AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 215
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....e income of the appellant at Rs. 2,22,86,425/- against return income of Rs. 1,76,79,150/-. 2. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (CIT (A)} is bad, both in the eye of low and on facts. 3. On the facts and circumstances of the case, the learned CIT (A) has erred, both on facts and in low in confirming the order under Section 147 read with Section 148, ignoring the fact that the same was bad in the eye of low as the conditions and procedure prescribed under the statute have not been satisfied and complied with. 4. On the and circumstances of the case, the Id. CIT(A) has erred, both on facts and in law in rejecting the contention of the assessee that the reassessment proceedings by the learned AO are bad in the eye of low as the reasons recorded for the issue of notice under Section 148 are bad in the eye of low and are contrary to the facts. 5. On the facts and circumstances of the case, the Id. CIT(A) has erred, both on facts and in low in confirming the disallowance made on the basis of the material collected at the back of the assessee without providing copy of the same & providi....
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....de modification these brokers have indulged in transferring the fictitious losses / profits to and after different clients. After analysis of data received from NSE and after considering the contention of brokers, it was established that the brokers had misused client code modification as a tool for tax evasion and created non-genuine losses and profits. It was revealed that these losses and profits were given to different client/ beneficiaries and the beneficiaries had taken fictitious losses to set off against their profits with a view to reduce their tax liability. The client also took fictitious profits to cover up their undisclosed income or to set off these profits against huge losses. 3. As per the above information and list of beneficiaries provided therein, it is seen that the assessee company is one such beneficiary who has availed of such non-genuine client code modification services from brokers and booked net non-genuine losses to the tune of Rs.46,07,275/- for AY 2009-10." 6. After recording the aforesaid reasons and obtaining requisite approval u/s 151 of the Act, the ld. AO issued notice u/s 148 of the Act on 30.03.2016 to the assessee. The assessee vide....
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....ld AO for reopening of the assessment in the instant case are very vague without having any live link to form a reasonable belief that the income of the assessee had escaped assessment. The reasons recorded and the assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reasons recorded only gives way to 'reason to suspect' and not 'reason to believe'. The very same issue was even subject matter of adjudication of this tribunal in the case of Stratagem Portfolio (P) Ltd Vs. DCIT in ITA No. 7878/Del/2019 dated 15.09.2020 and the operative portion of the said tribunal order is reproduced hereunder:- "4. The ground No. 1 to 1.4 of the appeal relates to validity of the reassessment proceeding. In the ground No. 1.1, the assessee has challenged "reason to believe" on the ground that same are not specific and lacking reliable and tangible material. 5. In support of the ground, the Learned Counsel of the assessee referred to the reasons recorded, which has been reproduced by the Assessing Officer in the impugned ass....
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....e learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. 5.3 He also submitted that there is no live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. The learned Counsel relied on decision of Hon'ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464 and following decisions of the Tribunal to support his contentions: 1. ITA No. 6809/D/2018 dated 22.10.2019 Simmi Sethi vs. ITO (pages 53-56 of JPB) 2. ITA No. 4542/D/2018 dated 29.11.2018 Radiance Stock Traders (P) Ltd. vs. ITO (pages 1-25 of JPB) 3. ITA No. 6628/D/2018 dated 12.4.2019 Kamal Kishoree Aggarwal vs. ACIT (pages 92-111 of JPB) 4. ITA No. 4395/D/2019 dated 27.2.2020 AKG Securities & Consulting Ltd. vs. ITO (pages 112-127 of JPB) 5. ITA No. 825/D/2019 dated 25.7.2019 Sanjay Kumar Jain vs. ITO (pages 57-91 of JPB) 5.4 The Learned DR, on the other hand, submitted that the reasons have been recorded on the information received from the Director of Income Tax (Investigation), Ahmadabad, which is a credible source of t....
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....ted only on the basis of the tangible material and not on the basis of assumptions and presumptions. The recondition u/s. 147 of the Act is "reason to believe" and, the expression is stronger than the word "satisfied". The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for assuming jurisdiction, as has been held in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC) and ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 (SC). Hence, in this case the proceedings have been initiated on the basis of no material much less any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiating proceedings u/s 147 of the Act. It is a case of reason to suspect' and not "reason to believe." 6.2 I further note that the action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of informatio....
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....inating of beneficiary clients who have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011- 12.... 8. We find that in the case of M/s. Prashant Agencies Pvt. Ltd. And PPN Properties Pvt. Ltd. Vs ITO in ITA Nos. 3059 & 3060/Del/2018 , order dated 16.01.2019, the Tribunal dealt with the similar issuance of notice u/s 148 of the Act by following the decision of the Hon'ble Bombay High Court in the case of Coronation "Agro Industries Ltd. Vs. DCIT 390 ITR 464 (Bom.). In that case, the reasons recorded were asunder: .................... 10. A perusal of the above, shows that Client Code Modification is legally permissible in case of mistake. In the instant case, the observation of the Assessing Officer is to the effect that due to Client Code Modification in two transactions, the assessee's income was reduced by Rs.5,96,176/-. 11. We find that there is no material which has been brought out in the recorded reasons to show that Client Code Modification in the instant case was malafide or the assessee received Rs.5,96,176/- in cash in lieu of the said Client Code Modification. Thus, the above recording at best is a reason to s....
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....ck exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code, the facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade. 3.1 Over a period of time, some persons, in connivance with brokers started using Client Code Modification for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes. 4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party ....
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....ted have accepted and withdrawn their claim of nun-genuine losses in F&O segment in A.Y-2010-11. They have revised their computation for A.Y.-2010-11 and paid taxes accordingly. The report of I&CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion. 6. An action was also undertaken by Ahmedabad Directorate of Investigation Wing. The wing had called for reports from different exchanges and the data was duty analysed. After analysis, 12 Brokers and their related entities/main clients were identified for survey where the pre-survey analysis indicated more quantum of tax-evasion. Based upon data analysis coordinated surveys u/s 133A of the Income Tax Act, 1961 were carried out at-the premises of 12 brokers across India on 23.03.2015. 7. Income-Tax (First Amendment) Rules. 2011 were amended vide Notification No. 14/2011 [F. No. 142/25/2008-So(TPL)], Dated 9-3-2011. The amendment came into force on the 1st day of April, 2011. The amendment required the stock exchanges to ensure that the transactions (in respect of cash and derivative market) once registered in the system are modified only in cases of genu....
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....or computation of the profits and losses shifted on account of client code modifications the matched combinations of the buy and sell orders, in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2020 modified on 06.03.2010 to client Y(MCC), then in such case the difference in buy and sell trades is taken to be profit/loss shifted from X to Y. All other transactions say where 500 buy and 200 sell trades are shifted front X to Y have been ignored. The transactions where exact buy and sell transaction were transferred from one client to another NO PRICE RISK EVER was borne by the client who received the transactions through CCM. Thus such ASCERTAINED LOSSES shifted through CCM for which no price risk ever was borne by a client are nongenuine losses shifted with the motive of tax evasion by setting of such selectively shifted losses against other income. Working on the said logic has been made in both scenarios, i.e., when a given client was original cl....
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....: To shift out profits. The Assessee's OCC of FSTP have been modified to new codes in MCC as under. Replaced Code Number Of Times I 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44 (ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one transaction in which he got OCC of someone else modified to its Code to gather losses. The original codes of 99 were replaced by assesses"s codes of FSTP. This resulted in shifting in of losses of Rs.4,420/- c) Levenshtein Distance or edit distance is that it 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 I. then it can be reasonably argued that the OCC (Original Client Cade) may have been typed wrongly by mistake But if the number of digits changed is more surely it cannot be a genuine typing mistake but a deliberate change. To this extent Levenshtein Distance Analysis or digit edit analysis acts as a clear indicator for genuineness in client code modification. The longer the distan....
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.... within the meaning of Section 147/148 of Income-tax Act, 1961." 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purchase and sale on behalf of the customers. The Learned Assessing Officer, however has alleged in the reasons recorded that client code modification has been done for shifting of the profit or loss by the assessee. But there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. The Hon'ble Supreme Court in the case of Rajesh Jhaveri St....