Case Law Details
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:
| Percentage (%) of client codes changed to total orders (matched) on a daily basis | Fine |
| Less than or equal to 1% | Nil |
| Greater than 1% but less than or equal to 5% | Fine of Rs.500/- lump sum per day |
| Greater than 5% but less than or equal to 10% | Fine of Rs. 1,000/- lump sum per day |
| Greater than 10% | Fine of Rs. 10,000/- lump sum per day |
The above shall be effective from trade date June 01, 2004
Yours faithfully,
For National Securities Clearing Corporation Ltd.
Jaya Chatterjee
Manager”
Therefore, it is submitted by the appellant that in their case, these errors are less than 1% of the total number of transactions entered into and the entries relating to CCM and have been accepted by both the parties. The A.O. has not brought any evidence to support the allegation apart from suspicion on the basis of SEBI guidelines. Hence, it is submitted by the appellant that there is no justification for drawing any adverse inference on this account, without bringing any specific anomaly with regard to genuineness of the transactions and no fine has been imposed by concerned authorities in respect of CCM.
It is further submitted by the appellant that the A.O. himself has made this addition by doing a guess work, whereby he has accepted that 20% of such CCM transactions, are genuine errors a 80%, as non-genuine errors and therefore, the entire addition on this account, is not correct. Therefore, it is submitted by the appellant that, the suspicion, cannot be a basis for making any addition.
(vi) It is further submitted by the appellant that the entries, which are being alleged, w profit/losses arising from the alleged transactions by the A.O., are all being assessed to tax and profit/losses, are included in total income declared in each of such case, which has been charged 1 Therefore, it is submitted that, there cannot be any allegation of intention to avoid taxes by shifting profit to loss by manipulating entries. From the above, following facts emerge:-
> The volume of CCM occurred, are within the permissible limit allowed by the and
> The Exchange / SEBI, has not found any violation of rules and regulations relating to CCM, and the CCM transactions are falling within the prescribed limit of less than 1 %.
In view of the above facts, I agree with the arguments of the appellant that the CCM transactions are genuine. Accordingly, I hold that the A.O. was not justified in making addition on above basis. Therefore, the addition of Rs.8,74,367/- made by the A.O., is hereby deleted.”
8. So far as the disallowance of Rs.6,36,885/- on account of various expenses is concerned, the ld.CIT(A) deleted the same by observing as under:-
“9.4 I have carefully considered assessment order, written submission, case and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:-
(i) In the assessment proceedings, the A.O. asked the appellant to produce supporting bills and vouchers for an amount of Rs.6,36,885/- [hotel expenses (Rs.2,57,040/-) and staff welfare (Rs.3,79,845/-)], relating to hotel and staff welfare expenses, for which auditor has given adverse remark. Accordingly, A.O. was of the view, that genuineness of the expenses has not been proved.
(ii) In the appellate proceeding, it has been submitted by the e requirement u/s 37(1) of the Act, for documentary evidence. Further, it has been stated by the appellant that these payment are made through banking channel and are business expenses.
From the above, it is clear that, appellant failed to produce the bills/vouchers for the payments made for the alleged expenses under the head hotel and staff welfare expenses. The payment made through banking channel, will not substantiate the allowability of the alleged expenses incurred wholly and exclusively for business purposes. In view of these facts, I do not find any infirmity in the findings of the A.O. in the assessment order and accordingly, the argument of the appellant is not acceptable.
In view of the above, addition of Rs. 636,835/- on account of hotel and staff welfare expenses, is confirmed.
Accordingly, ground no. 15, is hereby dismissed.”
9. So far as the disallowance of Rs.1,77,82,267/- by invoking the provisions of section 14A read with section 8D by the AO is concerned, the ld.CIT(A) deleted the same by observing as under:-
10.3 Findings: The findings are as under:-
10.4 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:-
(i) As per A.O., during the year under consideration, though, no dividend income has been earned, but the assessee has made the investment amounting to Rs. 1,10,61,51,815/-. However the A.O. was of the view that the assessee has not shown any expenditure against the income which might have been arisen as a dividend income on such investment, which is a exempt income and accordingly, the A.O. invoked the provisions of section 14A and determined the disallowance u/r 8D at Rs.1,77,82,267/.
(ii) During the appellate proceedings, the appellant has stated that the investment in group company JCSL, was strategic investment and not made for earning the dividend income. The dividend income on this investment was NIL and therefore, the A.O. was wrong in invoking provision of section 14A. The appellant has also relied upon the hon’able Delhi High Court decision in the case of CIT vs. Holcim India P. Ltd. ITA no. 486/2014 and ITA no. 299/2014 dated 05.9.2014. The ratio laid down by this decision is that no disallowance can be made 14A, if there is no exempt income earned during the year.
From the above, following facts emerge:-
> During the year under consideration, no dividend income has been earned, which can be treated as exempt income, and
> The investment made in its group concern, is on account of strategic investments and on which, no dividend income has been earned.
In view of .the above, I agree with the arguments of the appellant that no expenditure can be disallowed against NIL exempt income and this view is also supported by the decision of the jurisdictional High Court of Delhi in the above case (supra). Accordingly, I hold that since no exempt income is earned during the year under consideration and therefore, the A.O. has erroneously invoked the provision of section 14A for making disallowance of alleged expenses of Rs. 1,77,82,267/- and alleged addition made by the A.O. cannot be sustained. In view of the these facts addition of Rs. 1,77,82,267/-, is deleted.
Accordingly, ground no. 16, is hereby allowed.”
10. So far as the addition of Rs.95,45,816/- on account of interest expenses u/s 36(1)(iii) is concerned, the ld.CIT(A) deleted the same by observing as under:-
“11.3 Findings: The findings are as under:
11.4 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:-
(i) During the assessment proceedings, the A.O. alleged that on review of financial statement of assessee company, it can be observed that, it has paid interest amounting to Rs. 1,90,91,632 – on borrowed funds. Further, on perusal of accounts it is observed that the related person/ concerns of assessee company, has debit balances during the year under consideration.
(i) As per A.O., in the assessment proceedings, it has been stated that the peak debit balance in case of Shri. Gaurav Arora is Rs. 11.15 crore. The assessee has not charged any interest on such alleged loan provided to him.
(ii) During the appellate proceedings, it has been submitted by the appellant that chart showing the nexus between the borrowed funds used for business purposes and interest paid filed now, was also submitted during the assessment proceedings, vide which it can be clearly observed that borrowed funds are utilized for business only. From the perusal of submission filed during assessment proceedings, it can be observed that there are regular business transactions amongst the group persons / entities and the same are running throughout the year, which are attributed to the business of shares/futures/option of securities etc. In this background, the interest element on these funds cannot be disallowed, being part and parcel of business transactions. Further, the exercise of calculating peak balance on these accounts and then attributing interest expenses to the same, by the A.O. is incorrect. The assessee has filed detailed explanation before A.O. regarding money borrowed, on which interest has been paid and its utilization for business purposes. The A.O. has not pointed out any inaccuracy in the submission filed by the assessee. The assessee having utilized the borrowed funds for business purposes and therefore, it is submitted that no amount can be disallowed u/s 36(l)(iii) of the Act.
(iii) In alternate, assessee has also submitted that in light of the judgment of Hon’ble Supreme Court in the case of M/s S.A. Builders Ltd. vs. CIT (A) 2007 (158) Taxmann 74 SC and M/s Hero Cycles Pvt. Ltd. Vs. CIT 2015 (63 com 308 SC), no disallowance can be made u/s 36(l)(iii) of the Act, if the money is advanced to group concerns, is on account of commercial expediency and accordingly, interest paid on borrowed funds to the extent of advanced to group concerns, is allowable expense u/s 36(l)(iii).
From the above, it is a undisputed fact, that, the A.O. has disallowed an amount of Rs. 95,45,816/-, out of the total interest paid of Rs. 1,90,91,632/-, being 50% of the interest paid. The A.O. has made disallowance u/s 36(l)(iii) of the Act and the provision of section 36(l)(iii) of the Act, is to allow interest expenses on the funds borrowed for business purposes. This means that the interest expenses are allowable only to the extent of funds borrowed for business purposes. The A.O. while estimating the said disallowance, had also made certain estimation of peak debit balances in the account of Shri Gaurav Arora. The estimation of interest at 50% by the A.O. is without any basis, while disallowing any interest on borrowed funds not used for business purposes, the A.O. has to pinpoint for specific interest bearing funds, has been diverted for non-business purposes, on which no interest has been charged.
From the above, following facts emerge:
> The appellant is having business transactions with alleged client, and
> The transaction with these clients are, only business transactions and no loan transactions have taken place.
In view of the above, I hold that, appellant is engaged in the business of share broking/trading activities with the clients and there is no loan transaction with the alleged client. Accordingly, I agree with the main argument of the appellant and therefore, findings of the A.O. for making alleged disallowance of interest, are erroneous. Therefore, the addition of Rs.95,45,816/-, is deleted.
Accordingly, ground no. 17, is hereby allowed.”
11. So far as the addition of Rs.19,34,21,760/- made by the AO on account of deemed dividend by invoking the provisions of section 2(22)(e) of the Act is concerned, the ld.CIT(A) deleted the same by observing as under:-
“12.4 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:-
The A.O. in the assessment order, has made an addition of Rs. 19,34,21,760/- 2(22)(e), for the -following reasons:
(i) The companies namely M/s Jaypee Capital Services Pvt. Ltd.(JCPL), and M/s Futurz Next services (P) Ltd.(FNSL), are closely held companies. The assessee has substantial holding in JCPL. There are large number of transactions including payments by the JCPL to the assessee. Further, the group companies are also making the payments to each other regularly as per the ledger account submitted.
(ii) The ledger account submitted by the appellant, consists of large number of transactions in respect of shares transactions done by assessee, as client of JCPL, which are not covered u/s 2(22)(e) of the act. However, where there are cheque payments, the same has to be considered as loan/advance for the purpose of section 2(22)(e) of the Act.
It is further held by the A.O. that the JCPL, have granted advances in the nature of loan to the assessee The payment received from the JCPL by assessee is to be treated as deemed dividend in the hands of the assessee.
The objections/arguments submitted by the appellant during the appellate proceedings are discussed as under:-
(i) The JCPL, is share/currency/derivatives brokers, with whom the appellant and the group concerns maintain client account, in which business transaction of sale and purchase of share/currency/derivatives have taken place during the year under consideration.
In the appellate proceedings, appellant has submitted that the accounts of the assessee and other concerns, in which he is substantially interested, with JCPL, are not in the nature of advance or loan. Therefore, it is claimed that these accounts relates to business transactions of share/currency/derivatives only, which is evident from the copy of accounts filed in the assessment proceedings, as well as in the appellant proceedings.
(ii) It has been further submitted that the special auditor as well as the A.O., have extracted the alleged account and re-casted account without following any accounting norm. For the purpose of making the alleged addition by the A.O., the method adopted is discussed as under:
(a) The special auditor, while recasting the account, has picked up the figures of cheque received and paid by JCPL. After taking the figure of money received and money paid, the special auditor has worked out the peak balance of the same and treated it as deemed dividend in the hands of the appellant.
The A.O., while recasting the account, has picked up the figure of payments made by JCPL during the year and the negative balance appearing after the payments. Lower of the two figures i.e. amount paid by the company and the negative balance appearing after the payment, has been taken as the deemed dividend by the A.O.. The A.O. has adopted pick and choose, whereby he picked up only the debit entries of the cheque payments, but has ignored the debit and credit side of the transactions relating to purchase and sale of share/currency/derivatives.
(b) Both the above alleged accounts extracted by the special auditor and A.O., did not take into consideration, the business transactions entered into by the appellant/concern with this company. This fact is evident from the amount of Rs.19,34,21,760/-, computed by the A.O. in the case of JCPL on the basis of alleged re-casted copy of account, as against the actual copy of account maintained in the books of accounts of this company.
(c) It has been further submitted that the even alleged account prepared by the special auditor (in case of JCPL), which has not been followed by the A.O. and has prepared another account. The A.O. has taken alleged loan amount by adopting lesser of the payment made by JCPL to the appellant/concerns and net balance available on a particular date. Therefore, it is, submitted that even the alleged account prepared by the A.O., does not reflect the correct nature of the account, as same is prepared without following any accounting principles and ignoring the nature of each transaction. It is argued that the A.O. cannot ignore the nature of business transactions entered into by the assessee/group concerns with JCPL, which are relating to share/currency/derivatives and therefore, it is wrong on part of the A.O. to consider running account of business transactions as loans and advances, so as to consider the same as deemed dividend under section 2(22)(e)of the Act.
(iii) It is further submitted by the appellant that the ledger account maintained in the books of accounts of JCPL, copy of which was submitted before the A.O. as well as in the appellate proceedings, shows that the same is a running account of purchase/sale. The cheque payments & receipts are relating to transactions of share/currency/derivatives and there is no loan/advance transactions.
From the above, following facts emerge:
(a) The transactions of cheques received and paid from/to the broker company JCPL are related to the business transactions of sale/purchase of share/currency/derivatives carried out during the year under consideration, which cannot be segregated. If the transactions of cheque received and paid are taken out of the alleged client accounts, then there is no meaning of trading transactions. In the type of business transaction entered by the appellant with the broker company, the transfer of funds/money on both the sides, is part and parcel of the business done, otherwise it will not be possible to settle the accounts.
It is not possible to settle the trading transactions without transfer of the funds/money. Therefore, the method adopted by the special auditor in the audit report, which has not been considered and also the method adopted by the A.O. in assessment order, is not correct. The positive and the negative balances, emerging out of the said accounts, is the result of business activities, which cannot be considered as loans/advances, as to cover the same within the provisions of section 2(22)(e).
(b) The company JCPL is a registered stock, currency and derivative broker on NSE, BSE, USE and MCX Sx. The transactions entered by the said company with appellant and group concerns are related to its business only. The appellant and the group concerns, maintain client account with this company, where in large number of share/currency/derivatives trading transactions, has taken place in the year under consideration. These transactions are nowhere prohibited under any existing law and not covered u/s 2(22)(e) of the act.
(c) The transactions entered into are in the regular course of business and it is not a case where it has been alleged by the A.O. that transactions of sale/purchase of share/currency/derivatives, are not genuine. In fact, these purchase and sale transactions, have not even doubted by the special auditor in the audit report as well as by the A.O. in assessment order. The special auditor and A.O. has re-casted the ledger account by not considering the business transaction of sale/purchase of share/currency/derivatives, which is not correct, since deemed dividend cannot be computed by way of pick and choose of few transactions, rather an account has to be considered in its entirety.
The above view, is also supported by the ratio laid down in the decision by Jurisdictional High Court of Delhi in the case of CIT Vs. Creative Dyeing & Printing (P.) Ltd., [2009] 184 TAXMAN 483 (DELHI), as under:
” 11. The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Raj Kumar’s case (supra) deals with that part of the definition of deemed dividend under section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company [section 2(22)(e)( ii)J i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports (P.) Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would therefore be covered by section 2(22)(e)( ii) and consequently payments even for business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)( ii) is basically in the nature of an explanation. That cannot however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions does not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(
ii). The provision of section 2(22)(e)( ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that’s all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar’s case (supra). This Court in Raj Kumar’s case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under :
“10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A)in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax.
10.4 Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is pari materia with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.
10.5 If this purpose is kept in mind then, in our view, the word ‘advance ’ has to be read in conjunction with the word ‘loan ’. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term ‘advance ’ may or may not include lending. The word ‘advance’ if not found in the company of or in conjunction with a word ‘loan ’ may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum to what meaning one would attribute to the term ‘advance ’. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing ‘it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them’and our Supreme Court in the case of Rohit Pulp & Paper Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610.” (p.165)
12. Therefore, we hold that the Tribunal was correct in holding that the amounts advance for business transaction between the parties, namely, the assessee-company and M/s Pee Empro Exports (P.) Ltd. was not such to fall within the definition of deemed dividend under section 2(22)(e). The present appeal is therefore dismissed.
In view of the above, I hold that the transactions in the client ledger accounts, are transactions entered in the ordinary course of business and are relating to sale/purchase of share/currency/derivatives only. Therefore. I further hold that since these transactions are trading/business transactions, accordingly, provisions of section 2(22)(e), do not apply to the facts of the case of the appellant.
Accordingly, the addition made by the A.O. on account of deemed dividend of Rs. 19,34,21,760/-, is hereby deleted.”
12. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:-
“(a) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in deleting additions made on account of client code modifications(CCM).
(b) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding that the CCM done by the company is within permissible limit.
(c) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding that the CCM done by assessee company is within permissible criteria, thus, ignoring the fact that the CCM was done in the code of certain entities only and the modified client code were not similar to the original client code, the values of client code was significant and other conditions laid down by stock exchanges.
(d) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete disallowance u/s 36(i)(iii).
(e) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in directing the AO to delete disallowance made u/s 14A.
(f) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in arriving at the conclusion that the transaction in the client ledger account, are related to business activities.
(g) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by holding that recasting of ledger account of assessee in the books of JCSL by the AO is not correct.
(h) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts by deleting the addition of Rs. 19,34,21,760/- made on account of deemed dividend u/s 2(22)(e) of the Act.
(i) On the facts and in the circumstances of the case, the Ld. CIT(A) had erred in law and on facts in holding that all the transactions with JCPL are business transaction, thus, ignoring the fact that assessee company is a client of JCPL and it was obliged to pay only the profit earned by the assessee company.
(j) That the order of the CIT(A) is perverse, erroneous and is not tenable on facts and in law.
(k) That the grounds of appeal are without prejudice to each other.
(l) That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”
13. Grounds of appeal No. (a) to (c) by the Revenue relate to the order of the CIT(A) in deleting the addition of Rs.8,74,367/- made by the AO on account of Client Code Modification.
14. The ld. DR heavily relied on the order of the AO. He submitted that the AO, on the basis of report of the special auditors had made the addition on the ground that the assessee shifted its profit to other clients or shifted loss to itself from other clients during the year under consideration and the ld.CIT(A) without properly analyzing the facts of the case has deleted the addition which is not justified.
15. The ld. Counsel for the assessee, on the other hand, while supporting the order of the CIT(A) submitted that the assessee company is into such business wherein, various, i.e., more than thousands of orders are received and executed during the business hours of a single day and correspondingly the price of security/ shares etc., also fluctuates with every nano second, therefore practically it can be understood that, the punching of orders by the employees is always in a haste. He submitted that employees or staff working in this department are punching the orders in haste and hence undoubtedly, the task would be more prone to some human errors. In view of the above, there are certain client code modifications done by the assessee company, on account of punching of incorrect particulars of client code, at the time of punching of orders from them. He submitted that these errors are normal and routine errors accruing from the nature of business. The information regarding client code information is sought by the department from the exchange only. Therefore, there could be no doubt that the transactions executed were in accordance with the guidelines of exchange, otherwise the same would not have been allowed by the exchange. He submitted that the guidelines of exchange in this behalf also acknowledges the 1% of modifications as tolerable and genuine error. However beyond 1%, there are some minor penalty described by the exchange. He submitted that the ld.CIT(A) while deleting the addition has observed that the volume of Client Code Modification occurred, are within the permissible limit allowed by the SEBI and the Exchange/SEBI, has not found any violation of rules and regulations related to CCM, and the CCM transactions are falling within the prescribed limit of less than 1%. Referring to the decision of the Hon’ble Mumbai High Court in the case of Pr. Commissioner of lncomtax-13 Vs. Pat Commodity Services Pvt. Ltd.; the decision of the Ahmedabad Bench of the Tribunal in case of ACIT vs. Kunvarji Finance (P.) Ltd., [2015] 40 ITR (Trib) 64, order dated 19.03.2015; the decision of the Mumbai Bench of the Tribunal in the case of M/s. Sambhavnath Investment Vs. ACIT, vide ITA No.3109/Mum/2011, order dated 31st December 2013 and various other decisions, he submitted that identical issue has been decided in favour of the assessee. He further submitted that the coordinate Bench of the Tribunal in the case of sister concern of the company, namely, Jaypee Financial Services Ltd., for AY 2011-12 has decided the identical issue and has deleted the addition. Since the facts of the present case are identical to the facts of the case decided by the Tribunal, therefore, the order of the ld.CIT(A) being in consonance with the law should be upheld and the grounds raised by the Revenue should be dismissed.
16. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs.8,74,367/- on account of Client Code Modification on the ground that the assessee has shifted its profit to other clients or shifted loss to its sister concerns as alleged by the Special Auditors appointed by the Department. We find, the ld.CIT(A) deleted the addition on the ground that the volume of Client Code Modification occurred are within the permissible limit allowed by SEBI and the Exchange/SEBI has not found any violation of rules and regulations related to CCM and the CCM transactions are falling within the prescribed limit of less than 1%. We do not find any infirmity in the order of the CIT(A) on this issue. We find, identical issue had come up before the Tribunal in the case of group company, namely, M/s Jaypee Financial Services Ltd. for AY 2011-12. We find the Tribunal vide ITA No.4266/Del/2016, order dated 03.12.2019 has observed as under:-
“10. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs.1,90,71,392/- on account of CCM on the ground that in the case of member(broker) group of companies of the assessee, it is held that the CCM is by and large not for the genuine reasons and for extraneous consideration and that the assessee has suppressed its income to the extent of Rs.1,90,71,392/-. We find the Ld. CIT(A) deleted the addition made by the AO on the ground that the assessee is not a member of any exchange and cannot execute CCM. Further the transactions on account of CCM done by group concerns are genuine and the volume of CCM occurred are within permissible limit allowed by SEBI. It is also the observations of the CIT(A) that the exchange or SEBI has not found any violation of rules and regulations relating to CCM and the CCM transactions are falling within the prescribed limit. It is the submission of the Ld. DR that it is not a genuine mistake and the transactions are not genuine. Further the CCM was done by the assessee through its sister concern M/s. Futurz Next Services Limited through which the profit of the assessee company was reduced by Rs.1.90 crores. According to the Ld. DR the CCM is akin to penny stock. It is the submission of the Ld. Counsel for the assessee that the transactions entered into by the assessee are not found to be false or untrue and although SEBI is the regulator no action has been taken by SEBI holding that the transactions are not genuine. Further no adverse material has been found by the search party during the course of search and the revenue even have not gone to the broker who has done the CCM. It is also his argument that it is not known as to whom the account has shifted.
11. We find some force in the argument of the Ld. Counsel for the assessee. We find force in the argument of the Ld. Counsel for the assessee that client code modification is the internal matter of the broker and assessee has no control over it. The AO in the instant case has not spelt out as to on which scrips the assessee has shifted the profit. We find the AO nowhere in the assessment order has mentioned of any statement of broker of the assessee regarding the admission of any client code modification. We find in the instant case the addition has been made by the AO despite assertions by the assessee that it was not a registered broker on the stock exchange. There is also nothing on record to suggest that the CCM was done at the behest of the assessee. Further, there is no addition or adverse view taken in the case of the other person with whose accounts presumption is being made that transaction has been shifted. Admittedly there is nothing on record that the revenue has gone to the broker to find out as to who is the beneficiary of the CCM. Further the transactions have not been held to be non genuine. So far as the argument of the Ld. DR that the Client Code Modification is akin to penny stock is concerned, we do not find any merit in the said arguments. In case of the penny stocks shares are purchases at a very low price and were sold immediately after one year at astronomically high price just to claim the benefit of deduction u/s. 10 (38) or as the case may be. However, in case of CCM there is no such purchase at low price and sale at high price and it is on account of some punching error which has been rectified subsequently. We, therefore, do not find any merit in the argument of the Ld. DR that CCM is akin to penny stock.
12. We find an identical issue had come up before the Mumbai Bench of the Tribunal in the case of M/s. DCIT Vs. Comet Investment (P) Ltd. vide ITA No.5802/Mumbai/2017 order dated 13.05.2019. We find the Tribunal dismissed the appeal filed by the revenue by observing as under :-
“7. After having heard the counsels for both the parties at length and after having gone through the facts of the present case, we find from the records that the assessee is not a registered broker on the Stock Exchange. Only the registered brokers can modify Client code (CCM) of their own clients. Therefore in such circumstances, the allegations of assessee having done or restored to CCM is apparently not correct. The AO has not brought on record that even the instructions for CCM was ever given by the assessee. Hence, in these circumstances, the assessee can’t be held responsible for CCM if any done at the end of the broker. The AO except for the fact of receiving information from the DIT (I & Cl), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect i.e. receipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has stated the complete details of the Modus Operandi of creation of fictitious profit and / or losses with a malafide intention of escaping taxes. However, the AO has neither proved nor lead any evidence in case of any single transaction, which he has added to the income of the assessee, being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee.
8. It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any assessee should compulsorily have the following ingredients i.e.
i) A valid transaction must have been executed on the Stock Exchange.
ii) The customer of the registered share broker should confirm & agree that the transaction entered into by the broker belongs to him.
iii) The payment Ibr purchases and/or receipt of sale proceeds should have happened between the Bank Accounts of the broker & his customer.
iv) The above transaction must have been accounted for in the hooks of account of the registered broker as well as his customer.
v) The eventual profit/loss on the transactions executed on the Stock Exchange & exchange of monies having happened as well as getting accounted in the respective books of account would eventually result into taxable profit and/or loss in the hands of such customers of the registered broker.
9. Whereas, the AO in the present case has mechanically added amounts as income of assessee without verifying & furnishing evidences on record that all the above steps have actually happened in the case of all the transactions which he has added as assessee’s income. In our view, by no stretch of imagination can any AO consider a transaction on the Stock Exchange as income of a person other than the one who has either actually received monies in his bank account (in case of profit) and/or paid any monies from his bank account (in case of losses).
10. For the above proposition, we rely upon the decision in the case of M/s Sambhavanath Investment v. ACIT I.T.A. No.3109/Mum/2011 AY 2006-2007 dated 19/12/2013 (Mum.)(Trib.), ACIT v Kunvarji Finance (P) Ltd (2015) 61 Taxmann.com 52(Ahd.)(Trib.) wherein it was held that CCM within 1 % is absolutely normal. Accordingly the addition was deleted. In the facts of the present case also, CCM is within 1 %, ITO vs. Pat Commodity Services P. Ltd. ITA Nos. 3498 and 3499/Mum/2012 dt. 7th Aug,2015 (Mum.)(Trib.), DCIT v Sunil J Anandpara ITA No. 3132/MUM/2015 Assessment Year: 2010-11 Bench I dated 15/9/2017 (Mum.)(Trib.) and ITO vs. M/s. M.N. Shares & Stock Brokers Pvt. Ltd. IT No. 5399/M/2017, AN. 2009-10 Bench – SMC.
11. Even nothing has been placed on record by the AO to demonstrate that any proceedings were ever initiated against the assessee by the SEBI or any stock exchange. It was also clarified by the Ld. AR that the broker, through whom the assessee carried on share transactions, were also not imposed any penalty. No co- relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours. According to us, such co-relation was necessary to fasten any liability upon the assessee.
12. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed.”
13. We find the Ahmedabad Bench of the Tribunal in the case of ACIT Vs. Kunvarji Finance (P) Ltd. reported in 401 ITR (T) 64 has held as under :-
8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer believed the client code modification to be malafide because in his opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T&S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:-
Circular no. MCX/T&S/032/2007 January 22, 2007 Client Code Modifications In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under: Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-ll (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under.
a. The facility of client code modifications intra-day are allowed.
The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays and on Saturdays the same shall be allowed between 2:00 p.m. to 2:15 p.m. c. However, on the days when trading in commodities takes place till 11:55 p.m. the client code modification will be allowed only upto 12:00 p.m. d. At all times, Proprietary trades shall not be allowed to be modified as client trades and client trades shall not be allowed to be modified as proprietary trades.
e. In order to ensure that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under:
| S.No. | Percentage of Client Code changed to total orders (matched) on a daily basis | Penalty(Rs.) |
| 1 | Less than or equal to 1 % | Nil. |
| 2 | Greater than 1 % but less than or equal to 5% |
500 |
| 3 | Greater than 5% but less than or equal to 10% | 1000 |
| 4 | Greater than 10% | 10000 |
f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped.
With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. in international referenceable commodities (i.e. commodities traded upto 11:55 p.m.) Page | 18 Members are requested to take note of the FMC directives and ensure strict compliance.”
From the above, it is evident that client code modification is permitted intra- day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is Rs 500/-. If it is greater than 5% but less than 10%, penalty is Rs 1000/- and if it is greater than 10%, then penalty is Rs 10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs 500/-. In the context of the circular issued by Commodity Exchange, let us examine whether the client code modification done by the broker i.e. KCBPL is unusually high. At page No. 16 on paragraph No.4.3, the CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. That the Assessing Officer has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer.
9. The Assessing Officer held the client code modifications to be malafide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the Commodity Exchange, it is evident that client code modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. When the client code was modified on the same day, there cannot be any malafide intention. Had client modification done after the transactions period when the price of the commodity has already changed, then perhaps there could have been some basis to presume that client code modification is intentional. However, when the client code modification is done on the same day, in our opinion, there was no basis or justification to hold the same to be malafide.
10. Moreover, the Id. Assessing Officer has computed the notional profit/loss till the transactions period and not till the period by which the client code modification took place. Even if the view of the Revenue is accepted that the client code modification was with malafide intention, then the profit or loss accrued till the client code modification can be considered in the case of the assessee but by no stretch of imagination the profit/loss arising after the client code modification can be considered in the hands Of the assessee.
11. The Id. CIT(A) in paragraph 4.13 of his order has also recorded the findings that “all transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees.” These findings of fact recorded by the Id. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts, we do not find any justification to interfere with the order of the CIT(A) in this regard and the same is sustained; and Ground Nos. 1 and 3 of the Revenue’s appeal are rejected.
14. The various other decisions relied on by the Ld. Counsel for the assessee also supports his case that no addition can be made by the AO where CCM is done by the broker.
15. Since in the instant case it is an admitted fact that the assessee is not a member of any exchange and cannot execute 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.
17. We find, the coordinate Bench of the Tribunal in the case of M/s Jaypee Capital Services Ltd. vide ITA No.1384/Del/2017, order dated 17th January, 2020 has also decided identical issue and deleted the addition. Since the facts of instant case are identical to the facts of the cases decided by the Tribunal in the case of sister concerns of the assessee, therefore, respectfully following the same, we uphold the order of the CIT(A) on this issue and the grounds raised by the Revenue are dismissed.
18. Ground of appeal (d) by the Revenue relates to the order of the CIT(A) in deleting the addition of Rs.95,45,816/- made by the AO u/s 36(1)(iii) of the IT Act.
19. The ld. DR submitted that the AO has made the addition since the assessee could not establish that the interest bearing fund borrowed by it is wholly and exclusively used in business. He submitted that there is no commercial expediency in giving interest free loans to sister concern. Therefore, the ld.CIT(A) was not justified in deleting the addition.
20. The ld. Counsel for the assessee on the other hand while supporting the order of the CIT(A) submitted that the assessee is having business transactions with the clients and the transactions with these clients are only business transactions and no loan transaction has taken place. He submitted that the assessee during the impugned assessment year has incurred a sum of Rs.1,90,91,632/- towards interest on borrowed funds out of which the AO has disallowed an amount of Rs.95,45,816/- on estimate basis. He submitted that the assessee company has not granted any loan to Shri Gaurav Arora or Arora Timber Ltd. as alleged by the AO. All these transactions are business transactions and there are regular business transactions throughout the year wherein there are regular receipt and payment transactions accruing in the account. Further, all these transactions are attributed to the business of shares/future/auction of securities.
20.1 Referring to various decisions including the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT, [2007] 158 Taxman 74 (SC), and in the case of Hero Cycles (P.) Ltd. v. CIT, [2015] 63 taxmann.com 308 (SC), he submitted that the advances given to group companies are allowable expenses u/s 36(1)(iii) of the Act. Since, in the instant case, these are business transactions, therefore, no disallowance u/s 36(1)(iii) is called for. Further, the Tribunal in the case of group concern, namely, M/s Jaypee Capital Service Ltd. for the AY 2013-14 in ITA No.1384/Del/2017, order dated 17.01.2020 has deleted such disallowance. He submitted that in the case of Gaurav Arora also the Tribunal vide order dated 17.12.2018 in ITA No. ITA Nos.2034, 2035/Del/2016 for the AY 11-12 has held that the transactions of Gaurav Arora with the assessee and other group concern are in the nature of commercial transaction.
20.2 In his another plank of argument, the ld. Counsel submitted that the assessee has sufficient own funds as well as interest free funds which have been used to make these business advances which is evident from the balance sheet, copy of which is placed at page 7 of the paper book. He submitted that the paid-up share capital of the company is Rs.1 crore and the reserves from surplus of the company is Rs.48,89,70,877/- both totaling to Rs.49,89,70,877/-. Therefore, it is obvious that the advances to Shri Gaurav Arora were given out of own funds and not from borrowed funds. Referring to the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd., in Civil Appeal No. 10 of 2019 dated 02.01.2019, he submitted that the Hon’ble Supreme Court has upheld the decision of the Hon’ble Bombay High Court where it was held that interest free funds available to the assessee is sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. He accordingly submitted that the order of the ld.CIT(A) being in accordance with the law should be upheld and the ground raised by the Revenue should be dismissed.
21. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made disallowance of Rs.95,45,816/- out of the total interest expenditure of Rs.1,90,91,632/- on the ground that the assessee could not establish the diversion of interest bearing fund to Shri Gaurav Arora and M/s Arora Timber Ltd., free of interest. We find, the ld.CIT(A) deleted the disallowance the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of the CIT(A) on this issue. We find, the ld.CIT(A) while deleting the addition has given a finding that the assessee is having business transaction with Shri Gaurav Arora and M/s Arora Timber Ltd., and no loan transaction has taken place. Further, the assessee is having sufficient own capital and free reserves which is more than the advances given to Shri Gaurav Arora and M/s Arora Timber Ltd.
21.1. We find, identical issue had come up before the Tribunal in the case of group concerns, namely, Jaypee Capital Serves Ltd. We find, the Tribunal vide ITA No.1384/Del/2017, order dated 17.01.2020, for AY 2013-14 while deciding the issue in favour of the assessee has observed as under:-
“11. So far as addition of Rs.24,15,000/- made by the AO and confirmed by the ld. CIT (A) u/s 36(1)(iii) is concerned on account of disallowance of interest is concerned, assessee company has come up with specific plea that it has not granted any loans to Futurz Next Services Pvt. Ltd. rather all are regular business transactions supported with regular receipt and payment transactions occurring in the account. It is also contended by the ld. AR for the assessee that all the transactions are attributed to the business of shares/future/option of securities and drew our attention towards its financial ledger for the period 01.04.2012 to 31.03.2013, available at pages 64 to 68 of the paper book wherein business transactions with Futurz Next Services Pvt. Ltd. have been recorded.
12. It is also contended by the ld. AR for the assessee that advances to the group companies have been given out of its own paid up share capital and reserve & surplus of Rs.3,24,81,89,677/- for commercial expediency to the group companies and relied upon the decision of S.A. Builders Ltd. vs. CIT (2007) 158 taxman 74 (SC). So, in view of the financials brought on record by the assessee company discussed in the preceding para, we are of the considered view that since transactions are pertaining of business of shares/future/option of securities & advances having been given on account of commercial expediency of the group companies, disallowance made by the AO and confirmed by the ld. CIT (A) u/s 36(1)(iii) is not sustainable, hence ordered to be deleted. So, grounds no.5, 6, 7 & 8 are determined in favour of the assessee.
22. We further find, the Tribunal in the case of Shri Gaurav Arora vide ITA Nos.2034 & 2035/Del/2016, order dated 17.12.2018 for the AY 11-12 has held that the transaction of Gaurav Arora with the assessee and other group concerns are in the nature of commercial transaction. The relevant observations of the Tribunal at para 5 of the order read as under:-
“5. The Ld. CIT(A) has observed that the transactions in the ledger account of the assessee are in regular course of the business of purchase and sales of the shares/currency/derivatives/commodities etc. The Ld. DR could not controvert the above factual findings of the Ld. CIT(A) before us. In view of the above facts, the Ld. CIT(A) is justified in holding that the transactions between the assessee and those companies are in the nature of trading transactions which are beyond the ambit of deemed dividend in view of the decisions of the Hon’ble Jurisdictional High Court in the case of CIT vs. Creative Dyeing & Printing (P.) Ltd. (Supra). The Ld. CIT(A) has followed the above decision of the Hon’ble Delhi High Court. In our opinion, the Ld. CIT(A) has not committed any error in following the above decision of the Hon’ble Delhi High Court. Accordingly, we uphold the same. The ground of appeal of the Revenue is dismissed.”
23. In view of the above and in view of the detailed reasoning given by the ld.CIT(A) on this issue, we do not find any infirmity in the same. Accordingly, the order of the CIT(A) on this issue is upheld and the ground raised by the Revenue is dismissed.
24. Ground of appeal (e) relates to the order of the CIT(A) in deleting the addition of Rs.1,77,82,267/- made by the AO u/s 14A r.w. Rule 8D.
25. The ld. DR submitted that the AO was justified in making the addition since it was showing substantial investments in shares of other companies and the assessee is required to incur expenses on acquiring the funds for investments. Therefore, the ld.CIT(A) was not justified in deleting the addition.
26. The ld. Counsel for the assessee, on the other hand, submitted that since the assessee has not received any dividend income during the year, therefore, in view of the decision of the Hon’ble Supreme Court and jurisdictional High Court, no addition u/s 14A r.w. Rule 8D is called for and, therefore, the order of the CIT(A) is fully justified.
27. We have heard the rival arguments made by both the sides and perused the orders of the authorities below. We have also considered the various decisions cited by the ld. Counsel for the assessee in the synopsis as well as in the case law compilation. It is an admitted fact that the assessee company has not earned any exempt income or dividend income during the year, a fact brought on record by the AO himself. It has been held by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 that in absence of any exempt income, disallowance under Section 14-A of the Act of any amount was not permissible. Similar view has been taken in the case of PCIT vs. McDonald’s India Pvt. Ltd, vide ITA 725 of 2018. Further, the SLP filed by the Revenue on this issue has been dismissed by the Hon’ble Supreme Court in the case of PCIT Vs. Oil Industries Development Board, [2019] 103 com 326 (SC). Since, in the instant case, the assessee has admittedly not received any dividend income during the year, therefore, in view of the decision of the Hon’ble Delhi High Court in the case of Cheminvest (supra) and various other decisions cited, we do not find any infirmity in the order of the CIT(A) on this issue. Accordingly, the ground raised by the Revenue on this issue are dismissed.
28. Grounds of appeal (f) to (i) relate to the order of the CIT(A) in deleting the disallowance of Rs.19,34,21,760/- made by the AO u/s 2(22)(e) of the Act.
28.1 The ld. DR, while supporting the order of the AO submitted that the AO has made addition alleging that the negative balance indicates that the company has made payment to the assessee to receive that much amount from the assessee. On the other hand, positive balance shows that the company owes the amount to the assessee. He submitted that the ld.CIT(A) without considering the facts properly held that the addition is not justified.
28.2 The ld. Counsel for the assessee, on the other hand, while supporting the order of the CIT(A) submitted that the ld.CIT(A) deleted the same on the ground that the transactions in the client ledger account are transactions entered in the ordinary course of business and are relating to sale/purchase of shares, currency/derivatives only. He submitted that the amount which has been credited and debited in the account of the assessee is in association with the said party is on account of business transaction and transacted by the assessee being a client and shareholder of the company. He submitted that similar addition on account of deemed dividend was made in the case of Shri Gaurav Arora which has been deleted by the Tribunal vide ITA No.2034 & 2035/Del/2016, order dated 17th December, 2018 for AY 2011-12. He submitted that facts being similar, the ld.CIT(A) is fully justified in deleting the addition. He also relied on the following decisions:-
i) CIT vs. Raj Kumar (2009) 318 ITR 462 (Del);
ii) CIT v, Sunil Sethi in ITA No. 569/2009 dated 03.02.2010 (Delhi HC);
iii) CIT v. Creative Dyeing & Printing Pvt. Ltd. [2009] 318 ITR 476 (Del);
iv) CIT v. Arvind Kumar Jain in ITA No. 589 of 2011 dated 30.09.2011 (Delhi HC);
v) Krishan Murari Lal Agarwal v. DCIT [2013] 59 SOT 136 (ITAT, Agra Bench)
28.3 He also relied on the CBDT Circular No.19/2017 dated 12.06.2017 whereby it has been clarified that the advances which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ u/s 2(22)(e) of the Act. He accordingly submitted that the order of the CIT(A) being in consonance with law should be upheld and the ground raised by the Revenue on this issue be dismissed.
29. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs.19,34,21,760/- u/s 2(22)(e) on the ground that the advances in the nature of ‘loan and advance’ has been received by the assessee from M/s Jaypee Capital Services Ltd. and the assessee company has more than 10% shareholding in Jaypee Capital Services Ltd. We find, the ld.CIT(A) deleted the addition made by the AO holding that the transactions in the client ledger account are transactions entered in the ordinary course of business and are relating to sale/purchase of shares/currency/derivatives only. The reasons for which the ld.CIT(A) had deleted the addition have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order of the CIT(A) on this issue. We find, in the case of Shri Gaurav Arora, the Tribunal has deleted the addition vide ITA No.2034 & 2035/Del/2016, order dated 17.12.2018 for AY 2011-12 wherein the Tribunal has observed as under:-
“5. The Ld. CIT(A) has observed that the transactions in the ledger account of the assessee are in regular course of the business of purchase and sales of the shares/currency/derivatives/commodities etc. The Ld. DR could not controvert the above factual findings of the Ld. CIT(A) before us. In view of the above facts, the Ld. CIT(A) is justified in holding that the transactions between the assessee and those companies are in the nature of trading transactions which are beyond the ambit of deemed dividend in view of the decisions of the Hon’ble Jurisdictional High Court in the case of CIT vs. Creative Dyeing & Printing (P.) Ltd. (Supra). The Ld. CIT(A) has followed the above decision of the Hon’ble Delhi High Court. In our opinion, the Ld. CIT(A) has not committed any error in following the above decision of the Hon’ble Delhi High Court. Accordingly, we uphold the same. The ground of appeal of the Revenue is dismissed.”
29.1 We further find that the account of the assessee is a running account, i.e., on every day there are transactions of receipt and payment and, therefore, the payments made against the business transactions are outside the purview of section 2(22)(e) of the Act. We find, the CBDT vide Circular No.19/2017, dated 12th June, 2017 has clarified as under:-
“3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon. ”
29.2 The various decisions relied on by the ld. Counsel for the assessee also support his case to the proposition that the word ‘advance’ which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of section 2(22)(e) of the Act. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue, we do not find any infirmity in his order. Accordingly, the same is upheld and the ground raised by the Revenue on this issue is dismissed.
30. Grounds of appeal No. (j), (k) and (l) being general in nature are dismissed.
31. In the result, the appeal filed by the Revenue is dismissed.
Pronounced in the open court on 04.01.2022.
