DCIT Vs Futurz Next Services Ltd. (ITAT Delhi)
In the instant case it is an admitted fact that the assessee is not a member of any exchange and cannot execute Client Code Modifications (CCM) and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any action treating the transactions to be non genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI, therefore, in view of the discussions above and relying on the decisions cited (supra) we are of the considered opinion that there is no perversity in the order of the CIT(A) deleting the addition. Accordingly the same is upheld and the grounds raised by the revenue are dismissed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Revenue is directed against the order dated 17th March, 2016 of the CIT(A)-30, New Delhi, relating to the Assessment Year 2011-12.
2. Facts of the case, in brief, are that the assessee company is a member of recognized stock exchanges i.e., National Commodity and Derivates Exchange Ltd.(NCDEX) and Multi Commodity Exchange of India Ltd.(MCX) and providing trading services in commodity market through NCDEX and MCX. A search and seizure operation u/s 132 of the Income Tax Act, 1961 was initiated in the case of assessee company as part of search proceedings on Jaypee Group on 30.03.2012. In response to notice u/s 153A of the Act, the assessee filed the return of income on 02.09.2013 declaring the taxable income at Rs.53,99,850/-. During the course of assessment proceedings, the AO observed that the assessee company is a member of Stock Exchanges and doing trading for the clients as well as in its own account. It is also a client with M/s Jaypee Capital Services Ltd., for trading in commodities. These companies are registered with NSE, MCX, and NCDEX. These are also registered with the United Stock Exchange. During the course of search and post search proceedings, the evidences of Client Code Modifications done by these companies in their own account as well as in the accounts of clients were found. The special auditors appointed u/s 142(2A) had observed that the assessee company has shifted loss amounting to Rs.237,54,77,970/- which have occurred all through by itself on/or on behalf of the clients. The AO, therefore, confronted the same to the assessee and asked him to explain the following:-
(i) Explain the reason and necessity of each client code modification and how the same are in conformity of guidelines of Stock Exchanges.
(ii) To show cause as to why the amount of profit belonging to you shifted through CCM to other concerns/person should not be added in your income and the commission earned by you for facilitating the shifting the profit/loss of other persons through CCM without the valid reasons and in contravention of Stock Exchange guidelines should not be added to your income.
(iii) Instances of shifting of losses belonging to you to group companies as well as other persons are also reported. You are requested to explain the same and reply should include the complete details of CCM transactions along with the details of client code, name, address, PAN and account opening form of the beneficiaries. The copy of account of all the entities whose client code was modified is also required to be submitted.
(iv) You are also requested to submit the complete list of client codes, containing name, PAN and address of persons. The client codes of your group concerns, individuals and related parties are also requested to be submitted.
(v) You are requested to explain as to why modification through back office operation was undertaken and why the operation could not be materialized through CCM in exchange records.
(vi) You are also requested to submit the name, PAN and address of the persons to whom profit and loss earned by you was shifted through back office operation along with their copy of accounts.
3. Rejecting the various explanations given by the assessee and observing that the assessee company is also a client of its sister concern M/s Jaypee Captal Services Ltd. and observing the following, the AO made addition of Rs.8,74,367/- to the total income of the assessee:-
“(a) During the year under consideration, the auditor has reported that there is no client code modification in the account of assessee. Therefore, no action lies for CCM in its code.
(b) (i) The auditor in his report stated that as a result of CCM, during the year under consideration, client level shifting of profit amounting to Rs. 1,10,58,200/- and loss amounting to Rs. 2,42,400/- from one client to another client has been made by the assessee. As discussed above, it is apparent that the shifting of client code was not due to genuine reasons but for providing accommodation entries to some persons / concerns in lieu of consideration. One person has huge profit, he would like to take entry of loss, so that his profit may be reduced. Another person may have huge losses would like to take some profit, so that some capital is formed and same time he do not have to pay any taxes. This practice of providing profit and losses was very common in old days before advent of electronic exchanges. Even after introduction of online trade, the practice continues taking advantage of facility of CCM. The SEBI therefore continue to instructions with regard to regulating the CCM. At last now, the stock exchanges are required to inform Income Tax Department about the CCM done by each broker.
(ii) The auditor in his report submitted that the assessee during the year under consideration shifted profit of Rs. 1,10,58,200/- and loss of Rs. 2,42,400/- from one client to another client. The assessee shifted profit/loss among its group companies also. The same is being considered in the case of group companies separately in their individual cases. Therefore, amount is being taken out of the volume of transactions for the purpose determining the commission/profit earned by the assessee.
(iii) To the outside persons, the total shifting of profit in individual cases was Rs. 4,440/- in MCX and NCDEX. The amount of total loss shifted to outside persons in MCX and NCDEX was Rs. 3,12,22,972/-. It has been discussed above that the assessee could not explain the logic of shifting of client code in violation of the guidelines. It is resorted for the purpose of providing accommodation entries. However, the CCM may have been done in some genuine cases. Therefore, the figures of commission are determined by reducing 20% of the amount of profit and loss shifted through CCM out of group. The assessee shifted the profit as well as loss to different clients considering their specific needs, therefore, both type of cases i.e. one in which net profit taken and other in which net loss taken are considered for, the purpose of determining commission.
(iv) The rate of commission on providing the accommodation entries is a subjective matter. It is not a legal activity and parallel case are difficult be found in public domain. However, it can be inferred that the rate of commission charged on accommodation entries depends on many factors like nature of entry provided i.e whether it is of profit or loss, the personal relationship between the operator and beneficiaries, the number of middle man in between the operator and beneficiaries, the frequency and volume of accommodation entries between the two parties etc. It has been already stated that the activity is not legal, hence, the comparable rate of commission charged for providing such entry is not available in public domain. However, the information gathered from the market sources indicate that the commission from 3% upward is charged for such work. Therefore, taking a very conservative view, the commission earned by assessee on providing accommodation entries to the person out of group is taken @ 3.5%. Therefore, the commission @3.5% on the amount of Rs. 2,49,81,929/- (which is 20% less than the sum of profit and loss shifted out of group), which comes to Rs. 8,74,367/-. The same is added to the income of the assessee company.
(Addition Rs. 8,74,367/-) .
4. The AO similarly made addition of Rs.6,36,885/- on account of absence of documentary evidences to substantiate the claim of business expenditure. During the course of assessment proceedings, the AO noted that although the assessee has not received any exempt income, however, there are investments in the opening and closing balance of the accounts and the income likely to be received from such investment is exempt and interest and other expenses are claimed in the Profit & Loss Account. Rejecting the various explanations given by the assessee, the AO made disallowance of Rs.1,77,82,267/- to the total income of the assessee.
5. During the course of assessment proceedings, the AO noted that the assessee company has granted advances in the nature of loan during the year to Shri Gaurav Arora and to another group company M/s Jaypee Capital Services Ltd. and M/s Arora Timber Ltd., in which Shri Gaurav Arora has a substantial interest. Therefore, invoking the provisions of section 2(22)(e) of the Act, the AO made addition of Rs.19,34,21,760/- to the total income of the assessee. The AO further noted from the financial statements of the assessee that interest expenses amounting to Rs.1,90,91,632/- was paid on borrowed funds. The special auditors had observed that the company has granted interest-free advances to shareholders, group companies and others, the purpose of which is not made available to them. Since the assessee company has not provided the nexus of funds borrowed and granted as loan, the special auditors had held that interest expenditure aggregating to Rs.1,90,91,632/- attributable to such borrowings could not be allowed as business expenditure u/s 36(1)(iii) of the IT Act. On being confronted by the AO, the assessee submitted as under:-
“The Company has availed working capital facilities from Bank of India against hypothecation / pledge of commodities. Keeping inventory is necessary for further trading. The interest has been paid to the bank for availing working capital loan and interest has been paid as per the specific terms namely against the paid stock. Therefore, availment of loan facility can directly be correlated with inventory in hand and outstanding receivable. Therefore, no part of the interest has been paid for any advance given by the assessee , company. Thus it can be concluded that wholly and exclusively for the business purpose of the company. Therefore, it is a legitimate business expense and be allowed as claimed by the assessee.”
6. However, the AO was not satisfied with the arguments advanced by the assessee and made addition of Rs.95,45,816/- on the ground that the assessee could not satisfactorily explain as to why the borrowed fund was diverted to group concerns without charging any interest and could not give any details in respect of utilization of working capital loan on which interest of Rs. 1,90,91,632/- has been paid. The AO also made addition of Rs.73,231/- u/s 40a(ii) of the Act on the ground that interest on TDS amounting to Rs.73,231/-was claimed as expenditure. Thus, the AO completed the assessment determining the total income of the assessee at Rs.22,77,34,180/-.
7. In appeal, the ld.CIT(A) deleted all the additions made by the AO. So far as the addition of Rs.8,74,367/- made by the AO on account of Client Code Modification is concerned, he deleted the same by observing as under:-
“8.4 I have carefully considered assessment order, written submission, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant, are discussed as under:-
It has been stated by the A.O. in the assessment order, CCM were done by the assessee, for its clients (other than group concerns), vide which profit is transferred to the clients, who have losses and transferred losses to the clients, who have profit, to reduce tax liability of the clients and accordingly, accommodation entry is given, on which commission income is determined by the A.O. @ 3.5C: of profit/loss shifted.
It has been further analyzed by the A.O., that 20% of such CCM transactions, has been considered as genuine errors. However, the CCM, have been done in order to provide accommodation entries and therefore, it has been held that the assessee has earned commission @ 3.5% of Rs.874,367/-, for providing such accommodation entries of Rs.2,49,81,929/- (20% less than the sum of profit or loss shifted out of group).
(iv) During appellate proceedings, appellant has submitted that the CCM, is modification change of client codes, after execution of trades. This facility is provided by the Stock Exchange/ Commodity Exchange, in order to rectify any error or wrong data entry done by the staff of appellant broker company, at the time of punching orders. Further, it is submitted that these CCM, is subjected to certain guidelines provided by the SEBI, with regard to the execution of entries, genuinely punched wrong and not as a routine. The observations of the Special Auditor regarding huge number of CCM transactions, are grossly incorrect, being misused to shift the profit / loss from one client to another. However, in appellate proceedings, it has been submitted CCM transactions, have been recorded less than 1%, and no penal action has been taken by the exchange in this regard, meaning thereby there is no violation of rules and regulations prescribed in this regard by the Exchange.
(v) Further, appellant also submitted that these entries have been entered into normal course of business. These entries are duly recorded in the books of accounts and also forming part of the transactions reported to the exchange. No adverse inference has been drawn about these entries by the exchange and SEBI. In fact, even the information about these CCM, was obtained by the A.O. from the exchange. During assessment proceedings, the assessee has given detailed explanation in this regard to the A.O. In the explanations, it has been clarified that these errors are part of its normal course of business activities and permissible, even as per the Circular issued by National securities Clearing Corporation Ltd. vide circular no. NSCCL/SEC/2004/0464, dated 31.5.2004, where error upto 1% of the total number of transactions, is permissible, without any fine for the sake of clarity the circular is, reproduced as under:
“NATIONAL SECURITIES CLEARING CORPORATION LIMITED Download Ref No. NSE/CMPT/5128 Circular No. NSCCL/SEC/2004/0464
May 31, 2004
To,
All Members,
Sub:- Penalty for client code modification.
In pursuance of the Bye laws and Regulations of NSCCL and in partial modification to circulars no. NSE/CMPT/4041 dated March 27, 2003 and NSE/CMPT/4991 dtd. April 16, 2004, it is hereby notified that the penalty structure for client code modification in the capital market (Cash Segment) is being revised. The new penalty structure is as follows:
