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.
Client Code Modification
means modification/change of the client codes after execution of trades.
Stock Exchanges provide a facility to modify any client code after
the trade has been executed to rectify any error or wrong data entry done by
the dealers at the time of punching orders. Client code modifications are
allowed by SEBI/Stock Exchanges only to rectify genuine errors.
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.
They are more commonplace in the institutional segment when a
broker transacts on behalf of a client, only to transfer the securities to the
client later. Another case may be when an asset management company purchases a
stock for a particular scheme but later decides to allocate it to another
scheme, points out a source.
But for years, it has also been an underhand method to evade
taxes. For instance, an investor who has a loss on his book can transfer his
position to another who wants to book a bogus loss (to set it off against
capital gains).
Over the years, authorities have looked to tighten this
loophole by seeking greater disclosures. In fact, in 2012, SEBI had let off NSE
with a warning after observing that the exchange failed to provide an
explanation for the number of client code modifications on its platform. According
to Forward Markets Commission (FMC) sources, codes involving transaction worth
Rs 14,570 crore were modified by various commodity exchanges acting on brokers’
requests in March 2011 alone. This is out of the Rs 30,000 crore of such
changes done throughout the financial year 2010-11. According to CBDT’s letter
to NSE, client codes in trades worth Rs 78,131 crore were modified by brokers
in 2018 alone.
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
§ The modification of
client code is to be done, only in exceptional cases and not as a routine one.
§ 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.
§ 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.
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.
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.
Modification shall be allowed under following
circumstances:
The
following trades shall be modified/allowed to be modified, shall be treated as
genuine error and transferred to Error Account :
§
Where
original client code/name and modified client code/name are similar to each
other but
such modifications are
not repetitive.
§
Where
original client code and modified client code belong to a family. (Family for
this
purpose means spouse,
dependent parents, dependent children and HUF)
§ 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.
§ Trade entered for wrong client due to any
miscommunication from the client /authorized representative of the client.
§ Selecting wrong scrip while placing order.
§ Placing the order for a wrong quantity.
§ Placing buy order instead of sale and vice
versa.
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.
§ Institutional trades modified to broker error /
pro account.
§
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.
§
Shifting
of character positions like 4356 is punched as 4536 or one serial up or down.
§
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.
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.
“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.
Modification
shall not be allowed under the following circumstances:
§
If a wrong trade has been done intentionally.
§
If the wrong trade is not reported within the time
line.
§
Surveillance / RMS / Compliance department has not
recognised mistake.
§
Trade not executed with responsibility.
§
Without Cancel Limit order Executed.
§
Repetitive mistakes.
§
Technical glitches
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 (it is been real) 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.
Timeline of Reporting
It
is necessary to give information with evidence Client Code Modification
requests through “ERROR ACCOUNT” will be accepted only before the close of
Trading Session of that day.(i.e., Equity segment 15.30 P.M. & Currency
segment 5:00 P.M).
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. |
§ 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.
§ 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.
§ 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
§
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.
§
Assessee
being the beneficiary of the impugned loss and the claimer of the deduction by
way of set off against the other income.
§
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).
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 Client Code Modification (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 Client Code
Modification (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.
Amendments to provisions in SEBI
Circular dated 16.09.2016 on Unique Client Code (UCC) and mandatory requirement
of Permanent Account Number (PAN) [SEBI/HO/CDMRD/DNP/CIR/P/2021/30, Dated
08.03.2021
To
The Managing Directors / Chief
Executive Officers
All Recognized Stock
Exchanges and Clearing Corporations having
Commodity Derivatives Segment
Sir/Madam,
Subject : Amendments to
provisions in SEBI Circular dated September 16, 2016 on Unique Client Code
(UCC) and mandatory requirement of Permanent Account Number (PAN).
1. SEBI had issued circular no.
SEBI/HO/CDMRD/DMP/CIR/P/2016/87dated September 16, 2016
which,inter-alia,provided
guidelines onuse of Unique
Client Code (UCC)
and mandatory requirement of Permanent Account Number (PAN) for trading
on commodity derivative
exchanges(now referred as
Exchanges having commodity
derivativessegment).
2. In the Union
budget 2020, launch
ofinstant PAN facility was announced
and subsequently, Income Tax (IT)
Department launched the facility
of e-PAN which
is generated instantly through Aadhaar based e-KYC.
3. In order to
rationalize the compliance requirement of collecting and maintaining copies of
PAN of clients by their respective members and enhance the use of e-PAN, it has
been decided to modify certain provisions of SEBI circular dated September 16,
2016 which are as follows:
3.1 Clause 3 of the Circular is modified as
under: “It shall be mandatory for the members of the exchanges havingcommodity
derivativessegmentto use Unique Client Code (UCC) for all clients transacting
on the commodity derivative
segment. The exchanges with commodity
derivativessegmentshall not allow execution of trades without uploading of the
UCC details by the members of the exchange. For this purpose, members shall
collect after verifying the authenticityand maintain in their backoffice the
copies of Permanent Account Number (PAN) issued by the Income Tax (IT)
Department, for all their clients. However, in case of e-PAN, membersshall
verify the authenticity of e-PAN with the details on the website of IT
Department and maintain the soft copy of PAN in their records.”
3.2 Clause 5 of the
Circular is modified as under:
“The exchanges having
commodity
derivativessegmentshall
ensure that the members of their exchanges shall:
i. collect copies of PAN cards issued to their
existing as well as new clients after verifying with the original.
ii. cross-check the
aforesaid details collected
from their clients
with the details on the website
of the Income Tax (IT) Department. However, in case of e-PAN, verify the
authenticity of e-PAN with the details on the
website of IT
Department and maintain
the soft copy
of PAN in
their records.”
iii. upload details of PAN or e-PAN so collected to
the Exchanges as part of Unique Client code.
iv. verify the documents with respect to the
unique code and retain a copy of the document.
4. The
provisions of this
circular shall come
into effect from
April 1, 2021. All other
provisions in the circular dated September 16, 2016 shall continue to remain in
force.
5. This Circular
is issued in
exercise of powers
conferred under Section
11(1) of the Securities and Exchange Board of India
Act, 1992, to protect the interests of investors in securities and to promote
the development of, and to regulate the securities market.
6. The Exchanges with
commodity derivativessegment are advised to:
6.1 to make necessary amendments to the relevant
bye-laws, rules and regulations;
6.2 bring
the provisions of this circular
to the notice of the stock brokers/membersof the Exchange and also
to disseminate the same on their website; and
6.3 communicate
to SEBI, the
status of the
implementation of the
provisions of this circular.
7. This circular
is available on
SEBI website www.sebi.gov.inunder
the category “Legal -Circulars” and “Info for Commodity Derivatives”.
Yours
faithfully,
Sandeep
Kriplani
Deputy
General Manager
Division
of New Products
Commodity
Derivatives Market Regulation Department
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.
§ 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.
§ 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.
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
A reopening notice was issued upon assessee on basis
of information received that assessee had shifted out profit of certain amount
resulting in net reduction in income of certain amount through Client Code
Modification, minor discrepancies in language employed by revenue and as it
stood reflected in reasons provided to assessee and that which existed on
record of revenue would clearly not justify for interference with impugned
notice and thus, impugned reopening of assessment was justified
Assessing
Officer received an information from Investigation Directorate that assessee
had used Client Code Modification (CCM) as a tool for tax evasion and only
settled trades have been considered to arrive at beneficiaries. As per said
information, Assessing Officer issued a reopening notice upon assessee on
ground that assessee had shifted out profit of certain amount and losses of
certain amount resulting in net reduction in income of certain amount through
CCM. Assessee contended that there was distinction in recordal of reasons for
initiating proceedings under section 148 as appearing upon a reading of a copy
which was supplied to assessee and pro forma for recording reasons to initiate
proceedings under section 148 which existed on record of revenue. It was noted
that recordal of facts and reasons in pro forma would clearly indicate that
information was identically transcribed on record of revenue as well. An
annexure which was a copy of reasons supplied to assessee clearly tallied with
an annexure which appeared on record except for pro forma additionally
referring to information being basis for Assessing Officer having reason to
believe that income of assessee had escaped assessment. Minor discrepancies in
language employed by revenue and as it stood reflected in reasons provided to
assessee and that which existed on record would clearly not justify for
interference with impugned reopening notice. On facts, impugned reopening of
assessment was justified. [In favour of revenue] (Related Assessment years : 2009-10
to 2012-13) – [Seema Gupta v. ACIT (2024) 160 taxmann.com 574 (Del.)]
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. [In
favour of assessee] (Related Assessment Year : 2010-11)—[DCIT v. Vipul D.
Shah - I.T.A. No.5688/Mum/2017 – 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 [TS-343-ITAT-2019(Mum)]
- 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. - I.T.A. No.5689/Mum/2017 – 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.)]
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 : [TS-239-HC-2018(P &
H)] (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. ITA No. 6570/Mum/2014 - 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. - ITA No. 3498 - 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 (1995) 214
ITR 801 (SC)]
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