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2018 (5) TMI 445
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....onducted a survey under Section 133-A of the Act at the premises of twelve brokers. During investigation, it was found that Client Code Modification (CCM) was being used as a tool for tax evasion. The losses were being shifted out of the profit of the clients. A detailed investigation report was sent to respondent No.2 in a Compact Disc. In the investigation report, the details of Client Code Modification (CCM) used by the broker of the petitioner were also there. 4. A notice dated 31.03.2016 under Section 148 of the Act was served upon the petitioner by the respondent, after obtaining necessary satisfaction of the Principal Commissioner of Income Tax, Panchkula. The petitioner vide letter dated 26.08.2016 sent a copy of the income tax return filed for the assessment year 2009-10 stating that it be treated as the return filed in response to the notice under section 148. The petitioner also requested the respondent to furnish the reasons for reopening the assessment. 5. At the petitioner's request, the reasons for initiating proceedings under Section 147 of the Act were supplied to the assessee. The reasons read as follows :- "The assessee has filed return of i....
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.... believe that the income has escaped assessment; that the proceedings were merely on the directions of the Principal Director of Income Tax (Investigation), Ahmedabad; that the AO had acted only upon borrowed satisfaction, instead of satisfying himself and the satisfaction recorded by the Principal Commissioner of Income Tax, Panchkula under Section 151 was in a mechanical manner and without application of mind. 9. The relevant provisions of the Act are as follows :- 143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely :- (a) the total income or loss shall be computed after making the following adjustments, namely :- (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; (b) the tax and interest, if any, shall be computed on the basis of the total income computed under clause (a); (c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest, i....
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.... under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year : Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subjectmatter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.-Production before the Assessing Officer of acc....
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....espondent himself had reason to believe that income had escaped assessment or whether it was on borrowed satisfaction on his part, it is necessary to examine the material that was before the respondent. 13. In this regard, a letter dated 08.03.2016 from the Principal Director of Income-Tax (Investigation) Ahmedabad, is of vital importance. The letter was addressed to the Chief Commissioner of Income-tax, Panchkula. The subject of the letter referred to a survey report in respect of Client Code Modification (CCM) being forwarded regarding the dissemination of beneficiary clients who have taken losses and shifted out profits during the financial years 2008-09 to 2011-12. The letter explains that modification of the client code is a practice under which brokers change the client code in sale and purchase orders of securities after the trades are conducted. It further rightly explains that while it is permissible to rectify inadvertent errors, there were concerns that modifications could be made to manipulate the activities in the market. Thus, for instance, if a particular transaction is undertaken in the name of a client, it cannot be shifted to the name or account of another clie....
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....uested to initiate necessary action in the case of the beneficiary clients pertaining to your jurisdiction noted in the Pen Drive. These cases may also be closely monitored as huge revenue stake is involved." 14. Based on the above information, details regarding the petitioner were tabulated. The table contained several details regarding the petitioner. These details pertained to the alleged sham transactions between the petitioner and his broker M/s Competent Finman Pvt. Ltd. What is important to note is that between 19.12.2008 to 10.09.2009 i.e. within a period of about nine months, there were 74 modifications. In our view, this material undoubtedly justifies the need to investigate the transactions and the manner in which they have been recorded by the broker. These were not stray cases of modification. There were 74 modifications within a period of about nine months. There may well be a valid explanation for the same. The fact however remains that the number of modifications would justify a consideration of the matter. It would be necessary for instance to examine the circumstances and the reasons for which the errors allegedly occurred. In other words, it is necessary to as....
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....erial pertaining to the petitioner and pursuant thereto initiated proceedings under sections 147 and 148 of the Act. 17. Mrs. Suri relied upon a letter dated 27.10.2016, by which the respondent sought certain information from the broker of the petitioner, including the Client Code of the assessee during the Financial Year 2008- 09, the number of times the Client Code had been changed, the total investment made and a complete copy of the contract notes and copy of the account of the assessee in the books of the broker. She contended that the information having been sought after the reasons indicated that the decision to re-open the assessment was not passed on any material. 18. This would be a narrow reading of the letter. As we have already indicated, the respondent had sufficient reasons for initiating proceedings for re-assessment. An AO seeking further information and all the material on the basis of which he formed the opinion that the income had escaped assessment does not nullify the decision to re-open the assessment. In fact, this indicates that the AO intends considering the case on merits before passing the final assessment order. 19. It is evident that the AO be....
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....ourt found in that case that there was no material or fact which had been stated in the reasons for starting the proceedings for re-opening the assessment. In the case before us, as already discussed, this is not so. 22. As we will now indicate it is not necessary that the AO must know or be certain that income has escaped assessment. The AO must have reason to believe it has. He may finally accept the assessee's case. That would make no difference to the validity of the invocation of sections 147 and 148. 23. In Income-Tax Officer Vs. Purushottam Das Bangur and another, (1997) 224 ITR 362 (SC), relied upon by Mr. Putney, the Supreme Court rejected the contention of the assessee that the information received from the Deputy Director, Directorate of Inspector (Investigation) was not a definite information and should not be acted upon by the Income Tax Officer for taking action under Section 147 of the Act. It was held that the information contained in the letter could form the basis for forming an opinion that there was reason to believe that income had escaped assessment without any further verification. In that case, the assessee claimed to have suffered a long term capi....
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....f original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment. It could not be said that the information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the Income Tax Officer for taking action under Section 147 (b) of the Act. Ms. Gauri Rasgotra, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the Incometax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under Section 147 (b) of the Act and that he did not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income Tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income Tax officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the....
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.... High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment of income and consequent escapement of income from assessment and tax could be recorded in the proceedings before them. It certainly was not within the province of the High Court to finally determine that question. The High Court was only concerned to decide whether the conditions which invested the Income Tax Officer with power to re-open the assessment did exist, and there is nothing in the Judgment of the High Court which indicates that they disagreed with the view of the Trial Court that the conditions did exist." 27. In Central Provinces Manganese Ore Co. Ltd. Vs. I.T.O. Nagpur, 1991 (4) SCC 166, the Supreme Court held as under :- "11. So far as the first condition is concerned, the Income-tax Officer, in his recorded reasons, has relied upon the fact as found by the Custom Authorities that the appellant under-invoiced the goods he exported. It is no doubt correct that the said finding may not be binding upon the Incometax authorities but it can be a valid reason to believe that the chargeable income has been under-assessed. The ....
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....citude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147 (a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)." 30. Mrs. Suri's reliance upon an interim order passed by the Bombay High Court in Coronation Agro Industries Ltd. Vs. Deputy Commissioner of....
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....tion of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in Section 34 of the Act of 1922 at one time before its amendment in 1948 are there in Section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. 12. The powers of the Income-tax Officer to r....
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....oker was culled out and tabulated. There were 74 cases of the petitioner's broker having modified the petitioner's transactions. The information was directly on the issue of the transactions. It cannot by any stretch of imagination be said to be vague, indefinite or distant. For the reasons we have already stated, this was not a case where the AO merely had reason to support that income had escaped assessment. 35. The judgment of the Delhi High Court in CIT Vs. SFIL Stock Broking Ltd., (2010) 325 ITR 285 (Delhi) is clearly distinguishable. In that case, the reasons themselves recorded that the AO had been directed to get notices issued under Section 148 by the Deputy Director (Investigation) and subsequently by the Additional CIT. The judgment was based on the finding that the proceedings had been initiated only on the basis of these directions and without any independent application of mind by the AO. 36. In CIT Vs. Atul Jain, (2008) 299 ITR 383 (Delhi), the Delhi High Court upheld the decision of the Tribunal setting aside the proceedings under Sections 147 and 148. The Delhi High Court, however, found that the information did not include the source of the capital g....
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....tion that information from the broker was sought after issuance of the notice shows that there was no enquiry prior to the issuance of the notice and hence, the proceedings are bad is not well founded. Once it is held that the proceedings under Sections 147 and 148 have been validly initiated, the AO is not prevented from looking into the matter further, including by gathering further information. He in fact is bound to do so. 40. Mrs. Suri placed strong reliance upon the judgment of a Division Bench of the Gujarat High Court in Harikishan Sunderlal Virmani Vs. Deputy Commissioner of Income Tax, (2017) 394 ITR 146 (Guj). Firstly, in that case, the assessment was under Section 143 (3) whereas in the case before us, it was under Section 143 (1). The reasons furnished in that case and the finding of the court were referred to and relied upon by Mrs. Suri in extenso. It is only fair, therefore, that we set out both :- "3.1 At the outset, it is required to be noted that the impugned notice under section 148 of the Act to reopen the assessment in exercise of the power under section 147 of the Act, has been issued beyond the period of four years. Therefore, considering the pro....
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....igit edit analysis utility is also provided by the investigation Wing. This utility 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 1, then it can be reasonably argued that the OCC (Original Client Code) may have been typed wrongly by mistake. Similarly, if the number of digits changed is more say 4 or 5, it cannot be genuine mistake but a deliberate change. To this extent, Levenshtein distance analysis or digit edit analysis act as a clear indicator for genuineness in client code modification. In short, the longer the distance (i.e. number of digits changed), the lesser the chance of genuineness. 3. Hence, the editing of client code above it is termed as deliberate change and establishes the non-genuineness and contrived nature of the code change. 4. In view of the above facts, I have reason to believe that the income to the extent of Rs. 1,19,848/- has escaped assessment, which required to brought under tax. Therefore, this case is a fit case for initiating the proceeding under section 147 of the Act." 3.3. Thus from the reasons recorded, t....
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....ed 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. 3.4. At this stage it is required to be noted that even in the reasons recorded, there is no 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 Act. Under the circumstances, on the aforesaid ground alone, the impugned reassessment proceedings deserve to be quashed and set aside." 41. Firstly, there is a significant difference between that case which involved only one CCM and the case before us which involves 74 CMMs. Further, in our view, the reasons furnished in that case were sufficient to justify proceedings under Sections 147 and 148. The Assessing Officer had received information from the Principal Director of Income-tax (Investigation), Ahmedabad. As is evident from the rea....
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.... 43. This brings us to Mrs. Suri's contention that the satisfaction recorded by the Principal Commissioner of Income Tax, Panchkula, under Section 151 of the Act was mechanical. We do not agree. From a perusal of the record, it is evident that the section has been duly complied with and he has not signed on the dotted line. If he approves the reasons he is not bound to reiterate the same. That would be an empty formality. Mr. Putney's reliance upon the following observations of the Calcutta High Court in Income-Tax Officer and others Vs. Mahadeo Lal Tulsian and others, (1977) 110 ITR 786 (Calcutta) is well founded :- "... He has contended that there had been no due compliance with the provisions of section 151 (2) of the said Act since the Commissioner of Income-tax had failed to arrive at a bona fide satisfaction or record the same. Here again, the issue has to be considered from the point of view of what the facts establish in substance. Now, facts indicate that the proposal for reopening the assessment with reasons indicated hereinbefore was placed before the Commissioner of Incometax. Obviously he applied his mind as is indicated by his endorsement : "Yes, I....
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....ry for his assessment for that year,income chargeable to tax has escaped assessment forthat year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or (b) of Section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under Section 148. From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material' facts necessary for his assessment for the accounting year in question,income chargeable to tax has escaped assessment for that year; nor could it be said that he as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of eith....