JEAN ANTONY SEQUEIRA ,MUMBAI vs. INCOME TAX OFFICER-24(2)(2), MUMBAI

This appeal filed by the assessee is directed against the order passed by the ld. CIT(A)-48, dated 01.03.2023 for A.Y. 2009-10. The assessee has raised the following grounds before us: “1. Legal Grounds:

The Ld. CIT(A) is not justified in upholding the disallowance amounting to Rs.21.75,400/- without providing any opportunity to the Appellant to cross examine the parties whose statements were relied upon during the course of proceedings under section 133 of the Act. Thus, the disallowance made is in severe breach of the principles of natural justice and the therefore, the disallowance may be deleted.

The Ld. CIT(A) is not justified in upholding the disallowance of Rs.21,75,400/- merely on the allegation that the Client Code Modification facility was used on the very same day to rectify the mistake which were occurred at the time of trading. Thus, disallowance of Rs.21.75,400/- is without any basis and the same may be deleted 7. The Appellant seeks leave to add, alter and amend the above grounds whenever required.”

Fact in brief is that return of income declaring total income of Rs.19,58,900/- was filed on 29.09.2009. The return was process u/s 143(1) of the Act. Subsequently, information was received from the Pr.DIT (Investigation) that a survey operation u/s 133A were conducted by the Investigation Wing at premises of 12 share brokers and found that some of their clients were involved in misusing of clients code modification for the purpose of tax evasion. Thereafter the case of the assessee was reopened after recording the reason by issuing of notice u/s 148 of the Act on 31.03.2016. In response the assessee submitted P a g e | 3 Jean Antony Sequerira Vs. ITO 24(2)(2) that original return filed on 29.09.2009 may be treated as return filed in response to notice issued u/s 148 of the Act. During the course of assessment the assessing officer found that assessee has shifted out profit of Rs.21,75,400/- in shares by misusing client code modification facility. The assessing officer stated that every client is given a code which is registered with the stock exchange. The client code modification permit brokers to rectify human errors when a client inadvertently provides wrong code or when a wrong code punched in by the share broker while executing trade. The AO stated that vide circular No. SMP/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 genuine mistakes. The AO further stated that broker was allowed to change it between 3.30 pm & 4.00pm to rectify a genuine error that may have occurred while entering the code. He further stated that changing client’s codes within the 30 minutes after the market closed was a normal practice followed by brokers for rectifying genuine errors and mistakes which may have occurred during the trading hours. He also stated that in connivance with brokers the client code modification facility was misused and broker transferred gains or losses from one person to another by changing the code. In the case of the assessee information has been received from the office of I & C Mumbai and from the office of the Pr.DIT(Inv.) that the assesse has shifted profit of Rs.20,26,658/- by using client code modification. During the course of assessment the assessing officer issued notice u/s 133(6) to Arcadia Shares & Stock Brokers Pvt. Ltd. which was managed by the family of the assessee and the assesse was also one of the director in that company. From the details of the trade of the assessee received from the broker the AO stated that in the case of the assessee there was no similarity between the code that were changed under code client modification and also noticed that it was not an inadvertent human P a g e | 4 Jean Antony Sequerira Vs. ITO 24(2)(2) error for the purpose of which client code modification was used. Therefore, the assessing officer has issued show cause notice dated 24.11.2016 asking the assesse to provide details of all trades changed by using client code modification. However, the assessee neither replied nor filled any demat statement asked for. The assessing officer has also issued notice u/s 133(6) to the broker to provide detail of making trade changes by using client code modification. However, neither the assessee nor the broker has responded to the show cause notices issued by the assessee. The AO also stated that the broker vide letter dated 02.12.2016 filed on 06.12.2016 had expressed their inability to provide any data changed by them by using client code modification. Therefore, the assessing officer has added the claim of loss of Rs.21,75,400/- due to use of client code modification to the total income of the assessee.

The assessee filed the appeal before the ld. CIT(A). The ld.CIT(A) has dismissed the appeal of the assessee holding that neither assessee has responded to the show cause notice issued by the assessing officer nor made compliance to the notice issued by the ld. CIT(A) asking the detail in connection client code modification. Therefore, the appeal of the assessse was dismissed.

During the course of appellate proceedings before me the ld. Counsel filed a paper book comprising detail of submission made before the AO & CIT(A). The ld. Counsel also contended that the reopening of the assessment as bad in law as the assessing officer had reopened the assessment merely on the borrowed satisfaction. The ld. Counsel also referred page no. 53 of the paper book pertaining to reply given by the share broker in response to notice u/s 133(6) issued by the assessing officer by which detail of share transaction copy of leger account and contact notes of the transaction of the assessee were submitted. He also referred page no. 68 of the paper book showing script wise details P a g e | 5 Jean Antony Sequerira Vs. ITO 24(2)(2) of the profit and loss account of the assessee. The ld. Counsel submitted that client code modification was genuinely carried out. He also referred the decision of Hon’ble High Court of Bombay in the case of Coronation Agro Industries Ltd. Vs. DCIT, Circle 6(2)(i) (2017) 82 taxman.com 75 (Bom) and in the case of Chintan Jaswantbhai Shah Vs. ITO (2021) 125 taxman.com 439 (Ahd Trib) and in the case of DCIT, CC-1(1) Vs. Kaizen Stock Exchange (P) Ltd. (2021) 130 taxman.com 236 (Ahd Trib). On the other hand, ld. D.R. vehemently submitted that in spite of giving number of opportunities the assessee and the brokers have not made compliance to the notice issued by the assessing officer and ld. CIT(A) to provide the relevant detail pertaining to the changes made in the share trading by using of client code medication. The ld. D.R further submitted that in the case of the assessee because of not providing the relevant detail, the genuineness of the client code modification could not be verified. He also referred the copy of letter of the share broker in which he mentioned that he did not has record about the client code modification made in the case of the assessee. Legal Ground No. 1 to 3: Reopening u/s 148: 5. Heard both the sides and perused the material on record. The assessee has questioned the reopening of assessment on the ground that there was no tangible material at the time of issuing notice u/s 148 of the Act and the notice was issued on the basis of borrowed satisfaction and also stated that reason recorded for issuing the notice u/s 148 were inadequate. In this regard, after perusal of the record it is noticed that assessee has filed return of income showing total income of Rs.19,58,900/- which was processed u/s 143(1) of the Act and no scrutiny assessment u/s 143(3) of the Act was made in the case of the assessee. After perusal of the reason recorded placed at page no. 22 of the paper book, it is evident that assessing officer has received P a g e | 6 Jean Antony Sequerira Vs. ITO 24(2)(2) information from the investigation wing on the basis of survey action conducted u/s 133A of the Act on the premises of the brokers for misusing the client code modification for tax evasion. After analysis of the dated received from NSE and after considering the contentions of the brokers and the ADIT forwarded information received along with list of the beneficiaries of client code modification (CGM) the assessing officer observed that assesse was one of the assesse who has availed contrived losses of Rs.20,26,658/- because of client code modification during the F.Y. 2008-09. It is evident from the reason recorded that assessing officer has carried out the further exercise of making analysis of the said information, thereafter come to the satisfaction that assessee has availed contrived amount losses of Rs.20,26,658/- by using of client code modification. The fact in the case of the assesse are distinguishable from the cases referred by the ld. Counsel as in that case the reason did not indicate the basis for the assessing officer to come to reasonable belief that there have been any escapement of income. However, in the case of the assessee there was tangible material in the form of report of the investigation wing which was further analysed by the assessing officer to come to the conclusion that the assessee has availed contrived client code modification losses of Rs.20,26,658/- and return of income filed by the assessee was not assessed u/s 143(3) of the Act. At the stage of issuing of notice the only question is whether there was any relevant material of which a requisite person could have formed requisite belief and at the initiation stage what is required is the reason to believe but not to establish an escapement of income. Therefore, I don’t find any infirmity in the decision of the ld. CIT(A) therefore grounds of appeal 1 to 3 pertaining to reopening of assessment are dismissed. On Merit:

In view of the above facts and circumstances the availability of information relating to time and date of client code modification whether the client code modification was carried out within the permissible time limit and whether client code modification carried out through the stock exchange are utmost imperative to establish the genuineness of