2019 (7) TMI 2057 - AT - Income Tax

Reopening assessment valid for client code modification but disallowed loss deleted without proof of direct involvement

Canara Securities Ltd. Versus Dy. Commissioner of Income-tax, Central Circle – 2 (1), Hyderabad

ITAT Hyderabad upheld reopening of assessment based on specific information regarding client code modification involving the assessee's broker. However, ... Reopening of assessment - addition on client code modification [CCM] - AO observed that the assessee is involved in transaction involving in CCM to absorb contrived losses from the other parties - HELD THAT:- Assessment was reopened on the basis of specific information received by the AO from the DIT(Inv.) that the broker with whom assessee was dealing has involved in CCM. It is a fact that the broker has made CCM in the case of assessee, in which, about 13 transactions were involved. It came to light only in the reopening of assessment. When a specific information is received by the AO from the authentic sources, it is natural on the part of the AO to believe that there is a reason to believe that the income of the assessee has escaped assessment. This issue was aptly addressed by the CIT(A) in the order, therefore, we are in agreement with the findings of CIT(A) that there is a reason to believe that in the case of the assessee, income has escaped assessment and reopening of the assessment is proper. Losses through CCM - We notice that no such investigation was carried on the broker i.e. CIL Securities Ltd. AO can proceed with the addition when he has specific information that the assessee itself involved in such malpractices. In the given case, AO has not brought on record any specific instruction given by the assessee to the broker for such client code modification. It is only based on the information that there involves CCM, in which, assessee has suffered loss to the extent of Rs. 13,48,175/-. It does not mean that assessee has directly involved, may be, assessee must have benefitted out of it, but, still it is the duty of the AO to bring on record the fact that assessee has directly involved in such activities. From the record, we notice that assessee has incurred heavy losses in this year, we do not understand how shifting of profit will benefit the assessee. Therefore, in our considered view, in the absence of any findings that assessee has given specific instruction to the broker to make such CCM, assessee cannot be held responsible in such modification. Therefore, it is only a presumption of the AO that assessee might have involved in such transactions. Accordingly, the loss disallowed by the AO is hereby deleted. Enhancement of assessment - classification of business income as capital gains - Assessee itself is investment banker and makes investments in stock in order to make profit. The investment made for the business transactions, which can be classified only under business income in particular, the transactions involving stock-in-trade. Assessee cannot treat the above transaction as capital gains just because its long term as well as it has paid security transaction tax on the above investment. Assessee relied on Circular No. 6/2016, in which, the CBDT clarified that surplus generated from sale of shares/securities would be divided as capital gains or business income, where, a) assessee itself opts to trade them as stock-in-trade income arising from transfer of such sales would be treated as income from its business, b) in respect of shares/securities held for a period of more than 12 months, immediately preceding a date of its transfer, if the assessee desires to trade income arising from the transfer as capital gains, the same should not be disputed by the AO and c) in all other cases, nature of transaction was continued to be decided based on the Circular No. 4/2017. Above Circular may not be applicable in the case of the assessee, since the assessee’s main business itself is investment banker and the transactions were specifically transacted in the normal course of business. Therefore, we are in agreement with the findings of ld. CIT(A) and we are not inclined to disturb the findings of CIT(A). Accordingly, ground raised by the assessee on this issue is dismissed. Appeal of the assessee is partly allowed ISSUES PRESENTED and CONSIDEREDThe Tribunal considered the following core legal issues:Whether the reopening of the assessment under Section 147 of the Income-tax Act, 1961, was justified based on the information received about the misuse of the Client Code Modification (CCM) facility.Whether the additions made by the Assessing Officer (AO) regarding contrived losses through CCM were valid.Whether the enhancement of assessment by the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the classification of business income as capital gains was appropriate.Whether the assessee was denied natural justice by not being allowed to cross-examine the broker involved in the CCM transactions.ISSUE-WISE DETAILED ANALYSIS1. Reopening of Assessment under Section 147Relevant Legal Framework and Precedents: Section 147 allows the AO to reopen an assessment if there is reason to believe that income has escaped assessment. The AO must have tangible material to form such a belief.Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A)'s finding that the AO had a valid reason to believe that income had escaped assessment due to the specific information received about the misuse of the CCM facility.Key Evidence and Findings: The AO received information from the DIT(Inv.) about the broker's involvement in CCM, which led to the reopening of the assessment.Application of Law to Facts: The Tribunal held that the information provided a sufficient basis for the AO to believe that income had escaped assessment, justifying the reopening under Section 147.Treatment of Competing Arguments: The assessee argued that the reopening was based on suspicion without concrete evidence. However, the Tribunal found the AO's reliance on specific information justified.Conclusions: The Tribunal upheld the reopening of the assessment as proper and in accordance with the law.2. Additions Based on Client Code ModificationRelevant Legal Framework and Precedents: The CCM facility is intended for correcting genuine errors, not for tax evasion through contrived losses.Court's Interpretation and Reasoning: The Tribunal noted that the AO had not provided evidence of the assessee's direct involvement in instructing the broker for CCM.Key Evidence and Findings: The broker, CIL Securities Ltd., confirmed no written instructions from the assessee for CCM during FY 2009-10.Application of Law to Facts: The Tribunal found that the AO's presumption of the assessee's involvement was not substantiated by evidence.Treatment of Competing Arguments: The Tribunal considered the AO's suspicion but emphasized the lack of concrete evidence linking the assessee to the CCM.Conclusions: The Tribunal deleted the additions made by the AO, as there was no evidence of the assessee's direct involvement in CCM.3. Enhancement of Assessment by CIT(A)Relevant Legal Framework and Precedents: The classification of income as business income or capital gains depends on the nature and intention of transactions.Court's Interpretation and Reasoning: The Tribunal agreed with CIT(A) that the income from cash market long-term transactions should be classified as business income, not capital gains.Key Evidence and Findings: The assessee's books of account treated the transactions as stock-in-trade, supporting the classification as business income.Application of Law to Facts: The Tribunal found that the transactions were part of the assessee's regular business activities and should be taxed as business income.Treatment of Competing Arguments: The assessee argued for capital gains classification based on the holding period and intention. However, the Tribunal emphasized the business nature of the transactions.Conclusions: The Tribunal upheld the CIT(A)'s enhancement of assessment, agreeing with the classification of income as business income.4. Denial of Natural JusticeRelevant Legal Framework and Precedents: The principles of natural justice require that parties be given an opportunity to present their case and cross-examine witnesses.Court's Interpretation and Reasoning: The Tribunal acknowledged the assessee's claim of being denied the opportunity to cross-examine the broker but noted the lack of evidence showing the assessee's request for cross-examination.Key Evidence and Findings: The Tribunal considered the broker's letter indicating no written instructions from the assessee for CCM.Application of Law to Facts: The Tribunal found no procedural irregularity as the assessee did not demonstrate a formal request for cross-examination.Treatment of Competing Arguments: The Tribunal considered the assessee's claim but found no substantial procedural violation.Conclusions: The Tribunal did not find a denial of natural justice in the proceedings.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'In the absence of any findings that assessee has given specific instruction to the broker to make such CCM, assessee cannot be held responsible in such modification.'Core Principles Established: The reopening of assessment under Section 147 requires specific and credible information. Additions based on CCM require evidence of the assessee's direct involvement. The classification of income depends on the nature of transactions and their treatment in the books of account.Final Determinations on Each Issue: The Tribunal upheld the reopening of assessment, deleted the additions based on CCM, upheld the enhancement of assessment by CIT(A), and found no procedural violation regarding natural justice.