Income Tax Officer, Delhi vs Vishwas Kohli

“1.

That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deleting the addition of Rs.49,48,210/- made by the Assessing Officer on account of non-genuine loss claimed through Client Code Modification (CCM) in the Futures & Options segment, without appreciating that the addition was based on specific information from the Investigation Wing, detailed NSE data analysis, SEBI findings, and a clear pattern of artificial loss shifting, all of which conclusively established escapement of income through accommodation entries

2.

That the Ld. CIT(A) has erred in failing to appreciate that Client Code Modification is a recognized and organized method of tax evasion, and that in the present case losses were systematically shifted into the assessee’s account with no commercial rationale or evidence of genuine trading furnished by the assessee

3.

That the Ld. CIT(A) has erred in granting relief primarily on procedural and jurisdictional grounds without adjudicating the issue on merits and without rebutting the substantive findings of the Assessing Officer.

4.

That the order of the Ld. CIT(A) erred in deleting a well-reasoned addition without recording any finding on the genuineness of the CCM transactions or the artificial nature of losses.”

“5.6. Adjudication of Grounds No. 1, 3 & 4:

5.6.1.

In ground No. 1, the appellant had contended that the assessment order passed u/s. 144 r.w.s. 147 assessing income at Rs.49,48,210/- as against reported income of Rs.1,29,400/- is bad in law and unsustainable. In ground No. 3, the appellant had contended that the assessing officer had erred in making an addition of Rs.49,48,210/- on account of CCM without any evidence and the same is liable to be deleted. Accordingly, in ground No. 4, the appellant had prayed that the assessment be quashed or alternatively the addition be deleted. Since these grounds No.1, 3 & 4 challenge the addition of Rs.49,48,210/- made in the order passed u/s. 144 r.w.s. 147 and plead for deletion of the addition of Rs.49,48,210/- made in the order passed u/s. 144 r.w.s. 147, they are taken up together and collectively adjudicated as hereunder.

5.6.2.

In the appellant’s case, the assessing officer had alleged that as per CCM data, losses amounting to Rs.49,48,210/- were “shifted in” through the broker M/s. CPR Capital Services Limited, resulting in a “net reduction in income”, and had therefore, proceeded to treat the said amount of Rs.49,48,210/- as “profit from F&O transactions” and added the same to the total income of the appellant. It is pertinent to note that at the very threshold, it is noticed that the addition rests on an inherent contradiction, namely, that an amount described as “loss shifted in” and as causing “reduction of income” has been simultaneously treated as taxable income/profit, without reconciling how a loss entry can assume the character of income in the hands of the appellant.

5.6.3.

The addition of Rs.49,48,210/- has been made on the basis of CCM data which itself records “losses shifted in” and a “net reduction in income”. However, the assessing officer has treated this very amount as “profit from F&O transactions”, without explaining how a loss entry can assume the character of taxable income. This contradiction goes to the root of the addition and renders the foundation of the assessment inherently flawed. The appellant had factually rebutted the assessing officer’s allegations and had consistently stated that (i) he has never transacted with M/s CPR Capital Services Limited during the relevant year; (ii) he was never confronted with trade-wise details or contract notes; (iii) he was never informed whether profits or losses were allegedly shifted; and (iv) the CCM data itself shows a loss, not income. The appellant has further explained that his income for the year was below the taxable threshold, and therefore no return was filed, which also merits consideration.

5.6.4.

Further, the appellant has filed an affidavit dated 20.12.2018 categorically denying any transaction with the broker, any authorization for CCM, and any knowledge of or benefit from CCM. An affidavit is a substantive piece of evidence. The assessing officer has neither cross-examined the appellant nor brought any independent material on record to rebut the contents of the affidavit. But instead, the assessing officer in the remand report had merely stated that the affidavit “does not carry weightage”, without any verification or cogent reasoning, and this conclusion of the assessing officer demonstrates arbitrariness and is without any scientific/rational basis and illogical, not tenable under the law in a judicial proceeding.

5.6.5.

The remand report essentially reiterates the assessment order and general investigation inputs regarding misuse of CCM. It fails to establish the appellant as the real beneficiary; fails to demonstrate any linkage evidence such as trade confirmations, broker statements, bank trails, or consideration; and fails to reconcile how “loss shifted in” translates into taxable income. Thus, the remand report does not cure the foundational defects in the assessment.

5.6.6.

However, in the rejoinder, the appellant had specifically pointed out that the remand report is generic, the core issue of non-confrontation remains unanswered, and no evidence has been brought to controvert the affidavit. These contentions remain unrebutted on record.

5.6.7.

The real issue in the present case is not whether CCM exists as a general practice, but: (i) whether the appellant is the real beneficiary of CCM; (ii) whether there is cogent and specific linkage evidence connecting the appellant to such CCM; and (iii) whether an amount described as “loss shifted in” can be lawfully taxed as income. In the absence of satisfactory answers to the above, the addition cannot be sustained.

5.6.8.

In this regard, reliance is placed on the decision of the Ahmedabad Bench of the Income-tax Appellate Tribunal in ACIT v. Kunvarji Finance Pvt. Ltd. [2015] 63 taxmann.com 33 (Ahd - Trib.), which, though not binding, has strong persuasive value as it deals with identical allegations of CCM without independent corroborative evidence.

“Merely because client code modification has been carried out by the broker, it cannot be presumed that the assessee is the beneficiary of such modification. In the absence of any material brought on record to show that the assessee was a party to such arrangement or that any benefit accrued to the assessee, no addition can be sustained. ”

5.6.9.

The ratio of the above decision in ACIT v. Kunvarji Finance Pvt. Ltd. [2015] 63 taxmann.com 33 (Ahd - Trib.) squarely applies to the facts of the present case, where the assessing officer has failed to establish the appellant as the real beneficiary of CCM or to bring any independent corroborative evidence on record.

5.6.10.

Further, reliance is also placed on the decision of the Hon’ble Ahmedabad Tribunal in SHRI. CHINTAN JASWANTBHAI SHAH VERSUS I.T.O, WARD-5 (3) (1), AHMEDABAD [2021] 87 ITR 228 -(ITAT AHMEDABAD) dated March 23, 2021 wherein while adjudicating the issue of validity of reopening of assessment u/s. 147 on the basis of client code modification, the Hon’ble Tribunal held that: ‘We note that the Hon’ble Punjab and Haryana High Court has decided the issue in favour of the Revenue in the case of Shri. Rakesh Gupta [2018] 405 ITR 213 (Punjab & Haryana) which was reopened under section 147 of the Act based on the same investigation report Income Tax Department. In view of the above, we do not find any merit in the case of the assessee. Accordingly, we uphold the reopening made by the AO under section 147”, but however on the merits of the addition on account of client code modification done by the broker to shift the profit, the Hon’ble ITAT held that “Admittedly client codes were modified of the assessee as per the information received from the investigation wing. However, the first question that arises whether such client codes were modified at the instance of the assessee or there was some punching error at the end of the share broker. It is because the stock exchange permits the share broker to rectify the mistakes occurred while punching the data. If that be so, then there cannot be any fault which can be attributed to the assessee for the mistakes committed by the share broker. The client code modifications give rise to the doubt/ suspicion which requires detailed investigations from the parties concerned to reveal the truth. Merely, there were client codes modifications carried out by the broker cannot the basis to draw an inference against the assessee. In fact, in the case of client code modification the code of the other party is entered at the place of the assessee. Thus, the other party also required to be investigated whether the other party was involved in such transaction. Besides this other corroborative evidence has to be brought on record suggesting that there was the exchange of cash among the parties involved in such client code modification transaction. But we note that no such exercise has been carried out by the authorities below. As such there is no whisper in the order of the authorities below that there was the cash transfer between the parties for transferring the income of the assessee to the other party. Thus, in the absence of such verification/examination carried out by the authorities below, we are not inclined to uphold their findings. We are not inclined to uphold the findings of the authorities below. We direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.” These decisions of the hon’ble Gujarat ITAT IN SHRI. CHINTAN JASWANTBHAI SHAH [2021] 87 ITR 228 - (ITAT AHMEDABAD) following the Hon’ble Punjab High Court verdict in Shri. Rakesh Gupta [2018] 405 ITR 213 (Punjab & Haryana) squarely applies to the, because, in the appellant’s case also the case has been reopened based on client-code modification [CCM], and hence, the reopening in appellant’s case is valid, but on merits, the addition deserves to be deleted.

5.6.11.

Furthermore, reliance is also placed on the decision of the Hon’ble jurisdiction Delhi ITAT in the case of DCIT, CENTRAL CIRCLE-29, NEW DELHI vs FUTURZ NEXT SERVICES LTD. [2022] 94 ITR 119 (Delhi-Tribunal) wherein on the issue of addition on account of Client Code Modification that assessee has shifted its profit to other clients or shifted loss to its sister concerns as alleged by the Department, but the assessee claimed that the assessee company was into such business wherein, various, i.e., more than thousands of orders are received and executed during the business hours of a single day and correspondingly the price of security/ shares etc., also fluctuates with every nano second, therefore practically it can be understood that, the punching of orders by the employees is always in a haste and the 1st appellate authority had deleted the addition on the ground that the volume of Client Code Modification occurred are within the permissible limit allowed by SEBI and the Exchange/SEBI has not found any violation of rules and regulations related to CCM and the CCM transactions are falling within the prescribed limit of less than 1%, the Hon’ble jurisdictional ITAT held that “We do not find any infirmity in the order of the CIT(A) on this issue. We find, identical issue had come up before the Tribunal in the case of group company, namely, M/s J ay pee Financial Services Ltd. [2019 (12) TMI 820 - ITAT DELHI] as held the assessee is not a member of any exchange and cannot execute CCM and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any action treating the transactions to be non-genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI, therefore, we are of the considered opinion that there is no perversity in the order of the CIT(A) deleting the addition. Accordingly, the same is upheld and the grounds raised by the revenue are dismissed.”

5.6.12.

Furthermore, reliance is also placed on the decision of the Hon’ble jurisdiction Delhi ITAT in the case of DCIT, CENTRAL CIRCLE-29, NEW DELHI VERSUS M/S. JAYPEE CAPITAL SERVICES LTD. -[2021] 9 TMI 1172 (ITAT DELHI) in ITA.Nos.3558 & 3559/Del./2016 Dated September 21, 2021, wherein on the addition on account of CCM [Client Code Modification] and commission earned for providing accommodation entry to the persons out of the Group, 1st appellate authority had deleted the addition, the Hon’ble jurisdiction Delhi ITAT held that “We find an identical issue had come up before the Tribunal in the case of Group Company namely Jaypee Financial Services Ltd [2019 (12) TMI 820 - ITAT DELHI] as held nothing on record to suggest that the CCM was done at the behest of the assessee. Further, there is no addition or adverse view taken in the case of the other person with whose accounts presumption is being made that transaction has been shifted. Admittedly, there is nothing on record that the revenue has gone to the broker to find out as to who is the beneficiary of the CCM. Further the transactions have not been held to be non-genuine. Client Code Modification is akin to penny stock is concerned, we do not find any merit in the said arguments. In case of the penny stocks shares are purchases at a very low price and were sold immediately after one year at astronomically high price just to claim the benefit of deduction u/s. 10 (38) or as the case may be. However, in case of CCM there is no such purchase at low price and sale at high price and it is on account of some punching error which has been rectified subsequently. So, no infirmity in the order of the Ld. CIT(A) in deleting the addition made on account of Client Code Modification and commission earned for such accommodation entry. Appeal of revenue dismissed.”