Brief of the Case
ITAT Mumbai held In the case of ITO vs. M/s Pat Commodity Services P. Ltd. that it is a fact that the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions in its own code, i.e. since the timing of entering the transactions is crucial in the online trading, the staffs of the assessee company found it convenient to punch its own code. Further, it is pertinent to note that none of the clients, with whom the assessing officer has carried out the examination, has disowned the transactions. Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. Hence CIT (A) was justified in deleting the additions made in both the years under consideration.
Facts of the Case
The assessee is a member of Multi Commodity Exchange of India Ltd (MCX) and National Commodity and Derivatives Exchange of India. The assessee has started its operation in the month of July, 2005. The assessee was carrying on trading activities both on derivatives and delivery based transactions on its ‘own’ account as well as on behalf of the various clients. The MCX released their Commodity Transaction Data wherein it was reported that the assessee had indulged in modifying the client codes, i.e., transaction carried out in one Code was later shifted to another code. On the basis of above information, Revenue carried out survey operations at the business premises of the assessee. The survey team impounded many incriminating documents which indicated that the assessee was indulging in client code modification on a large-scale. It was further noticed that MCX has imposed penalties upon the assessee for carrying out client code modification.
The assessee submitted that such kind of modification of codes is quite normal in this trade. In this connection, the assessee relied upon a Circular dated 9th November, 2006 issued by MCX and submitted that the MCX was aware of the fact that these kind of modification of codes is inevitable. It was also submitted that the said Circular also supports the case of the assessee that there was no restriction on client code modification prior to that date. It was further submitted that the MCX does not levy penalty in the cases where such modification is less than or equal to 1 per cent of the total number of orders. The AO was not convinced with the explanations of the assessee and hence he took the view that the assessee has transferred its profits to various clients. Accordingly, the AO took the view that the profit arising out of the transactions, whose client code was modified later, should be considered as the profit of the assessee and hence the same should be assessed in its hands.
During the course of assessment proceedings relating to AY 2007-08, the AO also took note of the fact that the profit shifted to some of the clients have been used by them to set off the brought forward losses available with them. Hence the AO inferred that the object of shifting of profit was to reduce the tax burden of its clients. Hence the AO came to the conclusion that it was a colourable device adopted by the assessee to reduce the tax burden, which is not permissible as per the decision of Hon’ble Supreme Court in the case of Mc Dowell and Co. Ltd (1985)(154 ITR 148). Accordingly, he assessed the sum of Rs.44,80,376/- in the assessment year 2006-07 and Rs.18,60,33,553/- in assessment year 2007-08 as income of the assessee.
Contention of the Assessee
The ld counsel of the assessee submitted that the assessee had furnished PANs, addresses, etc. to prove the identity, genuineness of the transaction and creditworthiness of the depositors.
Held by CIT (A)
CIT (A) allowed the appeal of the assessee. It was held that the appellant proved the rationale, need and justification for client code modifications. It has also proved that such client code modification is not illegal and very well within the acceptable level. It has proved that all of its 110 clients are KYC complaint, having PAN, regularly assessed to Income Tax, confirmed the transaction and income in question has already been offered for tax in their hands and assessed. I also hold that there is nothing illegal discretionary trade carried out by the assessee on behalf of its client. The clients need not be aware of such client code modification. The requirement of collection margin is either not applicable and/or if applicable, and not collected, the same is the business understanding with the client and cannot be a basis for addition. The assessee has adequately explained the transaction and proved that income has already been taxed in the hands of clients, such income belongs to the clients and hence once again cannot be taxed in the hands of the assessee. The assesses also proved that in the case of profit of Rs.3,31,75,424/- where there is no instance of client code modification and of Rs.6,16,75,825/- where there is modification in client code from one client to another cannot be taxed in the hands of assessee even if preposition relied upon by the Assessing.
It is a fact that the Assessing Officer has not applied his mind independently in coming to the conclusion in the assessment order. The Assessing Officer could not bring anything on record which can prove that because of such shifting of profit from assessee to client; the assessee has received back the money either in cash or in other form as money’s worth. Further the Assessing Officer could not point out that the client to whom profits were transferred has not accounted for such profits as their income. It was also remained an undisputed fact that all the clients are having PAN and regularly filing their tax returns and such profit has already been taxed in their hands, therefore, the same profit once again cannot be taxed in the hands of the assessee.
Held by ITAT
ITAT held that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee. As noticed by the Ld CIT (A), the MCX, the stock exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable.
Whether the client code modification has resulted into shifting of profits
ITAT held that it is a fact that the assessee company has started its operations only in July, 2005 by converting individual membership into corporate membership. Further, the commodity exchange was about 3-4 years old only at the relevant point of time. Hence, the assessee cannot be considered to be an established player in the years under consideration. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions in its own code, i.e. since the timing of entering the transactions is crucial in the online trading, the staffs of the assessee company found it convenient to punch its own code.
Further, we notice that the fact that the assessee has changed the code to the concerned client’s account at the end of the day has not been disproved. If at all any person comes with a request seeking profits, there will normally be time lag and hence the fact that the assessee has changed the codes at the end of the day only shows that the assessee has carried out the transactions on behalf of its clients only. Such kind of transactions shall usually be sporadic transactions, where as in the instant case, the clients have carried out the transactions continuously. Further, it is pertinent to note that none of the clients, with whom the assessing officer has carried out the examination, has disowned the transactions.
Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. Though the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the CIT (A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The CIT (A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. All these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially.
Another important point that is relevant here is that none of the clients was shown as related to the assessee herein. Normally the question of shifting of profit would arise between the related parties only. If the assessee had really shifted the profits to an outsider, then the human probabilities would suggest that the assessee would have received back corresponding amount from the recipient of profit. However, in the instant case, the AO has not brought any material on record to show that the assessee had received back corresponding amount equivalent to the amount of profit claimed to have been shifted to the clients. The AO has mainly relied upon the report given by the MCX and has drawn adverse conclusions without bringing any material to support his view.
In view of the foregoing discussions, we are of the view that the CIT (A) was justified in deleting the additions made in both the years under consideration. In our view also, the assessing officer has drawn adverse conclusions against the assessee without properly bringing any materials to support the view, i.e., the additions have been made on suspicion and surmises only.
Accordingly appeals of the revenue dismissed.