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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini:
The captioned appeal filed by the Assessee, pertaining to assessment year 2009-10, is directed against an order passed by the learned Commissioner of Income Tax (Appeals)-10, Kolkata (in short the ld. ‘CIT(A)’], which in turn arises out of an assessment order passed by the Assessing Officer u/s 147/143(3) of the Income Tax Act, 1961 ( in short the ‘Act’), dated 28.12.2016.
The grounds of appeal
raised by the assessee are as follows:
1. For that on the facts and circumstances of the case the ld. Commissioner of Income Tax (Appeals) erred in accepting the validity of issue of notice u/s 148 dated 30.03.2016 by the Income Tax Officer, Ward-35(3) for alleged Client Code Modification by the appellant’s broker.
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 2. For that on the facts and circumstances of the case without prejudice to the Ground no. 1 the ld. Commissioner of Income Tax (Appeals) erred in confirming the addition made by the Income Tax Officer of a sum of Rs. 50,71,830/- being aggregate of alleged shifting of profit for Rs. 13,11,490/- and transferred loss received Rs.37,60,340/- on the ground of Client Code Modification by appellant’s broker.
For that your appellant craves leave to adduce further or other ground / grounds, if any on or before the hearing of appeal.
3.The appeal filed for Assessment Year 2009-10, is barred by limitation by 29 days. The assessee has moved a petition requesting the Bench to condone the delay.We heard the both the parties on this preliminary issue. Having regard to the reasons given in the petition, we condone the delay and admit the appeal for hearing.
Now, we shall take ground No.1 raised by the assessee, which relates to validity of issue of notice under section 148 of the Act, dated 30.03.2016, by the Income Tax Officer, for alleged Client Code Modification by the assessee’s broker.
The brief facts qua the issue are that the assessee submitted his original return of income as on 29.09.2009 declaring total income at Rs.NIL. On the basis of information received from the Pr. DIT (Inv.), Ahmadabad, the assessing officer noticed that some brokers by misusing the client code modification facility in derivatives on NSE during March, 2010 created fictitious losses and transferred the same to their clients as per the requirement and earned commission. The clients had taken fictitious losses to set off against their profits with a view to reduce their tax liability. The details of such client code modification transactions have been provided in CD in electronic data. On analysis of the details contained in the CD, the AO noticed that that profit of Rs.13,11,490/- was shifted out by Neeraj Umashankar Murarka, who is assessed in this charge under PAN: AEYPM0328R, and loss of Rs.37,60,340/- were transferred in, the case of the assessee by the broker M/s R K Global Shares & Securities Limited through client code modification. Thus, the net reduction in income due to client code Page | 2
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 modification was to the tune of Rs.50,71,830/-. Thereafter, based on above noted reasons, the assessee`s case was reopened u/s 147/148 of the Act,with a reason to believe that income of the assesse to the extent of Rs. 50,71,830/- for relevant assessment year had escaped assessment. So notice u/s 148 of the I.T. Act,dated 30.03.2016 was duly issued and served upon the assesse as on .31.03.2016.
6.In response to said notice, under section 148 of the Act, the assessee had submitted his return of income for relevant assessment year as on 27.05.2016, declaring total income of Rs. 261/-.During the assessment proceedings, the AO examined the possibility of shifting of profit and loss of assessee`s business through client code modification. From the details of information on record,it was noted by AO that the assesse had earned profit from sale of shares through R.K.Global Shares & Securities Ltd. for Rs. 13,11,490/- and that has been shifted out to Narendra Upendra Tiwari ( PAN-AHFPT0330G)for Rs.7,26,880/-,Pramila Ben Desai (PAN- AFEPD7969Q) for Rs.l,88,440/-,Mayank Desai(PAN- AAAPD9253A)forRs.3,25,435/- and Sidhartha jhunjhunwala (PAN- ACRPJ8641F) for Rs. 70,735/- and loss of Rs. 37,60,340/- was received on transfer through broker namely Techno Shares & Stock Ltd from the parties namely Mahendra H. Jain (PAN-ADGPJ5475P) for Rs. 12,29,760/- and Techno Broking & Financial Service Ltd.(PAN- AACCT3286G) for Rs. 25,30,580/-.The assesee was asked to explain the shifting of profit and loss of share business through client code modification. In response, the assessee furnished his submission on dated 23.12.2016 and claimed that during the relevant financial year he was engaged in the business of share purchase and sale and he had sustained business loss of Rs. 9,25,034/- from such share business. The assessee in his submission stated that he had made transaction through R.K. Global Share & Securities Ltd, and R.K. Global Commodities Broking Ltd. The assessee also explained the quantum of purchase and sale transactions. However, the assessing officer rejected the contention of the assessee and held that since it is evident on record that during the relevant assessment year the assessee had shifted out profit for Rs.13,11,490/- and transferred loss received of Rs.37,60,340/-,so it was considered that income to the Page | 3
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 extent of Rs.50,71,830/-(Rs.13,11,490 + Rs.37,60,340) had been escaped assessment and therefore added back to the total income of the assessee.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing Officer. The ld CIT(A) also observed that re-opening of assessment under section 147/148 was valid. The relevant observations of ld CIT(A) on the validity of reopening of assessment under section 147/148 is given below:
“I have carefully examined the action of the ld. A.O. in the matter of the addition of Rs.50,71,830/-. The ld. A.O. has arrived at this impugned figure by holding that the assessee-appellant had shifted profit of Rs.13,11,490/- and transferred losses of Rs.37,60,340/- to its account by indulging in security transactions carried out through client code modification. It is seen that the case was reopened on the basis of the solid information regarding the modus operandi of shifting of profits by the assessee through the broker. As such I find no infirmity in the issue of notice u/s 148 and the claims of the appellant about the validity of the notice stand rejected.”
8. Aggrieved by the order of ld CIT(A), the assessee is in appeal before us.
We have heard both the parties and perused the material available on record. The ld Counsel for the assessee submitted before us that the solitary grievance of the assessee in this appeal is that the ld. Commissioner of Income Tax (Appeals) was erred in accepting the validity of issue of notice under section 147 of the Act, by the Income Tax Officer,for alleged Client Code Modification by the assessee’s broker. On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. We note that assessee has challenged the validity of issue of notice under section 147/148 of the Act,therefore, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the assessee in respect of validity of issue of notice under section 147/148 of the Act and therefore we do not adjudicate the assessee`s appeal on merit.
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 First of all, let us examine the reasons recorded by the assessing officer, which are given below for ready reference: “Information has been received from the Pr. DIT (INV), Ahmedabad vide his letter bearing No. PDIT(INV)/CCM/Dissemination/15-16 dated 08.03.2016 that some brokers by misusing the client code modification facility in derivatives on NSE during March, 2010 created fictitious losses and transferred the same to their clients as per the requirement and earned commission. The clients had taken fictitious losses to set off against their profits with a view to reduce their tax liability. The details of such client code modification transactions have been provided in CD. On analysis of the details contained in the CD, it is apparent that profit of Rs.13,11,490/- was shifted out by Neeraj Umashankar Murarka, who is assessed in this charge under PAN: AEYPM0328R, and loss of Rs.37,60,340/- were transferred in the case of the assesse by the broker R K Global Shares & Securities Limited through client code modification. Thus, the net reduction in income due to client code modification is Rs.50,71,830/-. As per information available from records, Shri Neeraj Umashankar Murarka has not filed his return of income for the assessment year 2009-10. Therefore, I have reason to believe that the amount of Rs. 50,71,830/- and the amount paid as commission have escaped assessment for the assessment year 2009-10.”
Having gone through the reasons recorded by the assessing officer, as mentioned above, we notice that the reasons recorded by the Assessing Officer do not spell out the belief of the Assessing Officer. From the reasons recorded, it seems to us that it is a borrowed satisfaction. The information on the basis of which the AO has initiated proceedings u/s 147 of the Act are undoubtedly vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which a reasonable person could have formed a belief that income had escaped assessment. The above reasons recorded by the AO do not disclose the AO's mind as to what was the nature and amount of transaction or entries, which had been given or taken by the assessee in the relevant year and event of client code modification, the broker R K Global Shares & Securities Limited.The assessing officer did not apply his mind, he just reopened the assessment under section 147/148 based on the information received, from the Pr. DIT (INV), Ahmedabad. How far this information is related the assessee has not been examined by the AO, therefore, in our opinion, it is a general statement which is applicable to some brokers, which is evident from the reasons recorded, that is: “…..some brokers by misusing the client code modification facility in derivatives on NSE during March, 2010….” Page | 5
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 Hence, it is abundantly clear the reasons recorded by the assessing officer is a general statement which relate to ‘Some Brokers’ therefore, does not spell out the belief of the Assessing Officer, hence,the reasons recorded by the Assessing Officer is itself bad in law.
10.We note that from the reasons recorded, the reopening of the assessment is on the information which was supplied by the Pr. DIT(INV), Ahmadabad. From the reasons recorded, it does not appear that verification of the material on record there is independent formation of opinion by the Assessing Officer and that any income has escaped assessment due to any failure on the part of the assessee in not disclosing truly and correct facts / material necessary for assessment. From the reasons recorded, it appears that the impugned reopening proceedings are on the borrowed satisfaction. No independent opinion is formed. On the plain reading of the reasons recorded what emerges is that the Assessing Officer on considering the information received from the Pr. DIT(INV), Ahmadabad reassessment proceedings have been initiated on the ground that the income escaped assessment. However, there is no assertion regarding the basis on which material on record, he come to such conclusion. It cannot be disputed that on the basis of the information received from another agency, there cannot be any reassessment proceedings. However, after considering the information / material received from other source, Assessing Officer is required to consider the material on record in case of the assessee income and thereafter, he is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mechanically relying upon the information received from other source, there cannot be any reassessment for the verification. At this stage, it is required to be noted that even in the reasons recorded, there is not allegation that there was any failure on the part of the assessee in not disclosing truly and fully material facts necessary for assessment. Under the circumstances, the assumption of the jurisdiction to reopen the assessment beyond the period of four years in exercise of powers under section 147 of the Act is bad in law and contrary to the provisions of section 147 of the Page | 6
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 Act. Therefore, on the aforesaid ground alone, the impugned reassessment proceedings deserve to be quashed.
We note that the reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment.For that we rely of the judgment of the Hon`ble High Court of Bombay in the case of M/s Coronation Agro Industries Ltd Vs. DCIT, W. P. No.2627 of 2016, dated 23.11.2016, wherein it was held as under: 3. The reasons in support of the impugned notice relies upon the information received from the Principal Director of Income Tax that the petitioner has benefited from a client code modification by which a profit of Rs.22.50 lakhs was shifted out by the petitioner's broker, resulting in reduction of the petitioner's taxable income. The only basis for forming the belief is the report from the Principal Director of Income Tax and the application of mind to the report of the Assessing Officer along with the record available with him. This information and application of mind has led the Assessing Officer to form a reasonable belief that there is not only an escapement of income but there has been failure to truly and fully disclose all material facts and information as the modus operandi of shifting profits was not known to the Revenue as not disclosed by the petitioner when the Assessing Officer passed the order in regular assessment proceedings. 4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. 5. In the above view, prima facie, we are of the view that the impugned notice is without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment.” Page | 7
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 12.Our view is fortified by the judgment of the Co-ordinate Bench ITAT, Kolkata, on the similar facts, in the case of Naveen Bhattar vs.ACIT in wherein it was held as follows: 7. This Bench of the Tribunal in the case of M/s. Cygnus Investments & Finance Pvt. Ltd v. Assistant Commissioner of Income Tax, Central Circle 3(3), Kolkata I.T.A. No. 117/Kol/2018 Assessment Year: 2008-09; order dt. 18th May, 2018, held as follows:-
“7. Further a perusal of the reasons recorded shows non- application of mind by the Assessing Officer. Directions have been given by the DDIT (Inv.) Unit-2(1), Kolkata, vide communication cited in the reasons recorded and based on such directions, the reopening was done. The Hon’ble Delhi High Court in the case of Commissioner of Income-tax, IV v. Insecticides (India) Ltd [2013] 357 ITR 330 (Delhi) upheld the order of the ITAT Delhi Bench in 2333/Del/2010, holding as follows:-
“7. We may point out at this juncture itself that the Tribunal did not go into the question of merits. It only examined the question of the validity of the proceedings under Section 147 of the said Act. The Tribunal, in essence, held that the purported reasons for reopening the assessments were entirely vague and devoid of any material. As such, on the available material, no reasonable person could have any reason to believe that income had escaped assessment. Consequently, the Tribunal held that the proceedings under Section 147 of the said Act were invalid.
8. The Tribunal gave detailed reasons for concluding that the proceedings under Section 147 were invalid. Instead of adding anything to the said reasons, we think it would be appropriate if the same are reproduced:— "In the case at hand, as is seen from the reasons recorded by the AO, we find that the AO has merely stated that it has been informed by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 that the above named company was involved in giving and taking bogus entries/transactions during the relevant year, which is actually unexplained income of the assessee company. The AO has further stated that the assessee company has failed to disclose fully and truly all material facts and source of these funds routed through bank account of the assessee company. In the reasons recorded, it is nowhere mentioned as to who had given bogus entries/transactions to the assessee or to whom the assessee had given bogus entries or transactions. It is also nowhere mentioned as to on which dates and through which mode the bogus entries and transactions were made by the assessee. What was the information given by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 has also not been mentioned. In other words, the contents of the letter dated 16.06.2006 of the Director of Income-tax (Inv.), New Delhi have not been given. The AO has vaguely referred to certain communications that he had received Page | 8 Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 from the DIT(Inv.), New Delhi; the AO did not mention the facts mentioned in the said communication except that from the informations gathered by the DIT (Inv.), New Delhi that the assessee was involved in giving and taking accommodation entries only and represented unsecured money of the assessee company is actually unexplained income of the assessee company or that it has been informed by the Director of Income-tax (Inv.), New Delhi vide letter dated 16.06.2006 that the assessee company was involved in giving and taking bogus entries/transactions during the relevant financial year. The AO did not mention the details of transactions that represented unexplained income of the assessee company. The information on the basis of which the AO has initiated proceedings u/s 147 of the Act are undoubtedly vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which a reasonable person could have formed a belief that income had escaped assessment. In other words, the reasons recorded by the AO are totally vague, scanty and ambiguous. They are not clear and unambiguous but suffer from vagueness. The reasons recorded by the AO do not disclose the AO's mind as to what was the nature and amount of transaction or entries, which had been given or taken by the assessee in the relevant year. The reasons recorded by the AO also do not disclose his mind as to when and in what mode or way the bogus entries or transactions were given or taken by the assessee. From the reasons recorded, nobody can know what was the amount and nature of bogus entries or transactions given and taken by the assessee in the relevant year and with whom the transaction had taken place. As already noted above, it is well settled that only the reasons recorded by the AO for initiating proceedings u/s 147 of the Act are to be looked at or examined for sustaining or setting aside a notice issued u/s 148 of the Act. The reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No addition can be made to those reasons. Therefore, the details of entries or amount mentioned in the assessment order and in respect of which ultimate addition has been made by the AO, cannot be made a basis to say that the reasons recorded by the AO were with reference to those amounts mentioned in the assessment order. The reasons recorded by the AO are totally silent with regard to the amount and nature of bogus entries and transactions and the persons with whom the transactions had taken place. In this respect, we may rely upon the decision of Hon'ble jurisdictional Delhi High Court in the case of CIT v. Atul Jain [2000] 299 ITR 383, in which case the information relied upon by the AO for initiating proceedings u/s 147 of the Act did indicate the source of the capital gain and nobody knew which shares were transacted and with whom the transaction has taken place and in that case there were absolutely no details available and the information supplied was extremely scanty and vague and in that light of those facts, the Hon'ble Jurisdictional Delhi High Court held that initiation of proceedings u/s 147 of the Act by the AO was not valid and justified in the eyes of law. The recent decision of Hon'ble jurisdictional High Court of Delhi in the case of Signature Hotels (P.) Ltd. (supra) also supports the view we have taken above."
9. We do not see any reason to differ with the view expressed by the Tribunal. No substantial question of law arises for our
Shri Neeraj Uma Shankar Murarka Assessment Year:2009-10 consideration. The appeals are dismissed. There shall be no order as to costs. 8.Respectfully following the propositions of law laid down in the judgments cited above to the facts of the case, we have no other alternative but to hold that the reopening of the assessments is bad in law.”
Applying the propositions of law laid down by the Tribunal in the above referred case-law to the facts of the case on hand, I hold that the re-opening is bad in law. Accordingly, the re-assessment is quashed.”
Therefore, considering the above facts and circumstances of the case and taking into account the precedents cited above, we note that the reopening of the assessee’s case u/s 147/148 of the Act, is bad in law and accordingly the reassessment is quashed. As we have held so, we do not adjudicate the appeal of the assessee on merits.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 03.05.2019