SETRON TEXTILE MILLS PVT LTD,MUMBAI vs. INCOME TAX OFFICER, WARD 4(3)(1), MUMBAI, MUMBAI

Per: Smt. Beena Pillai, J.M.:

The Present appeal filed by the assessee arises out of order dated 30/06/2020 passed by NFAC, Delhi for assessment year
2014-15 on following grounds of appeal:
“1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned
Assessing Officer in reopening the case u/s.147 of the Income Tax

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M/s Setron Textile Mills Pvt Ltd

Act, 1961, without considering the facts and circumstances of the case.
2. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned
Assessing Officer in not providing the evidence or statements of person on which reliance has been placed by the AO for reopening the assessment proceedings and further erred in not providing the cross examination of said person, specifically and repeatedly asked by the appellant, which clearly results into violation of principle of natural justice, hence order passed u/s. 147 r.w.s
144B is null and void.
3. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned
Assessing Officer in making an addition of Rs.57,06,800/-, without considering the facts and circumstances of the case.
4. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned
Assessing Officer in making the addition of purchase amount of Rs.56,06,800/-, without appreciating the fact that the said amount has already been accounted and offered to tax by disclosing sales
& purchase in the books of accounts and the AO further erred in making an addition of purchases of Rs.56,06,800/- which is wrong and contrary to the provisions of law.
5. The appellant craves leave to add, amend, alter or delete the said ground of appeal.”
Brief facts of the case are as under:
2. The assessee is a private limited company and filed its return of income on 19/09/2014 declaring nil income. The return was processed under section 143 (1) of the act.
2.1 Subsequently, the case was reopened by issuing notice under section 148 of the act based on information received from various sources including the Insight Portal and communication from the investigation wing Mumbai, wherein the Ld.AO noted that assessee was involved in fictitious profits through

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M/s Setron Textile Mills Pvt Ltd commodity trading on the National spot exchange Ltd (hereinafter referred to as NSEL) showing a transaction value of Rs.57,06,800/.
2.2 The investigation report revealed that in assessee’s case, multiple trades were found where old general client codes were changed to that of assessee, and these modifications were executed by Anand Rathi Communications Ltd. It was noted by the Ld.AO that the broker in a statement admitted that these changes were made without client instructions and without maintaining proper communication records and without physical delivery of commodities. It was also noted that in several cases contract notes issued did not match exchange data.
2.3 Based on such investigation findings and documentary evidences, the Ld.AO concluded that Rs.57,06,800/-represented income arising from transaction involving manipulation of client codes and earning of fictitious profits. As the transaction lacked economic substance and were used to generate artificial profits, the Ld.AO treated the said amount as capital gain and brought to tax under special provisions of the act.
Aggrieved by the order of the Ld.AO the assessee preferred appeal before the Ld.CIT(A).
3. The Ld.CIT(A), after considering the submissions of the assessee, observed and held as under:
“5.1.1. In ground no. 1 & 2 of the appeal the appellant has challenged the Validity of Reopening under Section 147 of the Act. The appellant has challenged the juri iction of the AO to reopen the assessment under section 147, claiming the reasons were based on incorrect and contradictory facts and without independent application of mind, thus violating principles of natural justice. However, the reassessment was 4
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M/s Setron Textile Mills Pvt Ltd initiated on the basis of credible and specific information received from the Directorate of Income Tax (Investigation), Mumbai, and the Serious
Fraud Investigation Office (SFIO), which had conclusively unearthed large-scale manipulation involving client code modifications at NSEL through various brokers, including Anand Rathi Commodities Pvt. Ltd.
the broker through whom the appellant conducted its transactions. The investigation identified that trades were executed using dummy client codes and subsequently modified to shift fictitious profits/losses, and that no actual delivery of goods took place despite the transactions being routed through exchange platforms.
5.1.2. The Hon'ble Supreme Court in the case of Raymond Woollen Mills
Ltd. v. ITO [(1999) 236 ITR 34 (SC)] held that for initiation of reassessment proceedings, it is sufficient if there is a prima facie reason to believe that income has escaped assessment; the adequacy or correctness of the material cannot be questioned at this stage. Further, in A. A. Trading Co. v. ITO [(2019) 102 taxmann.com 47 (SC)] also, the Apex Court emphasized that information received from Investigation
Wing can be a valid basis for forming belief if the AO applies his mind to it. In the present case, the AO has clearly demonstrated a tangible nexus between the appellant's commodity trades and the client code modification operations flagged by the Investigative agencies. The approval of the competent authority was obtained u/s 151 of the Act, before issuing notice u/s 148, and detailed reasons were provided to the appellant. The appellant's objections were duly disposed of by the AO by passing a speaking order. Thus, the reassessment proceedings are in line with law and cannot be termed invalid. Therefore, ground no.
1 & 2 of the appeal are dismissed and not allowed.
5.2.1. Ground Nos. 3 to 5, 7 to 9 of the appeal are against the Addition of Rs. 57,06,800/-. The appellant has challenged the addition asserting that all transactions were routed through recognized exchanges, properly recorded in the books of accounts, and settled through banking channels. It was also claimed that the AO himself acknowledged the genuineness of transactions, and hence the addition lacks merit. This argument cannot be sustained in light of the material facts unearthed during assessment and investigation. The AO has clearly established that the appellant's broker, Anand Rathi Commodities Pvt. Ltd., was among the brokers involved in the manipulation of client codes to generate fictitious profits/losses. Statements recorded from broker representatives such as Shri Chetan Pitamber Bharkhada, President of Anand Rathi Commodities Ltd., confirmed that such modifications were done without client instructions and that no physical delivery of 5
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M/s Setron Textile Mills Pvt Ltd commodities ever took place, thereby rendering the entire transaction scheme a sham.
5.2.2. Moreover, in the face of such strong circumstantial evidence, the appellant's attempt to portray the transactions as genuine business income is not credible. The AO has observed that the contract notes submitted by the appellant were not standard documents as required by SEBI norms, lacked verifiable reference numbers and signatures, and appeared computer-generated without authentication. The AO's suspicion about the authenticity of these documents is, therefore, reasonable. It is a well-settled principle of law that the burden to prove the genuineness of a transaction, especially in cases where alleged manipulation or accommodation entries are suspected, lies on the assessee. In the case of CIT v. P. Mohankala [(2007) 291 ITR 278 (SC)]
and Sumati Dayal v. CIT [(1995) 214 ITR 801 (SC)], the Apex Court has emphasized that in determining the genuineness of transactions, the test of human probability and surrounding circumstances must be applied.
5.2.3. Here, there is overwhelming evidence that the transactions lacked economic substance and were designed to create fictitious profits. There is no explanation from the appellant as to why such trades, supposedly for genuine commodity trading did not result in any real movement of goods. The only logical inference, given the scheme exposed by SFIO and DDIT (Inv.), is that the transactions were structured to launder or rotate funds, or to generate artificial tax positions through CCM. Hence, the AO was correct in treating the profit embedded in the alleged purchases of Rs. 57,06,800/- as unexplained income, taxable under special provisions. Therefore, the impugned addition made by the AO is confirmed and sustained. Accordingly, ground no. 3 to 5, 7 to 9 of the appeal are dismissed and not allowed.
5.3. In Ground No. 6 the appellant has pointed out a discrepancy in the computation of total income vis-à-vis the assessed income, alleging that the AO wrongly computed total income at Rs. 1,14,13,600/- instead of loss of Rs. 57,06,610/-as per the assessment order, While While the claim appears arithmetically valid, this ground is purely procedural.
Such computation errors, if any, can be rectified under section 154. The substantive addition of Rs. 57,06,800/- has been rightly made and upheld. Hence, this procedural aspect does not alter the outcome of the appeal on merits.
5.4. The appellant contends that cross-examination of third-party statements, specifically, Shri Chetan Bharkhada, was not granted,

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M/s Setron Textile Mills Pvt Ltd resulting in a violation of principles of natural justice. However, this argument is unfounded in the present context. The Hon'ble Delhi High
Court in Krishna Textile Mills v. CIT [(2017) 84 taxmann.com 116] held that the right to cross-examination is not absolute and arises only where the evidence relied upon is not corroborated by other independent material on record. In the instant case, the AO has relied not merely on statements but on a chain of corroborative evidence including records from NSEL, SEBI findings, transaction flow mismatches, and fabricated documents. Moreover, the appellant has not demonstrated how the absence of cross-examination prejudiced its case, especially when it had access to and contested the very reports and findings upon which the AO relied. In such cases, the principle of useless formality applies. As held in Hindustan Tin Works Ltd. v.
Employees [(1979) 1 SCC 226], when the outcome is inevitable and cannot be altered, the absence of a particular procedural step cannot vitiate the entire proceedings.
5.5. In conclusion, the reassessment proceedings initiated by the AO were validly commenced based on credible information, and the addition of Rs. 57,06,800/- made on account of unexplained income through fictitious transactions in commodity trading is fully justified.
The appellant failed to furnish any cogent evidence disproving its involvement in the alleged CCM scheme, and instead relied on procedural arguments and generic denials. The AO has discharged the burden of proving that the transaction was a sham, and the appellant has failed to rebut this with credible documentation. Therefore, the contentions raised by the appellant in all grounds lack merit and are hereby dismissed. Accordingly, the addition of Rs. 57,06,800/- made by the AO is sustained.”
Aggrieved by the order of the Ld.CIT(A), the assessee is on appeal before the Tribunal.
4. The Ld.AR submitted that the reasons recorded prima facie are misleading, incorrect and baseless. He drew our attention to the table incorporated on the pages 6-7 of the said reasons recorded. He submitted that, perusal of the same would reveal that, at one hand Column for 'Information Type' mentions
'Fictitious Profits in Commodity Trading', against the same

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M/s Setron Textile Mills Pvt Ltd entries the Remarks bear mention of 'Buy'. He submitted that the same is contrary to each other.
4.1 The Ld.AR submitted that in the said reasons recorded, on the one hand it is stated that, 'Profits' in Commodity Trading would imply that money would have been received from the Broker on account of the said alleged fictitious trade, on the other hand, the remark 'Buy' would imply that, money was paid by the assessee to the Broker for taking the stated position in the commodity market.
4.2 He thus primarily submitted that the reasons for reopening of assessment reveals that it has been reopened on the basis of (incorrect) information received from DDIT(Inv), Mumbai and not on account of any independent basis formed by the Ld.AO. He submitted that there are various decisions of Hon'ble Supreme
Court and Hon’ble Bombay High Court, in this regard that, reopening on borrowed satisfaction has not even been examined or verified by the Ld.AO is bad in bad in law and not permissible.
He further submitted that reasons once recorded for reopening cannot be altered or improved upon as has been held by various decisions, including following decisions of Hon’ble Bombay High court as under:
1. Principal Commissioner of Income-tax-5 vs. Shodiman
3. “Reassessment Can’t Be Based on Reasons Borrowed From Other Dept. Or Justice M.B. Shah Commission Report” (Bombay
High Court)

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(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.By order

(Asstt.