AZIZUR RAHMAN FAIZUR RAHMAN,MUMBAI vs. ITO-17(1)(3),, MUMBAI

The Ld. Counsel for assessee (AR), drawing our attention to the reasons recorded by Ld. AO to reopen the case of the assessee, submitted that there was no independent formation of belief that the income had escaped assessment. For the same, Ld. AR relied on the decision of Hon’ble High Court of Bombay in the case of Pr. CIT V/s M/s Shodiman Investments Pvt. Ltd. (ITA No.1297 of 2015 dated 16/04/2018) rendered under similar factual matrix. The Ld. Sr. DR, on the other hand, supported the assessment framed by Ld. AO. Having heard rival submissions, our adjudication would be as under.

The material facts are that the assessee was originally assessed u/s 143(3) on 29/12/2011. However, the case was reopened and notice was issued u/s 148 on 23/03/2016. Though the assessee opposed reopening, however, the same was rejected and addition of Rs.4.70 Lacs was made in the hands of the assessee on the allegation that the loss from F&O transactions was fictitious loss obtained through Client Code Modification.

During appellate proceedings, the assessee assailed the reassessment proceedings, inter-alia, on the ground that the case was reopened merely upon receipt of information from investigation wing about entering into suspicious transactions. However, there was no independent application of mind by Ld. AO as to formation of belief that the income had escaped assessment. The reopening was done merely on borrowed satisfaction. However, the legal grounds were rejected on the ground that there was clear cut information that the assessee’s broker had shifted losses through client code modification. The Ld. AO used the information received from investigation wing to arrive at conscious decision that the assessee had obtained fictitious losses. The additions, on merits, were also confirmed after considering the factual matrix. Aggrieved, the assessee is in further appeal before us.

For the purpose of adjudication, it would be imperative to extract the reasons leading to reopening of the case of the assessee as follows:- The return of income was filed on 18-02-2009 declaring the returned income at Rs.29,79,840/-. Information was received from the office of the ADIT(lnv.) Unit -1(3), Ahmedabad vide letter No. ADIT(lnv.)1(3)/ADH/CCM/Dissemination/e-mail/15-16 dated 11-03-2016 regarding tax evasion through client code modification during the F.Y. 2008-09. As per the survey report prepared by the ADIT(lnv.) Unit 1(3), Ahmedabad on the basis of the data received from NSE, it has stated that CCM has been used as a tool for tax evasion. The survey report comprises the list of beneficiaries of CCM, wherein the assessee have taken losses of Rs.1,00,000/- and above and have shifted out profits of Rs.1,00,000/- and above. It was intimated that the above assessee is one of the beneficiaries of tax evasion through client code modification and has done transaction of Rs.1,00,000/- and above. In view of the above, I have reason to believe that income to the extent of Rs.1,00,000/- and above has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. Upon perusal of the recorded reasons, it could be gathered that the reasons have been recorded in a mechanical manner without ascertaining as to how the assessee has obtained fictitious losses through client code modification. The reasons are mere repetition of the information received from investigation wing without establishing the linkage of the assessee with the broker who manipulated the transactions. The details / nature of transactions which would, prima- facie, lead to reasonable belief of escapement of income has not been specified in the recorded reasons. The Hon’ble High Court of Bombay in the case of Pr. CIT V/s M/s Shodiman Investments Pvt. Ltd. (ITA No.1297 of 2015 dated 16/04/2018) held as under:- 12. The re-opening of an Assessment is an exercise of extraordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before re-opening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of re-opening Assessment and its reasons which would evidence the linkage/ nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as observed by the Supreme Court in S. Narayanappa v/s. CIT 63 ITR 219, that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in ITO v/s. Lakhmani Merwal Das 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re-opening of Assessment and assuming jurisdiction on the part of the Assessing Officer. 13 In this case, the reasons as made available to the Respondent-Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the Assessing Officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment. 14 Further, the reasons clearly shows that the Assessing Officer has not applied his mind to the information received by him from the DDIT (Inv.). The Assessing Officer has merely issued a re-opening notice on the basis of intimation regarding re- opening notice from the DDIT (Inv.) This is clearly in breach of the settled position in law that reopening notice has to be issued by the Assessing Office on his own satisfaction and not on borrowed satisfaction.