TaxTMI 
TaxTMI 
2022 (8) TMI 576
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis of tangible material and not on the basis of conjectures and surmises. (b) That initiation of proceedings u/s 147 is also based on non-application of mind much less independent application of mind. That mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. That AO cannot act mechanically on the basis of vague report of Investigation Wing not relating to the case of the assessee. In Appellant's case the amount referred in the reasons along with party's name on the basis of which proceedings u/s 148 have been initiated is also incorrect. (c) That Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the addition of Rs. 4999423/- made by AO by holding that assessee was indulged in transferring fictitious profits/loss. In this regard, there is no evidence with the Department for such additions. (d) That no proceedings u/s 147 can be initiated against the assessee merely on....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exchange data. The Stock Exchange then records tins data as client code modification data. 2. Many brokers misused this facility of CCM for creating artificial losses/profits and providing bogus profits/losses to various clients by charging some commission. An expert opinion was procured from NSE to indicate the existence of genuine arid non genuine client code Modification. NSE has broadly distinguished the genuine and non genuine CCM as under. 3. Genuine Client Code Modification 3.1 As per the NSE any client code modification would constitute as genuine client code modification in which the following errors/mistakes are rectified. a) Error due to communication and /or punching or typing such that the original client code/name and the modified client code/name are similar to each other. b) Modification within relatives (Relative for this purpose would mean "Relative" as defined under the Companies Act 1956). c) Any similar genuine error. 4. Non genuine client code modification 4.1 As per the NSE any client code modification to rectify the errors/mistakes other than mentioned above would constitute non genuine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Profit/Loss 0 TABLE 4: Account Of M/s. PQR (before client code modification) Trade Number Type Script Price Qty- Total value Nil Nil Nil Nil Nil Nil Net Qty 0 Net Profit/Loss 0 TABLE 5: Account of M/s. XYZ (After Client Code Modification) Trade Number Type Script Price Qty Total value A Buy , ReI Cap 1560 550 8,58,000 D Sell Rei Cap 1824 550 10,03,200 Net QTY 0 Net Profit/Loss 1,45,200 TABLE 6: Account of M/s. PQR (After Client Code Modification) Trade Number Type Script Price Qty- Total value B Buy Rel Cap 1560 550 8,58,000 C Sell Rel Cap 1824 550 10,03,200 Net QTY 0 Net Profit/Loss 1,45,200 Here the broker has purchased and sold the same quantity of shares in a day at txvo different time as shown in table 1 & table 2. The profit & loss was created by using the same data shown in table 1 and 2 by changing the client code of the transactions and in this way bogus profit & loss was created which is shown in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es were noticed: i. Number and percentage of modified trades/traded value is significantly higher in the total number of trades/ traded value of particular client involving into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-genuine. iv. Both buy and sell leg of different trades have been modified to most of the client. v. Number of trade client code modifications significantly increased during the closing months of the financial year. vi. In some cases, the clients in whose accounts trades were transferred after modification did not have enough margin money to trade in the F&O segment. vii. The client code modification was regularly used to always transfer losses in accounts of some clients and profits in the accounts of others. viii. Many brokers admitted that they charged brokerage at the rates varying from 0.5% to 2% on the amounts of accommodation entries provided by them to different beneficiarie....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee carried the matter to the Ld. CIT(A) and challenged the jurisdiction for initiating the reassessment proceedings under section 147 of the Act and submitted as under: ISSUE OF NON APPLICABILITY OF PROVISIONS OF SECTION 148 OF THE INCOME TAX ACT It is humbly submitted that Provisions of section 148 of the Income tax Act 1961 are not Applicable in the case of the Assessee. In as much as, it is well settled law that before issuing any notice under section 147/148 of the Income Tax Act 1961, Ld. Assessing officer must record tangible reasons with fresh material for initiation of provisions of section 148 of the Income Tax Act 1961.The only basis is that general information received by the Directorate of Intelligence and passed on to the Ld. Assessing Officer that assessee has probably shown bogus profits to adjust for un-accounted money generated from business . It proves that proceeding U/S 148 were initiated on the basis of surmises and conjectures not on the basis of tangible material on the basis of probabilities it was on serve that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the form of information or material on record... " It was further emphasized that "mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere basis of probality from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments. " Further It is a regular practice for the broker to make modifications in the client code after the purchase and sale of securities as per guidelines of SEBI. The mere fact that there is a client code modification prima facie does not mean that any income has escaped assessment in the case of the assessee. It appears to be case of 'reason to suspect' and not 'reason to believe' IN THE SUPREME COURT OF INDIA 320 ITR PAGE 561 (SC) COMMISSIONER OF INCOME TAX VS KELVINATOR OF INDIA L TD It was held by Hon'ble Apex court that after Is' April 1989, the Assessing officer power to reopen , provided there is a TANGIBLE MATERIAL to come to the conclusion that there is a escapement of income from Assessment, reasons must have a link with the formation of belief. For the aforestated reasons, we see no merit in these civil appeals filed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, it is a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. We are of the view that notice issued is without jurisdictional as it lacks reasons to believe that income chargeable to tax has escaped assessment. BOMBAY HIGH COURTS M/S Aventis Pharmu Limited VS Assistant Commissioner of Income Tax 232 ITR 570 Relevant portion of the Judgment is reproduced as under: The assessing Officer has power to reopen, provided there is ' tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. For the reasons already indicated, on the question as to whether the Assessing Officer has reason to believe that income has escaped assessment within the meaning of section 147, we have come to the conclusion that there was no tangible material before the Assessing officer to hold so and that the reasons recorded for reopening the assessment constitute a mere cha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dings. (That copy of notice issued u/s 148 dated 1403-2016 for reasons of reopening the assessment alongwith copy of assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act 1961 dated 29-12-2016 in which no addition was made on account of client code modification by the Ld. Assessing Officer are hereby enclosed for your kind perusal. It proves that action of making addition for Asstt. Year 2010-11 in the similar issue was not called for and unwarranted and liable to be quashed. It is further pertinent to mention that material available with the Ld. Assessing Officer obtained from Director (Investigation) on the basis of which addition was made as mentioned in the order was never confronted to the assessee. Wliereas it is well settled law that whatever material/evidence used against the assessee is to be confronted to the opposite party. It is also petinent to mention that names of beneficiaries to whom alleged profits was transferred mentioned in the order at page 8 & 9 were never disclosed at any stage of assessment proceedings. It proves that material/evidence whatever in the possession of the Ld. Assessing Officer which is used against the assessee has never....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case there were 113644 trades done by the assessee in the National Stock Exchange's Future and Option Segment. Out of these, CCM was done by the broker, only in 367 trades, which comprises of a mere .32% of the total trades. It is further relevant to mention that As per a daily scheme of events prescribed by the NSE, the assesse regularly received contract notes from broker which matched with the orders placed with the broker and no difference whatsoever was found. The assesse would also like to emphasize that in the market, there is no way prescribed the SEBI from where the client can get details of any CCM done by his broker. The contract notes do not carry any details of CCM and in assesse's case matched with the orders given by the assesse to the broker. In the background SEBI has allowed the CCM due to the following reasons. * Inexperience of the operating staff in handling technical software and voluminous data. * Communication error owing to the fact that trades are punched in a hurry because of rates in stock markets change every second and mobile phones connections are becoming weak by the day. * Indifference of the bro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s using numeric codes to fasten the punching of the orders, resulting in higher number of errors. * It is further relevant to mention that up to 1% CCM is allowable as per guidelines of SEBI notice number NSE/INVG/201 l/596as genuine errors owing to voluminous data, nature of stock market as rates change every second , inexperience and human errors on part of operators and other technical snags. It is further highlighted before your goodstlf thai during the course of assessment proceedings Ld. Assesing Officer also mentioned in his Show cause Notice that assessee was doing business with the M/S Maheshwari Technical and Financial Services Ltd. In reply to show cause notice by the assessee that no dealing was ever been done with M/S Maheshwari Technical and Financial Services Ltd. After this Ld. Assessing officer agreed that it was clerical and human error. Similar in such a large scale of transactions clerical mistake are human error are bound to happened It is further relevant to mention that assesse is reflecting income to the tune of Rs. 109078480/- is assessment year 2010-11, i.e. is the relevant year and paying income tax in crores there on., Hence it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion M>as made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Moreover, C1T(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parlies, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion. '' Hence appeal of the assessee is allowed on this ground. Moreover in the case of M/S Siihlhi Beverages vs. ACIT ITA No. 409/Ahd/2013 dated 01-08-2016 wherein The Assessing Ojficer 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 modification is permitted on the same day. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t was found that those brokers were involved into systematic changes through the client code modification and through those fictitious modifications, had booked profit and losses in the cases of assessees which brought their tax liability down abnormally. The Ld. CIT(A) further observed that merely stating that the assessee was not aware which modifications were carried out did not absolve the assessee from its onus and that the end result was that the assessee had been benefitted from the modification carried out in the profit / loss by bringing in losses in the case of the assessee. Thereafter the Ld. CIT(A) discussed the issue on merit and sustained the disallowance made by the AO, however no specific finding has been given as regards to the legal issue raised by the assessee relating to reopening of the assessment on the basis of the information received from Investigation Wing. 6. Now the assessee is in appeal. 7. The Ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the AO reopened the assessment framed under section 143(3) of the Act after making proper inquiries, only on the basis of a general informat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been decided in favour of the assessee by the ITAT Delhi 'SMC' Bench in ITA No. 6806/Del/2017 for the A.Y. 2009-10 in the case of Shri Tulsi Dass, Laxmi Nagar, Delhi Vs. ACIT, Circle 58(1), New Delhi, copy of the said order was furnished which is placed on record. 7.3 It was contended that the Ld. CIT(A) mentioned in the impugned order that the searches had been carried out in different brokers cases including in the case of M/s Competent Finman Ltd. across India on 23/03/2015 and M/s Competent Finman Ltd. was the broker of the assessee in this rgard, it was stated that no search and seizure operation was carried out at M/s Competent Finman Ltd. on 23/03/2015. The Ld. Counsel for the assessee furnished a certificate from the said company M/s Competent Finman Ltd. stating therein that no search was conducted at M/s Competent Finman Ltd. on 23/03/2015 copy of the same is placed at page no. 8 of the assessee's paper book. 8. In his rival submissions the Ld. DR strongly supported the orders of the authorities below and further submitted that the use of the word probably and the search took place in the case of M/s Competent Finman Ltd. on 23/03/2015 was a typhographical mistake ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 5.4 I have duly considered assessee's detailed submission filed at the time of assessment proceedings as well is appellate proceedings. In my considered opinion the assessee has not been able to satisfactorily explain the reason and logic of client code modification carried out in the case of assessee in detail. The assessee has also failed completely to furnish the detail and need of modification carried out in the case of assessee through its broker M/s Competent Finman Ltd. In my considered view the assessee was explicitly confronted with the information available with the Assessing Officer with regard to modalities and change in client code modification during the assessment proceedings. The inference drawn by the Assessing Officer, is in light of the facts available from the information received by him from investigation wing and the fact, wherein, the searches have been carried out in different brokers cases including, in the case of M/s Competent Finman. Ltd, across India on 23/03/2015. In the searches it was found that these brokers were involved into systematic changes through the client code modification and through these fictitious modifications, have booked pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion in section 147 'has reason to believe' is stronger than the words 'is satisfied'. In the case of Emirates Shipping Line, FZE Vs. Assistant Director of Income Tax (2012) 349 ITR 493 (Del), the Hon'ble Delhi High Court at pages 509 and 510 held as under : "23. We have quoted the "reasons to believe" recorded by the Assessing Officer. For invoking this power, it is not the requirement nor is the provision confined to cases of concealment of income. Reassessment provision empowers the Assessing Officer to assess income which has escaped assessment. The object of the section is to ensure that the taxable income is computed and calculated as per the Act and tax payable thereon is paid. At the same time, the power under this Section is not unbridled and there are several safeguards. One of the safeguards stipulated in the section itself is the requirement that the Assessing Officer must record 'reasons to believe'. This requirement mandates that the Assessing Officer must state in writing why and for what reason, i.e. cause or justification, he is invoking the said power. The said reasons must satisfy the stipulation that the Assessing Officer sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the power. The Hon'ble High Court further held that the reasons must satisfy the stipulation that the Assessing Officer should have formed a prima-facie belief that income has escaped assessment. In the instant case, the Assessing Officer proceeded on the premise that the asessee had made complaint to the SSP of Police, Ludhiana regarding Roka and Engagement functions solemnized on 29.8.2004 and expenditure of Rs.7 lacs was incurred on these functions. This observation is factually incorrect and it cannot be said that the Assessing Officer has formed a prima-facie belief that income has escaped assessment. At this juncture, I may refer to the decision t Hon'ble Jurisdictional High Court in the case of CIT Vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H), wherein it has been held that the Assessing Officer did not have the jurisdiction to proceed with the re- assessment, the moment he found the two grounds mentioned in the reassessment notice incorrect or non- existent. In the instant case also, notice was issued to the assessee on ground that he had made the complaint to the SSP of Police, which is factually incorrect. In fact, the assessee did not make any complaint t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....done on the basis of information received from the Investigation Wing as has been accepted by the AO and the Ld. CIT(A) in their respective orders, therefore, in the absence of independent application of mind by the AO, the reopening in the instant case under section 147 r.w.s 148 of the Act was not justified. 9.3 On a similar issue in the case of Shri Tulsi Dass, Laxmi Nagar, Delhi Vs. ACIT (supra) reopening in the similar circumstances was quashed vide order dt. 23/01/2019 in ITA No. 6806/Del/2017 for the A.Y. 2009-10 (supra) the relevant findings has been given in para 9 of the aforesaid referred to order dt. 23/01/2019 which read as under: 9. On perusal of the above recording shows that this was not at all a reason to believe envisaged u/s 147 of the Act. At best the same can be considered as reason to suspect only. The recording states that the assessee Sh. Tulsi Dass has suffered a loss of Rs.4,77,732.50/- in a transaction in which client code modification was involved and earned profit of Rs.10,05,287/- in a transaction in which client code modification was involved. However, there is no material on record to show that prima facie the said client code modificatio....