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Facts
The assessee, an individual trader, had their case reopened under sections 147/148 of the Income Tax Act for Assessment Year 2010-11. The reopening was based on information alleging misuse of the Client Code Modification (CCM) facility to shift profits/losses, resulting in an estimated escaped income of Rs. 18,08,568/-. The Assessing Officer subsequently made an addition of this amount, which was upheld by the CIT(A).
Held
The Tribunal found that the reasons recorded by the Assessing Officer for reopening the assessment were factually incorrect and demonstrated a non-application of mind. Specifically, the AO wrongly categorized the assessee as a 'broker' instead of a 'trader' and incorrectly stated that the assessee incurred a loss of Rs. 18,08,568/-, whereas the assessee had earned a profit of the same amount. Consequently, the jurisdictional requirement of having 'reason to believe' for escapement of income was not met, leading to the quashing of the reassessment proceedings.
Key Issues
Whether the reassessment proceedings initiated under section 147/148 of the Income Tax Act, 1961, were valid, given that the reasons recorded by the Assessing Officer contained factual inaccuracies and reflected a non-application of mind regarding the assessee's status and the nature of income (loss vs. profit).
Sections Cited
250, 143(3), 147, 148, 143(1), 44AB, 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT “SMC” BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI
(िनधा�रणवष�/Assessment Year: (2010-11) Ajaykumar Natwarlal Sheth DCIT, Circle – 1(2), Prop. Karan Tradelinks, 437-438, Star Vs. Rajkot – 360001 Chambers, Harithar Chowk, Rajkot (Guj) -360001 �ायीलेखासं./जीआइआरसं./PAN/GIR No.: AGGPS5893R (अपीलाथ�/Assessee) (��थ�/Respondent) Assessee by : Shri Fenil H. Maheta, Ld. AR Respondent by : Shri Abhimanyu Singh Yadav, Ld. Sr. DR Date of Hearing : 04/12/2025 Date of Pronouncement : 31/12/2025 ORDER
Per, Dr. Arjun Lal Saini, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year 2010-11, is directed against the order passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by National Faceless Appeal Centre (NFAC), Delhi/Commissioner of Income-tax (Appeals), dated 18.12.2024, which in turn arises out of an order passed by the Assessing Officer u/s. 143(3) r.w.s. 147 of the Act, vide order 29.12.2017.
2. Grounds of appeal raised by the assessee, are as follows:
“1. The learned A.O. has grievously erred in law and on facts in assuming jurisdiction u/s 147 of the Act.
2. That the learned CIT(A) has grievously erred in law and on facts in upholding the action of the learned A.O in assuming jurisdiction u/s 147 of the Act.
3. That the learned CIT(A) has grievously erred in law and on facts in upholding the action of the learned A.O. in making the addition of Rs. 12,70,282/- on account of total profits shifted out by changes made in 46 Client Code Modification Entries.
4. That the learned CIT(A) has grievously erred in law and on facts in upholding the action of the learned A.O. in making the addition of Rs.5,38,286/- on account of total loss shifted out by changes made in 38 Client Code Modification Entries.
5. Without prejudice to the above, that the learned CIT(A), NFAC, Delhi has grievously erred in law and on facts in passing the appellate order violating the principles of natural justice.
6. That the appellant craves leave to add, amend, alter, vary and / or withdraw any or all the above grounds of Appeal.”
Succinctly, the factual panorama of the case is that assessee before us is an Individual and e-filed return of income, on 13.09.2010, declaring total income of Rs. 43,65,610/-.The return was processed u/s 143(1) of the Act. Later on, case of the assessee was reopened by the assessing officer under section 147/148 of the Act and notice u/s. 148 of the Act dated. 27.03.2017, was issued upon the assessee. During the year the assessee derived income from trading in derivative & share transactions. Copies of audited accounts and Audit Report in Form No.3CB & 3CD and other documents and evidences required by the assessing officer, were filed by the assessee, during the course of assessment proceedings.
The assessee`s case was reopened after recording following reasons:
"a. The assessee Shri Ajaykumar Natwarlal Sheth, (PAN:AGGPS5893R) is a broker who facilitates share trading activities for its client. Besides, it is also engages in trading of shares and providing other financial services. The Directorate of Income tax Page 2 of 15 (Intelligence and Criminal Investigation) carried out a thorough investigation in respect of certain brokers who were indulging in the practice of transferring factitious profit or loss by misusing the client code modification facility in F & O segment on NSE during March 2010, to different client /beneficiaries, according to their requirements to enhance or reduce the tax liability. The Directorate obtained client code modification (CCM) data for AY 2009-10 from NSE and mapping was done of such data to ascertain the exact amount of fictitious profits/losses in each case. The analysis revealed that, the brokers (including the assessee) had misused the client code modification facility and created non- genuine losses and profits for its clients. The losses were utilized to reduce tax liability and the profits were utilized to cover up undisclosed income or to set off these profits against huge losses. On spot verification carried out by the DIT(I&CI), the brokers admitted to have misused the CCM facility to create factitious losses/profits and admitted to have received commission ranging from 0.5% to 2% on the amount of losses/profits for transferring such losses/profits to their clients. b. The DIT(I&CI) sought expert opinion from NSE to broadly distinguish a genuine CCM and non-genuine CCM. As per NSE, the following constituted genuine CCM.
Error due to communication and/or punching or typing such that the original client code/name and the modified client code/name are similar to each other.
Modification within relatives.
3. Any similar genuine error. C. Some of the most popular, non genuine client code modification constituted as under:- 4. Percentage of modified traded value is significantly higher than the total traded value of any trading members/client.
5. Number of modified trades is significant to total number of traders of any trading members/client.
6. Profit/loss arising on account of all modifications by trading member/client is significant in comparison to the profit/loss in the trades where no modifications have been carried out.
7. Profits/loss arising due to modification is significant.
8. Trades have been modified to unrelated parties.
Both buy and sell leg of different trades have been modified to same client.
10. The same sets of clients are observed to be making profit/loss due to the modifications carried out.
11. Total number of trade modification increased before closing of the financial year. d. All the above non-genuine CCMs were observed while analyzing the data of the brokers including the assessee by the I&Cl wing of the income tax department. The assessee has claimed losses to the fine of Rs. 18,08,568/- by resorting to such non- genuine CCM practices. These facts were not disclosed by it in its return of income. This claim of fictitious loss had resulted into under assessment to the tune of Rs. 18,08,568/-. e. In view of the above, I have reason to believe that the income of the assessee has escaped tax to the extent of Rs. 18,08,568/- as stated above and this escapement is within the meaning of section 147 of the Income tax Act, 1961. f. As the present case fall in the time limit of 4 years to 6 years from the end of the relevant assessment year, the approval of the Pr.CIT is sought".
The assessing officer, therefore, observed that Client Code Modification means modification / change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. Every client is given a code which is registered with the stock exchanges. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. In other words, modification of the client codes is a practice under which brokers change the client code in sale and purchase orders of securities after the trades are conducted. In response to notice u/s. 148 of the Act, the Authorised Representative of the assessee attended from time to time and filed the details and explanations called for during the course of assessment proceedings.
On the basis of data made available from the National Stock Exchange, the assessing officer noticed that in the following way assessee has made tax evasion of profit/loss by taking the advantage of client code modification system in the software;
(i) Total Profit Shifted out by changes made in 46 CCM entry: Rs.12,70,282/- (ii) Total loss Shifted out by changes made in 38 CCM entry: Rs. 5,38,286/ Total Rs. 18,08,568/- Thus, assessing officer noticed that by client code modification assessee has reduced income by shifting profit to other client, and assessee has obtained entries of losses by changing code of clients who incurred loss. In view of the above, the assessing officer observed that assessee has reduced income from share trading by Rs. 18,08,568/- by client code modification. Therefore, assessee was requested to show cause as to why the profit/loss evaded by changing client code should not be considered as income for the year under assessment and added to the total income of the assessee.
In response to the above show cause notice, the assessee vide reply dated. 12.12.2017 has submitted as under:
"Your above show-cause notice dated 08/1/2017 calling as to why the addition was Rs. 18,08,568/-should not be added in my income on the ground of client code modification. The compliance was sought for on 11.12.2017 at 11.30 AM with explanation and clarification on the issue. I am sorry to inform you that I have received the said show- cause notice on 11.12.2017 at 1.20 PM. Thus this Act which cannot be complied even by god as the show-cause notice itself was received 11.12.2017 at 1.20 PM, how can a person at 11.30 AM in this circumstances mentioned above. Further, it is submitted that because the only material relied upon in the show cause notice is alleged client code modification. For sake of argument ordinarily, client code modification would have no tax impact at all, as merely moves the incidence of tax from one person to another. The show-cause notice only state that ascertained profit was shifted out and ascertained loss was sifted out without relying on any material to indicate that there has been misuse of client code modification for the purpose of tax evasion. The show-cause notice do not state the basis of the information and how the Page 5 of 15 same relates to me. Therefore, an opportunity may be given to explain the information gathered from National Stock Exchange by your office of all Transactions alleged of client code modification with all Break-up (order & trade Log/Number) as there is no clarity in the figures shown in reasons recorded as well as in the show cause notice issued by you wherein the figures are not much with each other. Thus, it requires detailed information you have obtained from National Stock Exchange. The show cause notice does not reveal the complete details and only vague amount of profit shifted out and loss sifted out. Simple data of NSE stating that client code modification is carried out does not mean that such modification is for evading taxes more particularly when Department also are accepting that CCM has never been illegal. Thus on providing each and every transaction where the allegation have been made that the CCM have been utilized as a tool of tax evasion may be supplied so as to enable me to give my explanation and clarification. Further, please provide the specific information as to how you come to arrive that the 42 transaction of profit sifted out and 38 transaction of loss sifted out. In view of the above kindly allow me atleast clear 7 days time to answer, explain and reply to your above show-cause notice on providing of above cited information from your side. I reserve my right to give detailed reply of above show-cause notice after getting the above information from your side."
The assessing officer again issued a show -cause notice to the assessee and against such notice, the assessee submitted the reply before the assessing officer as follows( for the sake of brevity, we reproduce here part reply of the assessee, which is relevant for our analysis) :
"At the outset it is drawn to your notice that it has been alleged that I have claimed loss to the tune of Rs. 18,08,568/- by resorting CCM facility. Accordingly the reassessment proceedings have been initiated. I was dealing in F&O trading activities through the share broker M/s ANS Private Limited, Rajkot, I have maintained books of my Proprietorship concern, M/s Karan Tradelink and personal books of accounts which both are Audited u/s 44AB of the Income Tax Act. In the course of reassessment proceedings, I have produced all the information, details, data and materials such as books of accounts, expenses bills and vouchers and copy of each contract notes and bills and ledger account of F&O trading activities are also placed on records which you have verified. As you have not called for the details from my registered broker u/s 133(6) of the Income Tax Act, I am providing the copy of ledger accounts F&O segment from the books of my broker ANS Pvt LTD along with the 2 letters. From which 1st letter consist of the request to my Page 6 of 15
Broker to provide, if any, CCM have been made in my case for the year under consideration and second letter is reply from my broker, denying that no such CCM have been made in my case during the year under consideration. Thus it is very clear that whatsoever transaction in my case are recorded in my books of accounts and there is no evasion of any income by misuse of CCM facility. In this connection I have raised the objection against the whole reassessment proceedings. You have disposed off the said objection partially. For that again I raised the objection in form of rejoinder and till the matter was not ended on this issue. Now I have received the notice above dated 08-12-2017 received on 11-12-2017 accordingly approach you on 12-12-2017 with a partially reply of the above SCN and request that the said SCN received on 11-12-2017 and compliance is asked for 11-12-2017 which is not possible to reply the same. Therefore, you have given the date for compliance on 15-12-2017 and at that time you have supply the part information upon which reassessment proceeding are initiated (copy of the same is enclosed herewith) and you have assured that the further full information regarding CCM alongwith all the trades records and order number where the changes have been made, that you have called for from the appropriated authority and on receipt of the same it will be supply to me. Now my reply, explanation, clarification and objection to the said SCN are as under: In view of the aforesaid, I submit that the SCN dated 08.12.2017 is defective and therefore invalid. I also draw your kind attention to the anomaly in contents of your SCN dated 08.12.2017, wherein you have referred to proposed addition of Rs. 18,08,568/-, being alleged total profit shifted out by changes made in 46 CCM entries of Rs. 12,70,282/- and total loss shifted out by changes made in 38 CCM entries of Rs. 5,38,286/-. Your said allegations are in direct contravention of your earlier allegation comprised in your reasons recorded dated 20.03.2017 wherein you had mentioned a loss to the tune of Rs. 18,08,568/- and finally observed in said reasons recorded that this claim of fictitious loss had resulted into under assessment to the tune of Rs. 18,58,568/-. Still further it is to submit that on examination of the data supplied by you on 12-12-2017, the said data reveals in column number H "Net reduction in 4 Years" and "Grand total of Net reduction in income due to CCM" of Rs. 7,31,995.50. (On the basis of reassessment proceedings was initiated.) Thus, your changing stand is not in accordance with the law and therefore unlawful and it renders the whole reassessment process void. For your kind information, all my transactions as recorded in my books of accounts during the financial year 2009-10 relevant to A.Y. 2010-11 are genuine and complete and in strict confirmation with the records of my broker as well as of NSE. In fact, neither I have made, nor I am not entitled to make, any client code modification. I have not paid any commission to the broking house, over and above of that have been charged in the regular contract/bills. For your kind information, I also submit that on the basis of the data provided by you about the alleged CCM, the following analysis can be made which I provide for your kind perusal and consideration:
I reiterate that the data provided by you is incomplete and not sufficient to carry out any detailed analysis from my side as you have mentioned in SCN the total loss shifted by changes made in 38 CCM only of Rs 5,38,286/- while the data given by you reveals in column F When Modified Client (ascertained loss shifted in) of Rs. 5,38,286.60.”
The assessee submitted further reply also before the assessing officer, however, the assessing officer rejected their replies of the assessee, and held that the assessee has reduced income from securities transaction by Rs. 18,08,568/- by client code modification and evaded the tax. Therefore, an amount of Rs. 18,08,568/- is added to the total income for the year under assessment.
Aggrieved by the order of the assessing officer, the assessee carried the 9. matter in appeal before the Ld. CIT(A), who has confirmed the findings of the assessing officer, therefore, the assessee, is in appeal before this Tribunal.
Shri Fenil H. Mehta, Learned Counsel for the assessee vehemently argued on ground no.1 raised by the assessee, which relates to reopening of assessment under section 147/ 148 of the Act and stated that reasons recorded by the assessing officer are bad in law. The learned Counsel pointed out the following defects/ errors in the reasons recorded by the assessing officer which are as follows: (i).First of all, in the reasons recorded by the assessing officer, the assessing officer has considered the assessee, as a broker. However, the assessee is not a broker, he is a trader only, therefore, reasons were factually incorrect, and reasons were not recorded with reference to the assessee, under consideration, and these reasons were recorded with reference to the Broker, who is a third-party, as the assessee himself is not a broker, whereas Page 8 of 15
reasons recorded by the assessing officer stated that assessee is himself is a broker.
(ii).In facts, the assessing officer, has stated that the assessee has earned non- genuine loss to the tune of Rs. 18,08,568/-. However, the actual fact is that the assessee earned profit to tune of Rs.18,08,568/-.
(iii).The nature of transaction is not correct in the reasons recorded by the assessing officer. The assessing officer mentioned only 46 CCM entries of Rs. 12,70,282/- and total loss shifted out by changes made in 38 CCM entries of Rs. 5,38,286/-, however the assessee has carried out more than 57 transaction, as a trader. Therefore, the assessee is a trader not a broker, which is assumed in the reasons recorded by the assessing officer.
(iv)After recording the reasons, the assessing officer did not conduct the further enquiry to understand whether the assessee incurred profit or loss or whether the assessee is a broker or trader.
(v). The nature of transactions mentioned in the reasons recorded are not correct.
(vi) The reasons are recorded based on the borrowed satisfaction, and there is complete non-application of mind on the part of the assessing officer, while recording the reasons, by the assessing officer.
Therefore, ld.Counsel contended that the reasons recorded by the assessing officer for the re-assessment proceedings, were not the correct reasons, as explained above, therefore, reassessment proceedings may quashed.
On the other hand, Ld. DR for the Revenue submitted that reasons recorded, by the assessing officer are clearly based on the circumstances and documents available before the assessing officer at the time of recording reasons, therefore, reasons are recorded by the assessing officer, as per the provisions of the Act.
I have heard both sides in detail and also perused the records of the case including the paper book filed by the assessee. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case, I note that assessee, under consideration is a trader and not a broker, for that I find that the assessing officer in para 2 of the assessment order dated 29.12.2017, had himself stated that assessee is a trader, vide para No. 2 of the assessment order, which is reproduced below: “During the year the assessee derived income from trading in derivative & share transactions. Copies of audited accounts and Audit Report in Form No.3CB & 3CD are filed during the course of assessment proceedings.”
However, the Ld. DR for the revenue submitted that the assesse, himself is a broker. I note that the during the assessment proceeding, the assessee has also stated by way of letter dated 15.12.2017, before the assessing officer that the assessee is a trader only and relevant details of its trading account has been submitted before the assessing officer. Therefore considering these facts, I find that the assessee is a trader only. However, the reasons were recorded by the assessing officer based on the wrong notion and presumption that assessee is a Page 10 of 15 broker, hence the basic and fundamental information and the fact recorded in the reasons so recorded by the assessing officer is factually wrong, hence, the reasons so recorded by the assessing officer are not in relation to the assessee, under consideration. Hence, these reasons recorded by the assessing officer are not in accordance with the provisions of the Act and do not pertain to the assessee under consideration, as it is a settled position of law that income should be taxed in the hands of the correct assessee/person, hence the reassessment proceeding should be quashed on this score only.
The reasons recorded by the assessing officer, have already been reproduced in this order, vide para No. 4 of this order, and I find from these reasons that there is factual error also in the reasons so recorded by the assessing officer. The assessing officer, in the reasons recorded, mentioned that the assessee has earned loss to the tune of Rs. 18,08,568/-, however, the real facts is that the assessee had earned profit only, vide profit and loss account of the assessee placed in the paper book page no. 102. Hence, there is a major inconsistency in the reasons recorded by the assessing officer, and it is evident from the reasons, so recorded by the assessing officer, the relevant part of the reasons recorded by the assessing officer is again reproduced below for ready reference:
“All the above non-genuine CCMs were observed while analyzing the data of the brokers including the assessee by the I&Cl wing of the income tax department. The assessee has claimed losses to the fine of Rs. 18,08,568/- by resorting to such non-genuine CCM practices. These facts were not disclosed by it in its return of income. This claim of fictitious loss had resulted into under assessment to the tune of Rs. 18,08,568/-.
Hence, I find that the basic facts mentioned in the reasons recorded are not correct, and this action of the assessing officer shows that there is complete non- application of mind on the part of the assessing officer.
Besides, the nature of transaction is not correct in the reasons recorded by the assessing officer. The assessing officer mentioned only 46 CCM entries of Rs. 12,70,282/- and total loss shifted out by changes made in 38 CCM entries of Rs. 5,38,286/-, however the assessee has carried out more than 57 transaction, as a trader. Therefore, I find that the reasons were recorded based on the borrowed satisfaction, and there is complete non-application of mind on the part of the assessing officer, while recording the reasons. Therefore, reassessment proceedings initiated by the assessing officer needs to be quashed.
Plainly, the statutory provision envisages that the assessing officer (ITO) must first have information in his possession, and then in consequence of such information he must have reason to believe that income has escaped assessment. The realization that income has escaped assessment is covered by the words ‘reason to believe’, and it follows from the "information" received by the ITO. The information is not the realization, the information gives birth to the realization. In the assessee`s case under consideration, I find that there is basic and fundamental errors in using the information, while recording reasons by the assessing officer. The information about loss, the information about number of CCM entries, the information mentioned about broker vs. trader etc. were stated in the reasons recorded are factually incorrect.
The main grievance of the assessee is against the action of the assessing officer in reopening assessment completed u/s. 143(1) of the Act. According to Ld. Counsel for the assessee, the assessing officer without application of mind has simply reopened the assessment. According to Ld. Counsel, before the assessing Page 12 of 15 officer decides to reopen the assessment, he has to satisfy the condition precedent to assume jurisdiction and for that he took my attention to the expression used in section 147 of the Act which states that assessing officer should have ‘reason to believe’ escapement of income. Therefore, I find that even after there is a foundation based on information is there, still there must be some reasons warrant holding a belief that income chargeable to tax has escaped assessment, which expression used by Parliament is stronger than the expression ‘satisfied’ and in the present case such requirement as contemplated by law has not been met in the ‘reason recorded’ by the assessing officer before venturing to re-open the assessment which vitiates the re-opening itself. I note that even if the information given by the stock exchange/NSE, is adverse against the assessee, at the most it may trigger “reason to suspect”; then assessing officer has to make reasonable enquiry and collect material which would make him believe that there is in fact an escapement of income. However, here, in the assessee`s case, the assessing officer does not know whether assessee is a trader or a broker. Without doing so, the jurisdictional fact necessary to usurp jurisdiction to reopen the regular assessment cannot be made by the assessing officer. For the said proposition, I rely on the following case laws:
i).PCIT Vs. Meenakshi Overseas Ltd. 395 ITR 677(Del.) (referred to para 19 till para 37). ii).DCIT Vs. Greal Wall Marketing Pvt. Ltd.
(referred to page 10 para 11) iii).Shri Raj Kumar Goel Vs. ITO (referred to page 5- 8 para 11) (iv).Classic Flour & Food Processing Pvt. Ltd. Vs. CIT to 766/Kol/2014 (page 7 para 12 to 16)
Page 13 of 15 v).PCIT Vs. Shodiman Investments (P) Ltd. (2018) 93 taxmann.com 153 (Bom) page 4 para 12 to 14) vi).KSS Petron Pvt. Ltd. Vs. ACIT (referred to page 3 para 8-11) vii).PCIT Vs. Tupperware India Pvt. Ltd. (2016) 236 Taxman 494 (referred to page 3 para 6 and 9) viii).DCIT Vs. National Bank for Agriculture and Rural Development (referred to page 10- 13 para 12)
To the same effect, the Apex Court in ITO v. Lakhmani Merwal Das [1976] 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief , that is, 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. Therefore, the question for consideration is whether on the basis of the reasons recorded by the assessing officer to reopen the assessment it can be said that assessing officer on the basis of whatever material before it, had reasons which he had indicated in his “reasons recorded” which warrant holding a belief that income chargeable to tax has escaped assessment. The reasons recorded by assessing officer to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed while adjudicating the legal issue of assessing officer’s usurpation of jurisdiction u/s. 147 of the Act. In the assessee`s case under consideration, there is a gross error, while recording reasons by the assessing officer, therefore reasons recorded by the assessing officer are not as per the provisions of the Act.In view of the reasons set out above, as also bearing in mind entirety of the case, I am of the considered view Page 14 of 15 that the reasons recorded by the Assessing Officer, as set out earlier, were not sufficient reasons for reopening the assessment proceedings. I, therefore, quash the reassessment proceedings. As the reassessment itself is quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous.
In the result, the assessee’s appeal is allowed in the terms indicated above.
Order is pronounced in the open court on 31/12/2025.