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Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
ORDER PER M. BALAGANESH AM: (1) This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals)-6, Delhi,
[hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.CIT(A), Delhi-
6/10263/2017-18 dated 05/03/2019 against the order passed by Learned Income Tax Officer, Ward-16(4), New Delhi (hereinafter Joginder Pal Singh vs. ITO referred to as the ‘Ld. AO’) u/s 143(3) r.w.s 147 of the Income Tax
Act (hereinafter referred to as the ‘Act’) on 26/12/2017 for the Assessment Year 2010-11.
The assessee has raised the following grounds of appeal:
“1 That both the lower authorities were not justified in making and confirming the reassessment order u/s 147 since the same was not in accordance with the Provisions of the Income Tax Act, 1961 and is illegal on account of various grounds. 2. That the reassessment order passed by the Ld. AO deserves to be quashed as void ab initio since the same was passed without issuing any notice u/s 143(2) of the Income Tax Act, 1961.
3. That under the facts and circumstances of the case, an addition of Rs.20,18,500/- made by the Ld. AO and subsequently confirmed by the CIT(A) deserves to be deleted.
4. Without prejudice to above and under the facts and circumstances of the case, an addition of Rs.20,18,500/- amounts to double addition and the same deserves to be deleted.
5. That under the facts and circumstances of the case, disallowance of carried forward loss amounting to Rs.40,87,460/- from previous year by the Ld. AO is illegal and unjustified.
That without prejudice to above and under the facts and circumstances of the case, directions given by the Ld. CIT(A) to the Ld. AO for verification of carried forward loss amounting to Rs.40,87,460/- was beyond the powers given u/s 251 of the Income Tax act, 1961.
That the appellant craves leave to add, amend, alter or withdraw any ground of appeal at the time of hearing with the permission of the Hon’ble ITAT, Delhi Bench.”
The Ld. Counsel for the assessee (hereinafter referred to as ‘Ld. AR’) stated that ground No.2 raised supra by the assessee is not pressed. The same is reckoned as a statement made from the Page 2 of 16 Joginder Pal Singh vs. ITO Bar and hence, ground no.2 raised by the assessee is hereby dismissed as not pressed.
The remaining grounds raised by the assessee are taken up together herein.
We have heard the rival submissions and perused the materials available on record. The assessee is an individual and filed his return of income for the AY 2010-11 on 13/10/2010 declaring total income of Rs.33,96,417/-. No scrutiny assessment was framed on this return. Letter based on the information received from the Investigation Wing, Mumbai through the Assistant Director of Income (I&CI), New Delhi vide letter dated 09/10/2016 that the Modification of the Client Codes is a practice under which brokers change the client codes in sale and purchase orders of securities after the trades are conducted. The ADIT (I&CI), New Delhi passed on this information to the Ld. AO of the assessee along with information, list of such brokers, list of beneficiaries indicating (CCM) amount of transactions, amount of profit and loss against the name of each beneficiary obtained from National Stock Exchange (NSE) for future course of action. The allegation leveled thereon was that as a result of fictitious losses or profits, the Page 3 of 16 Joginder Pal Singh vs. ITO beneficiaries were either setting off their losses against the positive income with the intention to evade the tax or were introducing their undisclosed income. One such broker involved in the aforesaid CCM activity was M/s Integrated Master Securities Pvt. Ltd. (IMSPL) through whom the assessee herein has transacted. A survey u/s 133A of the Act was conducted on 24/06/2015 on M/s Integrated Master Securities Pvt. Ltd. The Directors of IMSPL in the statements recorded during the survey accepted the fact that the company had misused client code modification facility and created non genuine losses and profits which were given to different clients and beneficiaries according to their requirements. In the said list of beneficiaries, the assessee’s name also figured with the loss figure of Rs.10,09,250/-. The Ld. AO observed that the aggregate reduction in the income of the assessee comes to Rs.20,18,500/- on account of such client code modification. Accordingly, he concluded that he had reason to believe that income of the assessee to the extent of Rs.20,18,500/- had escaped assessment and hence, notice u/s 148 of the Act was issued on 28/03/2017. The main case of the AO is that income of the assessee has escaped assessment to the tune of Rs.20,18,500/- by way of shifting in Page 4 of 16 Joginder Pal Singh vs. ITO ascertained loss of Rs.10,09,250/- as appearing in the details supplied by the ADIT (I&CI), New Delhi has been suppressed in the books of accounts of the assessee with the connivance of the share broker in consideration of commission paid therein in cash to the brokers. Accordingly, the case of the assessee was reopened u/s 147 of the Act after obtaining the prior approval of the Pr.
Commissioner of Income tax, New Delhi. In response to the notice issued u/s 148 of the Act, the assessee vide letter dated 20/04/2017 submitted that the return already filed on 13/10/2010 may be treated as return in response to notice u/s 148 of the Act.
The assessee sought for reasons recorded for reopening the assessment. The Ld. AO supplied copy of the reasons recorded to the assessee vide letter dated 05/07/2017 which reads as under:
“During the course of survey operation in the case of M/s Integrated Master Securities Pvt. Ltd. the statement of Directors of the company was recorded on oath. They had accepted that the company had misused client code modification facility and created non genuine losses and profits. These losses and profits were given to different clients/beneficiaries according to their requirement. The clients had taken fictitious losses to set off the loss against their profits with a view to reduce their tax liability. Some of the clients also took fictitious profits to cover up their undisclosed income or to set off these profits against huge losses. In the list of beneficiaries received from the office of DIT (I&CI) Mumbai, the name of Sh. Joginder Pal Singh, who has taken fictitious loss of Rs.1009250 during F.Y.2009-10 relevant to A.Y.2010-11 representing accommodation entry through misuse of client code Modification in F&O Segment by M/s Integrated Master Securities Pvt. Ltd. also appears.”
Joginder Pal Singh vs. ITO 5.1. The assessee vide letter dated 15/07/2017 submitted before the Ld. AO that he had not claimed any loss in the return of income and that the amount mentioned in the sum of Rs.10,09,250/- representing the loss does not figure in the ledger account of M/s IMSPL maintained by the assessee. In other words, the assessee submitted that there was no loss claimed in the return of income to Rs. 10,09,250/- figured either in the books of accounts of the assessee or in the ledger account of IMSPL maintained by the assessee. Accordingly, the assessee pleaded for withdrawal of the notice issued u/s 148 of the Act as it is based on incorrect assumption of fact.
5.2. The Ld. AO, however, did not agree to the aforesaid contention and issued u/s 142(1) to the Act seeking further details. The assessee vide letter dated 16/10/2017 requested the Ld. AO to dispose of the objection raised for the reasons recorded by way of speaking order and also requested to provide the copies of statement or details relied upon by the Ld. AO, which would establish the escapement of income in the hands of the assessee.
Joginder Pal Singh vs. ITO 5.3. Vide letter dated 24/10/2017, the Ld. AO furnished the statement of loss transferred to the assessee in the sum of Rs.10,09,250/- indicating the two separate transactions of Rs.1,07,420/- and Rs.9,01,830/-. The assessee vide letter dated 30/10/2017 stated that the objections filed by the assessee were not disposed of by passing a separate speaking order by the Ld. AO.
The assessee also furnished the ledger account of IMSPL as appearing in the books of accounts of the assessee to drive home the point that the two entries mentioned in the AO letter representing loss figure of Rs.1,07,420/- and Rs.9,01,830/- does not figure in the said ledger account. Vide letter dated 02/11/2017 the assessee filed detailed reply before the Ld. AO clearly objecting to the entire re-opening made in this case by reiterating all the relevant facts on record available with him together with the relevant books of accounts. The assessee also explained the modus operandi of Future and Options (F & O) transactions carried by him together with the ledger account of the broker. The assessee categorically denied having taken any fictitious loss from the said broker which was also evident from the fact that no loss figure reflected in the ledger account of the IMSPL. The assessee also Page 7 of 16 Joginder Pal Singh vs. ITO sought for approval in terms of section 151 of the Act. The assessee also stated that all the details that were called for by the ld. AO in the notice issued u/s 142(1) of the Act, were duly submitted already to the extent available with the assessee. The assessee once again requested vide his letter dated 02/11/2017 to produce the complete details which were used against him to prepare his counter and defense thereon. The Ld. AO vide letter dated 07/11/2017 supplied the complete copy of the reasons recorded together with the approval papers obtained u/s 151 of the Act for reopening the case.
These documents are enclosed in pages 22 to 33 of the Paper Book filed before us. From the perusal of the proforma seeking approval u/s 151 of the Act from the competent authority, we find that the Ld. AO had mentioned the figure of Rs.20,18,500/- as income escaping assessment in the hands of the assessee. At the same time, the Ld. AO vide para 3.1 of Annexure-A attached with the Proforma for seeking approval u/s 151 of the Act under the caption ‘Reasons for formation of belief’ had stated that income of the assessee to the extent of Rs.1,70,650/- had escaped assessment.
Joginder Pal Singh vs. ITO 6. From the above, there are three figures for which the Ld. AO had reason to believe that income of the assessee had escaped assessment, though pertaining to the same transaction of fictitious losses. First, vide letter dated 05/07/2017, the Ld. AO says that assessee had taken fictitious loss of Rs.10,09,250/-. Second, the Ld. AO in the reasons recorded for reopening of assessment that too in the prescribed proforma thereon says that income of the assessee to the extent of Rs.20,18,500/- had escaped assessment. Thirdly, the Ld. AO in the caption ‘Reasons for formation to belief’ states that income of the assessee in the sum of Rs 1,70,650/- has escaped assessment, while seeking approval u/s 151 of the Act from the competent authority. The Ld. AO also issued summons u/s 131 of the Act to M/s IMSPL. In response to the summons, M/s IMSPL vide letter dated 06/11/2017 responded directly before the Ld. AO as to how the modus operendi of client code modification works and also explained that client code modification could be carried out by the broker for rectifying the genuine human punching errors which has been permitted by SEBI as well as Stock Exchange. In the said letter, M/s IMSPL also furnished the ledger account of the assessee during the financial year 2009-10 as Page 9 of 16 Joginder Pal Singh vs. ITO appearing in the books of IMSPL. The assessee pointed out the three different figures mentioned in the reasons by the Ld. AO vide letter dated 20/11/2017 filed before the ld. AO. In response thereto, the Ld. AO issued a letter dated 28/11/2017 stating that the figure of Rs.1,70,650/- has been inadvertently mentioned in the reasons.
In the said letter dated 28.11.2017, the Ld. AO stated that the correct figure is Rs.10,09,250/- which had escaped assessment.
The ld. AO also gave the details of the same containing the broker code, broker name, original client code, original client PAN, original client name, profit/loss to original client because of client code modification, modified client code, PAN of modified client, modified client’s name and the profit or loss to modified client because of client code modification. The assessee filed a letter dated 04/12/2017 in response to the letter issued by the Ld. AO dated 28/11/2017. In the said letter dated 04/12/2017, the assessee again objected to the validity of reopening by taking shelter from various case laws including the decisions rendered by the Hon’ble Jurisdictional High Court.
Joginder Pal Singh vs. ITO 7. The ld. DR argued that the letter dated 28/11/2017 issued by the ld. AO represents the order passed by him disposing of the objections raised by the assessee for reopening. In the said order/letter dated 28/11/2017, the Ld. AO categorically states that the correct figure of income escaping assessment is Rs.10,09,250/-.
The Ld. AO also gave details to supplement this figure. Whereas, we find that the Ld. AO had erroneously added a sum of Rs.20,18,500/-, towards disallowance of fictitious losses by stating as under:
12.3. I conclude therefore, in view of the foregoing discussion that the assessee Shri Joginder Pal Singh is one of the beneficiaries, who took the fictitious losses amounting to Rs.10,09,250/- to set off the loss against their profits with a view to reduce their tax liability by misusing the Client Code Modification facility in F&O Segment from the broker M/s Integrated Master Securities Pvt. Ltd. during the FY -2009-10 relevant to AY-2010-11. Therefore, the aggregate reduction in the income of the assessee comes to Rs.20,18,500/- on account of such client code modification. Accordingly, an addition of Rs.20,18,500/- is made to the income of the assessee for the FY-2009-10 relevant to AY-2010-11.
This action of the Ld. AO was upheld by the Ld. CIT(A).
The aforesaid narration of facts and various events clearly pointout the following:
(a) The Ld. AO in the reasons recorded for reopening the assessment had mentioned a figure of Rs.20,18,500/- to be the income escaping assessment in the hands of the assessee.
Joginder Pal Singh vs. ITO (b) In the prescribed proforma seeking approval in terms of section 151 of the Act for reopening of the assessment, the Ld.AO had mentioned the figure of Rs.20,18,500/- as the income escaping assessment in the hands of the assessee.
(c) The Ld. Addl.CIT / Ld. PCIT had accorded their respective approvals in the prescribed proforma u/s 151 of the Act taking cognizance of the figure of Rs.20,18,500/- as income escaping assessment in the hands of the assessee.
(d) Whereas the Ld. AO in his letter dated 28/11/2017 had categorically stated that the correct figure of income escaping assessment in the hands of the assessee to be Rs 10,09,250/-.
(e) The reasons recorded by the Ld. AO were completely based on the information received from I&CI Wing, New Delhi.
(f) Absolutely no independent enquiry was indeed carried out by the Ld. AO as to whether the assessee had per se claimed any loss in the sum of Rs.10,09,250/- in his return of income. From the computation of income enclosed by the assessee along with return of income which are also enclosed in pages 2 and 6 of PB, we find that assessee had only earned profit from its share transactions to the tune of Page 12 of 16 Joginder Pal Singh vs. ITO Rs.73,40,121/- and had not incurred any loss at all. Hence, there is absolutely no claim of loss of Rs.10,09,250/- by the assessee in his F&O Segment, whether fictitious or otherwise.
This fact was not even verified by the Ld. AO while recording reasons for formation of belief that income of the assessee had escaped assessment. Hence the reasons recorded by the Ld.
AO does not have live link to form a belief that income of the assessee had escaped assessment. Similar is the case of Ld.
Addl. CIT/Ld. PCIT while according their respective approvals u/s 151 of the Act.
(g) Hence, it could be safely concluded that reasons recorded for reopening of the assessment were made on incorrect assumption of fact.
(h) IMSPL had directly responded before the Ld. AO in response to the summons issued by the Ld. AO to IMSPL. In the said letter, IMSPL had indeed stated that client code modifications are permitted to be made by any broker as authorized by SEBI and Stock Exchange within the permitted time after the closure of the stock market to rectify human punching errors. Despite this, the Ld. AO had not even Page 13 of 16 Joginder Pal Singh vs. ITO bothered to first ensure as to whether there was any client code modification per se carried out in the case of the assessee. He simply relied on the information received from the I&CI Wing, New Delhi and proceeded directly to reopen the case of the assessee without making any enquiry on his own either while recording the reasons or during the course of reassessment proceedings. The reopening of assessment deserves to be quashed on this point also.
(i) Since, the reopening in the instant case has been made beyond four years from the end of the relevant assessment year, the competent authority in terms of section 151 of the Act for granting approval for reopening would be Ld. PCIT.
Admittedly in the instant case, the Ld. PCIT had accorded approval as is evident from the documents filed on record.
Hence, the objection raised by the Ld. AR that the name of the Ld. PCIT not being mentioned in the pre-printed notice u/s 148 of the Act dated 28/03/2017 would be mere technical and deserves to be dismissed.
The assessee had categorically stated that it had not incurred any loss in F&O Segment either in the sum of Rs.10,09,250/- or Page 14 of 16 Joginder Pal Singh vs. ITO 20,18,500/-. This is also evident from the ledger account of IMSPL maintained by the assessee which is placed on record before the Ld. AO. This fact is further evident from the ledger account of assessee as maintained in the books of account of IMSPL which was also placed on record before the Ld. AO. All these facts collectively go to prove that even on merits, there is no case made out by the Revenue that assessee had incurred fictitious losses on either Rs.10,09,250/- or Rs.20,18,500/-. On the contrary, the assessee had made actual profit on 73,40,121/- which was duly offered to tax from the F&O Segment.
Hence, we have no hesitation to hold that the reopening made suffers from various legal infirmities and deserves to be quashed.
Even on merits, there is no case made out by the Revenue and hence, the addition made in the sum of Rs.20,18,500/- is hereby deleted. Accordingly, Grounds No.1, 3 and 4 raised by the assessee are allowed.
Grounds No.5 & 6 raised by the assessee are with regard to disallowance of carry forward of loss of Rs.40,87,460/-. In view of our decision quashing the reassessment proceedings above, the adjudication of grounds no.5 & 6 become academic in nature. Page 15 of 16 Joginder Pal Singh vs. ITO 13. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 12th April, 2023.