What is Client Code Modification
(CCM)
Stock Exchanges provide a facility
to modify client code to rectify any error or wrong data entry done by the
stock brokers at the time of punching orders.
The client code modification (CCM)
is a practice under which brokers change the client code in sale and purchase
orders of securities after the trades are conducted. While it is permissible to
rectify inadvertent errors, modifications could be made to manipulate the
activities in the market.
Purpose of Client Code Modification (CCM)
For rectifying “genuine”
errors and mistakes that may have occurred during the trading hours. Admissible
upto 30 mts after closing of trading hours. Applicable only in Intra day
transactions.
NOTE
v The modification of client
code is to be done, only in exceptional cases and not as a routine one.
v The reason for
modification has to be ascertained and analyzed and genuineness is to be
established and also its impact on the clients should be studied before the
modification.
v Normally as a principle,
other than for punching errors, no modification of client codes will be
allowed.
Misuse to evade taxes
Some brokers transferred
Trade gains or losses from one person to another by changing the client codes,
in the garb of correcting an error. These gain or loss book entries were then
used to evade taxes.
CBDT Notification No. 14/2011,
dated 09.03.2011
As per Notification,
Stock Exchanges should ensure the transactions (Cash and F&O) once
registered in the system are not erased. Stock Exchanges to furnish monthly
statement in Form No. 3 BB (Rule 6DDA) and Form No. 3BC (Rule 6 DDC).
SEBI passed order in respect of
modification of Client Codes of traders
SEBI passed order vide
WTM/PS/09/DNPD/April/2012, Dated 11.07.2011 against National Stock Exchange
(NSE) for violating the procedures.
v SEBI is of the opinion
that the number of errors is a strong indicator whether the errors are genuine
or not. If we contrast this to thousand of errors committed in a month in the
case of modification of client code, it is but obvious that there would have
been some other reason than genuine mistake.
v NSE has taken a laid
back attitude towards the problem and either totally ignored or perfunctorily
imposed minor penalties to the brokers. It failed to apply its mind to the
unusualness of the happenings. I therefore find that NSE acted negligently in discharge
of its regulatory duties.
Modus Operandi – A
What the Share Brokers actually Do
|
A - wants to book a
loss during March, 2019 i.e. end of Financial Year, as he is already having
substantial taxable profits. |
B - wants to book
profit through intra day transactions to earn Profits. |
|
Client Code of ‘A’
with the share broker (for example) is SJ 1234 |
Client Code of ‘B’
with the share broker (for example) is RK 4567 |
B’s Loss transferred to A
|
‘A’ has not done any
transaction during the day but expecting to book loss through broker by using
other client code who incurs loss. |
‘B’ buys 1000 shares
of ‘XYZ Ltd’ at Rs. 100 a share through a broker in anticipation that the
price will go up. |
|
|
Due to volatile
market, ‘XYZ Ltd’ moves down to Rs. 90 a share at the end of the closing
hour. |
|
Broker modifies client
code of A i.e. SJ 1234 against transaction done by B through code RK 4567
within half an hour of closing of the day. |
‘B’ incurred loss of
Rs. 10,000/- intra day in sale/purchase of ‘XYZ Ltd’. |
|
Booked bogus Loss
& set off against Profits ending up paying no Taxes. |
‘B’ even though
incurred loss, end up receiving cash from ‘A’ through Broker. |
Modus Operandi – B
Imagine for a moment 2 clients A
& B :
|
A - wants to book a
loss (say for example he has already sufficient Profits and wants to close
the Financial Year with paying less or no Taxes after setting off of Profits
against acquired Loss). |
B - wants to book a profit.
|
v A buys stock ‘XYZ Ltd.’
from B at Rs. 100 a share in anticipation that the price will drop to Rs. 90.
But instead the stock moves up to Rs. 110.
v A ends up Profit of Rs.
10 per share and B ends of Loss of Rs. 10 per share at the end of the day.
v What the broker does
then is to swap the 2 client codes by 4:15 pm – gifting ‘A’ a loss and ‘B’ a
profit. Since on the exchange the trades have been squared, there are no
delivery obligations.
Transfer of Loss
Trading Gain/Trading
Losses were transferred from one account (A) to another (B) or vice versa under
guise of rectifying errors. Most common in Derivatives Market under National
Stock Exchange (NSE).
When & where it happens
An assessee who has made
profits during the year but has not paid any Taxes. At the end of the year, he
believes that he has a huge tax liability as well as interest liability. He
would take/buy loss with his cash unaccounted money from the persons who shift
their losses to him through share broker. He will end up setting off of his
profits against losses and end up paying NO Tax.
Stock Exchange Policy
As per the policy, the
modification (CCM) if any is not permitted across the board and the same is
allowed with restrictions. Only the following types of modifications are
permitted by NSE namely, (i) similarity of names and code numbers -
non-repetitive ones and (ii) family codes.
Modifications are not
permitted as a rule but only as exception to the rule.
Onus on the Assessee
v The assessee cannot
simply keep away himself from this major allegation by stating that the Client
Modification is the internal matter of the Broker and assessee has no control.
The fact that loss is transferred to assessee’s code is to the benefit of the
assesseev who is setting off against Profits.
v Assessee being the
beneficiary of the impugned loss and the claimer of the deduction by way of set
off against the other income.
v Share Broker, who is
party to such generation of loss, needs to demonstrate on what basis the client
Codes are similar to that of the assessee as per the Stock Exchange Policy.
(a) Are the names similar?
(b) Are the changed clients part of
the assessee’s family?
(c) Are the codes similar?
These are the logical questions
which are required to be answered by the claimer of the deduction (assessee) or
generator of the impugned losses (Broker).
Broadly distinguish a genuine CCM
and non-genuine CCM
The DIT (I & CI) sought expert
opinion from NSE to broadly distinguish a genuine CCM and non-genuine CCM. As per
NSE, the following constituted genuine CCM.
(i) Error due to communication and/or punching
or typing such that the original client code/name and the modified client code/name
are similar to each other.
(ii) Modification within relatives.
(iii) Any similar genuine error.
Some of the most popular Non
genuine client code modification constituted as under :-
(i) Percentage of modified traded value is
significantly higher than the total traded value of any trading
members/clients.
(ii) Number of modified trades is significant to
total number of trades of any trading members/clients.
(iii) Profit/loss arising on account of all
modifications by trading member/client is significant in comparison to the
profit/loss in the trades where no modifications have been carried out.
(iv) Profit/loss arising due to modification is
significant.
(v) Trades have been modified to unrelated
parties.
(vi) Both buy and sell leg of different trades
have been modified to same client.
(vii) The same sets of client are observed to be
making profit/loss due to the modifications carried out.
(viii) Total number of trade modifications increased
before closing of the financial year.
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.
Details about Genuine error
The following trades shall be
modified/allowed to be modified, shall be treated as genuine error and
transferred to Error Account.
(a) Punching error/typing error of
client codes due to any genuine error or mistake in order entry, while punching
the order, by any of dealer.
(b) Trade entered for wrong client
due to any miscommunication from the client/authorized representative of the
client.
(c) Client code/name and modified
client code/name are similar to each other but such Modifications are not
repetitive.
(d) Family Code (spouse, dependent
parents, dependent children and HUF)
(e) Institutional trades modified
to broker error/pro account.
(f) Misinterpretation of
communication as to what Investor speaks and what Dealer listens because of
similar sounding alphas and numbers like ‘B’ is being heard as ‘P’ etc. as
generally the dealing room environment is very noisy.
(g) Shifting of character positions
like 4356 is punched as 4536 or one serial up or down.
(h) Order getting punched in hurry
in the previously retained code. All the front-end application has facilities
to retain code of last punched order in order entry window and most of the
dealers use this feature to speed up the order entry process.
(i) Wrong trades due to
the mistake of dealers like ‘Buy’ order punched as ‘Sell’ or error in quantity
or prices. Such trades need to be owned up by the Trading Member and have to be
transferred to ‘Mistake/Error Account’ of the Trading Member.
Policy for Client Code Modification
Stock Exchanges provide a facility
to modify client code after the trade has been executed to rectify
any error or wrong data entry at
the time of punching orders. However, such Client Code
Modification is subject to certain
guidelines issued by SEBI and the Stock Exchanges in this regard.
“Error Trades” means the trades
which will be modified / to be modified / allowed, to be modified
subject to guidelines of the SEBI /
Stock Exchanges and this policy. The Exchange has provided the
facility of client code
modification only with a view to rectify genuine errors.
The facility is mainly to provide a
system for modification of client codes in case of genuine errors
in punching / placing the orders.
It is to be used as an exception and not a routine. To prevent
misuse of the facility Stock
Exchanges levy penalty / fine for all non-institutional client code
modifications.
This policy is applicable to all
Client Code Modifications carried out / to be carried out in any of
the client accounts, subject to
guidelines issued by the SEBI / Stock Exchanges from time to time,
in any segment of any exchange of
which the company is a Member.
The following client code
modifications would be considered as genuine modifications, provided
there is no consistent pattern in
such modifications:
(a)
Where
original client code/name and modified client code/name are similar to each
other but
such
modifications are not repetitive.
(b)
Where
original client code and modified client code belong to a family. (Family for
this
purpose
means spouse, dependent parents, dependent children and HUF)
However, there may also be a need
to resort to client code modification in following situations:
(a)
Punching
error / typing error of client codes due to any genuine error or mistake in
order entry, while punching the order, by any of dealer.
(b)
Trade
entered for wrong client due to any miscommunication from the client/
authorized
representative
of the client.
The facility for Client Code
Modification can be used only in case of Error Trade and the Client
Code Modification shall be carried
out only after obtaining approval of any of the Designated
Directors of the Company and in
their absence that of Compliance Officer subject to the process as
may be prescribed by SEBI / Stock
Exchange.
Business Income [Section 43(5)]
Section 43(5) of the Income Tax
Act, 1961
“speculative transaction” means a
transaction in which a contract for the purchase or sale of any commodity,
including stocks and shares, is periodically or ultimately settled otherwise
than by the actual delivery or transfer of the commodity or scrips:
Proviso to Section 43(5)
PROVIDED that for the purposes of
this clause—
(a) a contract in
respect of raw materials or merchandise entered into by a person in the course
of his manufacturing or merchanting business to guard against loss through
future price fluctuations in respect of his contracts for actual delivery of
goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks
and shares entered into by a dealer or investor therein to guard against loss
in his holdings of stocks and shares through price fluctuations, or
(c) a contract entered
into by a member of a forward market or a stock exchange in the course of any
transaction in the nature of jobbing or arbitrage to guard against loss which
may arise in the ordinary course of his business as such member; or
(d) an eligible
transaction in respect of trading in derivatives referred to in clause (ac) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
carried out in a recognised stock exchange; or
(e) an eligible
transaction in respect of trading in commodity derivatives carried out in a
recognised stock exchange which is chargeable to commodities transaction tax
under Chapter VII of the Finance Act, 2013 (17 of 2013),
Ø
shall
not be deemed to be a speculative transaction.
However, as per second
proviso inserted by the Finance Act, 2018, w.e.f. 1-4-2019, for the purposes of
clause (e) of the first proviso, in respect of trading in agricultural
commodity derivatives, the requirement of chargeability of commodity
transaction tax under Chapter VII of the Finance Act, 2013 shall not apply.
Speciman of Details required by
Assessing Officer
(A) Preliminary Details to be
called from the assessee:—
(i) Details of
Share/Derivative/Multi Commodity or any other Trade Transaction during the year
........
(ii) Name and address of the Share
Broker(s) through whom Transactions undertaken;
(iii) Details of Demat Account and
Trading Accounts maintained;
Details of Client Code
allotted to the assessee by the Broker(s);
(i) Ledger account copy with the Broker(s) for
the year under consideration;
(ii) Contract Notes of Sale/Purchase of shares/derivatives
etc., undertaken through the Broker during the period ............
(iii) Details of
Payments made to the Broker(s) during the year;
(iv) Details of Payments
received from the Broker(s) during the year;
(v) Whether Transaction
with the Broker for the first time or he is a regular client, furnish complete
details of the transactions;
(vi) Details of margin
money paid to the broker with sources thereof;
(vii) Frequency of
Transaction;
(viii) Details of
Transaction(s) during the year which involve Client Code Modification
undertaken by the Broker;
(ix) Reason for Client
Code Modification;
(x) Details of Capital
Gain or Capital Loss or Trade Profit or Trade Loss may be provided;
(xi) The Gain/Loss
involving Client Code Modification may be separately provided;
(B) Details to be obtained from
Share Brokers in respect of assessee:
(i) Transaction ID
(ii) Original Client Code
(iii) Modified Client Code
(iv) Name of the original client
(v) PAN of the original client
(vi) Name of the modified client
(vii) PAN of the modified client
(viii) Scrip name
(ix) Quantity of shares/scripts transacted through
modification
(x) Rate of (ix) above.
(xi) Total Value of transaction
(xii) Buy or sell
(xiii) Date of
transaction
(C) Details to be obtained from NSE
& MCX
(i) Details of Client Code Modification of
assessee for the period …….
(ii) Ledger account of assessee for all
exchanges.
(iii) Master summary of the above client for FY
…………….
(iv) Copies of KYC forms of the Client.
(v) Details as to who executed the transactions
(broker details).
(vi) Complete details of Original Client Code and
Modified Client Code along with name and address of the persons/ account
holders involved may be provided.
(vii) Quantity of shares/scripts transacted through
modification, rates, total value of transactions entered into by assessee during
the year.
(viii) Details with amount of loss or gain
transferred through Client Code Modification to
assessee i.e. Client Code ……...
(ix)
The detailed data along with financial implications
regarding the client code modifications for separate segments such as cash,
equity derivatives, currency derivatives and all trades in respect of
..............................
(assessee)
....................... (PAN) ....................... (client code).
Client Code Modification cases – A Suggestive
Questionnaire
The Assessing Officer may confront 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.
Taxability
The setting off of
losses through client code modification is not the actual loss incurred by the
assessee. Any setting off of such losses against profits is colourable device
to evade taxes. The difference should be treated as suppressed profit of
Assessee.
The loss is a
non-genuine and fictitious loss which has been acquired by the assessee in
gross misuse of error entry modification with the tacit connivance of the
Broker. The client code modification was being done in cases other than that
for rectifying the genuine errors under the garb of existing practices to evade
Taxes.
Trade loss from CCM
If Loss is claimed by
the Assessee : Whether the said modification to the Client Code was done with a
mala fide intention to generate Trading loss by the assessee by the
collusive arrangement with the broker ? If Yes, the Business Loss is to be
disallowed and Profit to be Taxed without setting off with Trading Losses.
Trade profit from CCM
If Profit is claimed by
the assessee : Whether the said modification to the client code was done with a
mala fide intention to generate Trading Profit ? It is the situation
where profit shifted from some of the clients by the broker through CCM to set
off the brought forward losses available with the assessee. The Object of
shifting of Profit is to introduce Undisclosed Money into the Capital in the
garb of Profit from Trading. It is nothing but Introduction of Black Money into
Capital which should be taxed as ‘Income from Undisclosed Sources’.
Undisclosed profits
The profit arising out
of the Client Code Modification transactions, wherein client code was modified
later, should be considered as the profit of the assessee and hence the same should
be assessed in its hands as Income from Undisclosed Sources. Setting off of
losses not to be allowed under section 115BBE of Income Tax Act, 1961.
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.
(b)
The
members are also allowed to change their clientcodes 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:
|
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 |
(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.
National Securities
Clearing Corporation Limited - Circular No.
NSE/CMPT/5128 Circular No. NSCCL/SEC/2004/0464, Dated 31.05.2004
To, All Members,
Subject :- 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 dated 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
No additions if client
code modifications done by Stock Exchange member were within permissible SEBI
limit
Assessee was a member of
recognized stock exchanges and provided trading services in commodity markets
through those exchanges. During search, evidence of client code modifications
done by assessee and its sister concerns in their own account as well as in
accounts of clients was found. It was also found that through client code modifications,
profit belonging to assessee was shifted to other persons and assessee had
earned commission for facilitating this. Assessing Officer was of view that
shifting of client code was not due to genuine reasons but for providing
accommodation entries to some persons in lieu of consideration and accordingly,
he added a sum of Rs. 8.74 lakhs to total income of assessee. Commissioner
(Appeals) deleted addition. It was found that transactions on account of client
code modifications done by group concerns were not found to be false or untrue
and SEBI or stock exchange had not taken any action treating transactions to be
non-genuine. Moreover, volume of client code modifications occurred were within
permissible limit allowed by SEBI. Therefore, there was no perversity in order
of Commissioner (Appeals) in deleting addition. [In favour of assessee] (Related
Assessment year : 2011-12) – [DCIT v. Futurz Next Services Ltd. (2022) 139
taxmann.com 199 : 94 ITR(T) 119 (ITAT Delhi)]
Code modifications carried out by the stock broker should not affect the claim of the assessee unless it is proved that the assessee has colluded with the stock broker in carrying out the modification
Assessee
is an individual and is a trader and investor in shares and commodities. During
the year under consideration, he had incurred loss of Rs. 1,24,17,318/- in
trading in shares and commodities. The Assessing
Officer received information from Investigation wing of Income tax
department, Ahmedabad that the assessee has obtained fictitious transactions to
generate loss of Rs. 1,24,17,318/-. Hence the Assessing Officer reopened the
assessment by issuing notice under section 148 of the Act on 29.03.2016. The Assessing
Officer completed the assessment to the best of his judgement under section 144
of the Act by disallowing the above said loss.
Held : We noticed earlier that the Assessing
Officer has reopened the assessment on the basis of information supplied by
the investigation wing of the department that the assessee has generated
fictitious loss. It is stated that the assessee is a beneficiary of client code
modification, which has resulted in loss. The question as to whether the
information received regarding client code modification could be a reason for
reopening of assessment was examined by the Hon’ble Bombay High Court in the
case of Coronation Agro Industries Ltd v. DCIT (2017) 390 ITR 464 : 82
taxmann.com 75 (Bom.) and it was held as under:-
“(3) The reasons in
support of the impugned notice relies upon the information received from the
Principal Director of Income Tax that the petitioner has benefited from a
client code modification by which a profit of Rs. 22.50 lakhs was shifted out
by the petitioner’s broker, resulting in reduction of the petitioner’s taxable
income. The only basis for forming the belief is the report from the Principal
Director of Income Tax and the application of mind to the report of the
Assessing Officer along with the record available with him. This information
and application of mind has led the Assessing Officer to form a reasonable
belief that there is not only an escapement of income but there has been
failure to truly and fully disclose all material facts and information as the
modus operandi of shifting profits was not known to the Revenue as not
disclosed by the petitioner when the Assessing Officer passed the order in
regular assessment proceedings.
(4) We note 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 makes 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 may have occurred while punching the
orders. The reasons do not indicate the basis for the Assessing Officer to come
to reasonable belief that there has 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 is
that there is a client code modification done by the Assessee’s broker but
there is no link from there to conclude that it was done to escape assessment
of a part of its income. Prima facie, this appears to be a case of reason to
suspect and not reason to believe that income chargeable to tax has escaped
assessment.
5. In the above view,
prima facie, we are of the view that the impugned notice is without
jurisdiction as it lacks reason to believe that income chargeable to tax has
escaped assessment.”
The facts in the present case are identical with the facts in
the case decided by Hon’ble Bombay High Court. Accordingly, we hold that the
reopening of assessment is bad in law. On merits also, we notice that the claim
of the assessee is duly supported by various evidences and further the code
modifications carried out by the stock broker should not affect the claim of
the assessee unless it is proved that the assessee has colluded with the stock
broker in carrying out the modification, which is not the case here.
Accordingly, we are of the view that the Assessing Officer could not have
disallowed the loss claimed by the assessee. Accordingly, we quash the orders
passed by the tax authorities. [ In favour of assessee] (Related Assessment year
: 2009-10) - [Ankit Girishkumar Vasani v. ITO Date of Judgement : 21.09.2022
(ITAT Mumbai)]
ITAT upheld disallowance of losses by client code modification
In the present case it was found by the Assessing Officer
that the assessee has obtained the benefit of accommodation entries by way of
client code modification used by the broker namely M/s Mehta Finstock (P) Ltd.
Thus the losses claimed by the assessee for Rs. 12,56,760/-, on account of
client code modification was disallowed and added to the total income of the
assessee. CIT (A) held that Client Code Modifications have been made in as many
as 63 transactions, It is difficult to understand how genuine punching errors
can occur in such large numbers. One can understand if an error is made on one
or two occasions. However, the error in punching on 63 separate occasions in
respect of the same broker and client is highly unlikely and suspicious. All
the derivative transactions took place with same broker but on different dates.
It is very unlikely that the same mistake will be committed by same person on
various dates. Especially since the error in. entry of client code has to be
corrected on the same date. It is unlikely that the same broker will keep on
making error and correcting it again and again within a short span of time.
Addition made by the Assessing Officer cannot be taken to be based merely on
suspicions, conjectures and surmises, as he has collected information from the
National Stock Exchange as well as the appellant’s broker before arriving at
his decision.
Held : At the outset, we note that the matter has already
been listed for hearing on several occasions but none appeared on behalf of the
assessee despite the fact that the notices for hearing were issued at the given
address of the assessee. It is the trite law that the assessee should be
vigilant enough to pursue the appeal after filing the same. The law assist
those who are vigilant in their rights and not those who sleep on their own
rights. In the absence of any contrary information available on record and
after considering the fact that the Ld. CIT(A) has passed a detailed reasoned
order as discussed above, we do not find any infirmity in the order of the
authorities below. Hence, the addition of Rs.12,56,760/- made by the Assessing Officer
is confirmed and the grounds of the appellant are dismissed. [In favour of revenue] (Related
Assessment year : 2009-10) – [Chandresh
Luniya v. ITO - Date of Judgement : 31.05.2022 (ITAT Ahmedabad)]
On basis of a retracted statement, Assessing Officer held that assessee-commodity broker had done client code modifications for helping clients to divert profits to other persons, in absence of any material or evidence to support alleged unaccounted income, no addition could be made to assessee’s income
Assessing Officer alleged that assessee-commodity broker had
done client code modifications for unusually high number of times helping
clients to divert their profits to other persons and, thus, assessee had earned
unaccounted income from clients. Assessing Officer attributed Rs. 2 crore to
assessee based on statement of one NT given on behalf of Kunvarji Finance that
income Rs. 12 crore was received which pertained to the assessee, Kunvarji
Finance, Kunvarji Finstock etc. However, said NT subsequently retracted from
his statement. In case of Kunvarji Finance itself, Tribunal had already found
that there was no material or evidence to support additions made by Assessing
Officer. Since addition was not based on any material other than disclosure
made by NT which was retracted, no substantial question of law arose on its
deletion. [In favour of assessee] – [Kunvarji Commodities Brokers
(P) Ltd. (2021) 432 ITR 180 : (2020) 274 Taxman 162 : 118 taxmann.com 374 (Guj.)]
Assessing Officer received information from Principle
Director of Income Tax (Investigation) that assessee had received bogus loss
from his broker by client code modification, reassessment on basis of said
information was justified
The
reopening of assessment of the assessee was made under section 147 on the basis
of the information received from the investigation wing wherein it was pointed
out that the assessee has diverted the profit by modifying its code maintained
with the share broker.
Held
that the Punjab and Haryana High Court has decided the issue in favour of the
revenue in the case of Rakesh Gupta v. CIT (2018) 93 taxmann.com 271 (P&H)
which was reopened under section 147 based on the same investigation report
Income Tax Department. Accordingly the reopening made by the Assessing Officer
under section 147 was to be upheld. [In favour of revenue] (Related Assessment
year : 2009-10) - [Chintan
Jaswantbhai Shah v. ITO (2021) 125 taxmann.com 439 : 87 ITR(T) 228 (ITAT Ahmedabad)]
Uncorroborated conclusion on tax-evasion, based merely
on client code modifications, not tenable
Assessee-Company (Kaizen
Stock Trade Pvt Ltd) engaged in the business of dealing / broking in
shares. On the basis of data received from the National Stock Exchange, Assessing
Officer for Assessment year 2009-10 noted that there was change in the code of
the Assessee maintained with the broker with respect to certain transactions
carried out in Futures & Options segment, and due to which the Assessee was
able to shift profit of Rs. 1.02 Cr. and loss of Rs. 83.63 lacs. Assessing Officer
held that Assessee by way of modification in client codes was trying to evade
taxes by booking artificial profits and losses, which had resulted in a
reduction of taxable income to the extent of Rs. 1.86 Cr. which was added to
Assessee’s total income. On appeal, the CIT(A) deleted the additions stating
that AO had made entire additions on presumption without proving that the
Assessee evaded taxes. Aggrieved, the Revenue preferred an appeal with ITAT.
ITAT observed that client code modification refers to a change of client codes after the execution of trades and observes that it is subject to certain guidelines. The facility mainly provides a system for modification of client codes in case genuine errors in punching / placing the orders. It is to be used as an exception and not a routine. To prevent misuse of the facility Stock Exchanges levy penalty / fine for all non-institutional client code modifications.
ITAT further noted that mere client code
modifications carried out by the broker cannot be the basis to draw an
inference against the Assessee. In case of client code modification, the code
of the other party is entered at the place of the assessee. Thus, the other
party is also required to be investigated over its involvement in such a
transaction. Besides this there has to be other corroborative evidence
suggesting that there was the exchange of cash among the parties involved in
such client code modification. But we note that no such exercise has been
carried out by the authorities below. ITAT notes that in absence of any such
verification carried out by the Assessing Officer, it was not inclined to
uphold the findings of the Assessing Officer.
Further, ITAT observed that the number of
transactions in respect of which the client codes were modified are less than
1% of the total transactions, and hence such changes cannot be held to be
indicative of a colourable device adopted for shifting out and shifting in the
profit/loss.
ITAT further remarked that the changes were not made
at the fag end of the year, and therefore it would not have been possible to
ascertain its profit / loss in the mid of the year when such client codes were
modified. ITAT further stated that it could not be inferred that Assessee
resorted to client code modification to reduce taxable income.
ITAT dismissed Revenue’s
appeal and upheld CIT(A)’s order. – [DC
IT v. Kaizen Stock Trade (P) Ltd. [TS-535-ITAT-2021(Ahd)] – Date of Judgement :
03.06.2021 (ITAT Ahmedabad)]
No reopening of Assessment for mere client code modification
Assessing
Officer noted that “The assessee’s code was modified 44 times in OCC to shift
out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs. 4,420/-.
The data clearly shows that the modification was not no grounds of feeding in
erroneous data.”
Finally
while making the addition learned Assessing Officer concluded
that : “In view of above, the profit of Rs. 6,47,201/- claimed by the assessee
in the above mentioned transactions is treated as a contrived profit artificially
generated through the misuse of the CCM. The profit is, therefore, liable to be
taxed and added to the total income of the assessee as unexplained investment under
section 68 r.w.s. 115BBE of the Income-tax Act, 1961.”
Assessing
Officer had completed assessment in terms of section 147 after making addition
under section 68 and 69C on the reason that client code modification was
allowed to the brokers by the stock exchange, within a limited window of time
after business hours, for rectification of any mistakes in punching of the
client code while carrying out transaction of purchase and sale on behalf of
the customers however in case of assessee client code modification had been
done for shifting of the profit or loss. It was held that there was no material
to infer that such client code modification had been done with malafide purpose
of shifting of the profit or evasion of the tax. There was no material before Assessing
Officer to form such a belief that income had escaped due to such client code
modification and thus there was no live link between the material before Assessing
Officer and inference made. The Hon’ble Supreme Court in the case of Rajesh
Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 (SC) had held that
for validity of reason recorded it is essential that there should be a relevant
material on which a reasonable person could make requisite belief.
Thus,
there was no material to infer that client code modification had been done by
assessee with malafide purpose of shifting of the profit or evasion of the tax
hence, assessment could not be reopened under section 147 in absence of any
tangible material to infer that income escaped in the case of assessee. (Related
Related Assessment year : 2010-11) – [Stratagem Portfolio (P) Ltd. v. DCIT -
Date of Judgement : 15.09.2020) (ITAT Delhi)]
Transactions of purchase and sale of shares was made
by assessee through registered stock exchange at prevailing market prices after
duly suffering STT and assessee had furnished all primary evidences in form of trade
files, contract rates, demat statements and bank statements to prove
genuineness of said transactions, loss incurred on such transactions could not
be disallowed treating same to be bogus
Assessee,
a registered share broker, filed his return claiming loss of certain amount on
sale of equity shares. Assessing Officer alleged that he had received an
information from investigation wing that assessee had received accommodation
entry of bogus/ficticious loss by way of share trading. On basis of same, he
held impugned loss claimed by assessee to be bogus and disallowed same. It was
noted that assessee had furnished all details of purchase and sale of shares as
called for in requisite format by Assessing Officer. Assessee also furnished
obligation files of stock exchange and trade files received from stock exchange
in which all details were given showing transactions entered into by assessee. Demat
transaction and holding statements showing delivery of shares for purchase and
sale of shares were also furnished. Assessee also provided copy of bank
statements marking payments made to/received from stock exchange in respect of
purchase and sale of shares. It also furnished copies of contract notes issued
by registered share broker for purchase and sale of shares. It was not case of
revenue that assessee had resorted to any client code modification. All
transactions were routed through recognized stock exchange with registered
share broker at prevailing market prices after duly suffering STT. On facts,
Assessing Officer was unjustified in disallowing loss in respect of purchase
and sale of shares by assessee treating same to be bogus. [In favour of
assessee]
(Related Assessment year : 2013-14) - [DCIT v. PRB Securities (P)
Ltd. (2019) 176 ITD 649 : 105 taxmann.com 129 (ITAT Kolkata)]
Upholds reassessment on share-trader based on information from investigation wing
Ahmedabad ITAT upholds
reassessment under section 147 in case of assessee (earning profits from
trading on stock exchanges through registered broker) for Assessment year
2011-12, however grants partial relief on merits; Assessing Officer had
reopened the assessment of the assessee based on information received from the
investigation wing whereby assessee's name appeared in the list of persons who
had misused Client Code Modification (CCM, a facility provided to brokers by
SEBI/Stock exchange to set out bonafide errors) for tax evasion by shifting out
profits/shifting in losses to reduce their taxable income; Rejects assessee's
contention that Assessing Officer had not formed any 'reason to belief' but had
merely acted on some abstract information, holds that the reasons recorded by
the Assessing Officer clearly show that Assessing Officer had obtained
objective details towards modifications in client codes whereby the
profits/losses were allegedly shifted; Further, states that, the Assessing
Officer at the time of reopening an assessment is not expected to build a full
proof case against the assessee and hold it conclusively against the assessee.”,
opines that the Assessing Officer was in possession of the relevant information
and material germane to the allegation to enable him to hold prima facie belief
towards escapement of income; Adjudicating on merits, ITAT notes that the
losses resulting from CCM can be classified in different categories based on
the extent and magnitude of modification of the client code, directs Assessing Officer
to delete additions w.r.t category ‘Distance 1’ - genuine error in punching of
client codes of only one digit and category ‘Distance -2’ - since the
modification resulted in shifting of profits/losses in both the ways resulting
in it being detrimental to the assessee and confirms additions w.r.t other 2
categories. [In
favour of Both, Partially] (Related
Assessment
year : 2011-12) – [Amitkumar
Amulakhrai Shah HUF v. DCIT, Bhavnagar [TS-817-ITAT-2019(Ahd)] – Date of Judgement :
18.12.2019 (ITAT Ahmedabad)]
Suppression of income –
Future and options – Shares and derivatives – Client code modifications (CCM) –
Burden is on the assessee to establish that the client code modifications have
been done on the behest of the assessee – Addition cannot be made as
suppression of income of the assessee
It was held that the
transactions were supported by bills/contract notes and the assessee couldn’t
have done any client code modifications. The data provided by the Assessing
Officer neither pertained to assessee nor any modification was carried out on
behest of the assessee. There is nothing on record to establish that the loss
transactions were not genuine. Further, assessee is not a registered broker and
thus, could not modify the client code. Nothing has been brought on record by
the Assessing Officer to prove that the modifications have been done on the
behest of the assessee and thus, the assessee couldn’t be held responsible for
the modification to the client code. Tribunal also held that no nexus can be
established with the losses suffered by the assessee. The connivance/collusion
of the assessee with the share broker could not be established. Accordingly,
the deletion of addition by the CIT(A) is affirmed. (Related Assessment Year :
2010-11)—[DCIT v. Vipul D. Shah – Date of Judgement : 03.07.2019 (UR) (ITAT
Mumbai)]
No ‘loss dis-allowance’ based on presumption that assessee misused ‘Client Code Modification’ facility
Hyderabad ITAT deletes
loss disallowance on account of Client Code modification [CCM] in case of
Canara Securities (assessee, engaged in the business of investment banking),
rejects Assessing Officer’s stand that assessee had
contrived losses by using CCM facility for Assessment year 2010-11, holds
that Revenue failed to bring on record any specific instruction given by the
assessee to the broker for carrying out the said malpractice; During relevant Assessment
year, DIT(Investigation) had submitted information to Revenue that the broker
with whom the assessee was dealing was involved in CCM, subsequent to which,
assessee’s case was reopened under section 147/148 (beyond 4 years' time
frame),on the ground that the assessee had 'selectively shifted out the
ascertained profits and shifted in only ascertained loss', and thus availed the
benefits of reduction in taxable income; At the outset, acknowledges that as
the information was received by Revenue from an authentic source, there existed
a 'reason to believe' that in assessee’s case there may have been escapement of
income and hence the reopening was justified; On merits, observes that, (1)
when genuine errors are noticed by the brokers themselves, then, they can modify
such errors suo-moto, or (2) when some genuine mistakes are brought to the
notice of broker by the client, it may be done only in writing and with the
specific request for such changes in the clients code; Takes note that assessee
had brought on record a letter copy from its broker, whereby it was reflected
that the assessee has not made any specific request on any of the CCM,
therefore states that the, CCM made by the broker are made by broker itself.”,
also notes that in the given case no investigation was carried out on the
broker by Assessing Officer. [In favour of assessee] (Related Assessment
year: 2010-11) – [Canara Securities Ltd. v. DCIT(C), Hyderabad - [TS-391-ITAT-2019(HYD)] – Date of Judgement :
03.07.2019 (ITAT Hyderabad)]
Upholds addition of bogus F&O losses being inflicted by mis-use of Client Code Modifications [CCM]
The Assessing Officer
received information from the office of DIT(I&CI) Mumbai, vide letter no.
DIT(I&CI)/CCM/2014-15, dated 27.02.2015 through learned PCIT that some
brokers were misusing the Client Code Modification facility in the F&O
segments on NSE and had created non-genuine profit and loss. It was observed by
the Assessing Officer that these Losses and Profits were given by these brokers
to their different clients/beneficiaries according to their requirements. The
Assessing Officer observed that clients had taken fictitious losses to set off
against their profits with a view to reduce their tax liability. As per
information received by the Assessing Officer, the assessee was one of the
beneficiary of the Client Code Modification as the name of the assessee also
appeared in the beneficiaries list who had taken fictitious F&O Losses
through the broker Inventure Growth & Securities Ltd. (hereinafter called
“Inventure”), during the financial year 2009-10 relevant to Assessment year
2010-11, to the tune of Rs. 31,98,597.50, which income as per Assessing Officer
had escaped taxation.
Further additions as
undisclosed income of the assessee to the tune of Rs. 1,59,930/- being @5% of
alleged bogus F&O losses to the tune of Rs. 31,98,597.50 were made by the
Assessing Officer towards commissions allegedly paid to the broker Inventure by
assessee from undisclosed sources for obtaining these bogus F&O losses were
made by the Assessing Officer as the assessee had failed to prove the
genuineness of these F&O losses and further the brokers had confirmed in an
enquiry made by Revenue under section 131(1A) having received brokerages on
these bogus F&O Losses, vide reassessment order dated 30.03.2016 passed by
the Assessing Officer under section 143(3) r.w.s. 147 of the Act.
In this case there was
an unusual and sudden spurt in client code modifications in the month of March
2010 undertaken by Brokers in Stock Exchanges. The assessee had also suffered
F&O Loss of Rs.31,98,597.50 through Broker Inventure for transactions
undertaken through NSE in the month of March 2010 which were inflicted by
client code modifications undertaken by Brokers with Stock Exchanges and which
were held to be fictitious losses by authorities below. The assessee
transactions in F&O segment also happened in the month of March 2010. The
transactions inflicted through client code modification incurred through Broker
Inventure in the month of March 2010 itself were as high as 92.2% of total
transactions executed by assessee with broker Inventure on quantum of loss
ratio basis.
In large number of
client code modifications, there is no similarity between wrong code and
correct code and secondly there are repetitive client code modifications. Thus,
client code modifications are tainted with collusive action and manipulations
and shall go out of the protection granted by the circulars of NSE/SEBI.
The matter reached ld.
CIT(A) at the behest of the assessee. The assessee reiterated before learned
CIT(A) that these F&O losses are genuine but it did not find favour with
ld. CIT(A) , who was pleased to dismiss the appeal of the assessee on merits as
well challenge raised by the assessee to the reopening of the concluded
assessment by Assessing Officer under section 147 of the 1961 Act. Aggrieved by
an appellate order dated 31.07.2017 passed by learned CIT(A), the assessee has
filed an appeal with tribunal. The appellate order of learned CIT(A) stood
affirmed and appeal of the assessee stood dismissed. [In favour of revenue] (Related
Assessment Year : 2010-11) - [Time Media & Entertainment LLP v. ITO Date
of Judgement : 18.06.2019 - (ITAT Mumbai)]
Future and options –
Shares and derivatives – Client code modifications (CCM) – No stretch of
imagination can any Assessing Officer 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 loss) – Burden is on Assessing Officer to
establish that the losses were purchased or that there was payment in
cash/cheque for such favours – Client code modification within 1% of is absolutely
normal
It was held that the
assessee is not registered broker on the stock exchange. Only the registered
brokers can modify client code (CCM) of their own clients. The Assessing
Officer has not brought on record to establish that the losses were purchased
or that there was payment in cash/cheque for such favours. Assessing Officer
has mechanically added amounts as income of the assessee without verifying the
records. Tribunal also held that, by no stretch of imagination can any
Assessing Officer 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 loss) and nothing has been placed on record by the Assessing Officer to
demonstrate that any proceedings were ever initiated against the assessee by
the SEBI or any stock exchange. Client code modification within 1% of is
absolutely normal. Accordingly, the loss is held to be allowable as business
loss. (Related Assessment Year : 2010-11)—[DCIT v. Comet Investment (P) Ltd.
– Date of Judgement : 13.05.2019 (ITAT Mumbai)]
Client code modification
- (CCM) - Shifting of profits - Addition as income on the basis of alleged
doubtful transaction is held to be not valid
The assessee is a member
of Multi Commodity Exchange of India Ltd (MCX) and National Commodity
and Derivatives Exchange of India. The assessee is carrying on trading
activities both on derivatives and delivery based transactions on its own
account as well as on behalf of various clients. Assessing Officer has added
the entire amount of doubtful transactions by way of assessee’s additional
income on the basis of client code modification. CIT(A) deleted the addition on
the ground that all the clients are having PAN and regularly filing their
returns and profits were taxed in their hands. Clients are not related parties.
Modification was around 3% of the total transactions. All of them were complied
with KYC norms. Tribunal affirmed the order of CIT(A). On appeal by the revenue
, dismissing the appeal the Court held that, even if the Revenue’s theory of
the assessee having enabled the clients to claim contrived losses is correct,
the Revenue had to bring on record some evidence of the income earned by the
assessee in the process, be it in the nature of commission or otherwise. Adding
the entire amount of doubtful transactions by way of assessee’s additional
income is wholly impermissible. The fate of the individual investors in whose
cases the Revenue could have questioned the artificial losses is not known.
Accordingly, the appeal of the revenue is dismissed. (Related Assessment years
: 2006-07, 2007-08)—[PCIT v. Pat Commodity Service (P) Ltd. - Date of
Judgement : 15.01.2019 (Bom.)]
Assessing Officer
received information from Principle Director of Income Tax (Investigation) that
assessee had received bogus loss from his broker by client code modification,
reassessment on basis of said information was justified
The Principal Director
of Income Tax (Investigation), Ahmedabad, conducted a survey under Section
133-A of the Act at the premises of twelve brokers. During investigation, it
was found that Client Code Modification (CCM) was being used as a tool for tax
evasion. The losses were being shifted out of the profit of the clients. A
detailed investigation report was sent to respondent No.2 in a Compact Disc. In
the investigation report, the details of Client Code Modification (CCM) used by
the broker of the petitioner were also there.
Dismissing the petition
the Court held that: there was a direct nexus or live link between the material
coming to the notice of the Assessing Officer, namely, the material submitted
by the Investigation Wing, and the formation of the Assessing Officer’s belief
that there has been escapement of income. Details of the client code
modification were furnished in the information. The information was in respect
of several brokers. The information pertaining to the assessee’s broker was
culled out and tabulated. There were 74 cases of the assessee’s broker having
modified the assessee’s transactions. The information was directly on the issue
of the transactions. It could not by any stretch of imagination be said to be
vague, indefinite or distant. Reasons to believe were there. The reasons were
based on tangible material. The return and account books of the assessee had
not undergone scrutiny at the time of assessment. The information was specific
and not vague. A reasonable person could form an opinion on the basis of the
material. The information received could form the basis of reason to believe
that income had escaped assessment and the reopening was not on mere suspicion.
Hence, the assumption of jurisdiction was in accordance with law. [In favour of
revenue] (Related Assessment year 2009-10)—[Rakesh Gupta v. CIT, Panchkula
(2018) 405 ITR 213 : 303 CTR 670 : 93 taxmann.com 271 (P&H)]
Losses cannot be treated as Bogus merely for client Code Modifications
Assessee under
consideration has done the transaction through recognised stock exchange and
produced before us the contract notes, details of the transactions, and details
of payment through account payee cheques. We noted that transactions have been
carried out through proper banking channels/ account payee cheques, through the
existence of the brokers and stock exchange and these facts were not disputed
by the ld. DR for the Revenue. In the assessee’s case, the Assessing Officer
treated the transactions as bogus only on the basis that the broker, M/s.
Sunchen Securities Ltd., has been blacklisted by SEBI and its registration was
cancelled subsequently. The fact that the registration has been cancelled
subsequently does not mean that the transactions are invalid. The assessee
cannot be punished for the default of the brokers and therefore the share
transactions cannot be held to be bogus. (Related Assessment year : 2008-09) - [Manoj
Kumar Damani v. ACIT – Date of Judgement : 23.05.2018 (ITAT Kolkata)]
Brokers client code modification – Failure by assessee to substantiate loss by producing evidence – Assessee participating in reassessment proceedings without pressing its earlier objections raised, reassessment was held to be valid
Dismissing the petition,
that the Assessing Officer had received credible information regarding income
escaping assessment for the relevant assessment year. He had applied his mind
to it and had informed the assessee of his intention to invoke section 148 of
the Income-tax Act, 1961 and had given his reasons for doing so. The assessee
had objected to the reasons furnished by the Assessing Officer for invoking
section 148. The assessee had neither insisted upon disposal of its objections
filed prior to the reassessment nor had pressed its objections but had
participated in the reassessment proceedings. The assessee had also furnished
the documents required by the Assessing Officer in the proceedings under
section 148 after raising the objections. The conduct of the assessee allowed
one to infer that it had waived its rights to have the objections disposed of,
or alternatively, the assessee had withdrawn its objections to the invocation
of section 148. From the reasons supplied by the Assessing Officer it could be
inferred that he had applied his mind to the issue. The assessee had not
demonstrated any material to substantiate that the loss from brokers by client
code modification being booked in its accounts was placed before the Assessing
Officer for consideration and that, the Assessing Officer had taken a view
after production of the material facts by the assessee. - [Rampuria Industries
and Investments Ltd v. DCIT (2017) 391 ITR 18 : 299 CTR 532 : 82 taxmann.com 78
(Cal.)]
It is a regular practice for the broker to make modifications in the client code after the purchase and sale of securities. The mere fact that there is a client code modification prima facie does not mean that any income has escaped assessment. it appears to be case of ‘reason to suspect’ and not ‘reason to believe’
As a matter of regular
business practice, a broker in the stock exchange makes 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 may have occurred while punching the orders. The
reasons do not indicate the basis for the Assessing Officer to come to
reasonable belief that there has been any escapement of income on the ground
that the modification done in the client code was not on account of a genuine
error, originally occurred while punching the trade. The material available is
that there is a client code modification done by the Assessee’s broker but
there is no link from there to conclude that it was done to escape assessment
of a part of its income. Prima facie, this appears to be a case of
reason to suspect and not reason to believe that income chargeable to tax has
escaped assessment. It was held that the impugned notice is without jurisdiction
as it lacks reason to believe that income chargeable to tax has escaped
assessment. [In favour of assessee] (Related Assessment year : 2009-10) - [Coronation Agro Industries Ltd v. DCIT (2017) 390 ITR 464
: 82 taxmann.com 75 (Bom.)]
Client code modifications
done by assessee-share broker were in negligible number, addition made by
reversing such modifications was to be deleted
The assessee was engaged
in commodity transactions through its broker, ‘KB’. The Assessing Officer
concluded that ‘KB’ had carried out clien tcode modifications in active
connivance with the assessee which had resulted into the diversion of profits
of the assessee to other persons. The Assessing Officer, thereafter, worked out
the difference of profits as indicated by the assessee in the books of account
and as worked out by reversing the effect of the client code modification, and
the difference was treated as suppressed profit of the assessee. The
Commissioner (Appeals) having found that total number of client code modifications
were in negligible number held that no adverse inference could be drawn on
basis of such negligible modification. He also found that addition was in
nature of notional income and made by assumption. Thus, he deleted the addition
made by the Assessing Officer. Held that there was no reason to interfere with
the order of the Commissioner (Appeals). [In favour of assessee] (Related Assessment
years : 2005-06 and 2007-08) – [ACIT(C), Ahmedabad v. Amar Mukesh Shah (2017)
81 taxmann.com 450 : (2016) 46 ITR(T) 234 (ITAT Ahmedabad)]
Bogus F&O Loss : No protection
if client code modifications are tainted with collusive action &
manipulations
The assessee case does not fall
under the above category of genuine client code modifications allowed by NSE as
we have seen that in large number of client code modifications, there are no
similarity between wrong code and correct code and secondly there are
repetitive client code modifications. Thus, client code modifications which are
tainted with collusive action and manipulations shall go out of the protection
granted by these circulars of NSE/SEBI. These aspects requires proper enquiry,
examination and verifications which under the circumstances authorities below
ought to have done to bring it to logical conclusion and to reach to the end of
the financial trail to unearth scheme of tax evasion and avoidance adopted by
persons acting in concert including entering into synchronized transactions
simultaneously of purchase and sale of the same securities at same time to
neutralize the collective profit/loss to zero but at the same time distribute
profits/loss separately arising from each of the squared transactions . These
requires coordinated enquiries by various agencies to reach to the bottom of
the truth. To term all such inconsistencies as are pointed out as mere
suspicion shall not be correct as collectively they are pointing towards a
collusive and manipulative action on part of certain persons acting in concert
to avoid taxation. We are fully aware that suspicion howsoever strong cannot
take place of proof but these inconsistencies collectively are on higher
pedestal than merely being a suspicions which requires deeper probe to unearth
the collusive action on behalf of certain parties acting in concert to
manipulate the system to evade and avoid taxes. The assessee has placed
reliance on decision of the tribunal in the case of Pat Commodity Services
Private Limited(supra) which was decided on its own facts and there were small
fraction of transactions effected by client code modification while in the
instant case we have seen that large number of transactions with large
magnitude were affected by client code modifications in the month of March 2010
which was itself categorized by NSE were effected towards tax evasion .
Similarly , the assessee has placed reliance on decision of Hon’ble Bombay High
Court in the case of Coronation Agro Industries Ltd v. DCIT (2017) 390 ITR
464 : 82 taxmann.com 75 (Bom.) vide judgement dated 23.11.2016 wherein
Hon’ble Bombay High Court was seized with an issue of escapement of income under
section 148 of the 1961, wherein Hon’ble jurisdictional High Court held that
the notice u/s 148 of the 1961 Act was without jurisdiction as it lacks reason to
believe that income chargeable to tax has escaped assessment and on facts it
was held that the Assessing Officer is suspecting income to have escaped
assessment rather having reasons to believe that income has escaped assessment.
These cases relied upon by the assessee were clearly distinguishable and are
not relevant for deciding the instant appeal wherein facts are materially
different as set out above. For Now, we are of the considered view, the
appellate order of the learned CIT(A) cannot be sustain in the eyes of law as
it is suffering from serious flaw and is perverse as indicated by us as above,
and hence we are inclined to set aside the order of learned CIT(A) and restore
the matter to the file of the learned Assessing Officer for fresh adjudication
of the issue on merits in accordance with law and in compliance with directions
issued by Addl. CIT vide orders dated 22.03.2013 passed under section 144A of
the 1961 Act. The Assessing Officer shall admit all relevant evidences and
explanations submitted by the assessee in its defense. We order accordingly. (Related
Assessment year : 2010-11) – [ITO v. Ninja Securities (P) Ltd. - Date of
Judgement : 15.05.2017 (ITAT Mumbai)]
Client code modification up to 1 per cent of total order is absolutely normal, assessee’s client code modification being only 0.94 per cent of total trading transactions, impugned addition was to be deleted
Assessee-company was engaged in
business of shares and securities, commodity trading, speculation in shares and
commodities, etc. Assessee-company was part of group of companies which
included KCBPL. KCBPL was a registered broker in Commodity Exchanges. In course
of search at assessee’s group company, KCBPL had done client code modifications
for unusually high numbers of time - Assessing Officer was of view that since
assessee-company and KCBPL were group concerns, client code modifications was
done with intention of transferring profit to some other persons as against
assessee. Assessing Officer, therefore, worked out notional profit/loss which
could have occurred to assessee had client code been not modified. It was
observed that as per MCX, client code modification upto 1 per cent of total
order is absolutely normal and broker is permitted to modify client up to 1 per
cent without paying any penalty. Since assessee’s client code modification was
only 0.94 per cent i.e. less than 1 per cent of total trading transactions,
impugned addition was to be deleted. [In favour of assessee] (Related Assessment
years : 2005-06 to 2008-09) – [ACIT v. Kunvarji Finance (P) Ltd. (2015) 170
TTJ 345 : 61 taxmann.com 52 : 40 ITR(T) 64 (ITAT Ahmedabad)]
Client codes modification permissible having no shifting of profits
It was held that it is a
fact that the movement of prices of commodities cannot be predicted by anyone
with accuracy and hence it is inconceivable or unlikely that the assessee could
have made profits consistently, even if it is assumed for a moment that the
assessee had actually carried out the transactions for its own benefit. We
noticed that the assessee has offered explanations as to why it carried out the
transactions in its own code, i.e. since the timing of entering the
transactions is crucial in the online trading, the staffs of the
assessee-company found it convenient to punch its own code. Further, it is
pertinent to note that none of the clients, with whom the assessing officer has
carried out the examination, has disowned the transactions. Further, all the
clients have duly disclosed the profits arising from the transactions as their respective
income. However, in the instant case, the Assessing Officer has not brought any material on record to show that
the assessee had received back corresponding amount equivalent to the amount of
profit claimed to have been shifted to the clients. Hence CIT(A) was justified
in deleting the additions made in both the years under consideration—(Related
Assessment Years : 2006- 07 & 2007-08) —[ITO v. M/s Pat Commodity
Services (P) Ltd—Date of Judgement: 07.08.2015 (ITAT Mumbai)]
McDowell & Co. Ltd.
v. CTO 154 ITR 148 (SC), the landmark decision by
Constitution Bench of Supreme Court is squarely applicable. The modus
operandi adopted by the assessees by acquiring Losses or acquiring Profits
with tacit connivance with the Brokers through Client Code Modifications
without paying any taxes or avoid declaring true Profits is nothing but a
colourable device as cited by Hon’ble SC Judgment.
“The taxing authority is
entitled and is indeed bound to determine the true legal relation resulting
from a transaction.
If the parties have
chosen to conceal by a device the legal relation, it is open to the taxing
authorities to unravel the device and to determine the true character of the
relationship. Hon’ble High Court of Delhi in the decision dated 19.11.2015 reported
in ITA 130/2001 CIT v. M/s Abhinandan Investment Ltd., followed the Supreme
Court Judgment while upholding the action of the Assessing Officer in
unraveling colourable device.
It was held that the
“taxing authorities are required to put on the blinkers while looking at the
documents produced before them. They are also entitled to look into the
surrounding circumstances to find out the reality..........” — [CIT v. Durga
Prasad More (1971) 82 ITR 540 (SC) and Sumati Dayal v. CIT 214 ITR 801 (SC)]
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