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Income Tax Appellate Tribunal, [DELHI BENCH “B”: NEW DELHI ]
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
I.T. Appeal No. 4824/Del/2018 is filed by the assessee for assessment year 2009-10 against the order passed by the ld. Commissioner of Income Tax (Appeals)–3, New Delhi, dated 23.04.2018 raising following grounds of appeal:- “1. On the fact and circumstances of the case and in law, the Assessment as well as the assessment order passed by the Ld. AO, which is upheld by the learned C1T (A) is wrong, bad in law.
2. On the fact and circumstances of the case and in law, the Id. CIT (A) has erred in upholding the validity of notice issued u/s 148 of the act. 2.1 On the facts and circumstances of the case and in law, the LD CIT (A) erred in upholding the Page | 1 reopening of completed assessment under section 148 of the act which is based on surmise, conjectures and not based on any tangible material. Therefore, confirming the reopening of the Assessment which is being made in contravention of jurisdictional conditions stipulated u/s. 147 to section 151 of the Act. 2.2 On the facts and circumstances of the case and in law, the LD CIT (A) erred in upholding the reopening of assessment under section 148 of the act without appreciating the fact that the assessment was already being completed under section 143(3) of the Act and at the relevant point of time the Appellant had disclosed fully and truly all the material facts necessary for making the assessment. As the Appellant had disclosed all material fact at the time of assessment under section 143(3) therefore the case of the Appellant could not be reopened under section 147 of the act after elapsed of 4 years from the end 'of the concerned assessment year. 2.3 On the facts and circumstances of the case and in law, the LD CIT (A) erred in upholding the reopening of completed assessment under section 148 of the act without appreciating the fact that there was a complete absence of application of independent mind of learned AO while recording the reason to believe which procrastinate him to reopen the assessment under section 147. 2.4 On the facts and circumstances of the case and in law, the LD CIT (A) erred in upholding the reopening made by Learned AO of completed assessment only based on the information which may be a reason to suspect but not a reason to believe.
3. The Ld. CIT(A) has erred on facts and in law in confirming the addition of Rs 2,73,631/- made by AO by holding that appellant was indulged in transferring fictitious profits/loss to the other clients/ beneficiaries by misusing the client code modification facility to the cash/F&O segment and thereby created a loss of Rs. 2,73,63 l/-and suppressed the income to that extent.
4. On the facts and circumstances of the case and in law, the LD CIT (A) erred in upholding the action of LD. Page | 2 AO who has treating the amount of Rs. 2,73,63!/- as income of the Appellant company on account of shifting of profit and loss in/out of the profit, without appreciating the fact that all transaction are executed by the broker on behalf of the Appellant as per the rules and regulation of the recognized stock exchange (NSE/BSE) which is a independent body in itself.
5. On the facts and circumstances of the case and in law, the Ld C1T(A) erred in confirming the action of Ld. AO who had levied the interest under sections 234A/B/C of Income Tax Act.
6. That the Appellant craves leave to alter, amend and substitute any' of the above mentioned grounds and add any further ground before or at the time of hearing of the appeal as per record. “ 02. Brief facts of the case shows that assessee is a company incorporated on 13th April, 1985, is engaged in the business of trading of shares and securities as a trader. It filed its return on 30th September, 2009 declaring a loss of Rs.13,86,65,711/-. The case of the assessee was selected for scrutiny under Section 143(2) of the Income Tax Act, 1961 (the Act) and ultimately assessed on 21.12.2011 where the only disallowance made under Section 14A of the Act of Rs.2,49,90,504/- and assessed loss was determined at Rs.11,36,75,208/-.
Subsequently, the Assessing Officer received the information from ADIT, Investigation Wing, Ahmadabad, vide letter dated 18th March, 2016 that assessee was a beneficiary of a loss of Rs.2,73,631/- arising on account of client code modification and there is escapement of income. Consequently, the notice under Section 147 of the Act was issued and the reasons were given to the assessee on 25.04.2016. Assessee filed objection on 19.05.2016 which were disposed of on 5.12.2016. After that, the Assessing Officer proceeded to make an assessment.
During the assessment proceedings the Assessing Officer questioned the assessee stating that SEBI vide Circular dated 06th February, 2003 stated that stock exchanges are not Page | 3 normally permitting changes in the client code accepted for correction of genuine mistakes. It was further noted that there are non-genuine client code modification carried out to book non-genuine losses where the brokers used this facility allowed between 3.30 PM to 4.00 PM to transfer gains or losses from one party to another party under the guise of rectifying errors. The Assessing Officer noted that in this case information is received from Investigation Wing from 1.04.2008 to 31.03.2009 That there is a client code modification by broker M/s. Arch Finance Ltd. wherein the client code modification has resulted into a loss of Rs. 2,73,631/-. Assessing Officer noted that assessee has shifted profit out of Rs.88,647/- and also shifted loss of Rs.1,84,984/- and, therefore, there is net reduction in income of Rs.2,73,631/-.
The assessee was questioned where assessee showed ignorance of such client code modification. Assessee submitted a reply dated 8.12.2016 stating that assessee has incurred loss of Rs.1,84,984/- and has also earned the profit of Rs.88,648/-. Therefore, the findings are incorrect that the assessee has incurred a loss of Rs.2,73,682/-. It was further stated that SEBI permits to correct genuine error in changing of codes and same are made at the hands of the broker. The ld. Assessing Officer rejected the contention of the assessee and made an addition of Rs.2,73,631/-. Accordingly, assessed loss under Section 143(3) of the Act as per order dated 21.12.2011 of Rs.11,36,75,208/- was determined at a loss of Rs.11,34,01,580/- by passing an order dated 29.12.2016.
The assessee preferred an appeal before the ld. CIT (Appeals) wherein it challenged the initiation of jurisdiction under Section 147 of the Act after passing of four years from the end of the assessment year as well as the issue on the merits of the case. The ld. CIT (Appeals) confirmed the re-opening of the assessment and further confirmed the addition on the merits. Page | 4 Accordingly, the appeal was dismissed. The assessee is aggrieved and, therefore, is in appeal before us.
The ld. AR i. challenged the re-opening of the assessment and stated that the reasons are incorrect as no failure on the part of the assessee was mentioned for the reasons. It was stated that re-assessment is beyond four years. He relied on the decision of the Hon’ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. Vs. DCIT dated 23.11.2016. He also relied upon several other decisions of the co-ordinate benches. He further relied upon the decision of the Hon’ble Madras High Court in Fenner (India) Ltd. Vs. DCIT (2000) 241 ITR 672. ii. It was further stated that the impugned assessment year is assessment year 2009-10 whereas the ld. Assessing Officer referred to the SEBI probe during March, 2010. He further submitted that the transactions entered into are not the year-end transaction, but were effected in June, 2008. iii. It was further stated that neither the brokers were examined nor it has been stated that assessee is involved in any bogus trading. iv. He further submitted that assessee has given complete details before the ld. Assessing Officer on 19.05.2016 which has not at all been proved otherwise. v. He further submitted that assessee has, as such, incurred loss of Rs.11 crores and, therefore, the mere CCM entrties of Rs.2,73,000/- could not have made any difference to the returned income of the assessee. In view of this, he submitted that the addition on the merits deserves to be quashed. He referred to the Paper book containing 110 pages and also reasons produced at page Nos. 46 to 54 of the Paper book to support his above contention.
The ld. DR merely relied upon the orders of the lower authorities. It was stated that the re-opening is correctly upheld by the ld. CIT (Appeals) and further the addition has been made on the basis of the report of the Investigation Wing, hence there is no infirmity in the orders of the lower authorities.
We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case, we find that a. assessee has filed its return of income on 30th September, 2009 wherein a loss of Rs.7.65 crores was shown under the head ‘business or profession’ and a loss of Rs.6,21,00,000/- was shown under the head ‘capital gain’. Thus, total loss was shown of Rs.13,87,00,000/-. The case of the assessee was picked up for scrutiny under Section 143(2) of the Act wherein the books of accounts and the relevant details were produced before the Assessing Officer. On 21st December, 2011 the assessment order under Section 143(3) of the Act was passed wherein the only disallowance under Section 14A of the Act was made of Rs.2.49 crores and the total income was assessed at Rs.11,37,00,000/- at loss. b. Subsequently the investigation report of ADIT, Ahmedabad, dated 18th March, 2016 was received by the Assessing Officer through e-mail stating that assessee has indulged in modification of client code. Report states that though it is legally permitted, however, modification could be misused for manipulative activities. Further the report also describes the modus operandi and the details of such transactions stating that assessee has shifted a loss of Rs.2,73,631/-. The Assessing Officer noted that the assessment has resulted into under-statement due to the failure of the assessee to disclose fully and truly material facts for its assessment and, therefore, the notice was issued to the Page | 6
assessee. Necessary sanction under Section 151 of the Act was also obtained. Assessing Officer also noted that assessee is already assessed under Section 143(3) of the Act. c. The reasons recorded by the learned assessing officer are placed at page number 46 – 54 of the paper book. There was a reference of any male received by the learned AO from the any IT investigation in the bath on 18th of March 2016 intimating that the assessee has indulged in modification of the client code practice. The email also says that such a modification could be misused for manipulative activities in the market. It further says that rectification of the genuine error is allowed but there are many in genuine activities being carried out by misusing client code modification facilities. Based on this the learned assessing officer examined the income tax return filed by the assessee of ₹ 273,631 through one broker. Such transactions were listed as annexure to the reasons for reopening of the assessment. The reopening is made beyond four years from the end of the assessment year; the assessee has failed to disclose such material on its own earlier. Based on this, reopening was made. In the reasons for reopening of the assessment, it is clearly stated that not all client code modifications are in genuine. Otherwise, the same we would not have given a window of half- an-hour to the brokers to modify the client codes to correct the genuine errors. The learned assessing officer without any allegation has presumed that assessee has entered into nongenuine client code modification activities. Neither the brokerage examined nor the assessee is examined. In fact the nongenuine client code modification activities could be established on the basis of analysis of Levenshtein Distance of Digit Edit analysis where there are edits ranging from three to five in the client code, then it is obvious that the code is not modified but actually replaced. There is no such allegation on finding of the learned assessing officer. d. There is no allegation in the reasons recorded by the learned assessing officer that there is any failure on part of the assessee to disclose fully and truly material facts of computation of the total income. It could not have been the duty of the assessee to disclose that there are client code modification made by the broker, when in fact profit or loss has been shown by the assessee before the assessing officer and same was scrutinized u/s 143 (3) of the act. It would be the duty of the learned assessing officer to decipher any inference, which he would like to draw. e. In the reasons of reopening, the learned assessing officer has considered the addition by combining the profit earned by the assessee of ₹ 88,648 on account of client code modification and further a loss of ₹ 184,981/– on account of client code modification. Therefore, in fact assessee has earned profit as well as loss because of client code modification whereas the learned assessing officer has considered both these figures as income of the assessee. f. The learned assessing officer has further made the addition stating that assessee has failed to provide any substantial evidence that can corroborated that the client code modification was bona fide. It was the case of the learned assessing officer that assessee has escaped income from taxation, therefore it was the duty of the learned assessing officer to show that the client code modification made by the broker of the assessee which has resulted into the Under assessment of income of the assessee because of evidences in the possession of the learned assessing officer. We find that there is no reference of any such evidences but merely a fact that there is a client code modification wherein which has resulted into income as well as loss to the assessee g. Furthermore it is to be noted that assessee has incurred a loss of ₹ 11.36 crores, the contrived loss even if it is presumed to be a bogus loss, it is merely ₹ 273,631 which would not have made any difference or saving in any tax to the assessee as assessee has assessed loss of Page | 8 more than ₹ 11.34 crores. This is not a clinching fact but it is a supportive fact to show that there is no intention of the assessee of saving of any tax even if the loss is held to be bogus. Merely on such facts the reopening or addition could not have been held invalid, but looking at the composite facts coupled with the other facts, it clinches the issue. h. There is no examination of broker of the assessee to determine whether the client code modification is genuine as falling into the allowable definition given by SEBI or nongenuine. In absence of either extracting these facts by examining the broker or by the assessee, we do not find any reason that addition can be sustained on the merits of the case also.
Therefore, in view of all the above reasons looked at comprehensively and not individually, we find that the action of the learned assessing officer cannot be upheld for reopening of the assessment as well as the addition cannot be sustained on the merits of the case. Thus, we reverse the orders of the lower authorities and allow the appeal of the assessee.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on : 05/10/2021.