Vayoo Nandan Finance Company Pvt. Ltd Vs ITO (ITAT Delhi)
Conclusion: Reassessment proceedings on the ground that assessee was one of the beneficiary of Client Code Modification (CCM) by some broker was quashed as there was no material to infer that such client code modification had been done with the malafide purpose of shifting the profit or evasion of the tax.
Held: Assessee had derived income from business of financing activities and trading in shares and securities. The assessment of assessee was sought to be reopened by AO on the ground that assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. It was held that following the decision in the case of Coronation Agro Industries Ltd vs DCIT reported in 390 ITR 464 (Bom) wherein it was held that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange made modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which might have occurred while punching the orders. The reasons did not indicate the basis for AO to come to reasonable belief that there had been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available was that there was a client code modification done by the Assessee’s broker but there was no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appeared to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. Prima facie, the impugned notice was without jurisdiction as it lacked reason to believe that income chargeable to tax had escaped assessment. There was no material to infer that such client code modification had been done with the malafide purpose of shifting of the profit or evasion of the tax.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No.3097/Del/2019 arises out of the order of CIT(A-16, Nw Delhi [hereinafter referred to as „ CIT(A)‟, in short] in Appeal No. 10185/2018-19 dated 28.02.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 dated 30.12.2016 (hereinafter referred to as „the Act‟) by ITO, Ward-26(2), New Delhi (hereinafter referred to as „ld. AO‟).
2. I find that the assessee had raised additional grounds. But on perusal of the same, it is noticed that they are only supportive of original ground no.1 already raised before me. Hence the additional grounds are hereby not admitted. The assessee had raised the following grounds of appeal:-
“1. The CIT(A) erred in law and facts in holding the reopening of the assessment u/s 148 of the Act as valid though notice u/s 148 was issued without fulfilling the conditions laid down under the said section. Thus the reopening is not valid and the assessment framed on the basis of invalid notice should be cancelled.
2. The CIT(A) erred in law and on facts in confirming the addition of Rs. 4,36,644/- by alleging that the assessee has shifted profit to another entities through client code modification undertaken by its broker in the transactions undertaken at recognised stock exchanges ignoring the submissions and evidences placed on record. Thus the addition so made should be deleted.”
4. I have heard the rival submissions and perused the materials available on record. The return of income for the Asst Year 2009-10 was filed by the assessee on 25.8.2009 declaring total loss of Rs 73,315/- . The ld. AO observed that the assessee had derived income from business of financing activities and trading in shares and securities. The assessment of the assessee was sought to be reopened by the ld. AO on the ground that the assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. This fact got unearthed based on some information received from Assistant Director of Income Tax (Investigation), Ahmedabad. The reasons recorded for reopening the assessment are as under:-
“Reasons for issue of Notice u/s 148 for reopening of assessment u/s 147 of IT Act 1961 for the A.Y.2009-10 in the case of M/s Yayoo Nandan Finance Co. Pvt. Ltd
A. The assessee is a company filed its return of income on 25.08.2009 declaring return Income of Rs. Nil. The details of the directors of the assessee company obtained from records are hereunder:
(a) Shailly Rathi
(b) Manit Jaju
2. Thereafter, the return was processed under 143(1) of the I.T. Act. Subsequent to the processing completed u/s 143(1), information through email was received on 14/03/2016 from Asstt. Director of Income Tax [Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted out profits using Client Code
3. It is a detailed report of 589 pages. I have gone through the report and gathered that Client Code is a unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. Client Code Modification means modification / change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade.
Over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes.
4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact tax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset.
Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified.
I have examined the ITR and the assessment record of the assessee in respect of FY 2008-09 relevant to A.Y. 2009-10 and the following facts are noted:
a) The return of the assessee shows that during the year it has undertaken transactions in sale/purchase of shares, and its turnover could have included the transactions contrived by way of CCM. In the relevant period, the assessee has filed return of Income of Rs. NIL. As per the ITR for the period 01.04.2008 to 31.03.2009, it has undertaken transactions through M/s. Multiplex Capital Ltd.
The transactions which involved CCM, as per information received under the report of the Investigation Wing are as under:
