TaxTMI 
TaxTMI 
2019 (7) TMI 1411
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....resulting assessment order so passed, is nullity and is liable to be quashed. iii) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on fact in confirming addition of Rs. 5,08,116/- being alleged profit from F&O transaction on the basis of information received from Investigation Wing without any independent and judicious application of mind on the said alleged information whereas the appellant has duly substantiated the profit declared on F&O transactions in securities for the FY under consideration. iv) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on facts in mechanically holding the validity of opening of assessment proceedings under section 147 of the Act as legal by the AO merely on the basis of external source of information without judicious application of mind to prove any nexus between the material and his belief that alleged adjustment of net loss done by the appellant through the alleged broker through Client Code Modification. v) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred both in law and on facts in confirming addition of Rs. 5,08,116/- being....
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....asis of Report of the Investigation Wing and the Assessing Officer has not conducted any enquiry on the same, therefore, respectively following the decisions of the Tribunal cited (supra), I hold that reassessment proceedings initiated in the instant case are not in accordance with law. Accordingly, the same is quashed. Since the assessee succeeds on the legal ground, the grounds of appeal challenging the addition on merit become academic in nature for which these are not being adjudicated." 2.1 He further stated that the answer has been given by the Bench positive in the case of the Appellant i.e. Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10) and therefore, requested to follow the same ratio in the case of the present assessee and quash the assessment by allowing the appeal of the assessee. 3. On the contrary, Ld. DR relied upon the orders of the authorities below and stated that Assessing Officer issued the notice u/s. 148 after due application of mind. He stated that the AO has followed due procedure before issuing the notice u/s 148 of the I.T. Act, 1961. The Assessing Officer had tangible material in the form of information received from the In....
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..... Vs DCIT Bombay High Court T20131 33 taxmann.com 454 (Bombay)/r20131 215 Taxman 109 (Bombay)(MAG.) Where there was failure on part of assessee to make true and complete disclosure in respect of share transactions entered into by it, in view of proviso to section 147, Assessing Officer was justified in initiating reassessment proceedings even after expiry of four years from end of relevant assessment year. 7. Acorus Unitech Wireless (P.) Ltd. Vs ACIT Delhi High Court T20141 43 taxmann.com 62 (Delhi)/r20141 223 Taxman 181 (Delhi)(MAG)/r20141 362 ITR 417 (Delhi) In terms of section 148, law only requires that information or material on which Assessing Officer records his or her satisfaction has to be communicated to assessee, without mandating disclosure of any specific document. 8. PCIT, Vs Paramount Communication (P.) Ltd. Delhi High Court [20171 79 taxmann.com 409 (Delhi)/r20171 392 ITR 444 (Delhi) Information regarding bogus purchase by assessee received by DRI from CCE which was passed on to revenue authorities was 'tangible material outside record' to initiate valid reassessment proceedings. 9. Paramount Communication (P.) Ltd. Vs PCIT Supreme Court 2017-TIQL-25....
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....on of Supreme Court in GKN Driveshafts (India) Ltd. Vs. ITO (2002) 125 Taxman 963 that on receipt of objection given by assessee to notice under section 148, Assessing Officer is bound to dispose objections by passing a speaking order, would not make reassessment order void ab initio. 17. Baldevbahi Bhikhabhai Patel vs. DCIT (Gujarat High Court) (2018) 94 Taxmann.co, 428(Gujarat) Where revenue produced bunch of documents to suggest that entire proposal of reopening of assessment alongwith reasons recorded by the Assessing Officer for same were placed before Additional Commissioner who, upon perusal of same, recorded his satisfaction that it was a fit case for issuance of notice for reopening assessment, reassessment notice issued against assessee was justified. 4. I have heard both the parties and carefully considered the case laws and the relevant documents available on record, especially the impugned order, Paper Book and the case laws cited by both the parties. I further note that the AO while recording the reasons for the belief that income has escaped assessment has recorded the reasons as under, a copy thereof was given by the Assessee's counsel during the hearing.:- "....
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....ac and above. The name and details of the assessee/beneficiary from the above mentioned list is given as under, which has been taken from the data of CD sent by the ADIT(Inv.)U-1 (3), Ahmedabad PAN OF BENEFICIARY CLIENT NAME BENEFICIARY CLIENT ADDRESS BENEFICIARY CLIENT NAME OF BROKER NET REDUCTION IN INCOME DUE TO CCM AAGPJ2808K SANJAY KUMAR JAIN 4669, GALI MOHAR SINGH PAHARI DHIRAJ, DELHI - 110 006 CPR CAPITAL SERVICES LTD. RS. (-) 510815.9/- On verification of records, it is found that the assessee filed his Return of Income for the AY. 2009-10. In view of the above, I have reasons to believe and I am satisfied that income above Rs. 1 lac chargeable to tax has escaped assessment for A Y. 2009-10 by reasons of the failure on the part of the assessee to disclose truly & fully all material facts necessary for his assessment for AY. 2009-10, and he case is fit for reopening the assessment u/s 147 by issuance of notice u/s. 148 of the I. T.Act, 1961." 6.1 After perusing the aforesaid reasons recorded, I find that 'information' was received from Asstt. Director of Income Tax (Investigation) Unit- 1(3), Ahmedabad and the AO has only relied on the said information a....
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....oducing the relevant findings of the Tribunal in the case of Mohan Aggarwal, ACIT, CC-15, New Delhi in ITA No. 2497/Del/2018 (AY 2009-10) as under:- "10. We have considered the rival arguments made by both the sides and perused the material available on record. We have also considered the various decisions cited before us. We find the Assessing Officer, on the basis of the information received in the shape of the report of the Investigation Wing of Ahemdabad, reopened the assessment u/s 147 of the IT Act on the ground that assessee has misused the facility of client code modification provided to stock brokers to avail contrived loss of Rs. 31,90,855/- There is no dispute to the fact that the assessee in the instant case has traded at the stock exchange through the broker M/s. Gaurav Investment and Consultancy Private Limited. There is also no dispute to the fact that the Assessing Officer during the course of assessment proceedings has called for certain information from the said broker who has replied to the queries raised by the Assessing Officer in response to notice u/s 133 (6) of the IT Act and there is no allegation by the Assessing Officer in his findings that there was ....
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....ode Modification such transactions are not possible when the parties are not related to each other party and are independent clients of a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of 1/2 hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and are closely related party. These transactions are even otherwise cannot be predesigned or planned as it can be done only after transaction is executed on the stock exchange and subsequently once the result and outcome of the transaction is known to the parties, the same can be shifted from one client to another client to serve the interest of parties. Prior to the execution of the transaction, it is not possible to conceive or preconceive the transfer of the transaction from one ac....
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....roker's level and the firm should not be held responsible for mistake committed by the brokers. 10. That the appellant has further submitted that client code modifications are a very legitimate transactions where if any mistake is committed then it has to be rectified within 15 minutes of the close of trading session. 5.3.2 I have considered the above mentioned facts. I have particularly taken into account the functioning of the stock exchange where a trading is done on the basis of purchase transaction entered by the brokers. The broker does it on the advice of the sub-brokers/ clients. Here in this case the broker i.e. M/s. Artistic Finance (P) Ltd. had booked purchase/ sale of scrip on the advice of the appellant i.e. M/s. Noble Securities using the client code of M/s. Noble Securities. Later, M/s. Noble Securities advised the broker M/s. Artistic Finance (P) Ltd. to modify the client code and book it in the name of the other clients of M/s. Noble Securities. Thus, the transactions which were earlier made in the name of the appellant were transferred to third parties. The appellant has claimed that the purchases were wrongly done in the name of M/s. Noble Securities ....
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....: (SCC pp. 254-55, para 45)''45. Tax planning may be legitimate provided it is within the frame work of law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.'' In this particular case, the appellant is found to be indulged in large use of facility to book a loss in the book by diverting a part of transaction to its clients. This type of transactions particularly gives undue advantage in F& O segment where loss and even income can be booked in clients favour to give advantage to them and also book losses against their own income. At the end of the session when the relative advantage of a transaction can be easily evaluated and then taking advantage of client Code modification, such transaction can be transferred to client's account depending upon the client's requirement and thus real income from such transactions can be suitably compromised. Therefore, in view of the regularity with which such transactions have been effected, ....
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.... executed, fine of 0.1% of value of trades transferred is applicable". 3. The broker on an average executes more than 5000 trades in a day. As is calculated by the AO, the exchange is operative only 260 days in a year. Thus, in a year approximately 13 lakhs trades are carried out by the broker. Therefore, the fact that during the year, the broker had carried out 2380 modifications by using CCM facility is irrelevant as it is only 0.18% of the total trades carried out by the broker during the year. Also, the fact the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. 4. A statement showing the details of modified client names and the profit/loss to the modified client due to CCM is at PB 27-32. Also by reply dated 15.02.2016 (PB 33-34), the assessee had submitted the confirmations of its parties in whose case modifications have been carried out. This shows that the profit/loss are of the clients of M/s Artistic Finance Pvt. Ltd. which is wrongly punched by it to the account of the assessee and when poin....
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....ssee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trade....
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....s allowed." Thus, it is clear that the stock exchange has accepted the reasonable error margin up to 5% and undisputedly in the case of the assessee, the error and rectification of the same by using the Client Code Modification constitute only 0.47%, therefore, the percentage of trade which are rectified are not only within the range but it is on lower side of the range of error margin acceptable in such transactions. The Mumbai Benches of the Tribunal in the case of ITO Vs. M/s Pat Commodity Services P. Ltd. has considered this issue in para 11 to 16 as under: "11. We have heard rival contentions and perused the record. A careful perusal of the order passed by the Ld CIT(A) would show that the Ld CIT(A) has met each and every point raised by the assessing officer. The Ld CIT(A) has pointed out that the AO has not brought on record any material to show that the client code modification made by the assessee was not genuine one. It was further noticed that none of the clients examined by the tax authorities has disowned the transactions carried on by the assessee. As noticed by the Ld CIT(A), the MCX, the stock ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka exchange....
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....used to set off the past brought forward losses, yet the Ld CIT(A) has made a detailed analysis of this matter and has given a clear finding that the same was not true in all the cases. The Ld CIT(A) has pointed out that majority of the clients have paid tax on the profits. It was further noticed that the some of the transactions have resulted in loss also and the said loss has also been accepted by the concerned clients. Ali these factors, in our view, go to show that the assessee has carried out the transactions on behalf of its clients only, even though the transactions were executed in the code of the assessee initially. 13. Further, the Ld CIT(A) has pointed out that there was no modification of client code to the tune of Rs. 3.31 crores and further there was change of code from one client to another client to the tune of Rs. 6.16 crores. In both these cases, the question of shifting of profit earned by the assessee does not arise at all. The action of the AO in assessing the above said profits in the hands of the assessee only show that there was no proper application of mind on the part of the assessing officer. 14. Another important point that is relevant here is that n....
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....sually high number of cases. Therefore, first thing to be decided is whether there was the client ITA No. 695/JP/2018 & CO 15/JP/2018 DCIT Vs. Gyandeep Khemka code modification for unusually high number of cases. The Commodity Exchange i.e. MCX vide circular No.MCX/T&S/032/2007 dated 22.01.2007, issued guidelines with regard to the client code modification, which reads as under:- "Circular no. MCX/T&S/032/2007 January 22, 2007 Client Code Modifications In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange, the Members of the Exchange are notified as under: Forward Markets Commission (FMC) vide its letter no. 6/3/2006/MKT-II (VOL III) dated December 20, 2006 and January 5, 2007 has directed as under. a. The facility of client code modifications intraday are allowed. b. The members are also allowed to change their client codes between 5:00 p.m. to 5:15 p.m., in case of the contracts traded till 5:00 p.m. and between 11:30 p.m. to 11:45 p.m. for the contracts traded till 11:30 p.m. on all the trading days from Mondays to Fridays and on Saturdays the same shall be allowed between 2:00 p.m. to 2:15 p.m. c. However, on the days when trading in com....
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....eproduced the same at paragraph No.6 of our order. From the said details, it is evident that the client code modification was done in four years 36,161 times. As an absolute figure, the client code modification may look very high, but if we look it at in terms of total transactions, it is only 0.94%. The total number of trade transactions is 38.58 lacs and the client code modification is only 36,161. Therefore, the client code modification is less than 1% of the total trading transactions. As per circular of Commodity Exchange, client code modification upto 1% is quite normal and is permitted without any penalty. That the Assessing Officer has not given any reason on what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer. 9. The Assessing Officer held the client code modifications to be malafide with the intention to transfer the profit to other person by modifying the client code so as to avoid the payment of tax. From the circular of the Commodity Exchange, it is evident that client code mo....
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....f the Revenue's appeal are rejected. Thus in the said case, it was found and held that the Client Code Modification up to 1% is quite normal and permissible without any penalty. The case in hand, it was only 0.47%, therefore, there is no reason to doubt the genuineness of the Client Code Modification done by the broker in the transactions where after the execution of the trade, the broker has carried out the correction of mistakes. A similar view has been taken by the Tribunal in the series of decisions as referred above. In view of the above facts and circumstances of the case and following the decisions of the Coordinate Benches of the Tribunals, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Hence, both these grounds of revenue's appeal are dismissed." 11. I find the Delhi Bench of the Tribunal in the case of Raidance Stock Traders Pvt. Ltd. (supra) has observed 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 ....
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....rder of the ITAT. He submitted that the AO was himself present in the Court and further efforts would be made to locate the materials on the basis of which the AO formed his opinion regarding reopening of the assessment. The Court was not prepared to grant further time for this purpose since it was not clear that the materials were, in fact, available with the Department. 12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated: "I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money in its bank account by way of above accommodation entries." The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been diff....
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....on allegedly received by him from the (Inv.)), Unit 1(3), Ahmedabad. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, I am of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. My aforesaid view is fortified by the following decisions:- (A) Hon'ble Delhi High Court in the case of Pr. CIT vs. M/s NC Cables Ltd. in ITA No. 335/2015 has held as under:- 11. Section 151 of the Act clearly stipulates that the CIT(a), who is the competent authority to authorize the reassessment notice, has to apply his mind and form an opinion. The mere appending of the expression 'approved' says nothing. It is not as if the CIT(A) has to record elaborate reasons for agreeing with the noting put up. At the same time, satisfaction has to be recorded of the given case which can be reflected in the briefest possible manner. In the present case, the exercise appears to have been ritualistic and formal rather than meaningful, which is the rationale for the safeguard of an approval by a higher ranking officer, For these reasons, the C....
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....ly his mind at all while granting sanction. The satisfaction has to be with objectivity on objective material 8. If the case in hand is analysed on the basis of the aforesaid principle, the mechanical way of recording satisfaction by the Joint Commissioner, which accords sanction for issuing notice under section 148, is clearly unsustainable and we find that on such consideration both the appellate authorities have interfered into the matter. In doing so, no error has been committed warranting reconsideration." (C.) Hon'ble Supreme Court of India in the case of CIT vs. S. Goyanka Lime & Chemical Ltd. reported in (2015) 64 taxmann.com 313 (SC) in the Head Notes has held that "Section 151, read with section 148 of Income Tax Act, 1961 - Income escaping assessment - Sanction for issue of notice (Recording of satisfaction) - High Court by impugned order held that where Joint Commissioner recorded satisfaction in mechanical manner and without application of mind to accord sanction for issuing notice under section 148, reopening of assessment was invalid - Whether Special Leave Petition filed against impugned order was to be dismissed - Held, Yes (in favour of the Assessee)." 6....
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....ned Income- tax Officer, even the assessment order has been passed within a very short time whereby the assessee is left without any remedy to challenge such an order of rejection. 4. Hence we make it clear that if the Assessing Officer does not accept the objections so filed, he shall not proceed further in the matter within a period of four weeks from the date of receipt of service of the said order on objections, on the assessee. 5. Accordingly, rule is made absolute. 6. We also direct that the Income Tax Officer concerned shall follow the above procedure strictly in all such cases of reopening of assessment." 6.7 As regards case law cited by the Id. DR is concerned, the same is an exparte order and on distinguished facts and circumstances of the case. 6.8 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 Assessing Officer and upheldby the Ld. CIT(A) are nonest in law and without jurisdiction, hence,the re- assessment is quashed. Since I have already quashed the re-assessment, the other grounds have b....