Tribunal allows appeals, directs deletion of addition for client code modification. Validity of assessment order dismissed.

The tribunal partly allowed both appeals filed by the assessee. The tribunal directed the AO to delete the addition made on account of client code modification, setting aside the CIT(A)'s findings. The issue of the validity of the assessment order framed under section 147 was dismissed as infructuous. The order was pronounced on 08/11/2021 in Ahmedabad.

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Issues Involved:
1. Validity of reopening the assessment under section 147 of the Income Tax Act, 1961.
2. Confirmation of the addition made by the Assessing Officer (AO) on account of client code modification.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:

The first issue raised by the assessee was the validity of the assessment order framed under section 147 of the Income Tax Act, 1961. The assessee contended that the Learned Commissioner of Income Tax (Appeals) [CIT(A)] had erred in confirming the action of the AO in reopening the assessment. The assessee argued that the ratio of the judgment of the Hon'ble Supreme Court in the case of GKN Driveshaft (India) Ltd. was not followed in its letter and spirit, thereby rendering the consequential reassessment order liable to be quashed.

However, the tribunal noted that the issue raised by the assessee on merit had been decided in her favor regarding the addition made by the AO. Given this, the tribunal refrained from deciding the issue on the validity of the assessment order framed under section 147, as it became infructuous. Therefore, the technical issue raised by the assessee was dismissed as infructuous.

2. Confirmation of Addition Made by the AO on Account of Client Code Modification:

The second issue was regarding the confirmation of the addition of Rs. 29,66,471 made by the AO on account of client code modification done by the broker to shift the profit. The assessee argued that the AO made the addition arbitrarily and did not provide specific transaction-wise breakup of the modification. The assessee also contended that the client code modifications were mistakes committed by the broker's staff, and no adverse inference should be drawn against the assessee.

The CIT(A) confirmed the AO's order, observing that the appellant had indulged in client code modification (CCM) to shift in losses and set off against taxable income. The CIT(A) noted that the AO had concrete information and scientific analysis showing that CCMs were not carried out to rectify genuine errors but to completely replace one client code with another. The CIT(A) also highlighted that the appellant failed to refute the allegations and did not provide any evidence to show that the appellant had not benefited from these transactions.

Upon appeal, the tribunal examined the facts and noted that the client codes were modified as per the information received from the investigation wing. The tribunal emphasized that client code modifications give rise to suspicion, requiring detailed investigations to reveal the truth. The tribunal found that no such detailed investigation was carried out by the authorities. Moreover, the tribunal observed that in most cases, the client code modification was carried out with the assessee's relatives, making it unlikely that the assessee would manipulate the income/loss with them.

The tribunal concluded that the authorities below did not carry out the necessary verification/examination and thus set aside the findings of the CIT(A). The tribunal directed the AO to delete the addition made by him, allowing the ground of appeal of the assessee.

Conclusion:

In the combined result, both appeals filed by the different assessee were partly allowed. The tribunal set aside the findings of the CIT(A) regarding the addition made on account of client code modification and directed the AO to delete the addition. The issue of the validity of the assessment order framed under section 147 was dismissed as infructuous. The order was pronounced in the court on 08/11/2021 at Ahmedabad.

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