BHARATI HEMANT CHHEDA, MUMBAI V. INCOME TAX OFFICER 29(1)(2) , MUMBAI

ITA 197/MUM/2023

AI Insights

The case involves Bharti Hemant Chheda, the appellant, who contested the reopening of her income tax assessment for the assessment year 2010-11 based on allegations of misuse of the Client Code Modification (CCM) facility by her broker. The Income Tax Department had received information about the misuse of CCM by various brokers to create artificial losses/profits. The AO issued a notice under section 148 of the Income Tax Act, 1961, and disallowed the F&O losses claimed by the assessee. The assessee appealed to the CIT(A), which upheld the AO's decision. Subsequently, the assessee appealed to the Income Tax Appellate Tribunal, which found that the AO had not adequately linked the alleged misuse of CCM by other brokers to the assessee's specific case, leading to the allowance of the appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123230 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-04-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 19-01-2023
• Other Referred Cases: ITO vs. PAT Commodity Services P Ltd ITA Nos. 3498 and 3499/Mum/2012, M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transactions in derivatives
• Section: 148; 143(3); 250; 43; 72

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “B”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 197/Mum/2023 (A.Y. 2010-11) Bharti Hemant Chheda B-30, Konark Indraprastha CHS Ltd Sarvodaya Nagar, Jain Mandir Road Mulund (W), Mumbai-400 080 PAN: AADPC1013E ...... Appellant Vs. ITO 29(1)(2), Bandra Kurla Complex, Bandra(E), Mumbai-400 051 ..... Respondent Appellant by : Shri Nishit Gandhi Respondent by : Shri Chetan M. Kacha, Sr. AR Date of hearing : 12/04/2023 Date of pronouncement : 15/05/2023 ORDER PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of National Faceless Appeal Centre; Delhi (for short ‘NFAC’) dated 30.11.2022 u/s. 250 of the Income 2 ITA No. 197/Mum/2023 Bharati Hemant Chheda Tax Act, 1961 (for short ‘the Act’) for A.Y. 2010-11. The assessee has raised the following grounds of appeal: “1. The Learned Commissioner of Income tax Appeal (Ld. CIT (A)) erred in upholding the Notice us-148 on the facts and in law as per which is invalid & bad in law for opening of assessment order on the basis of third-party information and order u/s 143(3) r.w.s 147 is void ab initio, as proper satisfaction was not recorded before the reopening notice was issued. 2. The Learned Commissioner of Income tax Appeal (Ld. CIT (A)) erred in upholding the order u/s. 143(3) r.w.s 147 on facts and in law, as it is void-ab-initio as no direct and specific information were against the Appellant and the disallowances of F&O loss were made based on one example of the various scripts entered by the Appellant and lack of proper and complete information. 3. On the facts and circumstances of the case and in law the Ld. CIT(A) erred in rejecting the Objections raised against the Notice u/s. 148 during the First Appeal proceeding. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of F&O loss amounting to Rs. 35,65,551/- on the basis of borrowed satisfaction, without any independent verification and relying on third party information with allegation that Client Code Modification (CCM) were done by Appellant, without considering the fact that F&O transaction entered were genuine and alleged CCM were not done by Appellant, but were done by Broker, to rectify errors and there was no involvement or malafide intention of the Appellant. 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of F&O loss on the basis of third party information without providing any document or statement recorded or relied against the Appellant and consequentially deprived Appellant of examining, rebuttal or cross examining the Broker. 6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of F&O loss on the basis of third party information without considering the fact that the details provided by the learned AO for alleged loss. 3 ITA No. 197/Mum/2023 Bharati Hemant Chheda 7. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of F&O loss without considering the fact that the details the of code modified were mostly relative or related party of the Appellant, which is a plausible reason and the Appellant had no control over Broker at whose end the error and its subsequent correction were made which the revenue alleged that Appellate had made CCM. 8. The Ld. CIT (A) erred in not considering the decision by the Jurisdictional Hon ITAT Mumbai in the case of ITO vs. PAT Commodity Services P Ltd ITA Nos. 3498 and 3499/Mum/2012 dated 7th Aug 2015 which was covered squarely in the Appellant case. 9. On the facts and circumstances of the case and in law the Ld. CIT(A) erred in upholding the disallowance of F&O loss on assumption and surmises which were mentioned in the Assessment order passed u/s. 143(3) r.w.s 144 of the Act. 10. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal.” 2. Brief facts of the case are that assessee filed a return of income on 28.09.2010 declaring total income at Rs. 14,50,738/-. In this case, information was received from the office of DIT (I & CI), Mumbai that the assessee is in receipt of F & O loss for Rs. 37,27,954/- by taking undue advantage in the guise of client code modification system (CCM) provided by the SEBI to undue any faulty transaction or modified punching errors on the system through her broker. Relevant it is of modifications carried out in the account of the assessee are as under:- Market segment Date Number of trade modified Qty of shares modified Value of trade modified. F & O 04/03/2010 111 110532 79,793,097 F & O 05/03/2010 61 122020 47,298,369 F & O 08/03/2010 160 73300 83,124,347 F & O 09/03/2010 83 73692 60,328,495 4 ITA No. 197/Mum/2023 Bharati Hemant Chheda F & O 10/03/2010 74 69156 68,078,538 F & O 11/03/2010 43 87000 24,445,825 F & O 12/03/2010 52 70700 32,079,848 F & O 15/03/2010 72 189472 36,357,641 F & O 16/03/2010 110 63314 52,506,618 3. Based on the information mentioned (supra) the AO of the assessee issued notice u/s. 148 vide dated 23.03.2015, thereafter assessee submitted that return furnished originally should be treated as return filed in response to notice u/s. 148 vide her letter dated 04.08.2015. During the investigations it was found that many brokers misused this facility of CCM for creating artificial losses/profits and providing such fictitious profit/losses to various clients by charging some commission. In this regard an expert opinion was obtained from NSE to indicate the existence of genuine and non-genuine client code modification. NSE has broadly distinguished the genuine and non- genuine CCM as under: Genuine Client Code Modification: As per the NSE any client code modification would constitute as genuine client code modification in which the following errors/mistake are rectified. a) 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 b) Modification within relatives (Relative for this purpose would mean "Relative" as defined under the companies Act 1956) c) Any Similar Genuine Error. Non Genuine Client Code modification: 5 ITA No. 197/Mum/2023 Bharati Hemant Chheda As per the NSE any client code modification to rectification to rectify the errors, mistake other than mentioned above would constitute non genuine client code modification. The NSE also mentioned some most popular non genuine types of errors/ mistake which used for non genuine client code modification. The non genuine errors mentioned by the NSE are as under a) Percentage of modified traded value is significantly higher than the total traded value of any trading members/clients b) Number of modified traded is significant to total number of trades of any trading members/clients c) Profit/loss arising on account of all modification by trading member/client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. d) Profit/loss arising due to modification is significant e) Trades have been modified to unrelated parties f) Both buy and sell leg of different trades have been modified to same client g) The same, set of client are observed to be making profit/loss due to the modification carried out. h) Total number of trade modification increased before closing of the financial year. 4. Based on above information and study done of NSE, AO added back the amount of loss in F & O claimed by the assessee. Assessee being aggrieved with this order of AO filed an appeal before Ld. CIT (A). In his order, Ld. CIT (A) also confirmed the order of AO and sustained the disallowance of loss claimed by the assessee. 5. Assessee being further aggrieved preferred this appeal before us. We have thoroughly considered the order of AO, order of Ld. CIT (A) and 6 ITA No. 197/Mum/2023 Bharati Hemant Chheda submissions of the assessee along with the case laws relied upon. It is observed that department was in possession of certain information about misuse of the facility provided by SEBI called CCM. In this case, AO relied upon the information received from the office of DIT (I & CI) about certain brokers, but in this information we have not found the name of assessee specifically. To strengthen his stand, AO further mentioned that in few case of brokers by DDIT(I & CI) Unit-1(1), Mumbai has done spot verification u/s. 131(1A) and they confirmed misuse of the facility of CCM in order to create fictitious losses /profits. They admitted additional income ranging from 0.5 to 2% and declared the same for tax purposes also. We have gone through the order of AO vide para 6, 7 & 8 wherein through an illustration and actual transactions in the books of the assessee, he tried to narrate the modus operandi as well as nexus of NSE study vis-a-vis case of assessee. All these illustrations and mapping of data to confirm the study done by regulator can be of use only in a case where there is a statement of assessee’s broker mentioning his name and any corroborative evidence against the assessee. 6. In his whole order, AO always use the word ‘many brokers misused facility of CCM’, nowhere they mentioned the name of the broker of the assessee and above that name of the assessee in any of the report prepared by either stock exchange or SEBI. Department simply received an exhaustive information about the persons /entities those who availed the facility of CCM but nowhere it was established that broker of the assessee was involved in this manipulation and even so, assessee also took undue advantage of this facility. It further holds that the reasons as recorded did not indicate any application of mind on the part of the Assessing Office to the 7 ITA No. 197/Mum/2023 Bharati Hemant Chheda information received from the DDIT (Investigation). It observes that the reason as recorded only records that intimation received from the DDIT (Inv.) only mentions that the few brokers was engaged in suspicious transactions. However, there is no further indication as to how the Respondent- Assessee could be linked to the activity of these few brokers which has led to escapement of income. 7. In this case, the reasons as made available to the Respondent- Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about few entities, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even do not indicate the amount which according to the Assessing Officer has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment. Reasons recorded are thus factually incorrect too, or the learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. He also not able to substantiate that there is any live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. On this issue we relied upon the decision of Hon’ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464. 8 ITA No. 197/Mum/2023 Bharati Hemant Chheda 8. 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. 9. In the result, grounds pertaining to re-opening of the case and consequent additions made are set-aside. In the result appeal of the assessee is allowed. Order pronounced in the open court on 15 th day of May, 2023. Sd/- Sd/- (KULDIP SINGH) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 15/05/2023 Mahesh R. Sonavane Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकर आयुक्त CIT 4. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्ड फ इल/Guard file. 9 ITA No. 197/Mum/2023 Bharati Hemant Chheda BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai