Personal funds were utilized to conduct transactions on NSEL platform: ITAT deleted addition

DCIT Vs Modern India Ltd. (ITAT Mumbai)

In the matter aforementioned ITAT deleted addition made on account of Client Code Modification after observing that assessee utilized its own funds to conduct transactions on NSEL platform and the profits from such transactions have already been offered to tax.

Assessee engaged in manufacturing and trading activities. It filed return at Rs.60,14,050/- and Rs.2,84,14,510/- for AYs  2012-13 and 2014-15 respectively. Assesssment were completed u/s 143(3). Subsequently assessments were reopened on information that the assessee has indulged in bogus transactions through commodity trading in both the assessment years under dispute. Assessee was asked to submit details pertaining to trading in commodities and the transactions which were subjected to client code modification. AO found that assessee notonly entered into commodity trading but such commodity trading was subjected to client code modification. AO concluded that the assessee has indulged in bogus commodity trading activity through Client code modification and added back the amounts of Rs.5,85,94,662/- and Rs.30,97,261/- respectively as unexplained investment u/s. 69 in AY 2012-13 and unexplained cash credit u/s. 68 of the Act in AY 2014-15.

On appeal, CIT (A) held that all the transactions have taken place on NSEL platform. The assessee has offered the income from the disputed transactions there cannot be any escapement income. There is nothing on record to show that assessee is involved in client code modification.  Even AO concluded that there was no escapement of income viz-a-viz transaction entered on NSEL platform. Accordingly CIT (A) decided appeal in favour of asseessee.

Revenue supported AO order and assessee relied upon the reasoning of CIT (A).

After considering the submission ITAT observed that AO himself make it clear that the report of the SFIO and DDIT (Inv.), on basis of which cases are reopened, do not in any manner establish or refer to any wrongdoing or illegal activity of the assessee either through client code modification or in any other mode or manner. Assessee was able to establish that its own funds were utilized to conduct transactions on NSEL platform and the profits from such transactions have already been offered to tax. Hence, appeal filed by revenue is liable to be dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. The Captioned appeals by the Revenue and Cross Objections by the assessee arise out of two separate orders passed by National Faceless Appeal Centre (NFAC), Delhi pertaining to Assessment Years (AY) 2012-13 and 2014-15.

2. At the first instance, we will deal with the appeals filed by the Revenue. Common issue arising in both the appeals relates to deletion of additions made on account of Client Code Modification relating to commodity trading.

3. Briefly the facts, more or less common, in both the appeals are, the assessee is a resident corporate entity stated to be engaged in manufacturing and trading activities. For the assessment years under dispute, the assessee had filed its return of income under Section (u/s.) 139(1) of the Act, declaring income of Rs.60,14,050/- and Rs.2,84,14,510/- for the Assessment Years (A.Ys) 2012-13 and 2014-15 respectively. The returns filed for these assessment years were selected for scrutiny and assessments were completed u/s. 143(3) of the Act. Post completion of assessments as aforesaid, the Assessing Officer received information from the Investigating Wing of the Department indicating that through client code modification, the assessee has indulged in bogus transactions through commodity trading in both the assessment years under dispute. Based on such information, the AO reopened the assessments u/s. 147 of the Act. In course of the assessment proceedings, the AO called upon the assessee to furnish all supporting details in relation to trading in commodities and the transactions which were subjected to client code modification.

4. After going through the details furnished by the assessee, the AO observed that as per ledger of commodity trading through Anand Rathi Commodities Ltd. and its Associates, it was found that several purchases were made and sold out on the same day with a different rate, which established that not only the assessee had entered into commodity trading but such commodity trading was subjected to client code modification. He observed that the volume of such trading through client code modification amounted to Rs.5,85,94,662/- in AY 2012-13 and Rs.30,97,261/- in AY 2014-15. Thus, while completing the assessments u/s 147 of the Act for both the A.Ys under dispute, the AO concluded that the assessee has indulged in bogus commodity trading activity through Client code modification and added back the amounts of Rs.5,85,94,662/- and Rs.30,97,261/- respectively as unexplained investment u/s. 69 of the Act in A.Y 2012-13 and unexplained cash credit u/s. 68 of the Act in AY 2014-15. Contesting the additions so made, assessee preferred appeal before learned First Appellate Authority.

5. After examining the contentions of the assessee in the context of facts and materials on record, learned First Appellate Authority found that all the transactions have taken place on NSEL platform. None of the transactions undertaken have resulted into losses and the income derived from such transactions have been offered to tax. On perusal of contract note, the purchase and sale transactions cannot be held to be non-genuine/bogus. Since, the assessee has offered the income from the disputed transactions there cannot be any escapement income. Assuming that client code modification was done by the broker there is nothing on record to prove that the assessee was anyway involved in such activity. Learned First Appellate Authority also took note of the fact that on identical reasoning assessment for AY 2013-14 was reopened u/s. 147 of the Act. However, in an order passed u/s. 148A(d) of the Act, the AO, after making necessary enquiry and examining all the evidences found that there was no specific allegation in the report of the Serious Fraud Investigation Office (SFIO) or DDIT (Investigation) against the assessee. The AO had also observed that there was no finding in the report of the authorities concerned that assessee’s own fund has been brought back in the form of profits on the NSEL platform. The AO had also recorded a factual finding that through documentary evidences, the assessee had established that its own funds were utilized to conduct transactions on the NSEL platform. Thus, taking cognizance of these facts, the AO concluded that there was no escarpment of income viz-a-viz transaction entered on NSEL platform. Thus, upon analysis of the aforesaid facts, learned first Appellate Authority concluded that the additions made on the allegation that the transactions are non-genuine/bogus on account of client code modifications are unsustainable.

6. Before us, learned Departmental Representative (DR) strongly relied upon the observations of the AO. Whereas, learned Senior counsel appearing for the assessee supported the reasoning of learned First Appellate Authority. Further, he brought to our notice the observations of the AO in the order passed u/s. 148A(d) of the Act for the AY 2013-14.

7. We have considered rival submissions and perused the materials on record. From the reasons recorded while reopening the assessments for both the years under consideration, it is the very clear that the basis of reopening is the report received from DDIT (Inv.) Wing which, in turn, is based on report of SFIO, which says that on an investigation conducted on NSEL, it was found that some brokers have made client code modification by using dummy/ghost client code to book trades commodities and later the client codes were modified. It is alleged, the investigation carried out by the SFIO found that no physical delivery goods took place at any time whatsoever in all trades executed on NSEL. Thus, based on the alleged investigation carried out by the SFIO on NSEL platform, assessments in case of the assessee were reopened and additions were made on account of alleged client code modification. However, while deciding the issue in appeal, learned First Appellate Authority has recorded clear factual finding to demonstrate the genuineness of these transactions, which has been discussed by us elsewhere in the order.

8. Pertinently, none of the factual findings recorded by learned First Appellate Authority could be controverted by the Department at the time of hearing. It is further relevant to observe, based on the very same report of DDIT(Inv.) and the investigation carried out by SFIO assessment for A.Y. 2013-14 was reopened alleging escapement of income due to client code modification. Objecting to the reopening of assessment, the assessee made detailed submissions with supporting evidences.

9. After considering the objection of the assessee and conducting necessary enquiry, the Assessing Officer passed an order u/s. 148A(d) of the Act on 31.07.2022, with the prior approval of PCCIT, Mumbai not to further proceed with the reassessment. In this regard, it would be apt to reproduce the following observations of the Assessing Officer:

“After going through the material available on the record and submission made by the assessee I am of the considerate view that, SFIO has carried out investigation in NSEL and shared the report with DGIT(Inv), Mumbai. In the report, the issue of client code modification has been discussed in cases of few brokers. During the course of investigation, the details of client code modification were called for from the NSEL and as per the data there are total 219 brokers who have made 51565 client code modification and the volume of sale and purchase transactions is 6311 crore.

During the investigation, it is revealed that the brokers indulged in rampant client code modification where dummy/ghost client code were used to book trades and later the client codes were modified.

The trading done in NSEL was in the form of paired contracts. The purchases and sales were executed on the same day. Contract note was received in the evening for both purchase and sale. The Brokers were found to be involved in unauthorized funding to the clients by obtaining funds from their NBFC subsidiaries. The Brokers had also stated that the verification of quality and quantity of goods was done by NSEL. The borrowers and borrowing brokers were supposed to deliver and deposit the goods in NSEL owned/accredited godowns. The warehouse receipts were then issued by the NSEL to complete the trade. The broker had also stated that there was no physical delivery of goods at any time in all the trades eamed out on the NSEL platform.

By this way, most of the entities/Individuals booked bogus speculative losses by trading on the NSEL platform. However, in the case of assessee none of the transactions taken place have incurred into losses.

Assessee has conducted transaction worth Rs. 272,76,67,062 for purchase and Rs.282,27,99,956 for sale on NSEL. Assessee has earned net gain of Rs.4,48,09,881 which it has offered for taxation.

Assessee has submitted following documents in support of its claim:

1. Opening stock summary on 1.4.2012

2. Closing Stock summary on 31.3.2013

3. Ledger of broker in our books

4. Excel working of sale and purchase of commodity transactions

5. Assessee’s ledger in the books of broker

6. Bank statement showing receipt of payments from broker

7. Contract notes

From these documents it can be seen that assessee has not incurred any losses on these transactions. And the working for net gain offered by the assessee is correct.

Assessee has submitted documents like contract notes issued by Broker, Assessee company’s own bank statement and ledger account of broker. From the documents submitted by the assesee it is verified that assessee has used its fund do the transaction at NSEL.

Further, transactions made by the assessee are verified with the help of ledger account submitted by the assessee, contract noted issued by the broker and bank statement of assessee company. All the transactions reflected in ledger are matched with contract notes.

Further with the help bank statements of assessee company it is verified that the sale proceed is deposited in the bank account of assessee which it has offered for taxation.

The contract notes issued by the broker gives the complete details of the order number, trade number, contract description, quality, unit, price, brokerage and amount. These transactions mentioned in the contract notes have been duly executed on the online exchange platform of NSEL. A perusal of the contract notes it is reveals that the purchase and sale transaction of the assessee cannot be held to be non-genuine / bogus by any stretch of imagination.

The transactions in NSEL are made through members of NSEL, who are authorized brokers. The assessee has made the transactions under paired contracts. Under the paired contract, generally the purchases were made at T+2 cycle and sales were made at T+25 or T+35 cycle. Under these transactions, the assessee made full payment for purchase immediately and delivery of the commodity lying in the warehouse was assigned to it. The transactions were subjected to VAT, delivery charges, service tax. As far as sale is concerned, the assessee immediately put a contract for sale on T+25 and T+35 and delivery was assigned from buyer to the seller. The amount is received as and when the transaction is completed. In the assessment years 2013-14 whatever the transactions were made on NSEL, whatever the profits or losses obtained, the same were duly disclosed in the profit & loss account and assessed as business income.

From the above discussion the conclusion is drawn that assessee has traded on the platform of NSEL and offered the profit of Rs.4,48,09,881 for taxation. There has been no specific allegation against the assessee company in the report of SFIO or DDIT(Inv) report. There has been no finding in the report that assessee’s own fund has been brought back in the form of profits from the NSEL platform. Assessee with the help of documentary evidences has established that its own funds are utilized to conduct transactions on at NSEL platform. Since, assessee has already offered the profits earned form NSEL platform for taxation, I hold that there has been no escapement of income vis-à-vis transactions entered on NSEL platform. Therefore it is not a fit case for reopening.

8. In light of the above facts and on the basis of material available on record the case of M/s. MODERN INDIA LTD (PAN: AAACT4121E), reopening u/s. 148 of the I.T. Act, 1961 in this case is not recommended for A.Y. 2013­14.

9. In view of this, prior approval from the Specified, Principal Chief Commissioner of Income Tax, Mumbai is received to pass the order u/s. 148A(d) of the Income Tax Act, 1961.”

10. The aforesaid observations of the Assessing Officer himself make it clear that the report of the SFIO and DDIT (Inv.), which are the cornerstone of reopening of assessment u/s. 147 of the Act for all the three years, which viz, A.Ys 2012-13, 2013-14 and 2014-15 do not in any manner establish or refer to any wrong doing or illegal activity of the assessee either through client code modification or in any other mode or manner. The Assessing Officer has further observed that through cogent evidence, the assessee was able to establish that its own funds were utilized to conduct transactions on NSEL platform and the profits from such transactions have already been offered to tax. Thus, the aforesaid observations, we do not find any valid reason to interfere with the decision of learned First Appellate Authority qua the deletion of additions made on account of Client Code Modification. Grounds are dismissed.

11. In view of our decision above in Revenues’ appeals, the cross objections of the assessee have become infructuous, hence, dismissed.

12. In the result, appeals and cross objections are dismissed.

Order pronounced in the open court on 21/01/2025.