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Facts
The assessee filed their return for AY 2009-10 declaring income and a loss. The case was reopened under Section 147 based on information regarding fictitious profit/loss from F&O and share transactions due to client code modification. The Assessing Officer made an addition of Rs. 26,76,143/-, reducing the claimed loss.
Held
The Tribunal held that the reasons recorded for reopening the assessment were not valid because they did not demonstrate any failure on the part of the assessee to disclose material facts, especially since the reopening occurred after four years. Furthermore, the addition was made without proper independent investigation of the evidence submitted by the assessee.
Key Issues
Whether reassessment proceedings initiated after four years, based on borrowed satisfaction and without independent verification, are valid? Whether the disallowance of business loss on account of alleged client code modification is justified without proper inquiry?
Sections Cited
147, 148, 143(1), 143(3), 254(1)
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of Ld. CIT(A)/ADDL/JCIT (A) – 2, Ahmedabad dated 17.02.2025 for assessment year (AY) 2009-10. The assessee has raised following grounds of appeal:
“1. The Ld. CIT(A) erred in confirming the actions of Assessing Officer of reassessment under section 147 of the Income Tax Act, 1961 solely based on borrowed satisfaction/investigation reports, without any independent analysis or finding.
2. The Ld. CIT(A) erred in confirming the actions of Assessing Officer of reassessment under section 147 of the Income Tax Act, 1961 based on change of opinion. That reassessment is illegal, void and bad in law.
3. The Ld. CIT(A) erred in confirming the action of Assessing Officer in disallowing the business loss of Rs. 26,76,143/- on account of alleged client code modification based on surmises, assumptions and conjectures.
The appellant craves leave to add to, alter, amend or delete any of the above grounds of appeal.”
Vide application dated 10.07.2025, the assessee has raised following additional ground of appeal:
“The ld. CIT(A) erred in upholding the action of the Assessing Officer in reopening the assessment u/s 147 of the Income-tax Act, 1961 without appreciating that the reasons recorded does not have any findings on failure on the part of the appellant to fully and truly disclose all material facts necessary for the assessment. That, the reopening was initiated after the expiry of four years from the end of the relevant assessment year, the reassessment is bad and void in law.”
Brief facts of the case are that assessee filed her return of income for assessment year (A.Y.) 2009-10 on 24.09.2009 declaring income of Rs. 25,544/-. In the computation of income, the assessee claimed current year loss of Rs. 76,50,612/-. The assessing officer recorded that return was processed under section 143(1). Later on, the case of assessee was reopened under section 147 by issuing notice under section 148 on 30.03.2016 after recording reasons. The assessing officer recorded reasons that information was received from ADIT, Ahmedabad regarding fictitious profit & loss through F&O transactions and share transaction by way of client code modification by changing client code of a particular trade and transfer trade from one account to another account during trading hours in the time permitted by stock exchange after the trading hours. The assessee received fictitious profit / loss of Rs. 26,76,143/- in his books through her broker M/s.
ARJ Securities Pvt. Ltd. on account of multiple transaction. On the basis of such information, the assessing officer was of the view that he has reason to believe that income of Rs. 26,76,143/- has escaped from assessment. In response to notice under section 148, the assessee filed her reply dated 05.04.2016 and submitted that her original return filed on 24.09.2009 may be treated return in response to notice under section 148. The reasons recorded were provided to the assessee. The assessing officer proceeded for reassessment. The assessing officer after recording modus operandi of client code modification made addition of Rs. 26,76,143/- and thereby reduce loss to that extent.
4. Aggrieved by the additions and reopening the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee challenged the validity of reopening and issuance of notice under section 148 as well as addition on merit. Before ld. CIT(A), the assessee filed detail written submission. While challenging the validity of reopening and issuance of notice under section 148, the assessee submitted that there was no tangible material with the assessing officer, on the basis of which he could have validly reopened the assessment. There was no information with the assessing officer for forming reason to believe that income chargeable to tax has escaped assessment. The alleged information received from ADIT (Inv.) could not be treated as tangible information for reason to believe that income chargeable to tax by escaped assessment. The assessing officer nowhere recorded that there was any failure on the part of assessee to disclose fully and truly all material facts necessary for assessment.
On merit, the assessee stated that he has entered into various F&A transaction through his registered broker. Client code modification was made only when there was mistake committed by dealer or broker. The client code modification facility is permitted as per rules and regulations of stock exchange. In the broker’s assessment order passed under section 143(3), the books of account have been accepted and no proceedings under section 147 is initiated for client code modification on the terminal belonging to his broker. No proceeding by stock exchange or SEBI has been initiated either against assessee’s dealer or broker for client code modification. Client code modifications are natural and common feature in the trade of exchange as genuine mistake arises while executing the transaction. The assessee also stated that his case was selected for scrutiny and assessment was completed under section 143(3) on 12.12.2011. In the scrutiny assessment, entire details and particulars of share transactions were considered and only after verification, the assessment order was passed. Reassessment proceeding has been initiated merely on the basis of change of opinion. There is no tangible material or relevant material which came through detail investigation of client code modification.
The ld. CIT(A) after considering the submission of assessee upheld the validity of reopening as well as additions on merit. While upholding the validity of reopening, the ld. CIT(A) held that case was reopened on the basis of information received from Investigation Wing about client code modification. It is settled position in law that the name of assessee figures in the information received about escaping income then the courts have held that there is live nexus between the information and the escapement of income and issuance of notice under section 148 on such information is found to be valid. It was further held that while recording reasons on the assessing officer need not established the escapement of income and only prima facie and not conclusive proof is sufficient for reopening. The reasons to believe should have rational connection or relevant bearing on the formation of belief and should not be extraneous or irrelevant. The assessing officer has information in his possession which was received from Investigation Wing, wherein there was clear cut finding about modus operandi adopted by assessee to manipulate / create artificial losses through client code modification. Hence, there is tangible material which was known to the assessee and assessing officer came to know only after detail investigation. On the objection of assessee about change of opinion after completion of assessment under section 143(3) dated 12.12.2011, the ld. CIT(A) held that assessing officer has tangible and relevant material which came to his notice through detail investigation of client code modification, hence, cannot be said that reopening was merely change of opinion. On merit of the addition, the ld. CIT(A) held that assessee has misused the client code modification facility to create artificial losses with no genuine commercial justification. The assessing officer has pointed out modification were not minor correction or typographical error rather deliberate and structured changes involving unrelated client could be transferred losses to specific account. The frequent feature of transaction and sale of modification indicates that transactions were pre-mediated and designed for tax benefit.
The assessing officer has clearly brought the fact about misuse of client code modification. Further aggrieved the assessee has filed present appeal before Tribunal.
I have heard the submissions of learned authorised representative (ld. AR) of the assessee and the learned senior departmental representative (ld. Sr. DR) for the revenue and have gone through the orders of lower authorities carefully. The ld. AR of the assessee submits that she has raised additional ground of appeal. The additional ground of appeal is legal ground which does not require to bring any new or additional fact on record for adjudication of such issue. The additional ground of appeal is inconsonance with original ground no. 1 & 2 and may be admitted. In support of additional ground of appeal and ground no. 1 & 2 of original ground of appeal, the ld. AR of the assessee submits that reasons recorded by assessing officer are not valid reasons. Admittedly, the case of assessee was reopened beyond four years from the end of relevant assessment year. There is no reference in the reasons recorded that there was any failure on the part of assessee in not disclosing fully and truly all the information necessary for assessment. There is no whisper in the reasons recorded that there was any failure on the part of assessee in not disclosing fully and truly all material facts necessary for assessment. The assessment was completed under section 143(3) on 12.12.2011. During the original assessment, entire details and particulars of share transaction was duly considered and only after verification of same, the assessment order was passed. Thus, reassessment initiated thereafter is nothing but a change of opinion. It is settled position in law that reopening on the basis of change of opinion is not permissible. In alternative submission, the ld. AR of the assessee submits that reopening cannot be based solely on borrowed satisfaction. The assessing officer solely relied on the information received from ADIT (Inv.) Ahmedabad and disallowed the genuine loss. The assessing officer has not investigated the matter independently except relying upon third party information. The assessing officer was required to at least make some independent analysis of information before using such information against the assessee. Mere information cannot be treated equivalent to material in the eyes of law. Mere information from any source would not tantamount to reason to believe that income chargeable to tax has escaped assessment. There is no allegation in the reasons recorded against the broker of assessee nor any adverse report against the broker of assessee. A plain reading of reasons recorded makes it clear that case was reopened only basis of suspicious only. There is no live link or close connection between the material and formation belief by assessing officer. Thus, the reasons recorded are not valid reasons. To support her submissions, the ld. AR of the assessee relied upon the decision of Jurisdictional High Court in Coronation Agro Industries Ltd. vs DCIT (2017)
82 taxmann.com 75 (Bombay) and the decision of Mumbai Tribunal in ACIT vs Kishco Limited ITA No. 6894/PN/2017.
On merit of the addition, the ld. AR of the assessee submits that the assessing officer treated the loss to the extent of Rs. 26,76,143/- as non- genuine on the basis of mere information. All the transactions wherein the assessee suffered losses are genuine. The losses were incidental to the activities of the assessee. The assessee suffered huge losses of more than Rs. 76 lakhs. The losses were carry forward for 8 years and were never set of against the profit. To support the genuine business losses, the assessee furnished broker’s bill, ledger account, scrip by salary and statement of account. All such documents were furnished in original assessment and assessee accepted. All such documents were again furnished to assessing officer in reassessment proceedings. The assessing officer has not made any comment on such genuine evidences. No enquiry was made either from the broker or from stock exchange or SEBI that assessee is actually beneficiary of any such client code modification. The action of assessing officer solely based on mere information. In support of her various submissions, the ld. AR of the assessee also relied upon the following decision: ACIT (ODS) vs Durr India (P) Ltd. (2023) 157 taxmann.com 371 (SC) SLP dismissal on merits filed by revenue against the judgement of Hon’ble Madras High Court (2023) 152 taxmann.com 303 (Mad HC). Ipca Laboratories Ltd. vs. DCIT (2002) 124 Taxman 556 (Bom HC) Caprihans India Ltd. vs DCIT (2003) 132 Taxman 123 (Bom HC) M/s. KediaFinvest Consultants Private Limited (ITA No. 1664/Mum/2018 (Mumbai Trib.) Ankit GirishkumarVasani vs ITO (ITA No. 1593/Mum/2021 (Mumbai Trib.) HasmukhKhetshi Shah vs ITO (ITA No. 5932/Mum/2024 (Mumbai Trib.)
On the other hand, the learned Senior Departmental Representative (ld. Sr.
DR) for the revenue supported the order of lower authorities. On the validity of reopening and issuance of notice under section 148 as well as against additional ground of appeal, the ld. Sr. DR submits that at the time of reopening, the assessing officer is not required to establish the escapement of income and only prima facie believe is sufficient as has been held in the series of decision. There was definite information from Investigation Wing, Ahmedabad about beneficiary of client code modification. The assessing officer has provided all information to the assessee and has been recorded of such information in the assessment. The assessing officer in para 5.3 of assessment order has mentioned the client code number of assessee as well as other persons which was modified to allow loss to the assessee. The ld. Sr.
DR for the revenue submits that all the submissions of assessee were considered by lower authorities.
I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also deliberated on various case laws relied by ld. AR of the assessee. Original ground no. 1 & 2 and additional ground relates to validity of reopening. The ld. AR of the assessee vehemently argued before me that case of assessee was completed under section 143(3) on 12.12.2011. While passing original assessment order, the assessing officer examined all such transactions and allowed losses. In the reasons recorded, there is no whisper about failure on the part of assessee in not disclosing fully and truly all the material facts necessary for assessment as the reopening was made after four years from the end of relevant assessment year. I have perused the reasons recorded. The reasons recorded is extracted in para 2 of assessment order. On perusal of reasons recorded, I find that there is no reference about failure on the part of assessee to disclose fully and truly all the material facts as per the requirement of first proviso to section 147 of the Income Tax Act.
I find that Hon’ble Jurisdictional High Court in Ipca Laboratories Ltd. vs DCIT (supra) held that no action can be taken for reopening of the assessment after expiry of four years from the end of relevant assessment year unless assessing authority has reason to believe that assessee’s income has escaped assessment by reason of failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. Similar view was taken by Hon’ble Madras High Court in ACIT vs Durr India (P) Ltd. 152 taxmann.com
As recorded above that there is no reference in the reasons recorded about failure on the part of assessee in not disclosing fully and truly all the material necessary for assessment. Thus, the reasons recorded are not valid hence, subsequent action initiated thereon the void ab initio.
Even n merit, I find that assessee furnished complete details of transaction of shares about the transaction and furnished necessary evidence in the form of broker’s bill, ledger account and scrip-wise summary and no adverse comment was made against such evidences. No investigation of fact either from broker or from stock exchange was carried out to disregard the evidences furnished by assessee, therefore, there was no justification for making addition. Thus, the assessee also succeeded on merit. In the result, grounds of appeal of assesse is allowed.
In the result, the appeal of assessee is allowed.