TaxTMI 
TaxTMI 
2026 (1) TMI 1114
X X X X Extracts X X X X
X X X X Extracts X X X X
....iginal assessment was completed under section 143(3) of the Act by the Assessing Officer, Income-tax Officer, Ward 7(1)(2), Mumbai, vide order dated 19.03.2013, determining the total income at Rs. 1,37,94,167/-. 3. Subsequently, the assessment was reopened under section 147 of the Act after obtaining approval of the competent authority. Notice under section 148 was issued on 21.09.2016 on the basis of information received from the Directorate of Investigation and Central Intelligence (DIT (I&CI)) through the Additional Commissioner of Income-tax, Range 10(1), Mumbai, alleging that the assessee had availed artificial profit or loss through Client Code Modification (CCM) in share transactions carried out in the F&O segment. Pursuant to the reopening, reassessment proceedings were completed under section 143(3) read with section 147 vide order dated 19.12.2017, whereby the Assessing Officer recomputed the total income of the assessee at Rs. 2,73,92,450/-. 4. During the reassessment proceedings, the Assessing Officer observed that certain brokers were misusing the client code modification facility provided by the stock exchange to create fictitious profits and losses. According t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed an appeal before the CIT(A). The appeal was dismissed by the CIT(A). 10. The CIT(A) upheld the validity of reopening under section 147, holding that the information received from the Investigation Wing constituted tangible material and that the assessee had failed to disclose fully and truly all material facts relating to the alleged artificial profits or losses arising from client code modification. The contention of the assessee regarding borrowed satisfaction and lack of application of mind by the Assessing Officer was rejected. 11. On merits, the CIT(A) concurred with the findings of the Assessing Officer that the loss claimed in the F&O segment was fictitious in nature and that the assessee was the beneficiary of profits or losses shifted through client code modification. The CIT(A) further upheld the addition made under section 69C on account of unexplained commission expenditure, holding that no prudent businessman would render such non-genuine services without consideration. Accordingly, the additions of Rs. 1,33,31,648/- and Rs. 2,66,633/- were confirmed. 12. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising following grounds: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ement made by broker against the appellant, since the same amounted to violation of principles of natural justice. 7. The above grounds of appeal are without prejudice to one another and the appellant craves leave to add, alter, amend, delete or modify any of the above grounds of appeal. 13. At the time of hearing, the learned Authorized Representative (AR) submitted that since certain grounds raised go to the very root of the jurisdiction of the Assessing Officer, the appeal deserves to be adjudicated ground-wise, beginning with the jurisdictional ground. Since the learned AR advanced his submissions ground-wise, and considering that the grounds raised by the assessee are distinct and independent, we also proceed to adjudicate the appeal ground-wise, dealing with each ground in the sequence in which it has been argued before us. Ground No.5 14. The AR addressed Ground No. 5, assailing the very jurisdiction of the Assessing Officer to reopen and complete the assessment. He submitted that the returned income of the assessee for the year under consideration was approximately Rs. 1.10 crore, which was well above the monetary threshold prescribed for cases to be handl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cally applied to the facts of the present case. The learned DR also pointed out that in the case before the Hon'ble High Court, the Assessing Officer had categorically admitted, by way of an affidavit, that the notice under section 148 was defective and had been issued by the Income-tax Officer only because the time available was too short to migrate the PAN to the jurisdiction of the DCIT after obtaining administrative approval. It was submitted that no such admission exists in the present case, and therefore the factual foundation on which the High Court quashed the notice is absent here. 19. With regard to CBDT Instruction No. 1/2011, the learned DR submitted that the instruction itself records that it was issued after the Board received representations from a large number of taxpayers, particularly from mofussil areas, highlighting hardship caused due to transfer of cases to DCIT/ACIT located in different stations, thereby increasing the cost of compliance. It was contended that the instruction was primarily intended to mitigate hardship to taxpayers. The learned DR submitted that, in the present case, the assessee is located at Parel, Mumbai, and the assessment was also car....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot vested with jurisdiction over the assessee under the framework of section 120 read with notifications/orders allocating jurisdiction, or that the assessee's PAN was not assigned to that officer. On the contrary, the assessee's own conduct in filing the return with ITO 8(2)(1) and being assessed originally by the ITO under section 143(3) supports the position that, as per the then prevailing administrative arrangement, the assessee's case stood with the ITO. 24. We further find merit in the Revenue's contention that the judgment of the Hon'ble Bombay High Court relied upon by the assessee stands on a distinct factual footing. In that case, as pointed out by the learned DR, the assessee had approached the Hon'ble High Court by way of a writ petition challenging the notice itself, and the Assessing Officer had filed an affidavit admitting issuance of the notice by the ITO due to paucity of time to migrate the PAN and obtain administrative approvals. The High Court, on the facts of that case, held the notice to be invalid. In the present case, the assessee did not challenge the notice at the threshold, participated throughout the reassessment proceedings without raising any juris....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... attribute any omission or suppression of facts to the assessee. The learned AR further pointed out that during the course of the original assessment proceedings under section 143(3), the assessee had furnished complete details in respect of his share trading activity with M/s. Transglobal Securities Ltd., including contract notes, transaction statements, and the ledger account of the broker as appearing in the books of the assessee. It was submitted that all primary facts relating to the transactions were thus placed on record before the Assessing Officer at the time of original assessment. The learned AR submitted that in the absence of any allegation or material demonstrating failure on the part of the assessee to disclose fully and truly all material facts, the reassessment proceedings are liable to be quashed as being without jurisdiction. 29. Per contra, the learned Departmental Representative strongly opposed the submissions advanced by the learned Authorized Representative on Ground No. 2. The learned DR submitted that the information regarding client code modification (CCM) was received by the Assessing Officer after completion of the original assessment under section 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the assessment. Ground No. 2 challenges the validity of reopening on the ground that the reassessment was initiated beyond four years from the end of the relevant assessment year and that the Assessing Officer failed to demonstrate any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. 31. It is an undisputed fact that the original assessment for the year under consideration was completed under section 143(3) and that the notice under section 148 was issued beyond the period of four years. Therefore, the proviso to section 147 is attracted, and the Assessing Officer was required to form a belief that income chargeable to tax had escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. 32. On a careful perusal of the reasons recorded, we find that the reopening was not based on a mere reappraisal of the material already on record, but was founded on specific and tangible information received from the Directorate of Investigation (DIT) after completion of the original assessment. The information so received indicated that the assessee had allegedly created fic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g Officer is only required to form a prima facie belief that income chargeable to tax has escaped assessment. The sufficiency or correctness of such belief is not to be examined at that stage. In the present case, the reasons recorded demonstrate a live link between the information received from the Investigation Wing and the belief formed by the Assessing Officer regarding escapement of income. 38. In view of the above discussion, we are of the considered opinion that the reopening of the assessment was based on tangible material received subsequent to the original assessment, that the conditions prescribed under section 147 read with its proviso were duly satisfied, and that the reassessment proceedings cannot be held to be without jurisdiction merely because the notice was issued beyond four years. Accordingly, Ground No. 2 raised by the assessee is dismissed. Ground No. 1 39. The learned AR further addressed Ground No. 1, challenging the validity of reopening on the ground that the Assessing Officer lacked the requisite jurisdiction as mandatory conditions prescribed under section 147 of the Act, as applicable to the assessment year under consideration, were not satisf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the existence of a live link between the information received and the belief formed by the Assessing Officer regarding escapement of income. 44. We have carefully considered the rival submissions, perused the material available on record, the reasons recorded for reopening, and the judicial precedents relied upon by both the parties. Ground No. 1 raised by the assessee challenges the validity of reopening of assessment under section 147 of the Act on the ground that the statutory conditions applicable to reopening were not satisfied. 45. On a careful examination of the reasons recorded, we find that the reopening was initiated on the basis of specific and tangible information received from the Directorate of Investigation subsequent to the completion of the original assessment. The information so received indicated that the assessee had allegedly benefited from client code modification in the F and O segment, resulting in creation of fictitious profits amounting to Rs. 1,33,31,648/-. This information was not part of the assessment records at the time of original assessment under section 143(3) and could not have been examined by the Assessing Officer at that stage. The cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....age of initiation of reassessment proceedings, the Assessing Officer is only required to form a prima facie belief based on material available on record, and not to conclusively establish escapement of income. The sufficiency or correctness of the material cannot be gone into at this stage. In our view, the Assessing Officer has duly recorded reasons based on tangible material and has demonstrated due application of mind. In view of the foregoing discussion, we hold that the reopening of assessment under section 147 was valid in law, and the conditions prescribed under the proviso to section 147 were duly satisfied. On the Merits of addition of Rs. 1,33,31,648/- 48. On the merits of the case, the learned AR submitted that the findings recorded by the Assessing Officer are based on an incorrect appreciation of facts. It was contended that the Assessing Officer has erroneously concluded that the assessee had taken a loss of Rs. 1,33,31,648/- pertaining to other parties, which, according to the learned AR, is factually incorrect and contrary to the record. 49. The learned AR submitted that, in reality, the assessee had declared a profit of Rs. 1,60,05,309/- from his trading a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessing Officer is based on the nature and source of the transactions through which such profit or loss arose. According to the learned DR, the Assessing Officer has specifically brought on record that the assessee was the beneficiary of client code modification, through which profits or losses were artificially shifted from other parties to the assessee. 54. We have carefully considered the rival submissions, perused the orders of the Assessing Officer and the learned CIT(A), and examined the material placed on record, including the documentary evidence referred to in the paper book. 55. At the outset, we note that there is a serious factual inconsistency in the approach adopted by the Assessing Officer in the reassessment proceedings. In the original assessment order passed under section 143(3) dated 19.03.2013, the Assessing Officer had finalised the assessment by determining the profit from futures and options transactions at Rs. 1,58,74,579/-, as reflected in the computation of income forming part of the said assessment order. However, the working and reconciliation on the basis of which such figure of profit was arrived at are not traceable from the records presen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f any, in the case of the assessee. A conjoint reading of the replies to Questions Nos. 6 and 7 shows that while the broker has acknowledged the existence of a facility for client code modification at the stock exchange level, he has expressly expressed his inability to confirm the circumstances, reasons or intent behind any such modification in respect of the assessee's transactions. This admission introduces a material ambiguity in the evidentiary chain relied upon by the Assessing Officer. In the absence of a clear attribution by the broker and without correlating such alleged modification with the assessee's transaction-wise records and financial flows, the inference that the assessee was a beneficiary of deliberate and fictitious loss remains inconclusive. 59. It is also pertinent to note that the assessee has consistently contended, with reference to the broker's statement and Form No. 10DB, that the transactions for the year resulted in a net profit, after payment of Securities Transaction Tax, and that the reduction in taxable income arose only on account of set-off of brought forward losses. However, the Assessing Officer has not clarified, either in the reassessment or....