Case Law Details

Case Name : ITO Vs M/s Ninja Securities Pvt. Ltd. (ITAT Mumbai)
Appeal Number : I.T.A. No.6570/Mum/2014
Date of Judgement/Order : 15/05/2017
Related Assessment Year : 2010-11
Courts : All ITAT (7448) ITAT Mumbai (2137)

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:-

Particulars Amount (Rs) Amount (Rs)
i) Director expenditure relating to exempt income being STT & D-Mat charges paid
ii) Amount computed as per Rule 8D(2)(ii) [AXB/C] 8,63,137
A = Interest expenses 876268
B = Average Investment including shares in closing and opening inventories 106428532
C = Average total asset 108047609
iii) 0.5% of average investment (0.5% x Rs. 106428532) 5,32,143/-
Total disallowance as per Rule 8D(i+iii+iii) Rs. 13,95,280/-

Thus, the A.O. worked out an amount of Rs. 13,95,280/- towards disallowance u/s 14A of the Act, vide assessment order dated 28-03-2013 passed by the AO u/s 143(3) of the 1961 Act.

4. The second issue is with regard to disallowance of loss of Rs. 3,67,83,145/- incurred through client code modifications w.r.t. trade in shares and securities on NSE through its broker. The A.O. observed that during the year the assessee had entered into certain trades in shares and securities on NSE through its brokers and the P&L account showed a loss of Rs. 3,67,83,145/- claimed on account of share trading loss. The assessee was asked to furnish the details by the AO vide letter dated 18-03-2013 which are reproduced as under:-

“It is seen that in the month of the March 2010 you are shown modified transition in F&O as your own transactions. These transitions are entered by brokers M/s ANUGRAH STOCK & BROKING PVT. LTD., M/s LABDHI FINANCE CORPORATION and M/s WELLWORTH SHARE & STOCK BROKING LIMITED and shown as modified in your name. Kindly be noted that these transactions are entered and settled on the same day and it has resulted in loss of Rs. 1,55,89,067/- (i.e. Rs. 28,19,798 – Rs. 1,83,98,865). Whereas it may be noted that the F&O transactions entered by you from 01.04.2009 to 31.03.2010 has resulted in net profit of Rs. 1,51,17,420/- (i.e. Rs. 2,04,97,205/- Rs. 53,79,785/-). You are requested to show cause as to why the loss of Rs. 1,55,89,067/- in respect of modified transactions shall not be disallowed.”

The assessee did not submit any reply before the AO but instead sought directions from Addl. CIT, Range – 9(2) for issuance of directions u/s 144A of the Act to the AO for not making any disallowance of loss incurred through the transaction of client code modifications. The assessee contended that the client code modifications were the correction of the punching errors at the broker side and the assessee had no role to play on this. The assessee had also filed confirmations from the brokers on such corrections made in the codes as per the guidelines of NSE. The addl. CIT, Range – 9(2) issued following directions to the A.O. u/s 144A of the Act:-

“The assessee has made an application u/s 144A of the I.T. Act vide letter dated 20.3.2013, which was received in the office on 20.3.2013. During the course of scrutiny assessment, a question in relation to understatement or overstatement of profit or loss was raised. In relation to the said question, the assessee has sought the guidance of the undersigned and made the said application. Accordingly, a report in the regard as called for from the concerned A.O. i.e. ITO 9(2), Mumbai. The A.O. has submitted a report vide letter dated 20.3.2013.

A hearing was also fixed with the assessee in the matter on 21/3/2013. Shri Sunul Shah, CA and AR appeared. He was asked if he had any further submissions to make on the basis of report made by the Assessing Officer, However, AR has reiterated the submission made earlier:-

The brief facts of the case are as follows:-  . .

(a) In the month of the March 2010, the assessee has shown modified transition in his F&O.

(b) These transactions are entered by brokers. M/s Anugrah Stock & Broking Pvt Ltd, M/s Labdhi Finance Corporation and M/s Wellworth Share & Stock Braking Ltd. and shown as modified in the assessee company’s name.

(c) It was also reported by the Assessing Officer that the assessee has entered and settled the transactions on the same day and it has resulted in loss of Rs. 1,55,89,067/- (i.e. 28,19,798 – Rs. 1,83,98,865/-).

It was further reported that the assessee’s F&O transactions entered during the F.Y. 2009-10 has resulted in net profit of Rs. 1,51,17,420/-/- (i.e. 2,04,97,205 – Rs. 53,79,785/-).

(d) The assessee has adjusted the loss of other companies against the profit of the assessee company and this has resulted into low profit offered for taxation.

in his application made u/s 144A the assessee’ has stated that the modified transactions are due to the error which has occurred in the punching by the respective brokers. He has taken the plea that the error in punching in the broker’s office cannot be reason for any alleged understatement or overstatement of profit or loss by the assessee. Further, the brokers have confirmed having done the modifications during the market hours and as per the exchange norms. It has been further stated that the change of client code can be executed only at the office of the main broker and not by the assessee company under any circumstances.

The assessee has therefore requested in his application to look into the matter and issue necessary directions to the Assessing Officer.

After going through the submissions made by the assessee, and the report furnished by the Assessing Officer, it is observed that there is no denying the fact that a large number of code changes have been made in the assessee’s case during the month of March, 2010. In the letters of confirmation from the brokers which have been filed, it is observed that in practically all such confirmation letters reason given by the broker is error in punching client code. The exact reasons for such changes are not given by the brokers. Also, though it is not denied that the changes in client code have been made by the brokers, however, the same may have been done on the instructions.

In their allocation made u/s 144A dtd. 20.03.2013, the assessee has also contended that the brokers have confirmed having done the modifications during the market hours and as per exchange norms.

The A.O. is therefore, directed to correctly verify the factual position as per the submissions made by the assesee and to ascertain the correct facts on the basis of information gathered from various sources.

The assessing Officer is also directed to determine whether the client code change, which have appeared in large numbers during the month of March, 2010 have had the effect of reducing the tax payable by the assessee and are in effect a device for tax avoidance and to pass the assessment order accordingly.”

The A.O. after considering the directions of the Addl. CIT vide order dated 22-03-2013 u/s 144A of the Act observed that from the report of various financial newspapers indicated that the NSE had allowed its member brokers to make clients modifications to the tune of Rs. 55,000 crores in March, 2010 against which investigation had been started by DIT (I&CI), Mumbai after obtaining approval from CBDT and the results and findings of the said inquiries with reference to the assessee’s transactions had been forwarded to the A.O. Notices were issued to the NSE calling for relevant data includes the following:-

“(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 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 modifications Value of modifications in crore of rupees
December, 2009 2.75 lakhs 21,896
January, 2010 3.36 lakhs 28,860
February, 2010 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.

(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 normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.)

(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.

(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.”

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. 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. 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.

5. Aggrieved by the assessment order dated 28-03-2013 passed by the A.O. u/s 143(3) of the 1961 Act, the assessee carried the matter in appeal before the ld. CIT(A) who partly allowed the appeal of the assessee. The ld. CIT(A) gave part relief to the assessee w.r.t disallowance u/s 14A of the 1961 Act vide appellate orders dated 05-08-2014 passed by learned CIT(A), by holding as under:-

“I have considered the issue under appeal, carefully. I find that appellant is engaged in the business of trading in shares, securities and F&O transaction with surplus fund, there is share trading investment of Rs. 12,50,94,940/-. Since there is a common activities related to share trading and also involvement in investment capable of dividend, the part of expenditure debited in profit and loss account is definitely attributable to the investment activities. There cannot be any denial that some part of the administrative expenses, office, salary and wages and other related expenses is not at all related to investment in shares. Therefore, the arguments of the ld. A.R. that no expenditure has been incurred for earning dividend of Rs. 15,97,859/-, is not tenable. However, the argument that interest expenditure is not related to investment as same was incurred in connection with loan taken for giving margin money to the broker for F&O transaction, therefore, the interest expenditure of Rs. 8,76,268/-is not directly or indirectly related to earning of dividend, is convincing one. Further, it is pertinent to mention that Assessing Officer has not clarified as to how such interest expenditure debited in profit and loss account is related to earning of dividend. Obviously, the explanation of the appellant and evidences on records support the contention that interest expenditure is not related to earning of dividend. Because of this fact it is not correct on the part of the Assessing Officer to disallow interest expenditure mechanically under Rule 8D(2)(ii) to the extent of Rs. 8,63,137/-. Assessing Officer is therefore directed to delete the disallowance of expenditure of Rs. 8,63,137/-. As regards disallowance of expenditure of Rs. 5,32,143, being 0.5% of average investment, the finding of the Assessing Officer is found to be worth approval. Appellant has not been successful in rebutting the finding of the Assessing Officer that for earning of’ dividend there is no element of expenditure. Apparently, investment activities requires support of office, employees, directors. Similarly, the part of the administrative expenses and office expenses can always be attributable for such investment activities. There cannot be any denial of such fact. Appellant has not been able to establish that no expenditure is require for investment activities which is done after thorough analysis of the investee companies, market trend, ups and downs in the price, review of feasibility of’ investment etc. . Because of these fats and various expenses shown in schedule – 3, the various case laws relied upon by Ld.A.R.is not found applicable to the facts of this case. In this case, there is obvious element of expenditure attributable to earning of dividend of Rs. 15,97,859/-. Therefore expenditure worked out to the extent of Rs. 5,32,143/- under Rule 8D is correct and deserves to be confirmed. Accordingly, disallowance of expenditure of Rs. 5,32,143/- is sustained and balance expenditure of Rs. 8,63,137/- is deleted.

In the result, Ground No.1 is partly allowed.”

With respect to the second disallowance concerning the loss on account of client code modifications, the assessee filed detail submission and the ld. CIT(A) after considering the same deleted the disallowance made by the A.O. by giving his observation in his appellate order at page 9 to 12., vide appellate orders dated 05-08-2014 passed by learned CIT(A).The learned CIT(A) 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 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. 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 . 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 disallowed transactional loss of Rs. 3,67,83,146/- . It was thus, held 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.

6. Aggrieved by the appellate order dated 05-08-2014 passed by the ld. CIT(A), the Revenue is in appeal before the Tribunal.

7. The ld. D.R. submitted that the ld. CIT(A) was not justified in deleting an amount of Rs. 8,63,137/- u/s 14A of the Act r.w.r. 8D(2)(ii) of Income-tax Rules, 1962 on account of interest expenditure incurred by the assessee . The learned DR relied upon order of the AO . It was submitted that the assessee did earned dividend income of Rs. 15,97,859/- which was claimed exempt by the assessee. The learned DR justified invocation of Rule 8D(2)(ii) of the Income-tax Rules, 1962 r.w.s. 14A of the 1961 Act by the AO for making disallowance of interest expenditure by the AO. The learned DR also assailed the appellate order of learned CIT(A) deleting the addition of loss of Rs. 3,67,83,146/- on account of client code modifications made by the assessee. The ld. D.R. drew our attention to the orders of the A.O. and drew our attention to assessment order of the AO wherein it was stated that there were large scale client code modifications undertaken by brokers of NSE wherein clients modification to the tune of Rs. 55,000 crores were undertaken and NSE had itself stated that there is tax evasion . It was submitted that investigation in the matter had been started by the DIT(I&CI),Mumbai after obtaining the approval of CBDT and the outcome of the inquiries with reference to the assessee was intimated to the A.O. and accordingly the disallowances were made.

8. The ld. counsel for the assessee submitted that the Mumbai Tribunal in assessee’s own case in ITA No. 4847/Mum/2016 for A.Y. 2012-13 vide orders dated 7thMarch, 2017 whereby the Tribunal has considered the disallowance u/s 14A r.w.s. Rule 8D and held that the no disallowance can be made u/s 14A r.w. Rule 8D for the securities held as stock-in-trade. The ld. counsel for the assessee drew our attention to the page 9 of the paper book filed with the tribunal whereby the copy of P&L account for the year ended March, 2010 is placed and submitted that the assessee’s income mainly consists of brokerage and share trading income and the shares were held as stock-in-trade. He submitted that the assessee’s own capital consisting of share capital and reserves was Rs.7,98,75,873/- and investments as on 31-03-2010 was only Rs.3,78,000/- hence, the ld. CIT(A) had rightly allowed the interest expenses incurred by the assessee. It was submitted that shares of Rs.12,50,94,940/-were held as closing stock-in-trade as at 31-03-2010 and our attention was drawn to page 9 and 13 of paper book filed with the tribunal wherein Profit and loss account and schedules to the account are placed. It is submitted that if shares are not held as investments but as stock-in-trade, no disallowance u/s 14A is warranted as profit from trading are chargeable to tax as business income and shares were held not for earning dividend income but for earning profits from business. The learned counsel also submitted that owned funds of Rs.7.98 crores representing by share capital and reserves are much higher than investment of Rs.3,78,000/- held by the assessee in shares .With respect to client code modifications, it was submitted that confirmations were filed from brokers which are placed in paper book/page 37-67. It was submitted that SBI and NSE circulars allow client code modifications which are placed in paper book/page 68-72. Learned counsel relied upon the appellate order of learned CIT(A) granting relief to the assessee. The learned counsel for the assessee relied upon orders of the Mumbai-tribunal in ITA no. 3498 and 3499/Mum/2012 for assessment year 2006-07 and 2007-08 vide orders dated 07-08-2015 in the case of ITO v. Pat Commodity Services Private Limited to contend that learned CIT(A) rightly allowed the loss of Rs. 3,67,83,146/- sustained on securities which were covered by client code modifications.

9. We have carefully considered rival contentions and also perused the material available on record including case laws relied upon .

We have observed that the assessee company is engaged in the business of trading in shares, securities and F&O transactions.

We have observed that the assessee has not come in appeal before the tribunal w.r.t. the additions of Rs.5,32,143/- made by the AO of disallowance u/r 8D(2)(iii) of the 1962 rules r.w.s. 14A of the 1961 Act being 0.5% of the investments which were later confirmed by learned CIT(A) in his appellate orders dated 05-08-2014, which now has attained finality as the assessee did not challenge the appellate order of learned CIT(A) as it is not brought on record by the assessee before the Bench that the assessee had filed any appeal against the appellate order dated 05-08-2014 passed by the learned CIT(A).We have observed that Revenue is aggrieved in this case by deletion of addition of Rs..8,63,137/- by learned CIT(A) which addition was made by the AO by applying Rule 8D(2)(ii) r.w.s. 14A w.r.t. interest expenditure incurred by the assessee . The assessee did earn dividend income of Rs.15,97,859/-which was claimed as exempt under the 1961 Act. We have observed from the perusal of audited financial statements which are placed in paper book filed with the tribunal by the assessee that the assessee has made investments in shares to the tune of Rs. 3,78,000/- (Previous Year Rs. 3,78,000/- as on 31-03-2009) which were held as ‘Investments’ in its books of accounts as on 31-03-2010 , while investments in shares and securities as on 31-03-2010 were Rs. 12,50,94,940 which were held as stock-in-trade (previous year as on 31-03-2009 of Rs. 8,70,06,123/-) –ref. pb/page 3-18). We have also observed that the assessee’s own funds are to the tune of Rs.7,98,02,973/- (consisting of share capital + reserves-miscellaneous expenditure(debit)). We have observed that the Mumbai-tribunal has decided this issue in the assessee’s own case in ITA no. 4847/Mum/2016 for assessment year 2012-13 vide orders dated 07-03-2017, wherein the tribunal held as under:

“4.During the course of hearing before us, the Authorised Representative (AR) relied upon the cases of HDFC Bank Ltd (383 ITR 529), India Advantages Securities Ltd (380 ITR 471), Max India Ltd (290 CTR 76). The Departmental Representative (DR) left the issue to the discretion of the Bench.

5. After hearing the rival submissions, we find that the only issue to be decided is as to whether the expenditure eligible to stock in trade can be disallowed invoking the provisions of section 14 A r. w.r.8D of the Rules. We find that in the cases relied upon by the AR, it has been clearly held that no disallowance u/s.14A r. w.r 8D of the Rules, can be made for the securities held as stock in trade. The reason behind it is not difficult to understand. Income arising from the business of an assessee is taxed under the head business and profession. So, all the expenses have to be considered while computing the business income. On the other hand, if the securities are held as investment and an assessee earns exempt income, same can be subjected to disallowance as envisaged by the provisions of section 14A.In the case under consideration the assessee is dealing in shares and F &O segments and offering its income under the head business income .Therefore, in our opinion, the FAA was not justified in confirming the disallowance made for expenses incurred with regard to stock in trade. Reversing his order ,we decide the effective ground of appeal in favour of the assessee.

As a result ,appeal filed by the assessee stands allowed.”

Respectfully following the aforesaid decision of the tribunal in ITA no. 4847/Mum/2016 for assessment year 2012-13 dated 07-03-2017 in assessee’s own case , we dismiss the appeal of the Revenue by applying the ratio of law laid down by the tribunal in aforesaid decision, with which we concur as the facts in the instant appeal before us are similar. We order accordingly.

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 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 modifications Value of modifications in crore of rupees
December, 2009 2.75 lakhs 21,896
January, 2010 3.36 lakhs 28,860
February, 2010 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.

(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 normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.)

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.

(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 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. 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 7annul 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 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 tax-payer. 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 un-sustainable 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 modifications Value of modifications in crore of rupees
December, 2009 2.75 lakhs 21,896
January, 2010 3.36 lakhs 28,860
February, 2010 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.

(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. 461 crores.

(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.

(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 enquiry nor directed AO to conduct any enquiry during appellate proceedings. The powers of learned CIT(A) are co-terminus with the powers of the AO including power of assessment. When the powers are granted by statute, the same need to be exercised in a manner to achieve the mandate of the 1961 Act to compute correct taxes in the hands of tax-payer. The powers cannot be used in an arbitrary manner otherwise the orders passed in pursuance of such arbitrary use of powers will enter the arena of perversity. The learned CIT(A) was fully aware that the AO could not comply with directions of learned Addl. CIT issued u/w 144A to conduct relevant enquiry, examination and verification as was directed by learned Addl. CIT due to matter getting time barred on 31-03-2013 as direction were issued only on 22-03-2013, it was incumbent on the learned CIT(A) to conduct the necessary enquiry , examination and verifications as were directed by learned Addl. CIT or should have directed AO to conduct such enquiry and furnish remand report to the learned CIT(A) before any relief could be granted by learned CIT(A)). The AO after relying on large number of judicial precedents held the transactions to be collusive and sham with an intent to evade taxes. The learned CIT(A) whose powers being co-terminus with the powers of the AO entered into blame game by blaming the AO for not following the directions of the learned Addl. CIT in complete disregard of the fact that the directions of the learned Addl. CIT u/s 144A were issued only on 22-03-2013 while the assessment was getting time barred on 31-03-2013 as provided u/s 153 of the 1961 Act. The learned CIT(A) in exercise of powers granted u/s 251(1)(a) of the 1961 Act ought to have got the said directions complied with by persuing the same at its own end to bring it to logical conclusions or ought to have directed the AO to complete the enquiries and verifications as are necessary for the said purposes and submit remand report to learned CIT(A).

The intent being to compute correct taxes in the hands of the assesse as per mandate of the 1961 Act instead of entering into blame game. If such powers are not used by learned CIT(A) to achieve the mandate of the 1961 Act to compute correct tax liability of the tax-payer, then the power of learned CIT(A) being co-terminus with the powers of AO will be reduced to dead words, which is not the intention of the legislature in granting such powers as there has to be effective use of powers by authorities who are vested with said powers directed to achieve the mandate of the 1961 ACT. In our considered view, the appellate order of learned CIT(A) is perverse and cannot be sustained keeping in view factual matrix of the case . The AO based on material on record on the touchstone of preponderance of human probabilities surrounding the case has come to conclusion that these losses are not genuine and are sham and collusive to evade taxes. The AO based hus decision on large number of judicial precedents which found mention in the assessment order at page 20-24. There is per-se no perversity in the assessment order of the AO as the facts surrounding the case clearly and strongly suggests and points to a collusive action on the part of the assessee and brokers who were acting in concert to avoid and evade taxes, which needed further probe to come to definitive conclusions as was rightly directed by learned Addl CIT vide directions dated 22-03-2013 u/s 144A of the 1961 Act. The huge magnitude of client code modifications in the last month of the previous year as well in the case of the assessee all the client code modifications being accorded and ascribed to punching errors cannot be mere chance to say that it is in the realm of suspicion or speculation .Rather the circumstances seen cumulatively takes it to a higher pedestal than being mere a suspicion. We are conscious of the fact that suspicion howsoever stron cannot take the place of proof. The liability to tax under the provisions of the 1961 Act is required to be fastened on the touchstone of preponderance of human probabilities , and strict proof / evidences as required under Indian Evidence Act, 1872 may not be pressed to fasten the tax-liability. No-doubt the assessee has placed on record broker confirmations but perusal of these conformations to suggest that such a large magnitude of client code modifications were carried out in the last month of the previous year i.e. March 2010 and that too in 9 trading sessions and all being ascribed to punching errors do not inspire confidence rather it clearly suggest a collusive, manipulative rigged action by persons acting in concert to evade and avoid taxes which needed further probe to fasten tax-liability on the assessee. We have also gone through brokers confirmation which are part of the paper book/page 37-67 and we have observed that client code is changed from 4403 to 61495 on 04-03-2010 by Well worth Share and Stock Brokers Limited(pb/page 37), client code is changed from 31495 to 61495 on 08-03-2010 by Well worth Share and Stock Brokers Limited(pb/page 38),client code changed from 7416 to 61495 by Well worth Share and Stock Brokers Limited on 15-03-2013 (pb/page 39) , client code changed from 61495 to 7744 by Well worth Share and Stock Brokers Limited on 08-03-2010(pb/page 49) , client code changed from 61495 to 10057 by Well worth Share and Stock Brokers Limited on 08-03-2010(pb/page 50), client code changed from 61495 to 8428 by Well worth Share and Stock Brokers Limited on 10-03-2010(pb/51), client code changed from 61495 to 7744 by Well worth Share and Stock Brokers Limited on 10-03-2010(pb/page 52), client code changed from 61495 to 74561 by Well worth Share and Stock Brokers Limited on 11-03-2010 (pb/53) , client code is changed from 61495 to 8014 on 11-03-2010 by Well worth Share and Stock Brokers Limited(pb/page 54 , client code is changed from 61495 to 74652 on 11-03-2010 by Well worth Share and Stock Brokers Limited(pb/page 55 , client code is changed from 61495 to 7015 on 15-03-2010 by Well worth Share and Stock Brokers Limited(pb/page 56)))etc.. The above is not exhaustive list but few instances quoted above to reflect that there is vast difference between the wrong codes from where the transactions were shifted to a correct code and possibility of punching error with such differential codes and that too in only 9 trading sessions which happened to be the month of March 2010(last month of previous year) in large magnitude of transactions was not mere coincidence and is a strong pointer to manipulation and collusive action of certain person acting in concert to evade taxes. This also raises another important question as to how many client codes are maintained by the assessee with the same broker and the reasons to have multiple codes. As could be seen above that large number of client codes are maintained by the assessee with the broker namely Well worth Share and Stock Brokers Limited namely code numbers 61495,7744,10057, 8428, 74561, 6449 , 8014, 7015,74562 etc. Regarding the contention of the assessee that NSE/SEBI permits the client code modifications, we have gone through the relevant circulars which are placed in paper book/page 68-72, we have observed that the said circulars clearly allows only ‘genuine’ client code modifications of transactions in the stock exchange. If the transaction is held to be ‘non-genuine’, we are afraid circulars of NSE/SEBI relied upon will not be applicable. Reference is drawn to circular no 663 dated 29-07-2010( Ref. No.: NSE/INVG/2011/184840 issued by NSE wherein it is clearly stipulated as under(relevant portion is extracted below):

“ The Exchange has provided the facility of client code modification only to rectify genuine errors.  Further, as per point 2(a) and 3(B) of the SEBI circular date dated July 5, 2011 , the following client code modifications would be considered as genuine modifications , provided there is no consistent pattern in such modifications;

i) Where original client code/name and modified client code/name are similar to each other but such modification are not repetitive.

ii) Where original client code and modified client code belong to a family. ( Family for this purpose means spouse, dependent parents, dependent children and HUF) “

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.

10. In the result, appeal filed by the Revenue in ITA No. 6570/Mum/2014 for assessment year 2010-11 is partly allowed for statistical purposes as indicated above.

Order pronounced in the open court on 15th May, 2017.

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