SANJAY KUMAR JAIN,NEW DELHI vs. ITO WARD - 63(2), NEW DELHI

This appeal filed by the assessee is directed against the order dated 26.11.2018 of the CIT(A)-20, New Delhi relating to A. Y. 2009-10 on the following grounds:- i) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in ignoring that reopening assessment proceedings under section 147 of the Act was merely on the basis of “reason to suspect” instead of definite “reason to believe”, is bad in law and without jurisdiction thus assessment order passed, is nullity and liable to be quashed. ii) That on the facts and in the circumstances of the case, Ld. CIT(A) failed to appreciate that purported “Reason’ are non ‘Reasons’ in the eyes of law in the light of fact that amount of escapement has not been quantified in the so called ‘Reason Recorded’ by the AO, thus such reopening is bad in law and without jurisdiction and resulting assessment order so passed, is nullity and is liable to be quashed. iii) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on fact in confirming addition of Rs. 5,08,116/- being alleged profit from F&O transaction on the basis of information received from Investigation Wing without any independent and judicious application of mind on the said alleged information whereas the appellant has duly substantiated the profit declared on F&O transactions in securities for the FY under consideration. iv) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on facts in mechanically holding the validity of opening of assessment proceedings under section 147 of the Act as legal by the AO merely on the basis of external source of information without judicious application of mind to prove any nexus between the material and his belief that alleged adjustment of net loss done by the appellant through the alleged broker through Client Code Modification. v) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on facts in confirming addition of Rs. 5,08,116/- being alleged profit from F&O transaction by mechanically holding the findings of the AO made in the assessment order without appreciating the documents and explanation furnished by the appellant and rely of the broker furnished in response to notice issued under section 133(6) of the Act that no Client Code Modification has been done. vi) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on fact in confirming addition of Rs. 5,08,116/- being alleged profit from F&O transaction made by the AO by arbitrary rejecting the documents, evidences submitted by the appellant and the alleged broker in response to notice issued under section 133(6) of the Act to substantiate alleged F&O transactions in securities and no Client Code Modification has been done without pointing out any specific defect or shortcoming on the same. vii) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on fact in confirming addition of Rs. 5,08,116/- being alleged profit from F&O transaction made by the AO on the basis of his own assumption and presumption without brining any cogent evidence on record that the appellant has actually reduced his profit from F&O transactions through Client Code Modification (CCM) through the alleged broker.

2. At the time of hearing, Ld. Counsel for the assessee has only argued the legal grounds on assumption of jurisdiction and stated that on similar facts and circumstances and on exactly similar legal issues involved in the present appeal have been decided and adjudicated by the ITAT, Delhi SMC in its decision dated 31.1.2019 in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in (AY 2009-10). He has filed the copy of the same decision before the Bench as well as the copy of the impugned order of the Ld. CIT(A). He also filed a Paper Book containing the case laws 2 compilation of pages 1-95 by which decisions the case of the assessee is also covered on legal aspect. He especially drew my attention towards page no. 26 to 52 which is a copy of the decision of the ITAT, Delhi SMC dated 31.1.2019 in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10) wherein the Tribunal has held as under:- “Since in the instant case action has ben taken u/s. 147 of the I.T. Act after completion of assessment u/s. 153A/143(3) on the basis of Report of the Investigation Wing and the Assessing Officer has not conducted any enquiry on the same, therefore, respectively following the decisions of the Tribunal cited (supra), I hold that reassessment proceedings initiated in the instant case are not in accordance with law. Accordingly, the same is quashed. Since the assessee succeeds on the legal ground, the grounds of appeal challenging the addition on merit become academic in nature for which these are not being adjudicated.”

2.1 He further stated that the answer has been given by the Bench positive in the case of the Appellant i.e. Mohan Aggarwal, ACIT, CC-15, New Delhi in (AY 2009-10) and therefore, requested to follow the same ratio in the case of the present assessee and quash the assessment by allowing the appeal of the assessee.

3. On the contrary, Ld. DR relied upon the orders of the authorities below and stated that Assessing Officer issued the notice u/s. 148 after due application of mind. He stated that the AO has followed due procedure before issuing the notice u/s 148 of the I.T. Act, 1961. The Assessing Officer had tangible material in the form of information received from the Investigation Wing. In support of his contention, he has filed the following written submission and requested to dismiss the appeal of the assessee. “Sub: Written Submission in the above case- reg. In the above case, it is humbly submitted that the following decisions, apart from relying on the decision of learned CIT(A), may kindly be considered with regard to reopening of cases u/s 147 of I.T. Act : 1. Yogendra kumar Gupta Vs ITO (51 taxmann.com 383) (SC)/f20141 227 Taxman 374 (SC) (Copy enclosed) where Hon’ble Supreme Court held that where subsequent to completion of original assessment, Assessing Officer, on basis of search carried out in case of another person, came to know that loan transactions of assessee with a finance 3 company were bogus as said company was engaged in providing accommodation entries, it being a fresh information, he was justified in initiating reassessment proceeding in case of assessee.

2. Raymond Woollen Mills Ltd. v. ITO And Others [236 ITR 341 (Copy Enclosed) where Hon’ble Supreme Court held that in determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.

3. Yuvraj v. Union of India Bombay High Court [20091 315 ITR 84 (Bombay)/r20091 225 CTR 283 (Bombay) Points not decided while passing assessment order under section 143(3) not a case of change of opinion. Assessment reopened validly.

4. ACIT Vs Rajesh Jhaveri Stock Brokers (P.) Ltd (2007) 161 Taxman 316 (SC)/r20071 291 ITR 500 (SC)/[2007] 210 CTR 30 (SC) So long as the conditions of section 147 are fulfilled, the Assessing Officer is free to initiate proceedings under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings, even when intimation under section 143(1) has been issued ADANI EXPORTS v. DCIT[1999] 240 ITR 224 (Guj) distinguished.

5. Devi Electronics Pvt Ltd Vs ITO Bombay High Court 2017-TIQL-92-HC-MUM- II The likelihood of a different view when materials exist of forming a reasonable belief of escaped income, will not debar the AO from exercising his jurisdiction to assess the assessee on reopening notice.

9. Paramount Communication (P.) Ltd. Vs PCIT Supreme Court 2017-TIQL-253- SC-IT SLP of assessee dismissed. Information regarding bogus purchase by assessee received by DRI from CCE which was passed on to revenue authorities was ’tangible material outside record’ to initiate valid reassessment proceedings.

10. Amit Polyprints (P.) Ltd. Vs PCIT Gujarat High Court T2018l 94 taxmann.com 393 (Gujarat) Where reassessment proceedings were initiated on basis of information received from Investigation wing that assessee had received certain amount from shell companies working as an accommodation entry provider, reassessment could not be held unjustified.

11. Aaspas Multimedia Ltd. Vs PCIT Gujarat High Court T20171 83 taxmann.com 82 (Gujarat) Where reassessment was made on basis of information received from Principal DIT (Investigation) that assessee was beneficiary of accommodation entries by way of share application provided by a third party, same was justified.

12. Murlibhai Fatandas Sawlani Vs ITO Gujarat High Court 2016-TIQL-370-HC- AHM-IT It is not open to the assessee to object to the reopening by asking the AO to produce the source from where the AO has gathered the information for forming a belief that income chargeable to tax has escaped assessment.

14. Rakesh Gupta Vs CIT P&H High Court f20181 93 taxmann.com 271 (Punjab & Haryana) 5 Where Assessing Officer received information from Principle Director of Income Tax (Investigation) that assessee had received bogus loss from his broker by client code modification, reassessment on basis of said information was justified.

4. I have heard both the parties and carefully considered the case laws and the relevant documents available on record, especially the impugned order, Paper Book and the case laws cited by both the parties. I further note that the AO while recording the reasons for the belief that income has escaped assessment has recorded the reasons as under, a copy thereof was given by the Assessee’s counsel during the hearing.:- “SANJAY KUMAR JAIN (PAN: AAGPJ2808K) F.Y. 2008-09 (A.Y. 2009-10) 28.03.2016 Reasons u/s 147 of the Income Tax Act, 1961 in the case of SH. SANJAY KUMAR JAIN (PAN: AAGPJ2808K) 4669, Gall Mohar 6

Singh, Pahari Dhiraj, Delhi- 110006 for the A.Y. 2009-10. In this case, a report from the ADIT(Inv.), Unit 1(3), Ahmedabad has been received vide letter F.No. ADIT(Inv.)1(3)/AHD/CCM/Disseminations/e-mail/2015-16 dated 18.03.2015, stating that Modification of the client codes is a practice under which brokers change the client codes in sale and purchase orders of securities after the trades are conducted. While it is legally permitted to rectify inadvertent errors in punching the orders, there were concerns that such modifications could be misused for manipulative activities in the market. SEBI conducted an probe into 'modification of client codes' by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the National Stock Exchange during March, 2010. The Ahmedabad Investigation Directorate, as an institutional response to the orchestrated misuse for client code modification for tax evasion, carried out coordinated limited purpose surveys uls 133A of the Income Tax Act, 1961 at the premises of 12 brokers and few of their clients across India on 23.03.2015. The survey report has been prepared by the ADIT(lnv.)Unit- 1(3), Ahmedabad on the basis of data received from National Stock Exchange (NSE). After analysis of data received from NSE and after considering the contention of brokers, it is concluded by the ADIT that CCM has been used as a tool for tax evasion. The genuine contentions of brokers have been duly addressed in the Survey Report. Only settled trades have been considered to arrive at the beneficiaries. After analysis of the data, the AD IT came to the conclusion that for the 4 years under analysis, 4890 assesses have availed contrived losses of Rs. 12,06,18,25,287/- as under:

F.Y. Sum of Contrived Losses due to CCM 2008-09 5,80,12,39,534/- 2009-10 5,01,56,44,734/- 2010-11 81,56,23,279/- 2011-12 42,93,17,740/- Total 12,06,18,25,287/- Annexure'B' to the survey report comprised the list of beneficiaries of CCM. This list includes the assesses who have taken losses of Rs. 1 lac and above and assesses who have shifted out profits of Rs. 1 lac and above. The name and details of the assessee/beneficiary from the above mentioned 7 list is given as under, which has been taken from the data of CD sent by the ADIT(Inv.)U-1 (3), Ahmedabad PAN OF NAME ADDRESS NAME OF NET BENEFICIARY BENEFICIARY BENEFICIARY BROKER REDUCTION CLIENT CLIENT CLIENT IN INCOME DUE TO CCM AAGPJ2808K SANJAY 4669, GALI CPR CAPITAL RS. (-) KUMAR JAIN MOHAR SERVICES 510815.9/- SINGH LTD. PAHARI DHIRAJ, DELHI – 110 006

On verification of records, it is found that the assessee filed his Return of Income for the AY. 2009-10. In view of the above, I have reasons to believe and I am satisfied that income above Rs. 1 lac chargeable to tax has escaped assessment for A Y. 2009-10 by reasons of the failure on the part of the assessee to disclose truly & fully all material facts necessary for his assessment for AY. 2009-10, and he case is fit for reopening the assessment u/s 147 by issuance of notice u/s. 148 of the I. T.Act, 1961.”

6.1 After perusing the aforesaid reasons recorded, I find that ‘information’ was received from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad and the AO has only relied on the said information and has not made any independent inquiry before recording his reasons to belive for opening assessment under section 147 of the Act which is also corroborated from the fact that he himself mentioned that, the name and details of the assessee has been mentioned in the data of CD sent by the ADIT(Inv.) Unit 1(3), Ahmedabad and believed that income of the assessee has escaped assessment. It is further noted that the AO merely on the basis of conclusion made by the ADIT (Inv.) Unit1(3), Ahamedabad as mentioned in the reasons record, satisfied himself that income of the assessee has escaped for the assessment year under consideration and both the revenue authorites have not brought any material evidence on record which can prove that assessee taken any loss through CCM. I further note that the action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re- assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind. This view is also fortified by the decision of the Hon’ble Delhi High Court in the case of Pr. CIT v. G&G Pharma India Ltd. reported at 384 ITR 147 (Del). I further find that on exactly on similar reasons and facts and circumstances of the case, ITAT SMC Bench, Delhi in the case of Radiance Stock Traders Pvt. Ltd. in vide order dated 29.11.2018 on identical issue of CCM has quashed the reassessment. I further find that the Tribunal in its decision dated 31.1.2019 in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10) on identical issue of CCM has quashed the reassessment by following the aforesaid decision of the Tribunal dated 29.11.2018 Radiance Stock Traders Pvt. Ltd. in ITA No. 4542/D/2018 and also followed other similar other decisions. For the sake of clarity, I am reproducing the relevant findings of the Tribunal in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10) as under:- “10. We have considered the rival arguments made by both the sides and perused the material available on record. We have also considered the various decisions cited before us. We find the Assessing Officer, on the basis of the information received in the shape of the report of the Investigation Wing of Ahemdabad, reopened the assessment u/s 147 of the IT Act on the ground that assessee has misused the facility of client code modification provided to stock brokers to avail contrived loss of Rs.31,90,855/- There is no dispute to the fact that the assessee in the instant case has traded at the stock exchange through the broker M/s. Gaurav Investment and Consultancy Private Limited. There is also no dispute to the fact that the Assessing Officer during the course of assessment proceedings has called for certain information 9 from the said broker who has replied to the queries raised by the Assessing Officer in response to notice u/s 133 (6) of the IT Act and there is no allegation by the Assessing Officer in his findings that there was any connivance between the assessee and the broker.

10.1 I find that the Jaipur Bench of the Tribunal in the case of DCIT Vs. Gyandeep Khemka (supra) under identical circumstances has observed as under:-

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11.1 We note that this issue of rectification of the error by using the Client Code Modification facility has been considered and decided by this Tribunal in the series of decisions as relied by the assessee. The Coordinate Bench of this Tribunal in the case of Nobel Securities Vs ITO (supra) has also considered an identical issue in para 3.1 to 3.4 as under:

"3.1 Apropos Ground No. 2 and 2.1 of the assessee, the facts as emerges from the order of the ld. CIT(A) is as under:- 5.3.1. I have gone through the assessment order as well as submissions made by the appellant. Following facts have emerged.

2. That the firm is doing trading on its own behalf and on behalf of its clients.

3. That on the basis of an information received from Directorate of Income Tax (Intelligence & Criminal Investigation) that the appellant had booked a loss of Rs. 27,63,104/- due to modification made by the assessee in F& O segment to the third parties through the Client Code Modification facility.

4. That the AO had reopened the case u/s 148 of the Act by duly recording the reasons

5. That the detail of reopening was provided to the assessee on 17-04- 2015.

6. That the assessee firm had raised objections to the reopening proceedings. The objections were duly considered by the AO and a written order disposing the petition of the assessee was passed and served to the assessee.

7. That it was found by the authorities that the firm was found using client code modification facility in F&O segment on NSE during the year under consideration. By doing this, it is alleged that fictitious losses and profits were transferred to its clients.

8. That the appellant has claimed that it was a genuine mistake on the part of its staffs to have punched firm's code instead of its client's code. And that later on when such a mistake was noticed the same was deleted by deleting the trading from the firm's code and credited to the client's code.

9. That the appellant has further submitted that the mistake was done at the broker's level and 12 the firm should not be held responsible for mistake committed by the brokers.

10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session.

5.3.2 I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artistic Finance (P) Ltd. to modify the client code and book it in the name of the other clients of M/s. Noble Securities. Thus, the transactions which were earlier made in the name of the appellant were transferred to third parties. The appellant has claimed that the purchases were wrongly done in the name of M/s. Noble Securities inadvertently punching its client code and that subsequently it was rectified by the brokers within time allowed by the exchange. So the whole submission of the appellant is hinged upon the inadvertent mistake of the staff in punching the wrong client code i.e. client code of the appellant instead of client code of its clients. However, the appellant's claim, to my mind, is hollow as clearly made out by the AO in the assessment order that such modifications are done 2380 times involving 55 clients over a period of 197 days during the year under consideration. Mistake cannot be repeated so brazenly over such a number of times. Even if the end of the session, still the facility cannot be allowed to be manipulated for undue gains and create a situation where the income/loss can be diverted. In this regard, I have also taken into account the Apex court judgement in the case of Mcdowell & Co. Ltd. It is worthwhile to quote from the landmark judgement as under:- 13 ''Misra,J. who delivered judgement on behalf of himself and three other Judges (other than Reddy. J.) extracted the following observation from the judgement of Gujarat High Court (ITR pp 200- 01) in the case of CIT vs. Sakarlal Balabhai (affirmed by the Supreme Court in CIT vs. Vadilal Lallubhai): (SCC 253-54, para 43) ' 'Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoid payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available foruse and enjoyment to the assessee's as in a case falling within Section 44-D or mask the true character of the income by disguising it as a capital receipt as in a case falling within Section 44-E or assume diverse other forms... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income- producing asset, so that the right to receive income arising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability: no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise''.

Then, Misra. J. responded: (SCC pp. 254-55, para 45)''45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'' In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F& O segment where loss and even income can be booked in clients 14 favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such transaction can be transferred to client's account depending upon the client's requirement and thus real income from such transactions can be suitably compromised. Therefore, in view of the regularity with which such transactions have been effected, the AO is justified in rejecting the claim of the appellant and added such transaction in the hand of the appellant's income. Accordingly, the addition of Rs. 27,63,104/- is sustained. Appellant's ground of appeal on the issue is dismissed.'' 3.2 During the course of hearing, the ld. AR of the assessee prayed for deletion of addition by filing the following written submission.

''1. It is submitted that the assessee is a trading in share business not in the capacity of broker but on its own account and for it clients. The assessee, itself, is a client of M/s Artistic Finance Pvt. Ltd which carried out transactions on behalf of the assessee and the clients of the assessee. Every client is assigned a unique client code which is punched in at the time of transactions. The AO issued notice u/s 131 to M/s Artistic Finance Pvt. Ltd. who vide letter dated 05.03.2016 (PB 37-38) explained that the assessee is its major client and provides them with a huge volume of transactions. The operating staff who are not well qualified, to save time had prefixed the client code of the assessee in the system as default which led to error in punching of client codes at the time of transactions. To rectify the error in punching of client code, a facility known as 'Client Code Modification (CCM)' is provided by the stock exchange till 4:15 PM of the trade day itself. This can be done on only written request of the clients (Copies of letters enclosed at PB 39- 46).

5. The Ld. CIT(A) only on surmises and conjectures observed that these transactions are of the assessee ignoring that M/s Artistic Finance Pvt. Ltd. has admitted that these transactions are not of the assessee. The reliance placed by him in case of McDowell & Co. Ltd. is thus misplaced and not applicable.

6. Reliance in this connection is placed in the case of ACIT Vs. Kunvarji Finance Pvt. Ltd. 119 DTR 1 (Ahd.) (Trib.) where it was held that as per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intra-day i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.

In view of the above, the Ld. CIT(A) is not justified in confirming the addition made by the AO and the same be deleted.'' 3.3 During the course of hearing, the ld. DR relied on the orders of the authorities below.

3.4 I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable". It is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. It may be noted that ITAT Ahemdabad Bench in the case of ACIT vs. Kunvarji Finance (P) Ltd. 119 ld. DR 1 had observed that the client code modification is permitted intra day i.e. on the same day. The relevant portion of the decision is as under:-

''As per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.'' Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed."

Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under:

"11. We have heard rival contentions and perused the record. A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee. As noticed by the Ld CIT(A), the MCX, the stock & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism. Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable.

12. Under these set of facts, the next question that arises is - Whether the client code modification has resulted into shifting of profits, otherwise earned by the assessee. It is a fact that the assessee company has started its operations only in July, 2005 by converting individual membership into corporate membership. Further, the commodity exchange was about 3-4 years old only at the relevant point of time. Hence, the assessee cannot be considered to be an established player in the years under consideration. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the assessee could have made profits consistently, even if it is assumed for a moment that the assessee had actually carried out the transactions for its own benefit. We notice that the assessee has offered explanations as to why it carried out the transactions in its own code, i.e. since the timing of entering the transactions is crucial in the 20 online trading, the staffs of the assessee company found it convenient to punch its own code. Further, we notice that the fact that the assessee has changed the code to the concerned client's account at the end of the day has not been disproved. If at all any person comes with a request seeking profits, there will normally be time lag and hence the fact that the assessee has changed the codes at the end of the day only shows that the assessee has carried out the transactions on behalf of its clients only. Such kind of transactions shall usually be sporadic transactions, where as in the instant * case, the clients have carried out the transactions continuously. Further, it is pertinent to note that none of the clients, with whom the assessing officer has carried out the examination, has disowned the transactions. Further, all the clients have duly disclosed the profits arising from the transactions as their respective income. Though the AO has alleged that the said profits have been used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The Ld CIT(A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. Ali these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially.

13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of Rs.3.31 crores and further there was change of code from one client to another client to the tune of Rs.6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The action of the AO in assessing the above said profits in the hands of the assessee only show that there was no proper application of mind on the part of the assessing officer.

15. The Ld CIT(A) has also pointed out that modifications carried out by the assessee works out to around 3% of the total transactions only and in our view, the said volume, in fact, vindicates the explanation of the assessee. Further none of the clients has been found to be bogus and all of them have complied with KYC norms, meaning thereby the identity of all the clients stand proved. None of them has disowned the transactions and all of them have also declared the income in their respective returns of income. All these factors, in our view, support the contentions of the assessee.

16. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in deleting the additions made in both the years under consideration. In our view also, the assessing officer has drawn adverse conclusions against the assessee without properly bringing any materials to support the view, i.e., the additions have been made on suspicion and surmises only. Accordingly, we uphold the order of Ld CIT(A) in both the years under consideration."

Thus, in the said case, the modification carried out by the assessee were 3% of the total transaction, which was found by the Tribunal as within the permissible limit of error margin. The 22 Ahmadabad Benches of the Tribunal in the case of ACIT Vs. M/s Kunvarjit Finance Pvt. Ltd. (supra) and others in bunch of appeals has analysed the issue in para 8 to 11 as under:

"8. We have carefully considered the arguments of both the sides and perused the material placed before us. The Assessing Officer believed the client code modification to be malafide because in his opinion the client code modification was for unusually high number of cases. Therefore, first thing to be decided is whether there was the client & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T&S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:-

"Circular no. MCX/T&S/032/2007 January 22, 2007 Client Code Modifications In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under:

Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-II (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under. a. The facility of client code modifications intra- day are allowed. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays and on Saturdays the same shall be allowed between 2:00 p.m. to 2:15 p.m. c. However, on the days when trading in commodities takes place till 11:55 p.m. the client 23 code modification will be allowed only upto 12:00 p.m. d. At all times, Proprietary trades shall not be allowed to be modified as client trades and client trades shall not be allowed to be modified as proprietary trades. e. In order to ensure that client codes are entered with alertness and care, a penalty on the client code changes made on a daily basis shall be imposed as under:

S. Percentage of Client Code changed Penalty (Rs.) No to total orders (matched) on a daily basis 1 Less than or equal to 1% Nil Nil 2 Greater than 1% but less than or 500 equal to 5% 3 Greater than 5% but less than or 1000 equal to 10% 4 Greater than 10% 10000 f. It is clarified that the facility of client code modification is allowed as an interim measure only upto March 31, 2007 and after this date the said facility will be completely stopped.

With reference to point C. as referred above, Members may please note that the client code modifications will be allowed only upto 11:55 p.m. international referenceable commodities (i.e. commodities traded upto 11:55 p.m.)

Members are requested to take note of the FMC directives and ensure strict compliance."

From the above, it is evident that client code modification is permitted intra-day, i.e. on the same day. As per Commodity Exchange, if client code modification is upto 1% of the total orders, there is no penalty and if it is greater than 1% but less than 5%, the penalty is Rs.500/-. If it is greater than 5% but less than 10%, penalty is Rs.1000/- and if it is greater than 10%, then penalty is Rs.10,000/-. From the above, the only 24 inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs.500/-. In the context of the circular issued by Commodity Exchange, let us examine whether the client code modification done by the broker i.e. KCBPL is unusually high. At page No.16 on paragraph No.4.3, the CIT(A) has given the number of transactions entered into by the assessee for the period 2004-05 to 2007-08 and the number of client code modification and percentage thereof. We have also reproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. That the Assessing Officer has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer.

11. The ld. CIT(A) in paragraph 4.13 of his order has also recorded the findings that "all transactions at the Commodities Exchanges have been duly accounted in the books of account maintained by the concerned parties. Such profits/loss has been duly accounted whenever the transactions have been closed. Thus, whatever profits have been generated or accounting of actual trade, have been offered and brought to the charge of tax in the cases of concerned assessees." These findings of fact recorded by the ld. CIT(A) has not been controverted by the Revenue at the time of hearing before us. When the transaction has been duly accounted for and the profit/loss has accrued to the concerned parties in whose names transactions have been closed, there cannot be any basis or justification for considering those profit/loss in the case of the assessee on the basis of mere presumption or suspicion. It is not the case of the Revenue that such alleged profit has actually been received by the assessee. In view of the totality of the above facts, we do not find any justification to interfere with the order of 26 the CIT(A) in this regard and the same is sustained; and Ground Nos. 1 and 3 of the Revenue's appeal are rejected.

Thus in the said case, it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue's appeal are dismissed.”

11. I find the Delhi Bench of the Tribunal in the case of Raidance Stock Traders Pvt. Ltd. (supra) has observed as under :- After perusing the aforesaid reasons 6.1 recorded, I find that 'information' was received on 21.3.2016 from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad without conducting any enquiry on the same by Assessing officer and without considering the fact of the case of assessee in light of the issue is not a tangible and relevant material to form opinion that income has escaped assessment. It is noted that the proceedings u/s. 147 of the Act can be initiated only on the basis of the tangible material and not on the basis of assumptions and presumptions. The precondition u/s. 147 of the Act is "reason to believe" and, the expression is stronger than the word "satisfied". The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable. In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for assuming jurisdiction, as has been held in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC) and ACIT vs. Rajesh Jhaveri Stock 27 Brokers (P) Ltd. reported in 291 ITR 500 (SC). Hence, in this case the proceedings have been initiated on the basis of no material much less any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiating proceedings u/s 147 of the Act. It is a case of reason to suspect' and not 'reason to believe’. I further note that the action of the AO has 6.2 been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind. This view is fortified by the decision of the Hon'ble Delhi High Court in the case of Pr. CIT v. G&G Pharma India Ltd. reported at 384 ITR 147 (Del), wherein it has been held as under:- "Today when the case was called out, Mr. Sawhney produced before the Court the very same letter of the AO dated 15th September 2010 which has been reproduced in its entirely in the impugned order of the ITAT. He submitted that the AO was himself present in the Court and further efforts would be made to locate the materials on the basis of which the AO formed his opinion regarding reopening of the assessment. The Court was not prepared to grant further time for this purpose since it was not clear that the materials were, in fact, available with the Department.

12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated: "I have also perused various 28 materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money in its bank account by way of above accommodation entries." The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: "it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries". In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the presentcase."

I further note that in the reasons recorded assessee has relied upon the information by the Investigation Wing, Ahmedabad, the AO has stated that having perused and considered the information received from Investigation Wing he has reason to believe that income of the assessee has escaped which has not been conformed to the assesssee company, in the course of assessment proceedings, though in view of the judgment of Hon'ble Delhi High Court in the case of Sabh Infrastructure Ltd. Vs. ACIT reported in 398 ITR 198 the same was to be confronted alongwith reasons wherein it has been held as under:

"(iii) where the reasons make a reference to another document, whether as a letter or report, 29 such document and / or relevant portions of such report should be enclosed alongwith the reasons." Hence in the absence of such material, the 6.3.1 allegation and assumptions are nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis. It is further noted that the approval 6.3 granted by the competent authority is a mechanical approval and action has been taken mechanically because on perusing the reasons recorded, it demonstrates that Pr. CIT has written "Yes, I am satisfied." which establishes that the competent authority has not recorded proper satisfaction / approval, before issue of notice u/s. 148 of the I.T. Act. Thereafter, the AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the (Inv.)), Unit 1(3), Ahmedabad. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, I am of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. My aforesaid view is fortified by the following decisions:- Hon'ble Delhi High Court in the case of Pr. CIT vs. (A) M/s NC Cables Ltd. in has held as under:- 11. Section 151 of the Act clearly stipulates that the CIT(a), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT(A) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer, For these reasons, the Court is satisfied that the findings by the ITAT cannot be disturbed."

(B). Hon'ble High Court of Madhya Pradesh in the case of CIT vs. S. Goyanka Lime & Chemicals Ltd. reported in (2015) 56 taxmann.com 390 (MP) has held as under:- "7. We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has only recorded so "Yes, I am Satisfied". In the case of Arjun Singh vs. Asstt. DIT (2000) 246 ITR 363 (MP), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:-

Hon'ble Delhi High Court in the case of Pr. CIT (A) vs. M/s NC Cables Ltd. in IT A No. 335/2015 has held as under 11. Section 151 of the Act clearly stipulates that the CIT(a), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT(A) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer, For these reasons, the Court is satisfied that the findings by the ITAT cannot be disturbed." (B) . Hon'ble High Court of Madhya Pradesh in the case of CIT vs. S. Goyanka Lime & Chemicals Ltd. reported in (2015) 56 taxmann.com 390 (MP) has held as under:- "7. We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has only recorded so "Yes, I am Satisfied". In the case of ARjun Singh vs. Asstt. DIT (2000) 246 ITR 363 (MP), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:- "The Commissioner acted, of course, mechanically in order to discharge his statutory obligation property in the matter of recording sanction as he 31 merely wrote on the format "Yes, I am satisfied" which indicates as if he was to sign only on the dotted line. Even otherwise also, the exercise is shown to have been performed in less than 24 hours of time which also goes to indicate that the Commisisoner did not apply his mind at all while granting sanction. The satisfaction has to be with objectivity on objective material 8. If the case in hand is analysed on the basis of the aforesaid principle, the mechanical way of recording satisfaction by the Joint Commissioner, which accords sanction for issuing notice under section 148, is clearly unsustainable and we find that on such consideration both the appellate authorities have interfered into the matter. In doing so, no error has been committed warranting reconsideration." (C.) Hon'ble Supreme Court of India in the case of CIT vs. S. Goyanka Lime & Chemical Ltd. reported in (2015) 64 taxmann.com 313 (SC) in the Head Notes has held that "Section 151, read with section 148 of Income Tax Act, 1961 - Income escaping assessment - Sanction for issue of notice (Recording of satisfaction) - High Court by impugned order held that where Joint Commissioner recorded satisfaction in mechanical manner and without application of mind to accord sanction for issuing notice under section 148, reopening of assessment was invalid - Whether Special Leave Petition filed against impugned order was to be dismissed - Held, Yes (in favour of the Assessee)." I further note that it is well settled law 6.4 that reasons alone can be looked into and, cannot be supported by any supplementary or additional material. I further note that Assessing Officer at 6.5 page no. 2 of his assessment order dated 8.12.2017 u/s. 147/143(3) of the Act stated as under:-

"Obiection to reopening Assessee filed objection vide letter dated 24.11.2017 to the notice u/s. 148/reason recorded.

Removal of objection The objection filed by the assessee were rejected vide order dated 27.11.2017." 6.6.1 After perusing the aforesaid extracts from the assessment order, it is evident that the assessee has raised objection to initiation of assessment proceedings u/s. 147 of the Act vide letter dated 24.11.2017 and the aforesaid objections were disposed of by the AO vide order dated 27.11.2017, which shows that the AO did not accept the objections so filed, he shall not proceed further in the matter with in a very short period of service of order disposing off objection, however, he has made the order of assessment u/s. 147/143(3) of the Act on 8.12.2017, which is not in accordance with law and not permissible. This view is fortified by the following decisions :- i) DATED 6.4.2018 Meta Plast Engineering (P) Ltd. v. ITO "9. Further, in view of the decision of the Hon'ble Bombay High Court in the case of Bharat Jayant Patel (supra), learned AO held should have allowed four weeks' time to the assessee to seek their legal remedies after rejection of the objections of the assessee. In view of the fact that the AO has disposed of the objections of the assessee on and passed the assessment order on it is clear that no such time was granted to the assessee. Further, the reasons recorded at the time of assumption of jurisdiction by the AO that the assessee has received an accommodation entry of Rs.15 lacs whereas at the time of framing of assessment, the assessee was assessed the share application money to the tune of Rs.2.15 crores. We find reason in the submission of learned AR that in view of the decision in PCIT vs. RMG Polyvinyl (I) Ltd.386 ITR 5 (Bom), such an error indicates non application of mind by the learned AO." ii) 296 ITR 90 (Bom) Asian Paints Ltd. vs. DCIT 3. The learned senior counsel for the petitioner pointed out that in some of the cases as soon as the objections were rejected by the concerned Income- tax Officer, even the assessment order 33 has been passed within a very short time whereby the assessee is left without any remedy to challenge such an order of rejection.

4. Hence we make it clear that if the Assessing Officer does not accept the objections so filed, he shall not proceed further in the matter within a period of four weeks from the date of receipt of service of the said order on objections, on the assessee.

6. We also direct that the Income Tax Officer concerned shall follow the above procedure strictly in all such cases of reopening of assessment." As regards case law cited by the Id. DR is 6.7 concerned, the same is an exparte order and on distinguished facts and circumstances of the case. 6.8 In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the Assessing Officer and upheldby the Ld. CIT(A) are nonest in law and without jurisdiction, hence,the re- assessment is quashed. Since I have already quashed the re-assessment, the other grounds have become academic and are therefore not adjudicated and accordingly, the assessee’s appeal is allowed.”

6.2 Keeping in view of the facts and circumstances of the present case and case laws relied upon by both the parties. The judicial decisions relied upon by the Ld. DR have been duly considered. In my considered view, I do not find any parity in the 34 facts of the decisions relied upon by him with the peculiar facts of the case in hand. However, the case law cited by the Ld. Counsel for the assessee are exactly on similar facts and circumstances of the present case, hence, respectfully following the precedent in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in (AY 2009-10), I am of the considered view that proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law, without jurisdiction and without applying his mind. Hence, the reassessment is quashed and accordingly, I allow the legal grounds raised by the assessee. No other ground has been adjudicated as the same has not been argued by the Ld. Counsel for the assessee.