ITO Vs M/s Ninja Securities Pvt. Ltd. (ITAT Mumbai)
The assessee case does not fall under the above category of genuine client code modifications allowed by NSE as we have seen that in large number of client code modifications, there are no similarity between wrong code and correct code and secondly there are repetitive client code modifications.
Thus, client code modifications which are tainted with collusive action and manipulations shall go out of the protection granted by these circulars of NSE/SEBI. These aspects requires proper enquiry, examination and verifications which under the circumstances authorities below ought to have done to bring it to logical conclusion and to reach to the end of the financial trail to unearth scheme of tax evasion and avoidance adopted by persons acting in concert including entering into synchronized transactions simultaneously of purchase and sale of the same securities at same time to neutralize the collective profit/loss to zero but at the same time distribute profits/loss separately arising from each of the squared transactions . These requires coordinated enquiries by various agencies to reach to the bottom of the truth. To term all such inconsistencies as are pointed out as mere suspicion shall not be correct as collectively they are pointing towards a collusive and manipulative action on part of certain persons acting in concert to avoid taxation. We are fully aware that suspicion howsoever strong cannot take place of proof but these inconsistencies collectively are on higher pedestal than merely being a suspicions which requires deeper probe to unearth the collusive action on behalf of certain parties acting in concert to manipulate the system to evade and avoid taxes. The assessee has placed reliance on decision of the tribunal in the case of Pat Commodity Services Private Limited(supra) which was decided on its own facts and there were small fraction of transactions effected by client code modification while in the instant case we have seen that large number of transactions with large magnitude were affected by client code modifications in the month of March 2010 which was itself categorized by NSE were effected towards tax evasion . Similarly , the assessee has placed reliance on decision of Hon’ble Bombay High Court in the case of Coronation Agro Industries Limited v. DCT in ITA no. 2627 of 2016 vide judgement dated 23-11-2016 wherein Hon’ble Bombay High Court was seized with an issue of escapement of income u/s 148 of the 1961, wherein Hon’ble jurisdictional High Court held that the notice u/s 148 of the 1961 Act was without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment and on facts it was held that the AO is suspecting income to have escaped assessment rather having reasons to believe that income has escaped assessment. These cases relied upon by the assessee were clearly distinguishable and are not relevant for deciding the instant appeal wherein facts are materially different as set out above. For Now, we are of the considered view, the appellate order of the learned CIT(A) cannot be sustain in the eyes of law as it is suffering from serious flaw and is perverse as indicated by us as above, and hence we are inclined to set aside the order of learned CIT(A) and restore the matter to the file of the learned AO for fresh adjudication of the issue on merits in accordance with law and in compliance with directions issued by Addl. CIT vide orders dated 22-03-2013 passed u/s 144A of the 1961 Act . Needless to say proper and adequate opportunity of being heard shall be granted by the AO to the assessee in accordance with principles of natural justice in accordance with law. The AO shall admit all relevant evidences and explanations submitted by the assessee in its defense. We order accordingly.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal, filed by the Revenue, being ITA No. 6570/Mum/2014, is directed against the appellate order dated 5th August, 2014 passed by learned Commissioner of Income Tax (Appeals)- 20, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 28th March, 2013 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called “the Act”).
2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting of Rs. 8,63,137/- u/s. 14A made on account of expenditure incurred towards earning exempt income in the form of dividend ?”.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of loss of Rs. 3,67,85,146/- on account of client code modifications made by the assessee in the month of March 2010 when the entire gamut of facts clearly point towards these being sham transactions?.
3. The appellant prays that the order of the CIT(A) on the grounds above, may be set aside and that of the Assessing Officer be restored.”
3. The brief facts of the case are that the assessee company is engaged in the business of trading in shares, securities and F&O transactions. In this appeal, the Revenue is aggrieved by two disallowances, one is disallowance u/s 14A read with Rule 8D of the Income-tax Rules, 1962 and second one is disallowance on artificial loss incurred through client code modifications. During assessment proceedings u/s 143(3) r.w.s. 143(2), the A.O. observed that the assessee had earned exempt income and further the assessee had shown dividend income amounting to Rs. 15,97,859/- and had claimed the said amount as exempt. The assessee was asked to show cause as to why the disallowance u/s 14A of the Act should not be made in the case of the assessee. In reply, the assessee submitted as under:-
“Justification for disallowance for expenses incurred for dividend:
During the year there is no expenses incurred by the company for earning the dividend which has been claimed as exempt in computation of income. The expenses incurred for payment of interest on loans are for the loans which have been taken for the purpose of giving margin money to the broker for the future and options transactions. The expenses other than interest on loans which has been incurred are for the purpose of trading in shares/Future and option with the intension of gaining from the share trading/future and option business. The company has never intended to gain any income by way of the dividend. Though the dividends are received during the year, as an incidental income. The company has never incurred any expenses with the intention to earn dividend income, hence no disallowance can be made.”
The A.O. considered the submissions of the assessee which were rejected by the A.O. whereby the AO observed that the assessee except for claiming that no expenses have been incurred has not provided any details to prove that the accounts for the taxable income and exempt income were separately maintained and in the absence of such evidences, the explanation offered by the assessee were rejected by the AO. It was also observed by the A.O. that the assessee had purchased the securities and held as it as investments which are capable of earning dividend income which is exempt from tax. The AO observed that the assessee had earned dividend income which was claimed exempt from income-tax. The A.O. observed that section 14A of the Act is clearly applicable and all the expenses which has been incurred in relation to earning of exempt income shall be disallowed. The A.O. observed that the assessee has not proved that the interest which was paid is directly attributable to FDRs made and the nexus could not be established in the absence of any evidence. In the absence of any evidence to prove one to one nexus of funds received and utilized, the AO held that it could only be inferred that interest bearing loans were also utilized for purchasing the shares. The A.O. observed that the expenditure incurred by way of interest during the previous year which was not directly attributable to any particular income or receipt, hence, in accordance with the formula of Rule 8D is applicable in this case. The AO invoked provisions of Section 14A(2) and the claim of the assessee that no expenditure was incurred in relation to the income which does not form part of the total income under the Act was rejected by the AO. The mechanism as provided u/s 14A(3) was invoked and method as prescribed under Rule 8D of the 1962 Rules was applied. The A.O. accordingly applied Rule 8D and worked out the disallowance u/s 14A of the Act as under:-
