2018 (10) TMI 1626 - AT - Income Tax

Reopening of assessment - addition on account of transfer of profits under Client Code Modification by brokers in respect of transactions carried out on National Stock Exchange (NSE) - AO also made an addition on account of commission @ 2% on the said amount - Held that - Once the notice U/s 143(2) of the Act was issued by the Assessing Officer as it is part of the assessment record then we do not find any defect or illegality in the reassessment order so far as the requirement of notice U/s 143(2) of the Act is concerned. Hence, we set aside the impugned order of ld. CIT(A) qua this issue. This ground of revenue s appeal is allowed. 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 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 thus 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. Reopening of assessment - borrowed satisfaction - Held that - As relying on SHODIMAN INVESTMENTS PVT. LTD., 2018 (4) TMI 1287 - BOMBAY HIGH COURT Reopening of the assessment based on the report of DIT (Inv) is not valid when the case is hit by the proviso to Section 147 of the Act. It is pertinent to note that the assessee is not expected to disclose the fact that he has indulged in transaction of fictitious transfer of profits but what is required to be disclosed is the transactions carried out by the assessee thorugh the broker. Hence, once the transactions carried out by the assessee are matter of record then the case does not fall in the category of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The assessee is not supposed to do what ought to have been done by the Assessing Officer during the scrutiny assessment. Accordingly, the reopening is bad in law and liable to be quashed.

Issues Involved:
1. Validity of reassessment for want of notice under Section 143(2) of the Income Tax Act.
2. Deletion of additions related to transfer of ascertained profits and losses.
3. Deletion of additions based on the theory of assumption regarding Client Code Modification.
4. Validity of reopening of assessment after four years based on borrowed satisfaction.

Issue-Wise Detailed Analysis:

1. Validity of reassessment for want of notice under Section 143(2) of the Income Tax Act:
The primary issue was whether the reassessment order was valid without the issuance of a notice under Section 143(2). The original assessment was completed under Section 143(3), and the assessment was reopened by issuing a notice under Section 148. The CIT(A) quashed the reassessment order for the absence of a notice under Section 143(2). However, upon review, it was found that a notice under Section 143(2) was indeed issued on 14/06/2016, and the assessee had appeared in response to this notice. The Tribunal concluded that the reassessment order was valid as the requirement of issuing a notice under Section 143(2) was satisfied. Therefore, the ground of the revenue's appeal was allowed, and the reassessment order was upheld.

2. Deletion of additions related to transfer of ascertained profits and losses:
The revenue challenged the deletion of additions made by the Assessing Officer regarding profits and losses transferred through Client Code Modification by brokers. The Assessing Officer had added ?3,52,94,479/- to the income of the assessee, alleging misuse of Client Code Modification to shift profits and losses. The CIT(A) deleted these additions, observing that the transactions were not based on sound footing but on assumptions. The Tribunal upheld the CIT(A)'s decision, noting that the Client Code Modification was within permissible limits and there was no evidence of collusion between the assessee and the brokers. The Tribunal emphasized that the modifications were only 0.47% of the total transactions, which is within the acceptable error margin as per SEBI guidelines. Thus, the revenue's grounds regarding these additions were dismissed.

3. Deletion of additions based on the theory of assumption regarding Client Code Modification:
The revenue argued that the CIT(A) wrongly deleted the additions based on the theory and assumption that the assessee was not a broker and the modifications were not genuine. The Tribunal found that the Assessing Officer had not conducted any independent inquiry and relied solely on the report of the Investigation Wing. The Tribunal noted that the assessee was not granted the opportunity to cross-examine the brokers whose statements were used against him, which violated the principles of natural justice. The Tribunal reiterated that the modifications were within the permissible error margin and upheld the CIT(A)'s deletion of the additions. Hence, the revenue's grounds on this issue were dismissed.

4. Validity of reopening of assessment after four years based on borrowed satisfaction:
The assessee contended that the reopening of the assessment after four years was invalid as it was based on borrowed satisfaction from the report of the Investigation Wing. The Tribunal agreed with the assessee, noting that the Assessing Officer did not independently apply his mind but relied on the report of the Investigation Wing. The Tribunal cited the decisions of the Hon'ble Bombay High Court and the Hon'ble Jurisdictional High Court, which held that reopening based on borrowed satisfaction is not permissible. The Tribunal concluded that the reassessment was invalid as it was based on borrowed satisfaction and quashed the reopening of the assessment.

Conclusion:
The Tribunal allowed the revenue's appeal regarding the validity of the reassessment for want of notice under Section 143(2) and dismissed the revenue's appeal regarding the deletion of additions related to Client Code Modification. The Tribunal also quashed the reopening of the assessment after four years based on borrowed satisfaction. The assessee's cross-objections were partly allowed.

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