Loading judgment…
Facts
The assessee, M/s. Vayoo Nandan Finance Company Pvt. Ltd, had its assessment reopened for AY 2009-10 after filing a return declaring a loss. The AO reopened the assessment under Sections 147/148, alleging that the assessee had shifted profit of Rs. 4,36,644/- through Client Code Modification (CCM) by a broker, based on information from the Investigation Wing. The assessee objected to the reopening, asserting that the reasons recorded lacked tangible material and a live link to escaped income, and that their broker confirmed CCM was due to punching errors, not profit shifting.
Held
The Tribunal quashed the reassessment proceedings, ruling that the reasons recorded by the AO amounted to a mere 'reason to suspect' and not a 'reason to believe' that income had escaped assessment. It found no tangible material to establish a direct nexus between the client code modifications and the assessee's alleged intent to evade tax. The Tribunal relied on several judicial precedents which similarly invalidated reassessments based on general allegations of CCM misuse without specific evidence linking it to income escapement for the particular assessee.
Key Issues
Whether the reopening of assessment under Sections 147/148 was valid when the reasons recorded by the AO amounted to 'reason to suspect' rather than 'reason to believe' regarding income escapement through Client Code Modification (CCM), and if the AO's failure to dispose of objections made the reassessment unsustainable.
Sections Cited
143(1), 143(2), 143(3), 147, 148, 148(2), 151(1), 133A, 133(6), 68, 115BBE
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, DELHI BENCH “SMC”: NEW DELHI
O R D E R
The appeal in CIT(A-16, Nw Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 10185/2018-19 dated 28.02.2019 against the order of assessment passed u/s 143(3) of the Income- tax Act, 1961 dated 30.12.2016 (hereinafter referred to as „the Act‟) by ITO, Ward- 26(2), New Delhi (hereinafter referred to as „ld. AO‟).
2. I find that the assessee had raised additional grounds. But on perusal of the same, it is noticed that they are only supportive of original ground no.1 already raised before me. Hence the additional grounds are hereby not admitted.
3. The assessee had raised the following grounds of appeal:-
“1. The CIT(A) erred in law and facts in holding the reopening of the assessment u/s 148 of the Act as valid though notice u/s 148 was issued without fulfilling the conditions laid down under the said section. Thus the reopening is not valid and the assessment framed on the basis of invalid notice should be cancelled.
2. The CIT(A) erred in law and on facts in confirming the addition of Rs. 4,36,644/- by alleging that the assessee has shifted profit to another entities Page | 1 M/s. Vayoo Nandan Finance Company Pvt. Ltd through client code modification undertaken by its broker in the transactions undertaken at recognised stock exchanges ignoring the submissions and evidences placed on record. Thus the addition so made should be deleted.”
I have heard the rival submissions and perused the materials available on record. The return of income for the Asst Year 2009-10 was filed by the assessee on 25.8.2009 declaring total loss of Rs 73,315/- . The ld. AO observed that the assessee had derived income from business of financing activities and trading in shares and securities. The assessment of the assessee was sought to be reopened by the ld. AO on the ground that the assessee was one of the beneficiary of Client Code Modification (CCM) by some broker. This fact got unearthed based on some information received from Assistant Director of Income Tax (Investigation), Ahmedabad. The reasons recorded for reopening the assessment are as under:-
“Reasons for issue of Notice u/s 148 for reopening of assessment u/s 147 of IT Act 1961 for the A.Y.2009-10 in the case of M/s Yayoo Nandan Finance Co. Pvt. Ltd A. The assessee is a company filed its return of income on 25.08.2009 declaring return Income of Rs. Nil. The details of the directors of the assessee company obtained from records are hereunder: (a) Shailly Rathi (b) Manit Jaju 2. Thereafter, the return was processed under 143(1) of the I.T. Act. Subsequent to the processing completed u/s 143(1), information through email was received on 14/03/2016 from Asstt. Director of Income Tax [Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted out profits using Client Code Modification.
3. It is a detailed report of 589 pages. I have gone through the report and gathered that Client Code is a unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. 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. The client code modifications permit brokers to rectify human errors when a 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 M/s. Vayoo Nandan Finance Company Pvt. Ltd used as an exception rather than routine. Client code modification means modification of client code after the execution of trade. Over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes.
4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact tax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset. Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March) of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified. I have examined the ITR and the assessment record of the assessee in respect of FY 2008-09 relevant to A.Y. 2009-10 and the following facts are noted: a) The return of the assessee shows that during the year it has undertaken transactions in sale/purchase of shares, and its turnover could have included the transactions contrived by way of CCM. In the relevant period, the assessee has filed return of Income of Rs. NIL. As per the ITR for the period 01.04.2008 to 31.03.2009, it has undertaken transactions through M/s. Multiplex Capital Ltd. The transactions which involved CCM, as per information received under the report of the Investigation Wing are as under: Name of the Address of Name of When OC When MC Net reduction in beneficiary Beneficiary Broker (Ascertaine (Ascertained Income due to Orient d Profit Losses Shifted CCM Shifted Out) T-n) M/s Yayoo LB-6, Tolstoy SS 436643.7 0 (-)436643.7 Nandan House, Corporate Finance Co. Tolstoy Securities Ltd Pvt. Ltd Marg, New Delhi- 110001 (Now III, ESSEL House, 10 Asaf Ali Road Delhi- M/s. Vayoo Nandan Finance Company Pvt. Ltd c) Thus, the assessee has shifted in ascertained loss of Rs. (-)436643.7 through a transaction involving CCM. 4 Thus, a careful scrutiny of information received from the investigation wing and analysis of report, data of transactions and verification of ITR/Assessment Record lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained loss of Rs. 436643.7/-. By shifting in the above losses through contrived transactions by means of CCM, the assessee has artificially depressed its profits. By withholding these facts surrounding the transaction during the regular assessment proceedings, the assessee has failed to disclose fully and truly all the material facts necessary for its assessment.
5. Considering the above referred credible information and analysis subsequent to the information, I have reason to believe that an amount at least of Rs. 436643.7/- has escaped assessment in case the of M/s Vayoo Nandan Finance Co Pvt. Ltd for the A.Y 2009-10 within the meaning of Section 147/148 of Income-tax Act, 1961. The case is squarely covered under provisions of section 147 of income tax Act, 1961.
6. Since, more than 4 years from the end of the relevant assessment year have elapsed, approval of Pr Commissioner of Income Tax, Delhi-09, is solicited in terms of the Provisions of Section 151(1) of the Act. (Ram Niwas) Income Tax Officer Ward- 26(2), New Delhi”
5. After recording the aforesaid reasons and obtaining requisite approval u/s 151 of the Act, the ld. AO issued notice u/s 148 of the Act on 31.3.2016 which is beyond the period of 4 years from the end of the relevant assessment year. The assessee filed a letter dated 28.11.2016 stating that the return already filed on 25.9.2009 may be treated as a return in response to notice issued u/s 148 of the Act. The assessee sought for the reasons recorded for reopening the assessment and the same were duly supplied to the assessee. The assessee filed objections for the reasons recorded vide letter dated 14.12.2016. These objections were not disposed of by the speaking order by the ld.AO thereby violating the guidelines provided by the Hon‟ble Supreme Court in the case of GKN Driveshafts Ltd reported in 259 ITR 19 (SC). The ld. AO issued notice u/s 143(2) of the Act on 28.11.2016 which was the same date of filing of return by the assessee in response to notice u/s 148 of the Act. I find that the ld. AO had initiated the re-assessment proceedings way back on 31.3.2016 itself and had been waiting for the assessee to file a return in response to notice u/s 148 of the Act by offering the alleged profit earned by the assessee due to CCM amounting to Rs 4,36,644/-. But since the return was filed vide letter dated Page | 4 M/s. Vayoo Nandan Finance Company Pvt. Ltd 28.11.2016 disclosing Nil income, there was no need for any verification of the said return by the ld. AO. In our considered opinion, the ld. AO had already perused the original return of income filed on 25.9.2009 while recording the reasons itself. Since the same return is repeated by the assessee, the ld. AO had due satisfaction to proceed with the re-assessment proceedings on getting satisfied that some more details are required in the instant case for which purpose, he issued notice u/s 143(2) of the Act. Hence the reliance placed by the ld. AR on the decision of the Hon‟ble Jurisdictional High Court in the case of DIT vs Society for Worldwide Interbank Financial Telecommunications reported in 323 ITR 249 (Del) is factually distinguishable with the assessee. The ld.AO completed the re-assessment proceedings u/s 143(3)/147 of the Act on 30.12.2016 after adding a sum of Rs 4,36,644/- on account of shifting of profits due to CCM. This action of the ld. AO was upheld by the ld. CIT(A).
6. From the perusal of the reasons recorded it is very clear that there is no information provided in the reasons as to in whose hands, a survey u/s 133A of the Act was conducted by Ahmedabad Investigation wing. The reason only speaks that some survey in Ahmedabad conducted revealted that some broker was involved in misusing the CCM facility of NSE and engaged in providing non-genuine losses and profits. The reason does not specify whether the broker through whom the assessee had carried out the transation of trading of shares and securities was involved in such malpractices. Infact during the course of re-assessment proceedings, the ld. AO even sought to examine the broker of the assessee M/s S S Corporate Securities Ltd u/s 133(6) of the Act and that the said broker had duly replied directly to the ld. AO confirming the fact of CCM being carried out by them for their clients due to punching errors committed by their staff but had never confirmed that their actions had enabled the assessee to shift the losses or profits in the sum of Rs 4,36,644/-. For the sake of convenience, the reply given by SS Corporate Securities Ltd together with their certificate which are enclosed in pages 35 to 37 of the paper book are reproduced below:-
“Subject:-Information u/s 133(6) in the case of M/s Vayoo Nandan Finance Company Private Limited, PAN-AAACV0437F, AY-2009-10 Page | 5 M/s. Vayoo Nandan Finance Company Pvt. Ltd Dear Sir This is in reference to your letter dated 28.11.2016 are humbly submitting the following details and information point wise: 1. Point no.-1 Contract Notes of all transaction attached herewith in a compact disc (CD) as annexure-1 2. Point no.-2 Ledger account of M/s Vayoo Nandan Finance Company Private Limited-Annexure-2 3. Point no.---3 Account Details of M/s Vayoo Nandan Finance Company Private Limited Client Code-V28 DP ID- IN3O3108 DP CLIENT ID-10004815 4. Point No.4 M/s Vayoo Nandan Finance Company Private Limited is our regular client since 12th March 1996. Copy of client agreement form is enclosed as Annexure-3 5 Point no.-5 Complete details of Shares/Derivatives- Copy of contract notes attached as annexure-1 and copy ledger as annexure-2
6. Point no.-6 The transactions are under taken on NSE and BSE.
7. Point no.7,8 & 9 The details regarding client code modification error in punching/entering the client code came to our knowledge while reconciling the dient wise transactions as per the orders placed by them and on cross confirmation of the orders with them. The said data feeding mistake has been subsequently rectified by replacing the correct client code of Vayoo Nandan Finance Company Private in place of client code of other parties wrongly entered by our staff members at the time of order received on telephone from the client. The said clerical and data feeding errors was rectified after acceptance of the NSE as per the rule and regulations and such modification are duly informed to the NSE and it is further submitted that the final concluded transactions are Imported from the sauda/transaction file of NSE in our computer systern as provided by the NSE and all the trades were confirmed by the client. On the basis of purchase and sale transactions file and details received from the NSE data, are posted in to the client ledger account and DP account and shares are send/received from/to NSE into the client DP account and payments are received/paid from the NSE by the client, in between there is no role of the SS Corporate Securities Ltd. It is also informed that our account with all these clients are duly tallied and there is no pendency or dispute in account. Hope you will find the above in the order and any other information or detail if any further required will be submitted.
M/s. Vayoo Nandan Finance Company Pvt. Ltd Thanking You For: SS Corporate Securities Limited For SS Corporate Securities Ltd. Director Director”
TO WHOMSOEVER IT MAY CONCERN We hereby certify that Vayoo Nandan Finance Company Private Limited having client code V28 is carrying out the activity of trading In share and securities through us. During the financial year 2008-09, they have carried out 52475 trades (transations) in Capital Market and 18090 trade (transactions) in F & O segment. It may be noted that our staff members who punches the orders of clients on terminal for purchase and sale of shares and securities has by mistake instead of entering/punching the client code of Vayoo Nandan Finance Company Private Limited inadvertently entered the client code of other parties in certain transactions of Future & Option segment/Capital Market. The said error in punching/entering the cilent code came to our knowledge while reconciling the client wise transactions as per the orders placed by them and on cross confirmation of the orders with them. The said mistake as described in the income tax notice of M/s Vayoo Nandan Finance Company Private Limited has been subsequently rectified while replacing the correct client code of Vayoo Nandan Finance Company Private Limited in place of client code of other parties wrongly mentioned by our staff members.”
7. I find that the issue in dispute is squarely covered by the decision of the Co- ordinate Bench of this Tribunal in the case of Globus Power Generation Ltd vs ACIT in for Asst Year 2009-10 dated 3.5.2023. The relevant operative portion of the said order is reproduced below:-
8. We find that the assessee have been objecting right from the beginning that it is not aware as to how the figure of loss of Rs. 46,07,275/- of income escaping assessment mentioned in the reasons, was even arrived at. This is evident from the reply letter dated 26.12.2016 filed by the assessee before the Id AO wherein, the assessee had categorically denied that the broker had carried out any client code modification in its case to book artificial losses. The assessee had also stated that it is not even aware as to how the figure of Rs. 46,07,275/- regarding alleged artificial loss booked through CCM mentioned in the show cause notice was even arrived at nor is there any information T regarding the broker who is alleged to have carried out client code modification. The assessee submitted that it had no details of transaction of Rs. 46,07,275/- in its records. None of these contentions were even sought to be addressed by the lower authorities.
9. We find that the reasons recorded by the Id AO for reopening of the assessment in the instant case are very without having any live link to form a reasonable belief that the income of the assessee had escaped assessment. The reasons recorded and the Page | 7 M/s. Vayoo Nandan Finance Company Pvt. Ltd assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reasons recorded only gives way to 'reason to suspect' and not 'reason to believe. The very same issue was even subject matter of adjudication of this tribunal in the case of Stratagem Portfolio (P) Ltd Vs. DCIT in dated 15.09.2020 and the operative portion of the said tribunal order is reproduced hereunder:- "4. The ground No. 1 to 1.4 of the appeal relates to validity of the reassessment proceeding. In the ground No. 1.1, the assessee has challenged "reason to believe" on the ground that same are not specific and lacking reliable and tangible material.
In support of the ground, the Learned Counsel of the assessee referred to the reasons recorded, which has been reproduced by the Assessing Officer in the impugned assessment order. He submitted that in the reasons recorded, the Assessing Officer has recorded about process of Client Code Modification (CCM) by the brokers under the facility provided by the stock exchanges for rectification of error in punching of the client code while carrying out transaction of purchase and sale of the shares. He further referred to para-12 of the said reasons and submitted that the Assessing Officer has reproduced number of events, where assessee's code was modified by the broker. The learned Counsel submitted that the Assessing Officer on the basis of modification in the client code of the assessee, has jumped to believe that it had been done for shifting of profit of ₹ 6,42,781/- and shifting of loss of ₹ 4,420/-. According to Learned Counsel, this belief of the Assessing Officer is without any tangible material to support that such client code modification has been done for evasion of the tax. Further, he submitted that the Learned Assessing Officer is not justified in making the belief that profit or loss shifted to other persons by way of client code modification by the broker has resulted into any income to the assessee, which could be assessed under section 68 as cash credit. 5.1 He submitted that learned Assessing Officer acted only on the basis of suspicion and it could not be said that it was based on belief that income chargeable to tax had escaped assessment. He referred to page 5 of reasons recorded where the learned Assessing Officer noted that: "The assessee's code was modified 44 times in OCC to shift out profits Rs. 6,42,781 and one time in MCC to Shift in loss of Rs.4,420/-. The data clearly shows that the modification was not no grounds of feeding in erroneous data." He further submitted that finally while making the addition learned Assessing Officer at page 16 of order of Assessment, however, concluded that: "In view of above, the profit of Rs. 6,47,201/- claimed by the assessee in the above mentioned transactions is treated as a contrived profit artificially generated through the misuse of the CCM. The profit is, therefore, liable to be taxed and added to the total income of the assessee as unexplained investment u/s 68 r.w.s. 115BBE of the Income-tax Act, 1961." Page | 8 M/s. Vayoo Nandan Finance Company Pvt. Ltd 5.2 The Ld. Counsel accordingly, submitted that reasons recorded are thus factually incorrect too, or the learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. 5.3 He also submitted that there is no live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. The learned Counsel relied on decision of Hon'ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464 and following decisions of the Tribunal to support his contentions: 1. dated 22.10.2019 Simmi Sethi vs. ITO (pages 53-56 of JPB) 2. ITA No. 4542/D/2018 dated 29.11.2018 Radiance Stock Traders (P) Ltd. vs. ITO (pages 1-25 of JPB) 3. ITA No. 6628/D/2018 dated 12.4.2019 Kamal Kishoree Aggarwal vs. ACIT (pages 92-111 of JPB) 4. ITA No. 4395/D/2019 dated 27.2.2020 AKG Securities & Consulting Ltd. vs. ITO (pages 112-127 of JPB) 5. ITA No. 825/D/2019 dated 25.7.2019 Sanjay Kumar Jain vs. ITO (pages 57-91 of JPB) 5.4 The Learned DR, on the other hand, submitted that the reasons have been recorded on the information received from the Director of Income Tax (Investigation), Ahmadabad, which is a credible source of the information. He further relied on the order of the lower authorities to support that reasons have been recorded validly. 5.5 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In the instant case, the dispute is whether there is any tangible material to infer that by way of the client code modification, the assessee has escaped the income and evaded the Income-tax. The Learned Counsel of the assessee has referred to the various decisions mentioned above, wherein cases were reopened on the basis of the information of client code modification. In the case of M/s. Coronation Agro Industries Ltd. vs. DCIT (supra), the Hon'ble Bombay High Court quashed reopening of assessment on identical issue. It has been held in the said judgment as under: "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 M/s. Vayoo Nandan Finance Company Pvt. Ltd facie, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment." 5.5.1 Further, the Tribunal in Radiance Stock Traders (P) Ltd. vs. ITO (supra), has held as under: "6.1 After perusing the aforesaid reasons 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 recondition 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 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 believe." 6.2 1 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....... 6.3 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, such document and / or relevant portions of such report should be enclosed alongwith the reasons." 6.3.1 Hence in the absence of such material, the allegation and assumptions are nothing but figment of imagination as they are based on assumption and presumption, apart from being without basis.
M/s. Vayoo Nandan Finance Company Pvt. Ltd 4.8 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 AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction, hence, the reassessment is quashed." 5.5.2 Similarly, in the case of Kamal Kishoree Aggarwal vs. ACIT (supra), the Tribunal has observed as under: "7. I find that the reasons recorded for issuance of notice u/s 148 was as under: "REASONS FOR BELIEF THAT THE INCOME HAS ESCAPEDASSESSMENT IN THE CASE OF SHRI GOPAL GUPTA FORTHE ASSESSMENT YEAR 2009-10 As Survey Report in R/o client code modification (CCM) has been received from ADIT (Inv.) U-1(3) Ahmadabad disseminating of beneficiary clients who have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011- 12....
8. We find that in the case of M/s. Prashant Agencies Pvt. Ltd. And PPN Properties Pvt. Ltd. Vs ITO in & 3060/Del/2018, order dated 16.01.2019, the Tribunal dealt with the similar issuance of notice u/s 148 of the Act by following the decision of the Hon'ble Bombay High Court in the case of Coronation 'Agro Industries Ltd. Vs. DCIT 390 ITR 464 (Bom.). In that case, the reasons recorded were asunder: 10. A perusal of the above, shows that Client Code Modification is legally permissible in case of mistake. In the instant case, the observation of the Assessing Officer is to the effect that due to Client Code Modification in two transactions, the assessee's income was reduced by Rs. 5,96,176/-.
We find that there is no material which has been brought out in the recorded reasons to show that Client Code Modification in the instant case was malafide or the assessee received Rs. 5,96,176/- in cash in lieu of the said Client Code Modification. Thus, the above recording at best is a reason to suspect only.
12. It is an established position of law that the validity of reopening is to be decided on the basis of recording made u/s 148(2) of the Act alone and nothing can be added thereto. The recording should be self-contained to withstand the validity of the reopening made.
13. In the circumstances, respectfully following the decision of the Hon'ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs DCIT (supra) and the above quoted decision of the Tribunal, in our considered opinion, the reasons recorded in the instant case does not satisfy the requirement of law and the same does not constitute the reason to believe for escapement of any income from tax. Therefore, the reason is not valid. The consequential order of reassessment passed in pursuance thereto cannot be sustained. We, therefore, set aside the impugned order of reassessment passed u/s 147 of the Act and allow this ground of appeal of the assessee."
M/s. Vayoo Nandan Finance Company Pvt. Ltd 5.3 In the instant case, though the Assessing Officer has reproduced the reasons recorded, for ready reference same are reproduced here as under: "1. The assessee is a company filed its return of income on 27.09.2010 declaring Rs.5,06,454/- income. The details of the directors of the assessee company obtained from recants are hereunder:- (a) Alul Sethi (b) Gautam Jagga The return has been verified A digitally signed by Shri Atul Sethi.
Thereafter, the return was processed under 143(1) of the IT Act. However, the case was not selected for scrutiny/or scrutinized us 143(3) of the Act. Subsequently, information through email was received on 11/03/2016 from Asstt. Director of Income Tax (Investigation), Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted old profits using Client Code Modification.
It is a detailed report of 593 pages. I have gone through the report and gathered that how Client code modification has been done in case of the assessee to evade tax. Client code is unique code which is assigned by a broker to its clients. A broker can issue just one code to a client. Client Code Modification means modification/change of the client codes after execution of trades. Vide Circular no. SMD/POLICY/Cir-103, dated February 6, 2003 SEBI mandated that the slack exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. 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. Client code modification means modification of client code after the execution of trade. 3.1 Over a period of time, some persons, in connivance with brokers started using Client Code Modification for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes.
4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact lax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset. 4.1 Client code modification (CCM) especially in the Futures and Options Segment (F&O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan M/s. Vayoo Nandan Finance Company Pvt. Ltd to March of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified.
5. Enquiries were conducted by DIT (I&CI) Mumbai: On the spot verification u/s 131 (IA) of the Act was conducted in the cases of few brokers. The brokers admitted misuse of Client code modification & receipt of commission of 0.5 to 2%. In addition, following patterns were observed in the I&CI report: i. Number and percentage of modified trades traded value is significantly higher in the total number of trades/traded value of particular client indulging into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-genuine iv. Both buy and sell log of different trades have been modified to most of the client. v. Number of trade client code modifications substantially increased during the closing months of the financial year. vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F & O segment. vii The client code modification was consistently used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers accepted that they charged commission at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiaries. ix. These brokers revised their computation for A.Y 2010-11 and paid taxes accordingly. x. Some beneficiaries against whom enquiries were conducted have accepted and withdrawn their claim of nun-genuine losses in F&O segment in A.Y-2010- 11. They have revised their computation for A.Y.-2010-11 and paid taxes accordingly. The report of I&CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion.
An action was also undertaken by Ahmedabad Directorate of Investigation Wing. The wing had called for reports from different exchanges and the data was duty analysed. After analysis, 12Brokers and their related entities/main clients were identified for survey where the pre-survey analysis indicated more quantum of tax-evasion. Based upon data analysis coordinated surveys u/s 133A of the Income Tax Act, 1961 were carried out at-the premises of 12 brokers across India on 23.03.2015.
M/s. Vayoo Nandan Finance Company Pvt. Ltd
Income-Tax (First Amendment) Rules. 2011 were amended vide Notification No. 14/2011 [F. No. 142/25/2008-So(TPL)], Dated 9-3-2011. The amendment came into force on the 1st day of April, 2011. The amendment required the stock exchanges to ensure that the transactions (in respect of cash and derivative market) once registered in the system are modified only in cases of genuine error and maintain data regarding all transactions tin respect of cash and derivative market) registered in the system which have been modified and submit a monthly statement in Form No. 3BB to the Director General of Income-tax (Intelligence), New Delhi within fifteen days from the last day of each month to which such statement relates.
SEBI conducted a probe into 'modification of client ended by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2011). With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, the Indian markets were seeing diem code modifications to the tune of Rs.50,000 Rs. 60,000 crore a month, which came down to just about Rs. 100 crore soon after SEBI action. Quantum of such modifications was much higher during March, compared to the other months, which hinted towards the tax evasion angle due to it being the last month of the fiscal. This showed that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing 'genuine errors' In April 2012, SEB1 passed an order against NSE for being "negligent in discharge of its duties" in a case of modification of client codes. 9. The report of Ahmedabad Investigation Wing has been compiled after taking into account the findings of SEBI, DG I&CI. Data available with department in form of Form no. 3BB and the information collected by way of surveys. The report points out that the essence of lax evasion through CCM is that if the Broker has punched in both Buy and Sell Orders for a given quantity of a given security then at the end id the trading session he has with him an ascertained loss/gain on this Buy Sell pair that he can shift during the CCM window. The analysis of the Investigation Wing focused on narrowing down on systemic transfer of matched quantities of Buy and Sell Orders front a given Original Client Code (OCC) or to a given Modified Client Code (MCC) for a given Broker 10. The following steps were followed for analysis and computing the quantum of losses profits shifted due to the CCM: for computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2020 modified on 06.03.2010 to client Y(MCC), then in such case the difference in buy and sell trades is taken to be profit/loss shifted from X to Y.
M/s. Vayoo Nandan Finance Company Pvt. Ltd All other transactions say where 500 buy and 200 sell trades are shifted front X to Y have been ignored. The transactions where exact buy and sell transaction were transferred from one client to another NO PRICE RISK EVER was borne by the client who received the transactions through CCM. Thus such ASCERTAINED LOSSES shifted through CCM for which no price risk ever was borne by a client are nongenuine losses shifted with the motive of tax evasion by setting of such selectively shifted losses against other income. Working on the said logic has been made in both scenarios, i.e., when a given client was original client (OCC) and when the client was modified client(MCC). It has been seen with regard to all the clients, so identified to have obtained losses/profits consequent to such working on the NSE data, that when a client has received losses as MCC. It has shifted out profits when it was OCC and its code was modified. Thus, the total losses obtained by the client through CCM would be the sum of the losses received as MCC and profits shifted out to other clients as OCC.
As per the said working, year-wise and client-wise lasses computed for all the diems of different brokers is enclosed al Annexture B, to this report. The final figures of the profits and losses shifted due to CCM are at Annexure B to this report, 11. The submissions were requested from the brokers by the Investigation Wing and were duty considered. In case the submission had merits, these were duly honoured. The final set of beneficiaries as compiled contained only such beneficiaries for whom no tenable contention remains standing. To counter the contention of Brokers that the Department has not taken into account the open positions shifted from one client to another as a result of CCM as the shifting of one leg of trade (i.e. buy or sell open position) from one client to another only CCM wherein equal number of buy and sell trades between two clients have been shifted have been taken for computation of the losses profits shifted due to CCM. To be more specific and in simple terms, modifications which appear to be genuine or resemble at being germane were ignored and not considered in this report. Such benefit has already been given by the department.
I have gone through the report as well as the basic data of transaction in respect of my assessee which was supplied with the report. My findings on the issue arc as under: a) The return of the assessee shows that it is involved in sale purchase in stock exchanges and its gross turnover could have included the transactions contrived by way of CCM. b) The transactions which involved CCM in case of assessee are as under i) The assessee's code was modified 44 times in OCC to Shift out profits Rs.6,42,781 and one time in MCC to Shift in loss of Rs 4.420/ The data clearly Page | 15 M/s. Vayoo Nandan Finance Company Pvt. Ltd shows that the modification was not on grounds of feeding in erroneous data. The modifications are as under: To shift out profits. The Assessee's OCC of FSTP have been modified to new codes in MCC as under. Replaced Code Number of Times q I 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44 (ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one transaction in which he got OCC of someone else modified to its Code to gather losses. The original codes of 99 were replaced by assesses's codes of FSTP. This resulted in shifting in of losses of Rs.4,420/- c) Levenshtein Distance or edit distance is that it gives a clear indication as to whether the code is wrongly typed or is completely replaced. If the number of digits changed from original code to modified code is I. then it can be reasonably argued that the OCC (Original Client Cade) may have been typed wrongly by mistake But if the number of digits changed is more surely it cannot be a genuine typing mistake but a deliberate change. To this extent Levenshtein Distance Analysis or digit edit analysis acts as a clear indicator for genuineness in client code modification. The longer the distance (i.e. number of digits changed), the lesser the chances at genuineness. The analysis of Levenshtein Distance or digit edit analysis, when clubbed with the parameters mentioned in this report establishes the non- genuineness and contrived nature at the code change. Levenshtein Distance Analysis or digit edit analysis in case of the assessee shows that in all transactions the value was 2 or more. (d) Beneficiaries who shift out their profits and at the same time, they have also taken losses from others. These tactics are generally resorted to by the persons who already have taxable income in their books and they want to set it off against contrived losses through CCM. An important finding of the survey is trend analysis The trend analysis show that the profits are shifted out when the person is original client and losses are shifted in when the client is modified client. This trend show that the CCM has been carried out for nongenuine purposes in the case of assessees. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for a purpose other than genuine punching errors.
It should also be kept in mind that Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not he accepted as evidence in a court of law. In clandestine transactions, like that of CCM, it is impossible to have direct evidence or demonstrative proof of every Page | 16 M/s. Vayoo Nandan Finance Company Pvt. Ltd move, the AO has no choice but to take recourse to preponderance of evidence available.
A careful scrutiny of information received from the investigation wing and subsequent analysis of report of investigation wing, data of transactions and verification at ITR lead to an irresistible conclusion that Client Code Modification had been carried out in the case of assessee to shift in ascertained losses & shift out profits of Rs.6,47,201/- Income Chargeable to tax escaping assessment 15. Considering the above referred credible information, and enquiries and analysts subsequent to the information, I have reason to believe that an amount at least of Rs.6,47,201/-& commission @ 2%, amounting to Rs.12,944/- (@2%) has escaped assessment in case the of M/s Stratagem Portfolio P Ltd for the A.Y. 2010-11 within the meaning of Section 147/148 of Income-tax Act, 1961." 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purchase and sale on behalf of the customers. The Learned Assessing Officer, however has alleged in the reasons recorded that client code modification has been done for shifting of the profit or loss by the assessee. But there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. The Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 has held that for validity of reason recorded it is essential that there should be a relevant material on which a reasonable person could make requisite belief. In the circumstances, in view of the above decision of the Hon'ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. (supra) and decisions of the Tribunal (supra), we are of the opinion that the assessment cannot be reopened validly on the basis of the above reasons recorded in absence of any tangible material to infer that income escaped in the case of the assessee. We, accordingly, quash the reassessment proceedings and set aside the order of the Learned CIT(A) on the issue in dispute. The ground No. 1.1 of the appeal is accordingly allowed. 5.5 Since we have already quashed the reassessment proceeding, we are not adjudicating other ground of the appeal challenging validity of the reassessment as well as on the merit of the additions."
In view of the aforesaid observations and respectfully following the judicial precedent relied upon by the assessee hereinabove, we have no hesitation in the reassessment proceedings as they are not sustainable in the eyes of law. Since, reopening is quashed on technical ground there is no need to adjudicate the grounds raised by the assessee on merits and they are left open. The grounds raised by the assessee are allowed. 10. ) In the result, appeal of the assessee is allowed.”
M/s. Vayoo Nandan Finance Company Pvt. Ltd
8. Further I find that the similar issue had also been addressed by the Hon‟ble Bombay High Court in the case of Coronation Agro Industries Ltd vs DCIT reported in 390 ITR 464 (Bom) wherein it was held as under:-
“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.”
9. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in quashing the reassessment proceedings as they are not sustainable in the eyes of law. Since reopening is quashed on legal ground there is no need to adjudicate the ground raised by the assessee on merits and it is left open. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 23/01/2024.