.A. No.6534/Mum/2017 2010. Incidentally , the assessee made first payment to broker Inventure of Rs. 25 lacs after opening the account on 02.03.2010 and second/final payment of Rs. 25 lacs was made on 09.03.2010. The F&O loss of Rs. 34,67,657.96 occurred in the month of March 2010 in quick succession within short spell and balance amount of Rs.15,32,623.36 was returned by the said broker Inventure to the assessee on 30.03.2010 through banking channel and the balance between both the parties got squared off in the month of March 2010 itself. It is stated by assessee that thereafter no transactions took place with said Broker Inventures and the account of the assessee with said Broker Inventure stood closed. Out of the total loss of Rs. 34,67,657.96 in F & O segment suffered by the assessee with respect to its trade with Broker Inventure , the F&O loss of Rs. 31,98,657.50 was inflicted with client code modifications and was held by the authorities below to be fictitious F&O Loss. The ratio of transactions of the assessee in F & O segment inflicted with client code modifications undertaken with Broker Inventure is as high as 92.21%. The said broker Inventure claimed in its reply to AO vide letter dated 15.03.2015, that its turnover is Rs. 97,000 crores and client code modifications undertaken by it is less than 1% but it failed to explain the reasons for undertaking client code modifications in the case of the assessee as high as 92.2% of the transactions with in short spell in the month of March 2010 itself which month incidentally was the last month of the fiscal year 2009-10 relevant to impugned assessment year 2010-11 where there could be an incentive to bring down income- tax by adopting unfair and illegitimate means and secondly this month of March 2010 also saw a sudden / massive spurt in the client code modifications to the tune of Rs. 48,794 crores undertaken at NSE which was reported by NSE to have been done with an intent to defraud Revenue by evading taxes. The DIT( I& CI) has in its letter dated 27.02.2015 also written that many assessee have engaged in tax evasion through client code modifications during F.Y. 2009-10, with the help of brokers who have misused the facility of client code Page | 24 I.T.A. No.6534/Mum/2017 modification for creating artificial losses/profits and providing such fictitious profits/losses to various clients by charging some commission income on these fictitious profits/losses for their clients/beneficiaries. The factum of this unusual sudden spurt in client code modifications undertaken by Brokers in the Month of March 2010 at NSE was taken judicial note in the order dated 15.05.2017 passed by Mumbai-tribunal in the case of ITO v. Ninja Securities Private Limited in ITA No. 6570/Mum/2014 for AY 2010-11 to which one of us being Accountant Member was part of the Division Bench pronouncing the order, wherein tribunal observed at page 28 as under:

―….There was material on record that there was a large scale transactions of approx Rs 55000 crores entered by brokers through NSE in the month of March 2010 wherein there were modifications in client codes in F & O transactions undertaken by NSE Brokers where in transactions were shifted to another codes by brokers which led to consequent shifting of profit/losses from one entity to another entity and NSE itself has cast shadow of doubt to the sudden spurt in magnitude of client code modifications which spurted from 2.75 lacs modifications in the month of December 2010 involving Rs. 21,896 crores to 6.18 lacs modifications involving value of Rs. 48,794 crores, which again fell to 1.62 lacs modifications with corresponding value to the tune of Rs 11882 crores in April 2010 . Similarly there was a sudden spurt in the client code modifications in currency derivatives. The NSE has itself stated that it is directed towards large scale tax evasion . The NSE itself stated that these transactions were modified beyond normal trading hours and reflect violation of proviso (d) to Section 43(5) of the 1961 Act…..‖ The attention is also drawn to judgment passed by Hon‟ble Punjab and Haryana High Court in the case of Rakesh Gupta v. CIT reported in (2018) 405 ITR 213(P&H) , wherein Hon‟ble Court took cognizance of the SEBI investigation being conducted with respect to client code modifications undertaken by Brokers on NSE in the month of March 2010, as under:-
“13. In this regard, a letter dated 08.03.2016 from the Principal Director of Income-Tax (Investigation) Ahmedabad, is of vital importance. The letter was addressed to the Chief Commissioner Page | 25 I.T.A. No.6534/Mum/2017 of Income-tax, Panchkula. The subject of the letter referred to a survey report in respect of Client Code Modification (CCM) being forwarded regarding the dissemination of beneficiary clients who have taken losses and shifted out profits during the financial years 2008-09 to 2011-12. The letter explains that modification of the client code is a practice under which brokers change the client code in sale and purchase orders of securities after the trades are conducted. It further rightly explains that while it is permissible to rectify inadvertent errors, there were concerns that modifications could be made to manipulate the activities in the market. Thus, for instance, if a particular transaction is undertaken in the name of a client, it cannot be shifted to the name or account of another client unless it was on account of an inadvertent error. The letter stated that SEBI had conducted a probe into the matter pursuant to the observations by the Finance Ministry about many such modifications having taken place in derivative transactions in the National Stock Exchange during March, 2010. ”
Thus, there was an unusual and sudden spurt in client code modifications in the month of March 2010 undertaken by Brokers in Stock Exchanges. The assessee had also suffered F&O Loss of Rs.31,98,597.50 through Broker Inventure for transactions undertaken through NSE in the month of March 2010 which were inflicted by client code modifications undertaken by Brokers with Stock Exchanges and which were held to be fictitious losses by authorities below. The assessee transactions in F&O segment also happened in the month of March 2010. The transactions inflicted through client code modification incurred through Broker Inventure in the month of March 2010 itself were as high as 92.2% of total transactions executed by assessee with broker Inventure on quantum of loss ratio basis.
At this stage , we would like to now refer and reproduce the decision of Mumbai-tribunal in the case of Ninja Securities Private Limited(supra), wherein Mumbai-tribunal held as under:

―….With respect to the second issue raised vide Ground No. 2 concerning disallowance of loss of Rs. 3,67,83,145/- claimed by the assessee as F & O trading loss which had arisen due to client code modifications undertaken in the month of March 2010 by the brokers of NSE wherein said F & O transactions were modified through client code modification by the three brokers of National Stock Exchange namely Page | 26 I.T.A. No.6534/Mum/2017 M/s Anugrah Stock & Broking Private Limited , M/s Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Limited and said F & O transaction were shown as assessee’s transaction post modification to reflect loss in the hands of the assessee to the tune of Rs. 3,67,83,145/-, the said loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes. The AO observed that there were reports in various financial newspapers that the NSE had allowed its members brokers to make client modifications to the tune of Rs. 55,000 crores in March 2010. Investigations in the matter was carried by DIT(I&CI), Mumbai after obtaining the approval of the CBDT . The notices were issued to NSE calling for relevant details as under :
―(i) Details of all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients.
(ii) Details of trade time stamp for each transaction where modifications have been carried out.
(iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates:
(iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies received from the NSE is as under:-
―The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non- institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs).
Month No. of Value of modifications in
modifications crore of rupees
December 2.75 lakhs 21,896

January 3.36 lakhs 28,860

February 4.05 lakhs 35,241

March 2010 6.18 lakhs 48,794
April 2010 1.62 lakhs 11,882

(ii) The increase in the client code modifications in the equity derivative segment in March, 2010, is in spite of the fact that trading volume and turnover actually fell during this months.
Page | 27 I.T.A. No.6534/Mum/2017
(iii) The number of client code modifications in the currency derivative segment in March, 2010 was 19395 and the value thereof was Rs.13282 crores while the comparative figures for January, 2010 was 863 modifications for a total value of Rs.461crores.
(iv) The above facts would indicate that the modifications made were part of an organized tax evasion racket which should be dealt with firmly.

(v) the important point to note is that client codes of deals carried out were changed by the brokers after the close of normal trading hours. The income tax act u/s 43(5) normally considers any transaction in which a contract for purchase or sale of any commodity including shares is settled other than by actual delivery or transfer as a speculative transaction. One of the exceptions to this position is contained in proviso (d) to S. 43(5) which states that an eligible transaction in respect of trading in derivative referred to in clause (act) of section 2 of the Securities Contracts Regulation Act, 1956 (42 of 1956) carried out in a recognized stock exchange) shall not be deemed to be a speculative transaction. An eligible transaction is one which is carried out. electronically on screen based systems and supported by a time stamped contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above.

(vi) Code changed can legitimately occur in some circumstances. For example, the broker may wrongly feed the client code of the husband when the shares are actually held by the wife. Similarly, there may be confusion between a HUF and individual having the same name. It is also observed that mutual funds follow a practice of purchasing shares under the code and then allotting to different schemes at the end of the day.

(vii) Other than the above, it is difficult to understand how a code change can legitimately occur.

viii) Code changes reported by the Exchange have been made to set off a trade made in normal trading hours though screen based trading in some earlier trading session. To clarify, a code change cannot take place from a static position it is always done to set off a trade which has already taken place.

(ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is Page | 28 I.T.A. No.6534/Mum/2017 normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.)

  1. x) The role of code modifications comes when these synchronized trades do not work due to market volatility. To clarify, suppose there are two clients, A that wants to book a loss and B that want to book a gain.

(xi) So A buys stock ‘x’ from, B at Rs. 100 a share in anticipation that the closing market price will be Rs. 90 rupees. But instead the stock, thanks to a volatile market, moves up and closes at a price of Rs. 110 if the position is squared at the end of the day. A would end up with a Rs.10 profit instead of a Rs.l0 loss and B is left holding a loss instead of the anticipated profit.

(xii) What the helpful broker does then is to swap the 2 client codes after the close to trading hours, thus gifting A a loss and B a profit. Since on the exchange the trades have been squared, there are no delivery obligations and everybody is satisfied.

(xiii) Market insiders say this subterfuge took a new, sophisticated proportions since 2004 with the advent of derivative trading and became rampant on the NSE as it was the only exchange with a liquid derivatives market.

(xiv) The above narration is one possible scenario for code changes aimed at tax evasion and not the only one.

(xv) The mere fact that a code change has occurred is not sufficient to arrive at a conclusion that the purpose was tax evasion. The broker concerned is very likely to give a certificate that he had made a mistake and there was no fault of the two parties concerned as was done in this case.

{xvi) As stated earlier a client code change implies that an earlier transaction has happened in the Stock Exchange it has sought to be set off by the present code change.‖ The A.O. after analyzing the facts and modus operandi of the above illustrations, observed as under:

―(a) it is seen that in the month of the March, 2010 the assessee has shown modified transaction in F&O segment.
(b) These transactions are entered by broker M/s Anugrah Stock & Broking Pvt. Ltd., M/s Labadhi Finance Corporation and M/s Wellworth Share & Stock Broking Ltd. and shown as modified in the assessee company’s name.
Page | 29 I.T.A. No.6534/Mum/2017 (c ) It. is seen from the details availed from NSE that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs.l,55,89,067/- (i.e. Rs. 28,19,798- Rs. l,83,98,865).
(d) It has also observed from the assessee’s F&O Transactions entered during the F.Y. 2009-1O has resulted in net profit of Rs.1,51,17,420/- (i.e. Rs. 2,04,97,205- Rs.53.,79,785).
(e) It is observed from the details that the assessee has adjusted the loss on sale of shares of other companies against the profit of the assessee company and resulted into low profit offered for taxation.
(f) There are total of 1113 transaction on sale side involving transaction value of Rs. 40,51,75,893/- and 1353 transaction on buy side involving transactions value of Rs. 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th , 11th, 15th, 22nd,23rd and 25th of March., 2010.
(g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client.
(h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of this order as annexure -A to this order.
(i) It could be seen from the above Annexure -A, the modifications are done in the trading hours which is against the normal trading trends and practices.
Normally the genuine errors could be traced only at the end or towards the end of the trading session and corrected or modified under intimation to the exchange.‖ The assessee in response to notice dated 18-03-2013 issued by the AO did not file any reply before the AO rather sought directions from the Addl. CIT u/s 144A to the AO to not making any disallowance of loss incurred through the transactions of client code modifications, who observed that large number of code changes had been made in assessee’s case during the month of March 2010 which were claimed to be punching errors . The assessee also claimed before the learned Addl. CIT that these client code changes had been done by broker and were done during the market hours . The learned Addl. CIT after considering the petition of the assessee directed the AO to verify the contentions and claims of the assessee and to ascertain the facts on the basis of information gathered from various sources. The AO was also directed by the learned Addl. CIT u/s 144A to determine whether the Page | 30 I.T.A. No.6534/Mum/2017 client code changes, which had appeared in large numbers in the month of March 2010 had the effect of reducing the tax payable by the assessee and in-fact was used as a device for tax avoidance and to pass the assessment order accordingly .

It is important to note at this point of time that notice was issued by the AO on 18-03-2013 .The assessee in response to the notice of the AO instead of replying before the AO , approached the learned Addl. CIT vide letter dated 20-03-2013 seeking direction to the AO. The learned Addl. CIT after calling from report from the AO and granting opportunity of heard to the assessee, issue directions to the AO u/s 144A on 22-03- 2013.The assessment were getting time barred on 31-03-2013 as provided u/s 153 of the 1961 Act. The AO passed assessment order on 28-03-2013 u/s 143(3) of the 1961 Act.

Thus, the A.O. doubted the genuineness of the transaction of losses of Rs. 3,67,83,145/- as in the opinion of the AO these transactions are structured pre-planned to generate a loss arising as business loss and these transaction were entered to avoid taxes and is a fiscal nullity being colorable device to evade taxes, as held by the AO. The AO observed that there is a nexus between the broker and the assessee in entering into these transactions which are preplanned and premeditated with object to generate losses to offset the profits made previously made or to be made in future with a view to avoid and evade taxes. The AO observed that the onus lies on the assessee to prove that these transactions are genuine. The A.O. finally concluded that the assessee’s transactions have no commercial purpose apart from the avoidance of tax liability and are sham transaction. The A.O. also cited several case laws in support of his conclusion are illustrated vide his order page No. 20 to 24 to come to conclusion that these are not genuine transactions but sham and colorable transactions with objective of evading taxes. The A.O. accordingly disallowed the loss claimed of Rs. 3,67,83,146/- and added the same to total income of the assessee, vide assessment order dated 28-03-2013 passed u/s 143(3) of the 1961 Act.

The learned CIT(A) while deciding first appeal observed that directions were issued by learned Addl. CIT u/s 144A to AO to cause verifications from NSE as to factual position as per submissions of the assessee and to ascertain correct facts on the basis of information so gathered afterwards from various sources which was not done by the AO . The learned CIT(A) observed that the AO was also directed by learned Addl. CIT vide orders dated 22-03-2013 u/s 144A to determine whether client code change which has appeared in large number in the month of March 2010 , had the effect of reducing the tax payable by the assessee and to see whether the same was adopted as an device for tax avoidance. It was observed by learned CIT(A) that the AO has not made any further investigation or enquiry nor caused any verification from the brokers namely Anugrah Stock and Broking Private Limited, Labdhi Finance Corporation and M/s Wellworth Share and Stock Broking Ltd or from Vice President Investigation, NSE or from General Manager, SEBI. The finding was recorded by learned CIT(A) that when no further investigation or proper verification has been made by the AO, there is no compliance of order u/s 144A dated 22-03-2013 of the Addl.

Page | 31 I.T.A. No.6534/Mum/2017 CIT and hence it was observed by the learned CIT(A) that contentions of the assessee cannot be ignored or brushed aside and hence it was observed that assessment order of the AO cannot be sustained on legal footing. After recording the above finding, learned CIT(A) granted the relief to the assessee on the grounds that the AO did not conducted enquiry as per directions of the learned Addl. CIT and the AO disallowed the said loss merely on presumption that these transactions were sham transactions to evade and avoid taxes. The learned CIT(A) observed that these client code modifications necessitated by punching errors in the office of the broker were done during normal trading hours and were as per exchange norms and SEBI circulars. It was observed that there are in few cases similarity in clients codes which were modified such as client code modification from code ANC 21 to PNL 21 as also from 31951 to 31953 are similar and hence there is a genuine possibility of punching errors. The learned CIT(A) observed that when share trading income of Rs. 1,83,53,985/- is brought to tax by the AO , it is contradictory on the part of the AO to have disallowed transactional loss of Rs. 3,67,83,146/- . It was thus, held by learned CIT(A) that it was wrong on the part of the AO to disallow the loss by treating it as sham transaction more-so when no action has been taken by SEBI and NSE against the assessee. Thus the disallowance of loss of Rs. 3,67,83,146/- as was made by the AO was deleted by learned CIT(A) vide appellate order dated 05-08-2014.

We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent that it has made the order of learned CIT(A) enter the arena of perversity and this order of learned CIT(A) cannot be sustained in the eyes of law and is liable to be set aside. The powers of the learned CIT(A) is co-terminus with the powers of the AO including powers to enhance assessment, after following due procedures as contemplated by law. Attention is drawn to Section 251(1)(a) and 251(2) of the 1961 Act which provides as under :

―Powers of the [Commissioner (Appeals)].
251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers–
(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or 7 annul the assessment [(aa)
(b) ******
(c) ****** (2) The [Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.
Explanation.–In disposing of an appeal, the [Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order Page | 32 I.T.A. No.6534/Mum/2017 appealed against was passed, notwithstanding that such matter was not raised before the [Commissioner (Appeals)] by the appellant.‖ If the powers of the learned CIT(A) are co-terminus to the powers of the AO including the power of enhancement, the same cannot be used in an arbitrary manner but need to be exercised in a manner to achieve the mandate of the 1961 Act which is directed towards collection of correct taxes from the taxpayer. Any exercise of the power by learned CIT(A) in an arbitrary manner or in disregard of the facts on records or coming to conclusions without any material on record will make the order of the learned CIT(A) perverse and unsustainable in the eyes of law.There was material on record that there was a large scale transactions of approx Rs 55000 crores entered by brokers through NSE in the month of March 2010 wherein there were modifications in client codes in F & O transactions undertaken by NSE Brokers wherein transactions were shifted to another codes by brokers which led to consequent shifting of profit/losses from one entity to another entity and NSE itself has cast shadow of doubt to the sudden spurt in magnitude of client code modifications which spurted from 2.75 lacs modifications in the month of December 2010 involving Rs. 21,896 crores to 6.18 lacs modifications involving value of Rs. 48,794 crores, which again fell to 1.62 lacs modifications with corresponding value to the tune of Rs 11882 crores in April 2010 . Similarly there was a sudden spurt in the client code modifications in currency derivatives. The NSE has itself stated that it is directed towards large scale tax evasion . The NSE itself stated that these transactions were modified beyond normal trading hours and reflect violation of proviso (d) to Section 43(5) of the 1961 Act. The relevant extract of NSE replies are as under:
―The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non- institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs).
Month No. of Value of modifications in
modifications crore of rupees
December 2.75 lakhs 21,896

January 3.36 lakhs 28,860

February 4.05 lakhs 35,241

March 2010 6.18 lakhs 48,794
April 2010 1.62 lakhs 11,882

(ii) The increase in the client code modifications in the equity derivative segment in March, 2010, is in spite of the Page | 33 I.T.A. No.6534/Mum/2017 fact that trading volume and turnover actually fell during this months.
(iii) The number of client code modifications in the currency derivative segment in March, 2010 was 19395 and the value thereof was Rs.13282 crores while the comparative figures for January, 2010 was 863 modifications for a total value of Rs.461crores.
(iv) The above facts would indicate that the modifications made were part of an organized tax evasion racket which should be dealt with firmly.

(v) the important point to note is that client codes of deals carried out were changed by the brokers after the close of normal trading hours. The income tax act u/s 43(5) normally considers any transaction in which a contract for purchase or sale of any commodity including shares is settled other than by actual delivery or transfer as a speculative transaction. One of the exceptions to this position is contained in proviso (d) to S. 43(5) which states that an eligible transaction in respect of trading in derivative referred to in clause (act) of section 2 of the Securities Contracts Regulation Act, 1956 (42 of 1956) carried out in a recognized stock exchange) shall not be deemed to be a speculative transaction. An eligible transaction is one which is carried out. electronically on screen based systems and supported by a time stamped contract indicating the unique client identity number and PAN {Expln (i) to S. 43(5)(d)}; The manual change in client code is therefore against the spirit of the Act as laid out above.

The sudden and huge spurt in the last months of the previous year itself is indicative of manipulations and collusive action by the person acting in concert to rig the profits/losses to manipulate with profits / losses and consequently taxes and NSE itself confirming that these facts indicate that it is a part of organized tax evasion racket, needed further probe . All the transactions in the case of the assessee happened in the month of March 2010 in just 9 trading sessions with three brokers namely Anugrah Stock & Broking Private Limited, Wellworth Share & Stock Broking Limited and Labdhi Finance Corporation wherein large number of sale and purchase transactions were entered in the name of the assessee through modified client codes in just 9 trading session . The relevant extract of the AO findings are as under:

(f) There are total of 1113 transaction on sale side involving transaction value of Rs. 40,51,75,893/- and 1353 transaction on buy side involving transactions value of Rs. 40,79,95,691/-. These transactions are recorded between 04.03.2010 to 25.03.2010 i.e. within a span of 9 trading sessions on 4th, 5th, 9th, 10th , 11th, 15th, 22nd,23rd and 25th of March., 2010.

Page | 34 I.T.A. No.6534/Mum/2017

(g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client.

The finding of learned CIT(A) that SEBI and NSE has not taken any action against the assessee is also not supported by any material on record as no such enquiry was conducted by AO and/or CIT(A) . It was only in response to initial enquiry conducted by DIT(I&CI) based on newspaper reports from NSE that NSE confirmed that there was a spectacular rise in client code modifications in March 2010 which indicates towards tax evasion, which information was passed on by DIT(I&CI) to the AO. No enquiry could be conducted by AO during assessment proceedings nor in response to directions of Addl. CIT dated 22-03-2013 . The learned CIT(A) also did not conducted any enqu

 

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