Canara Securities Ltd. Vs DCIT (ITAT Hyderabad)

ITAT Hyderabad held that no records brought suggesting that assessee has contrived losses by using Client Code Modification. Thus, disallowance of losses only on presumption is not justifiable. Accordingly, disallowance deleted.

Facts- The assessee, engaged in the business of investment banking i.e. purchase and sale of securities in equity segment and futures & option segment. AO received specific information that the assessee had contrived losses by using Client Code Modification (CCM) facility and based on the information, AO reopened the assessment u/s 147 of the Act.

AO held that the losses / profits were not incurred on account of any genuine risk taking in market but were in a way bought after they were ascertained and are hence contrived. Hence, in view of the above it is evidently cleared that, by resorting to CCM, assessee has reduced its taxable income to the tune of Rs.1 3,48,175/-.

CIT(A) rejected the submissions of the assessee and dismissed the grounds raised by the assessee. Being aggrieved, the present appeal is filed.

Conclusion- Held that that no such investigation was carried on the broker i.e. CIL Securities Ltd. AO can proceed with the addition when he has specific information that the assessee itself involved in such malpractices. In the given case, AO has not brought on record any specific instruction given by the assessee to the broker for such client code modification. It is only based on the information that there involves CCM, in which, assessee has suffered loss to the extent of Rs. 13,48,175/-. It does not mean that assessee has directly involved, may be, assessee must have benefitted out of it, but, still it is the duty of the AO to bring on record the fact that assessee has directly involved in such activities. From the record, we notice that assessee has incurred heavy losses in this year, we do not understand how shifting of profit will benefit the assessee. Therefore, in our considered view, in the absence   of any   findings that assessee has given specific instruction to the broker to make such CCM, assessee cannot be held responsible in such modification. Therefore, it is only a presumption of the AO that assessee might have involved in such transactions. Accordingly, the loss disallowed by the AO is hereby deleted.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

his appeal filed by the assessee is directed against the order of CIT(A) – 6, Hyderabad, dated, 03/09/2018 for AY 2010-11.

2. Brief facts of the case are, the assessee, engaged in the business of investment banking i.e. purchase and sale of securities in equity segment and futures & option segment, filed its return of income for the AY 2010-11 on 13/09/2010 admitting a loss of Rs. 36,59,561/-, consisting of business loss of Rs. 36,52,900/- and unabsorbed depreciation allowance of Rs. 6,660/-. The return of income was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’) and there is no 143(3) assessment in this case.

2.1 Subsequently, the AO received specific information that the assessee had contrived losses by using Client Code Modification (CCM) facility and based on the information, AO reopened the assessment u/s 147 of the Act. Accordingly, notice u/s 148 of the Act, dated 06/12/2016 was issued calling for return of income. In response, the assessee filed its return of income on 23/01/2017 admitting loss of Rs. 36,59,561/-, which is similar to the return of income filed on 30/09/2010. Subsequently, assessee asked the reasons for reopening of the assessment. In response, the AO provided the reasons for reopening of assessment. In response, the assessee filed a letter dated 25/03/2017 informing that assessee did not indulge any CCM since the company was not active on stock-exchange during that period. However, AO proceeded with the reassessment of the case.

2.2 During the reassessment proceedings, the AO observed that the assessee is involved in transaction involving in CCM to absorb contrived losses from the other parties and AO came to the conclusion with the following observations in his order, which is reproduced below:

“5.2 In this regard the details of the client code modification in assessee’s account during FY 2009-10 were called u/a 133(6) of the IT Act for from the broker CIL Securities Ltd However, Mis. CIL Securities vide their letter dt. 13.11.2017 stated that as the matter in not of recent years. they do not have orders for F.Y.2009-10 and therefore did not furnish the specific information called for and this was brought to the notice of the assessee vide this office show cause letter dated JJ .12.20 17 calling for the assessee’s explanation as to why on the basis of the information available with the department . the profit of Rs. 13, 19,201/- shifted out from its account should not be assessed as its income for the A Y. 2010-11.6

6.The submissions argument made by the representative of the assessee and have been carefully considered However, the same is not found to be tenable.

6.1 The assessee was provided with the copy of the letter from their broker M/s. Canara Securities Ltd on 18.12.2017. The assessee request for cross examining its own broker Mis. Canara Securities. is nothing but resorting to dilatory tactics. The assessee is in Hyderabad, so also its broker with whom the assessee is perhaps having a trading account even today and access to the broker. Nothing prevented the assessee from furnishing any evidence from his broker. Notwithstanding the above, the fact remains that it is the assessee’s profits that have been shifted out and other’s loss shifted in, reducing the assessee’s income.

6.2 The client Code modification means change of client code after the trade is executed It was allowed by exchanges and the SEBI for correcting punching errors and was never intended to be allowed to be used as an accommodative tool in the hands of brokers so as to remunerate the traders by shifting out the profits from the clients account through CCM or booking of contrived losses. The circular no. SMD/Policy/Cir/O3 dated February 06, 2003 of SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct the genuine mistakes like punching or communication errors. This facility was misused by brokers to transfer gains or losses from one individual to another by modifying client codes in the guise of rectifying the error. The ascertained gains/losses are shifted out/ in for the purpose of evading taxes.

6.3 It is clearly evident that the change of the client codes involves more than one digits in all Instances and thus, the same cannot be merely on account of punching errors, but, has been systematically done so as to facilitate booking of contrived losses to clients as per their requirements.

6.4 Even considering the placement of the alphabets and numbers of the MCC on the keyboard, it cannot be seen as genuine punching errors. Thus these CCM are non-genuine changes even as per parameters laid out in order of SEBI Thus, from the above analysis of the assessee’s account, it can satisfactorily be concluded that the real motive behind this array of CCM was to facilitate the clients to avail the losses/profits as per their requirement.

6.5 From the above it can be observed that a cluster of CCMs were used for all the modifications. Thus, CCMs are repeating between only few client codes. This cannot be a co-incidence. This shows that whole facade of the CCM was created to reduce the taxable income by shifting in losses and shifting out the profits in connivance with the broker.

6.6 Again, it can also be observed that the assessee’s client code is H 176 and client codes with Whom repeated CCMs happened are HDMI, H1702, H406, H1651. From the keyboard we can see that the positions of the letters & numbers are not adjacent so as to be construed as punching error. Similarly it is also strange that the broker has changed the assessee’s client code repeatedly with same person. Again, ff we presume that all the CCMs between these two codes were edited due to bonafide mistake but what is the justification of keys position in the keyboard and repetition with the same person. This shows that the CCMs were done with a malafide intention of reduction in the taxable profit.

6.7 The following observations of Shri. Prashant Saran, Whole Time Member, SEBI in his order u/s 12A of the Securities Contracts (Regulation) Act, 1956 (SEBI order no. WFM/PS/09/DNPD/APRIL/2012 dated 10.04.2012) in respect of NSE in the matter of modification of client codes of trades is noteworthy:

“I am of the opinion that the number of errors is a strong indicator whether the errors are genuine or not. I note that the. broker enters other fields as well viz. price and number of securities purchased/sold. No modifications are allowed in for these fields even in case of a genuine error and the broker has to compensate the clients, if he commits a mistake. The cases where the broker had to compensate a client for mistake in data entry is truly rare. 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 …. “

7. As the assessee has selectively shifted out the ascertained profits and shifted in only ascertained loss, thereby availed the benefits of reduction in taxable income. Thus this is contrived shifting of profits and losses for the purpose of evading taxes due which is otherwise due on other income! gain already incurred. Thus, there is no element of price risk. This shows that the losses ! profits were not incurred on account of any genuine risk taking in market but were in a way bought after they were ascertained and are hence contrived. Hence, in view of the above it is evidently cleared that, by resorting to CCM, assessee has reduced its taxable income to the tune of Rs.1 3,48,175!-.”

3. Aggrieved with the above order of AO, assessee preferred an appeal before the CIT(A) and raised several grounds on the legal issue of initiation of proceedings u/s 147 of the Act. On merit, assessee objected to making addition on contrived losses.

4. Ld. CIT(A) gave detailed finding on reopening of assessment by the AO as proper with reason to believe that the income of the assessee has escaped assessment.

4.1 With regard to CCM, assessee filed a detailed written submission objecting the above addition and submitted that CCM is possible only in two circumstances, i.e., i) when the broker himself finds a genuine mistake in the clients code, he can make the correction suo-moto, whereas, ii) when the correction is made on the advice of the assessee, it can be done only by request in writing.

4.2 However, CIT(A) rejected the submissions of the assessee and dismissed the grounds raised by the assessee by observing as under:

“7.16 Coming to the merits of the case, as explained elsewhere in this order, it is an admitted fact that the detailed investigation conducted by Pr. DIT(INV), Ahmadabad, revealed the fact that the assessee has availed the benefit of contrived losses by way of client code modification indulged in through its broker M!s. ClL Securities Ltd. To be precise, twelve modified transactions were carried out by the broker M!s. ClL securities Ltd. thereby profits earned by the company to the extent of Rs.13,33,688/- was transferred out to the codes of various other clients. Similarly, in respect of one modified transaction, loss ofRs. 14,487/- pertaining to some other client has been transferred to the assessee’s code. All these transactions have been clearly tabulated by the AO (in para.no.5 of pg.no.4&5 of the impugned order) and made available to the assessee calling for its comments during the course of assessment proceedings. The same is given in the form of scanned copy at para.no.7.4 of this order. Further, the assessee has failed to rebut the same except stating that it did not give any instructions to its broker to undertake the modifications in its client code. Also, it is contended by the assessee that the AD has failed to provide an opportunity of cross examination of the broker M/s. CIL Securities Ltd.

7.17 I have carefully considered the assessee’s contention and examined the evidence brought on record. Basically, the assessee is raising a technical ground that it did not give any instruction to the broker. However, notwithstanding the fact whether the assessee gave any instruction to the broker to undertake modifications in its client code or not, it is an admitted fact that the assessee’s broker had carried out twelve modifications by using the assessee’s client code and, thereby, the assessee’s profits to the extent of Rs.13,33,688/- have been shifted out which resulted in reduction in the assessee’s profits or increase in loss, as the case may be. The same is the case in respect of shifting of loss of Rs.14,487/- from some other client’s code to the assessee’s code.

7.18 Accordingly, the question whether the assessee has given his consent to the broker to undertake modifications in it’s client code or not is of no relevance, in the given set of facts and circumstances of the case. However, the important outcome to be considered is that the assessee has availed the benefit of such modification and, accordingly, while filing the return of income, the assessee disclosed profits on the basis of the statement provided by the broker without making any verification or adjustments to its income/losses, as the case may be. In view of this, I don’t find merit in the assessee’s argument warranting any interference with the order of the AD. Thus, the grounds of appeal raised by the assessee on this issue are missed.”

4.3 Further, the CIT(A) has made enhancement of assessment by disallowing business loss claimed by the assessee to the extent of Rs. 20,10,867/- by observing that assessee is dealing in investment banking and during this AY, assessee has incurred loss of Rs. 13,97,928/- in investment banking, which is given below:

CIT(A) observed that in the computation of income, assessee has adjusted Rs. 20,10,867/- as long term capital gain and declared total business loss under the head ‘income from business or profession’ as Rs. 36,59,560/-. The long term capital gains, which is declared as loss in business income is claimed as exempt u/s 10(23) of the Act. After giving opportunity to the assessee and considering the submissions of the assessee, the CIT(A) enhanced the assessment by bringing to tax the adjustment made in business income. He came to the conclusion with the following findings:

“8.9 On other hand, in the instant case, as recorded in the books of account maintained by the assessee, the shares sold by the assessee categorised as cash market long term transactions, which resulted in net profit of Rs.20,15,661/-, were actually forming part of stock-in­trade of the assessee brought forward as on 01.04.2009. Accordingly, as per the assessee’s own books of account and method of accounting followed, the said amount of Rs.20, 15,661/- would fall under Business Income of the assessee rather than Capital Gains.

8.10 In this regard, it is not out of place to mention that the assessee itself has shown purchase of certain shares as investment activity by way of disclosing the same under the head investment in balance sheet as on 31.03.2010. To be precise, the assessee invested in unquoted shares of sister concerns and others to the extent of Rs.68,34,390/- and the same was actually brought forward from FY 2008-09, without any change. During the course of the appellate proceedings, the assessee filed’ the financial statements for the year ending 31.03.2010 along with schedule/annexures. A scanned copy of annexure containing the details of investments as on 31.03.2009 and 31.03.2010 is given below.

ANNEXURE: DETAILS OF INVESTMENT AS AT 31^ST
MARCH, 2010

8.11. As seen from the above, there was no change in the investment made in the shares of sister concerns and others wherein the main purpose of investment is long term in nature either for earning dividend, strategic investment or capital appreciation and any income earned on sale of such shares should have come under the head LTCG or Short Term Capital Gain, as the case may be, rather than income under the head Business. In this regard, reliance is placed on the following judicial precedents:

1) CIT Vs Associated Industrial Development Co.(p.) Ltd [1971182 ITR 586 (SC): In this case, the Hon’ble Supreme Court has held that, in view of the assessee’s failure to produce evidence from its records as to whether it had maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment, the profits earned by the assessee in the course of its business as a dealer in shares is liable to be assessed as a revenue receipt under the head business rather than capital gains. The relevant portion of the decision is reproduced below for ready reference:

“It seems to us that the High Court went beyond the matters which were the subject matter of controversy before the departmental authorities and the Appellate Tribunal. It was never the case of the assessee at any stage that although it was a dealer in shares those shares which were the subject-matter of sale were held by way of investment. It had maintained throughout that all the shares were held by it as an investor and that it could not be regarded as a dealer because the shares did not form its stock-in-trade. That case of the assessee was negatived because of the extensive dealings and other facts and circumstances which were taken into consideration. The figure of purchases and sales as also of the profits relating to the years 1954 to 1957 which were set out in the order of the President of the Tribunal justified the view that although up to a certain point of time it had been assessed as an investor, the multiplicity of the transactions occurring successively over the years supported the departmental stand that the assessee had ceased to be an investor and had become a dealer. Before the Tribunal it was open to the assessee to contend that even on the assumption that it had become a dealer and was no longer an investor in shares the particular holdings which had been cleared and the sales of which had resulted in the profit in question had always been treated by it as an investment. It can hardly be disputed that there was no bar to a dealer investing in shares. But then the matter does not rest purely on the technical question of onus which undoubtedly is initially on the revenue to prove that a particular item of receipt is taxable. Whether a particular holding of shares is by way of investment or forms part of the stock-intrade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in­trade and those which are held by way of investment. The assessee, in the present case, made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment. Nor did it place any material from which it could be established that those shares had been treated in its books differently from other shares held by it. The mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency could not be regarded as sufficient to establish that these shares had been held by way of investment. Even otherwise it was for the Appellate Tribunal to give its decision on facts and since no decision was invited from the Tribunal as to whether the shares ill question had been held by way of investment it was not open to the High Court to give its finding on that question which was essentially one of fact and which it was within the jurisdiction of the Tribunal to determine.” (emphasis supplied)

2) Marat/al Fabrics (P.) Ltd. Vs DC/T [20/2/17 taxmann.com 50 (Mum. –Trib). In this case, the Hon’ble ITAT has held that the assessee, being a private limited company, having passed resolution authorising it to trade in shares, profit on such sale of shares has to be treated as business income rather than capital gains. The relevant portion of the decision is reproduced below for ready reference:

“The conduct and intention of the assessee has to be considered before deciding the issue as to whether the profit from purchase and sale of shares has to be treated as “capital gain” or “business income”. The conduct of the assessee in the instant case by passing the board resolution to do trading in shares of various companies indicates clearly the intention of the assessee to do business in shares. Further, merely because the profit on sale of shares was accepted as “capital gain” in the preceding year will not entitle the assessee to claim it as “short term capital gain” during the impugned assessment year. It is the settled proposition of law that principles of res judicata do not apply to Income Tax proceedings and each assessment year is separate and distinct. Further, the AO in the Assessment Year 2005-06 has not gone through the Board Resolution of the company authorising it to trade in shares. It was only during the appeal proceedings for the Assessment Year 2006-0 7 that the Ld. CIT(A) called for the copy of the minutes of the meeting of the Board of Directors and the resolutions came to light. Therefore, the order of the Assessment Year 2005-06 cannot apply to the Assessment Year 2006-07. The various decisions relied on by the Ld. Counsel for the assessee are distinguishable and not applicable to the facts of the present case. As has already been pointed out earlier whether the profit on sale of shares is to be treated as “business income” or “short term capital gain” depends on the facts and circumstances of each case. In none of the cases cited by the Ld. Counsel for the assessee profit on sale and purchase of shares has been treated as “short term capital gain” despite a resolution authorising the company to trade in shares has been passed Therefore, the decisions relied on by the Ld Counsel for the assessee are distinguishable and not applicable to the facts of the present case. The assessee being a Private Limited Company having passed a resolution authorising it to trade in shares, the profit on such purchase and sale of shares, in our opinion, has to be treated as “business income”. Nothing more, in our opinion, is required to justify the same. In this view of the matter we uphold the order of the Ld. CIT(A). The grounds raised by the assessee are accordingly dismissed. ” (emphasis supplied)

3) Dalhousie Investment Trust Co. Ltd. Vs CIT [1968/68 ITR 486 (SC): In this case, the Hon’ble Supreme Court has held that, on the basis of the facts of the case that the assessee purchased shares not as investments, but for the purpose of sale at profit and that they were actually sold with the purpose of earning profit and, accordingly, profit on sale of such shares would form in the nature of revenue receipt. The relevant portion of the decision is reproduced below for ready reference:

“It was urged that, in this case, the Tribunal has recorded no finding at all that [he shares in McLeod & Co. Ltd which were sold by the assessee, were converted by it into stock-in-trade, nor has it been held that the variation of its investments by the assessee amounted to dealings in investments. The facts that we found above show that, so far as the shares of McLeod & Co. Ltd and the allied companies which were sold by the assessee and the income from which has been taxed as revenue income are concerned, the assessee, in fact, dealt with. them as stock-in-trade. It is true that in the account books they were never shown as such ; but we have indicated how the evidence and the material in this case lead to the conclusion that the shares were in fact purchased even initially not as investments, but for the purpose of sale at profit and that they were actually sold with the purpose of earning profit, so that the transactions amounted to an adventure in the nature of trade.

Learned counsel also referred to the decision of this court in Ramnarain Sons (Pr.) Ltd v, Commissioner of Income-tax [I961} 41 ITR 534 to urge that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares, and, if the purpose was investment, the fact that, in varying the investment, the sale of those shares resulted in a profit will not make that profit revenue income. The principle is perfectly correct, but is not applicable to the case before us on the finding mentioned by us above that even the initial purchase of these shares by the assessee was not for the purpose of investment for earning income from dividends, but was with a view to earn profit by resale of those shares.

In these circumstances, we hold that the High Court was right in arriving at the conclusion that, on the facts and circumstances of the present case, the income derived by the assessee from the sale of its shares and securities in the relevant previous years was revenue receipt and as such taxable under the Income-tax Act. The appeal fail and are dismissed with costs.” (emphasis supplied)

4) Karanpura Development Co.Ltd. Vs CIT (l962/44 ITR 362 (SC)

8.12 In view of the aforementioned facts & circumstances and settled position of law, I am of the considered opinion that the assessee has wrongly claimed Business income derived from sale of its stock­in-trade i.e., cash market long term transactions/shares as LTCG with the sole purpose of availing the benefit of exemption u/s.l0(38) of the Act to the extent of Rs.20,15,6611- which is not allowed as per the provisions of the Act. Thus, the assessment is enhanced to the extent of Rs.20,15,661/-. Accordingly, the AO is directed to reduce the business loss to the extent of Rs. 20,15,661/-.

5. Aggrieved with the above order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

“1. On the facts and circumstances of the case, the order of the learned CIT(A) is erroneous both on facts and in law and is against the principles of natural justice.

2. The leaned CIT (A) erred in confirming the action of the Assessing officer in completing the assessment of the appellant merely based on the suspicion that the client code modification is done by the Appellant. Also, the AO failed to establish any link from the client code modification to conclude that the income has escaped Assessment which is the primary requirement of section 147.

3. The only basis for forming the belief is the report from the Principal Director of Income tax, Ahmedabad 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 believe that Income has escaped The leaned CIT(A) failed to appreciate the fact that there is no evidence brought on record that the income has escaped assessment except for the suspicion of the AO.

4. Further the learned CIT(A) failed to appreciate that the assessment was completed without providing an opportunity to cross examine the broker M/s CIL Securities Limited thereby depriving the assessee of its lawful rights which are against the principle of the natural justice.

5. In addition to the above, the Honorable CIT(A) failed to appreciate that the assessment under section 143(3) read with section 148 was completed without passing a speaking order.

6. Further the Honorable CIT (A) failed to appreciate in his enhanced Assessment that entries in the books of accounts alone are not conclusive evidence in determining the nature of Income. The intention of the assessee is an important factor in deciding the same.

7. Any other ground (if any) that may be urged at the time of hearing.”

6. Before us, ld. AR submitted that the assessment was reopened u/s 147 of the Act with the reason that the assessee has involved in CCM transactions. He submitted that AO has no reason to believe, but, on suspicion and relying on the third parties information reopened the assessment. He submitted that CCM is possible only in two situations and these modifications are done only by the Brokers. When the broker notices certain mistakes after execution of the trades, brokers are permitted to make changes in the client code, in order to rectify the mistakes made during execution of trade i.e. when a wrong code is punched in by the broker while executing the trade. The broker is allowed to change it during the close of the day when he identifies certain genuine errors and broker can do on his own or at the advice of the clients. He submitted in the first instance, brokers can do the rectification on their own, but, must maintain the relevant documentation. When the broker rectifies the mistake on the advice of the clients, it should be done only by written request from the client. He submitted that in the given case, assessee has not made any of such rectification request to the broker. He submitted that the above situation was clearly brought to the notice of the AO and ld. CIT(A) and, further, on the specific request of the assessee, AO has not granted cross-examination of the broker, which is against the principles of natural justice and he brought to our notice, the observation of the AO in para 6.1 of the assessment order.

6.1 With regard to enhancement of the assessment, hrelied on the orders of ld. CIT(A). book, submitted that CBDT Circular allows the assessee itself irrespective of period of holding of listed shares and securities , opts to trade them as stock-in-trade, income arising from transfer of such shares/securities would be treated as its business income. He submitted that in the instant case, assessee has kept the securities as stock-in-trade and the income earned in transferring securities were declared as capital gains. Therefore, he strongly relied on the CBDT Circular No. 6/2016.

7. Ld. DR, on the other hand, submitted that ld. AR now heavily banking on the fact that AO has not granted cross-examination to the assessee, he submitted that assessee was continuously dealing with the broker and assessee could have directly contacted the brokers instead of relying on such technical ground. He submitted that the finding of the AO is clear that assessee is involved in such transaction in which contrived losses were absorbed by the assessee. In case, bench feels that assessee may be given opportunity for cross-examination, it may go back to  Ao

7.1 regard to enhancement of the assessment, hrelied on the orders of ld. CIT(A).

8. In the rejoinder, ld. AR brought to our notice that copy of the letters written by the assessee to broker and the reply received from the broker. In the letter of the broker, namely, CIL Securities Ltd., informed the assessee that “the matter belongs to more than 8 years old. However, based on verification from available records, we do not find any instructions in writing from your company for any transaction of code modification during FY 2009-10” The copy of above letter is placed on record

9. Considered the rival submissions and perused the material on record. We notice from the grounds of appeal, assessee has raised ground nos. 2 to 5 on reopening of assessment and confirming the addition on client code modification.

9.1 With regard to the above grounds, we observe that the assessment was reopened on the basis of specific information received by the AO from the DIT(Inv.) that the broker with whom assessee was dealing has involved in CCM. It is a fact that the broker has made CCM in the case of assessee, in which, about 13 transactions were involved   It came to light only in the reopening of assessment. When a specific information is received by the AO from the authentic sources, it is natural on the part of the AO to believe that there is a reason to believe that the income of the assessee has escaped assessment. We notice that this issue was aptly addressed by the CIT(A) in the order, therefore, we are in agreement with the findings of CIT(A) that there is a reason to believe that in the case of the assessee, income has escaped assessment and reopening of the assessment is proper.

9.2 On merits, we notice that the broker i.e. CIL Securities Ltd. has made CCM in the case of the assessee involving 13 transactions, the details of which is reproduced by CIT(A) in his order at page 11.

9.3 Client Code Modification means, modification/change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock Exchanges shall not normally permit changes in the client code except to Correct for genuine mistakes. Every client is given a code which is registered with the stock Exchanges. The client code Modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be Used as an exception rather than routine.

9.4 From the above, it is clear that the brokers are permitted to make rectifications after execution of the trade by applying the facility under CCM permitted by the SEBI. The brokers can make modification when they notice certain errors at the time of punching orders. When such genuine errors are noticed by the brokers themselves, then, they can modify such genuine errors suo-moto. When some genuine mistakes were 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. It is the duty of the broker to maintain records of such modifications. In the given case, assessee has brought to our notice by submitting copy of the letter from CIL Securities Ltd, who is the broker that assessee has not made any specific request on any of the CCM. Therefore, CCM made by the broker are made by broker itself. We notice from the record that SEBI and other Investigation Agencies observe that there is malpractices by using CCM facility. These are of the malpractices made by the brokers, but, any suspicious transaction made by the broker, it has to be investigated at the broker level. In the given case, we notice that no such investigation was carried on the broker i.e. CIL Securities Ltd. AO can proceed with the addition when he has specific information that the assessee itself involved in such malpractices. In the given case, AO has not brought on record any specific instruction given by the assessee to the broker for such client code modification. It is only based on the information that there involves CCM, in which, assessee has suffered loss to the extent of Rs. 13,48,175/-. It does not mean that assessee has directly involved, may be, assessee must have benefitted out of it, but, still it is the duty of the AO to bring on record the fact that assessee has directly involved in such activities. From the record, we notice that assessee has incurred heavy losses in this year, we do not understand how shifting of profit will benefit the assessee. Therefore, in our considered view, in the absence   of any   findings that assessee has given specific instruction to the broker to make such CCM, assessee cannot be held  responsible in such modification. Therefore, it is only a presumption of the AO that assessee might have involved in        such transactions. Accordingly, the loss disallowed by the AO is hereby deleted.

9.5 With regard to ground No. 6, enhancement of assessment, we notice that assessee is an investment banker and during the year, assessee has incurred losses in such investment banking business and the details are given below:

During the year, assessee has earned income from cash market long term transactions to the extent of Rs. 20,15,661/-, which was claimed by the assessee as exempt u/s 10(38) by shifting the above transaction to capital gains from business income. We notice that before the CIT(A), assessee submitted that entries made in the books of account alone are not conclusive in determining the nature of income. It is submitted where the object of investment in shares of company to derive income by way of dividend, capital appreciation etc., the profits accruing from sale of such shares will yield capital gains and not revenue receipt.

9.6 it is fact that assessee is engaged in the business of investment banking and it consists of cash market transactions both short term and long term, futures & option transactions etc. The nature and object of investment depends upon the transaction itself and how the assessee trades in its books of account. In the given case, assessee has made investment in cash market short term as well as long term transactions and treated the same in the books of account as stock-in-trade. Further, assessee also made certain investments to the extent of Rs. 68,34,390 in other companies as unquoted equity shares. Therefore, the assessee has made specific classification as far as its investments is concerned, i.e. investment made for long term with the intention to derive income from dividend and capital appreciation. Whereas, cash market transactions are made for the purpose of trading business, which is properly classified as stock-in-trade. In our view, assessee itself is investment banker and makes investments in stock in order to make profit. The investment made for the business transactions, which can be classified only under business income in particular, the transactions involving stock-in-trade. Assessee cannot treat the above transaction as capital gains just because its long term as well as it has paid security transaction tax on the above investment. Assessee relied on Circular No. 6/2016, in which, the CBDT clarified that surplus generated from sale of shares/securities would be divided as capital gains or business income, where, a) assessee itself opts to trade them as stock-in-trade income arising from transfer of such sales would be treated as income from its business, b) in respect of shares/securities held for a period of more than 12 months, immediately preceding a date of its transfer, if the assessee desires to trade income arising from the transfer as capital gains, the same should not be disputed by the AO and c) in all other cases, nature of transaction was continued to be decided based on the Circular No. 4/2017. In our view, the above Circular may not be applicable in the case of the assessee, since the assessee’s main business itself is investment banker and the transactions were specifically transacted in the normal course of business. Therefore, we are in agreement with the findings of ld. CIT(A) and we are not inclined to disturb the findings of CIT(A). Accordingly, ground raised by the assessee on this issue is dismissed.

10. In the result, appeal of the assessee is partly allowed.

Pronounced in the open court on 3^rd July, 2019.