DCIT-4(3)(2), MUMBAI V. M/S.SETU SECURITIES PRIVATE LIMITED, MUMBAI

ITA 5611/MUM/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5351 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 04-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V VINOD KUMAR
• Assessee Lawyers: DR K SHIVARAM; RAHUL HAKANI ARS
• Keywords: Principle of natural justice; Transactions in derivatives; Accommodation entries; Reassessment proceedings
• Section: 143(3); 143(1); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI RAVISH SOOD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 5611/MUM/2017 ASSESSMENT YEAR: 2010-11 DY. CIT, 4(3)(2), ROOM NO. 649, 6 TH FLOOR, AAYAKARBHAVAN, MUMBAI- 400020. VS. M/S SETU SECURITIES PVT. LTD., A/502, SHREYAS APARTMENT, 51/52, TPS ROAD, BORIWALI (WEST), MUMBAI-400092. PAN NO. AAGCS3919K APPELLANT RESPON DENT REVENUE BY : MR. V. VINOD KUMAR, DR ASSESSEE BY : DR. K. SHIVARAM & MR. RA HUL HAKANI, ARS DATE OF HEARING : 07/10/2019 DATE OF PRONOUNCEMENT : 25/10/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2010-11. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-9, MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143( 3) R.W.S. 147 OF THE INCOME TAX ACT 1961, (THE ACT). ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 2 2. THE GROUND OF APPEAL FILED BY THE REVENUE READS AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE TOWARDS SET OFF OF FICTITIOUS LOSSES THROUGH CLIENT CODE MODIFICATION. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE-COMPANY FILED ITS RETURN OF INCOME FOR THE A.Y. 2010-11 ON 28.09.2010 DECLARING OF TOTAL INCOME OF RS.42,43,345/-. THE ASSESSEE INVEST S IN SHARES AND SECURITIES. THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT. THEREAFTER, ON RECEIPT OF INFORMATION FROM THE DIRECTOR OF INCO ME TAX (I&CI) [IN SHORT DIT] THAT THE ASSESSEE HAD TAKEN LOSS ADJUS TMENT ENTRIES WORTH OF RS.1,55,31,999/- IN F&O AND CASH SEGMENT BY WAY OF CLIENT CODE MODIFICATION (CCM), THE ASSESSING OFFICER (AO) AFTE R RECORDING REASONS, ISSUED NOTICE U/S.148 ON 21.03.2015. IN RESPONSE TO IT, THE ASSESSEE VIDE LETTER DATED 26.03.2015 REQUESTED THE AO TO TREAT T HE RETURN FILED ON 28.09.2010 AS THE RETURN FILED IN RESPONSE TO NOTIC E U/S.148 OF THE ACT. DURING THE COURSE OF REASSESSMENT PROCEEDINGS, IN RESPONSE TO NOTICE ISSUED U/S.143(2) AND 142(1), THE ASSESSEE F ILED THE DETAILS BEFORE THE AO. FURTHER, THE AO ISSUED NOTICE U/S.133(6) TO NATIONAL STOCK EXCHANGE (NSE) SEEKING INFORMATION OF THE TRANSACTI ONS ENTERED INTO BY ASSESSEE DURING THE CORRESPONDING PERIOD. AFTER REC EIPT OF THE INFORMATION FROM NSE, THE AO FORWARDED A COPY OF IT TO THE ASSESSEE AND ASKED TO EXPLAIN WHY THE AMOUNT OF RS.1,55,31,999/- SHOULD NOT BE DISALLOWED AND ADDED TO THE TOTAL INCOME. IN RESPON SE TO IT, THE ASSESSEE FILED A REPLY STATING: ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 3 .......CLIENT CODE MODIFICATION IS NOT IN THE ASSE SSEES HAND AND IT IS SOLELY UNDER THE HANDS OF THE BROKER. OUR CLIENT DISOWNS A NY SUCH CLIENT MODIFICATION AS ALLEGED BY YOUR HONOUR BY WHICH OUR CLIENT HAS RECEIVED ANY UNDUE BENEFIT. WE WOULD LIKE TO SUBMIT THAT THE DET AILS PROVIDED US DO NOT PROVIDE ANY CLARITY ON THE NATURE OF TRANSACTION AN D HOW OUR CLIENT HAS CONCEALED THE INCOME. IN THE ABSENCE OF SELF EXPLAN ATORY DETAILS NO FURTHER SUBMISSION CAN BE MADE. HOWEVER, THE AO WAS NOT CONVINCED WITH THE ABOVE EX PLANATION OF THE ASSESSEE OF THE REASON THAT (I) THE DIT HAS NOT ONLY CONDUCTED SPOT VERIFICATION BUT ALSO RECORDED STATEMENTS OF VARIOU S BROKERS AND CLIENTS, WHEREIN THEY HAVE ADMITTED TO HAVE MISUSED THE CCM FACILITY, (II) GENERALLY THE LOSSES ARE SHIFTED TO THE CLIENTS, TH E LOSSES SO TRANSFERRED ARE USED TO CLAIM SET OFF AGAINST THE PROFITS AND T O NEUTRALIZE THE TAX LIABILITY, LIKEWISE THE PROFIT IS SHIFTED TO THOSE PARTIES WHICH HAVE SUFFERED LOSSES, THEREBY FACING THE PROBLEM OF CAPI TAL EROSION, (III) ONE BENEFICIARY IS THE BROKER WHO DOES MODIFICATION FOR THE CLIENTS AND SECOND IS THE CLIENT IN WHOSE ACCOUNT MODIFICATION IS DONE, (IV) THE BROKER CHARGES CERTAIN PERCENTAGE OF COMMISSION IN CASH WHICH RANGES FROM 0.5% TO 6% OF THE TRANSACTION VALUE, THE COMMI SSION SO EARNED IN CASH IS NOT OFFERED TO TAX, (V) SECOND BENEFICIARY IS THE ULTIMATE BENEFICIARY IN WHOSE ACCOUNTS, PROFITS OR LOSSES AR E SHIFTED WITH AN INTENTION TO REDUCE THE TAX LIABILITY. THE AO FURTHER NOTED THAT CCM WAS PERMISSIBLE WITH IN THE LIMITS PRESCRIBED BY SEBI/EXCHANGES, BUT THE SAME WAS TO R ECTIFY THE GENUINE MISTAKES WHICH MAY OCCUR WHILE PUNCHING THE TRADES IN THE SYSTEM; THERE MAY BE INSTANCES WHERE DUE TO SOME GENUINE RE ASONS WRONG ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 4 NUMBERS, NAMES AND SCRIPTS ETC. HAVE BEEN PUNCHED I N THE SYSTEM WHICH NEED TO BE CORRECTED. THUS, CCM WAS ALLOWED WITH CE RTAIN RESTRICTIONS SO AS TO ENSURE ITS GENUINE USE FOR RECTIFYING THE MIS TAKES WHICH HAVE TAKEN PLACE INADVERTENTLY. OBSERVING THAT THE ASSESSEE FAILED TO FILE THE DET AILS CALLED FOR AND IT HAD OBTAINED THESE ENTRIES TO COVER UP THE PROFI TS AND GAINS FROM THE SAID SEGMENT, THE AO DISALLOWED THE FICTITIOUS LOSS OF RS.1,55,31,999/-. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LD. CIT(A). WE FIND THAT VIDE ORDER DATED 28.06.2017, THE LD. CIT(A) OBSERVED THAT (I) THE AO HAS MADE THE ADDITI ON SOLELY ON THE BASIS OF ENQUIRIES CONDUCTED BY THE DIT, (II) THE L ETTER RECEIVED FROM NSE IN RESPONSE TO THE NOTICE U/S.133(6) ISSUED BY THE AO ONLY PROVIDES THE DETAILS OF CCM MADE IN THE ASSESSEES ACCOUNT; THE SAID LETTER OF NSE NOWHERE STATES THAT THE LOSS DERIVED BY THE ASSESSE E USING CCM FACILITY IS FICTITIOUS OR CCM IS DONE IN ASSESSEES ACCOUNT WIT H MALAFIDE INTENTION, (III) NSE HAS SPECIFICALLY STATED THAT IT CANNOT PR OVIDE THE PROFIT AND LOSS ACCOUNT INVOLVED IN THE TRANSACTION WHEREIN CLIENT CODES ARE MODIFIED, (IV) THE MODIFICATION OF CLIENT CODE IS PERMISSIBLE BY SEBI AND IS IN THE HANDS OF THE BROKER, THE ASSESSEE AS A CLIENT CANNO T DO ANY MODIFICATION IN THE CLIENT CODE, (V) AT A TIME, IT MAY HAPPEN TH AT AN ORDER IS PUNCHED IN THE CODE IN WHICH THE PREVIOUS WAS DONE, IN ORDE R TO RECTIFY THE ERROR ON THE PART OF THE BROKER, THE SAME SHOULD HAVE BEE N CORRECTED, THE ACT OF RECTIFYING THE ERROR CANNOT BE TERMED AS CCM, (V I) THE ACT OF CCM IS VERY MUCH LEGAL AND HAD TO BE RESORTED TO BY THE BR OKERS TO RECTIFY THE PUNCHING ERRORS, BOTH NSE AND BSE CLOSELY MONITOR T HE TRANSACTION ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 5 UNDERTAKEN BY THE BROKERS AND PENALISE THEM, IF THE RE IS SUBSTANTIAL ALTERATION IN THE CLIENT CODE. OBSERVING AS ABOVE, THE LD. CIT(A) NOTED THAT THE M ODIFICATION IN CLIENT CODE IS SOLELY IN THE HAND OF THE BROKER AND THE ASSESSEE CANNOT BE PENALIZED FOR ACTS OF OTHERS. FURTHER, IT IS NOTED BY HIM THAT THE AO IN THE ASSESSMENT ORDER HAS ALSO NOT BROUGHT OUT ANY SPECI FIC EVIDENCE FROM WHICH IT CAN BE CONCLUDED THAT THE MODIFICATIONS IN THE ASSESSEES CLIENT CODE WERE DONE WITH MALAFIDE INTENTION. RELYING ON THE ORDER OF THE ITAT, AHMEDABAD IN THE CASE OF ACIT V. KUNVARJI FINANCE PVT. LTD ON SIMILAR FACTS, THE LD. CIT(A) DELETED THE ADDITION OF RS.1,55,31,999/- MADE BY THE AO. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ( DR) SUBMITS THAT IN THE PRESENT CASE THE DIT HAS NOT ONLY CONDUCTED SPOT VERIFICATION BUT ALSO RECORDED STATEMENTS OF VARIOUS BROKERS AND OF CLIENTS, WHEREIN THEY HAVE ADMITTED TO HAVE MISUSED THE CCM FACILITY. IT IS STATING BY HIM THAT THE ASSESSEE OBTAINED THESE ENTRIES TO COVER UP THE PROFIT AND GAINS FROM THE SAME SEGMENTS. THUS, IT IS ARGUED BY HIM THAT T HE ORDER PASSED BY THE AO THE RESTORED. 6. ON THE OTHER HANDS, THE LD. COUNSEL FOR THE ASSE SSEE FILES AN APPLICATION UNDER RULE 27 OF THE INCOME TAX APPELLA TE TRIBUNAL RULES, 1963 (THE RULES) AND SUBMITS THAT THE LD. CIT(A) FA ILED TO APPRECIATE THAT REOPENING THE ASSESSMENT IS BAD IN LAW AS THE AO HA D NO REASONS TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT, AS RECO RDED REASONS ARE VAGUE AND INCORRECT AND REOPENING IS DONE ON THE BA SIS OF BORROWED ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 6 SATISFACTION AND WITHOUT INDEPENDENT APPLICATION OF MIND AND HENCE REOPENING IS BAD IN LAW. THE LD.COUNSEL FURTHER SUBMITS THAT THE ASSESSEE I S NOT A REGISTERED BROKER ON THE STOCK EXCHANGE; ONLY REGISTERED BROKE RS CAN MODIFY CLIENT CODE OF THEIR OWN CLIENTS AND HENCE THE ALLEGATION THAT THE ASSESSEE HAVING DONE OR RESORTED TO CCM IS INCORRECT. IT IS STATED THAT NOTHING HAS BEEN BROUGHT ON RECORD BY THE AO TO SHOW THAT INSTR UCTION FOR CCM WAS GIVEN BY THE ASSESSEE. IT IS FURTHER STATED THAT TH ERE IS NO INCRIMINATING STATEMENT FROM BROKERS OF THE ASSESSEE I.E. MANSI S HARE & STOCK ADVISORS PVT. LTD, BONANZA PORTFOLIO LTD AND KM JAI N SHARE BROKERS PVT. LTD. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT NO E VIDENCE HAS BEEN BROUGHT ON RECORD BY THE AO OF ANY ACTION BY SEBI O N THE ASSESSEE OR ITS BROKERS FOR CCM; THE DATA PROVIDED BY NSE NOWHERE S TATES THAT THE LOSS SUFFERED BY THE ASSESSEE IS NON-GENUINE. FURTHER, I T IS STATED THAT THE TABLE EXTRACTED IN THE ASSESSMENT ORDER WAS NOT PRO VIDED TO THE ASSESSEE. FINALLY THE LD. COUNSEL SUBMITS THAT THERE IS A BR EACH OF PRINCIPLE OF NATURAL JUSTICE AS THE REPORT OF THE INVESTIGATION WAS NOT PROVIDED TO THE ASSESSEE IN SPITE OF REPEATED REQUEST AND CROSS EXA MINATION OF THE THIRD PARTIES ON WHOSE STATEMENTS REVENUE RELIED UPON WAS ALSO NOT PROVIDED, IN SPITE OF REPEATED REQUEST MADE BY THE ASSESSEE. RELYING ON THE DECISION IN H.R. MEHTA V. ACIT (2016) 387 ITR 561 (BOM.), ANDAMAN TIMBER INDUSTRIES V. CCE (2015) 281 CTR 241 (BOM) AND KISHANCHAND CHELLARAM V. CIT (1980) 125 ITR 713 (SC), THE LD. COUNSEL SUBMITS TH AT ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 7 THE ASSESSEE WAS BOUND TO BE PROVIDED WITH MATERIAL S USED AGAINST HIM APART FROM THE OPPORTUNITY TO CROSS-EXAMINE THE DEP ONENTS AND THIS NOT HAVING BEEN DONE, THE ADDITION IS NOT SUSTAINABLE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS MENTIONED EARLIER, THE RETURN FILED BY THE ASSESSEE-COMPANY WAS PROCESSED U/S. 143(1) OF T HE ACT. THEREAFTER, THE AO ON RECEIPT OF INFORMATION FROM THE DIT THAT THE ASSESSEE HAD TAKEN LOSS ADJUSTMENT ENTRIES WORTH OF RS.1,55,31,9 99/- IN F&O AND CASH SEGMENT BY WAY OF CCM, RE-OPENED THE ASSESSMEN T BY ISSUING NOTICE U/S. 148 OF THE ACT. THE ASSESSEE VIDE LETTER DATED 15.10.2015 FILED OBJECTION AGAINST THE SAID NOTICE U/S.148. THE AO R EJECTED THE OBJECTION BY AN ORDER DATED 05.02.2016. THE HONBLE SUPREME COURT IN THE CASE OF ACIT V. RAJESH JHAVERI STOCK BROKERS P. LTD. (2007) 291 ITR 500 (SC) ANALYZED THE DISTINCTION BETWEEN THE ACCEPTANCE OF A RETURN U/S 143(1) AND A N ASSESSMENT WHICH IS FRAMED U/S 143(3) OF THE ACT. IN THE FORMER CASE , THE AO WOULD HAVE MUCH WIDER LATITUDE TO REOPEN THE ASSESSMENT. IN TH E CASE OF AVIRAT STAR HOMES VENTURE P. LTD. V. ITO (2019) 411 ITR 321 (BOM), THE HONBLE BOMBAY HIGH COURT REFERRING TO THE ABOVE DECISION H AS HELD : THAT THE RETURN HAD BEEN ACCEPTED WITHOUT SCRUTINY . THE INCOME-TAX INVESTIGATION HAD SUBSEQUENTLY PROVIDED INFORMATION ABOUT CERTAIN COMPANIES HAVING BANK ACCOUNTS WITH A BANK IN KOLKA TA AND WHO WERE INVOLVED IN GIVING ACCOMMODATION ENTRIES OF VARIOUS NATURE TO SEVERAL BENEFICIARIES INCLUDING THE ASSESSEE. THE INFORMATI ON SUPPLIED BY THE INVESTIGATION WING TO THE ASSESSING OFFICER FORMED A PRIMA FACIE BASIS TO ENABLE THE ASSESSING OFFICER TO FORM A BELIEF OF IN COME CHARGEABLE TO TAX ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 8 HAVING ESCAPED ASSESSMENT. THE ASSESSING OFFICER PE RUSED THE INFORMATION SUPPLIED BY THE INVESTIGATION WING AND HAVING FORME D THE BELIEF THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT, COULD NOT BE STATED TO HAVE ACTED MECHANICALLY. FURTHER, THE MERE FACT THAT THE ASSES SEE HAD ASKED FOR CERTAIN INFORMATION FROM THE ASSESSING OFFICER, WHICH AT TH IS STAGE WAS NOT SUPPLIED, WOULD NOT INVALIDATE THE REASONS RECORDED BY THE AS SESSING OFFICER IN ISSUING THE NOTICE. THE NOTICE WAS VALID. THUS IN THE INSTANT CASE, THE AO HAS RIGHTLY ISSUED NOTICE U/S 148 FOR REOPENING THE RETURN OF INCOME PROCESSED U/S 143(1) OF THE ACT. ACCORDINGLY WE DISMISS THE GROUNDS RAISED BY THE AS SESSEE AGAINST THE RE-OPENING DONE BY THE AO. 7.1 HOWEVER, ON MERIT WE FIND THAT THE ASSESSEE IS NOT A REGISTERED BROKER ON THE STOCK EXCHANGE AND ONLY REGISTERED BR OKERS CAN MODIFY CLIENT CODE OF THEIR OWN CLIENTS. HENCE, THE OBSERV ATIONS BY THE AO THAT THE ASSESSEE HAVING DONE OR RESORTED TO CCM IS INCO RRECT. IT IS SEEN THAT NOTHING HAS BEEN BROUGHT ON RECORD BY THE AO TO SHO W THAT INSTRUCTION FOR CCM WAS GIVEN BY THE ASSESSEE. IN FACT, THE ASS ESSEE CANNOT BE HELD RESPONSIBLE FOR CCM DONE AT THE END OF THE BROKER. IN THE INSTANT CASE, THERE IS NO INCRIMINATING STA TEMENT FROM THE BROKERS OF THE ASSESSEE I.E. MANSI SHARE & STOCK AD VISORS PVT. LTD, BONANZA PORTFOLIO LTD AND KM JAIN SHARE BROKERS PVT . LTD. FURTHER, NO EVIDENCE IS BROUGHT ON RECORD BY THE A O OF ANY ACTION BY SEBI ON ASSESSEE OR ITS BROKERS FOR CCM. THE DAT A PROVIDED BY NSE NOWHERE STATES THAT LOSS SUFFERED BY ASSESSEE IS NO N-GENUINE. ITA NO. 56 11/MUM/2017 M/S. SETU SECU RITIES PRIVATE LIMITED 9 IN THE ASSESSMENT ORDER DATED 31.03.2016, THE AO H AS STATED THE MODUS OPERANDI OF CREATION OF FICTITIOUS PROFITS AND /OR LOSSES W ITH A MALAFIDE INTENTION OF ESCAPING TAXES, BUT HE HAS NE ITHER PROVED NOR LED ANY EVIDENCE IN CASE OF ANY SINGLE TRANSACTION, WHI LE MAKING ADDITION TO THE INCOME OF THE ASSESSEE. THE ABOVE BASIC FACTS CLEARLY INDICATE THAT THE AD DITION OF RS.1,55,31,999/- MADE BY THE AO IS BASED ON GENERAL PROPOSITIONS, WHICH CANNOT BE SUSTAINED. THEREFORE, WE CONFIRM THE ORDER OF THE LD. CIT(A). 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.10.2019 SD/- SD/- (RAVISH SOOD) (N.K . PRADHAN) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI; DATED: 25.10.2019 S. SAMANTA, P.S.(ON TOUR) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (ASSISTANT REGISTRAR) ITAT, MUMBAI