2019 (4) TMI 1905 - AT - Income Tax

Reopening of assessment u/s 147 - Bogus Client Code Modification - validity of reasons to believe - HELD THAT - 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 in cash in lieu of the said Client Code Modification. Thus, the above recording at best is a reason to suspect only. It is an established position of law that the validity of reopening is to be decided on the basis of recording made u/s 148(2) of the Act alone and nothing can be added thereto. The recording should be self contained to withstand the validity of the reopening made. Respectfully following the decision in the case of Coronation Agro Industries Ltd. Vs DCIT 2017 (1) TMI 904 - BOMBAY HIGH COURT in our considered opinion, the reasons recorded in the instant case does not satisfy the requirement of law and the same does not constitute the reason to believe for escapement of any income from tax. Therefore, the reason is not valid. The consequential order of reassessment passed in pursuance thereto cannot be sustained. We, therefore, set aside the impugned order of reassessment passed u/s 147 of the Act and allow this ground of appeal of the assessee.

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Confirmation of the addition of ?5,96,177/- by treating certain share transactions as bogus.
3. Recognition of Client Code Modification (CCM) as a rectification of genuine errors.
4. Failure of the Assessing Officer to provide details of the transactions where Client Code was modified.
5. Initiation of penalty proceedings under Section 271(1)(c) read with Section 274 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Validity of Reopening the Assessment Under Section 147 of the Income Tax Act, 1961:
The assessee challenged the reopening of the assessment under Section 147, arguing that it was "bad in law." The Commissioner of Income Tax (Appeals) held that the Assessing Officer (AO) must have "reason to believe" that income had escaped assessment, which requires a rational, intimate, and direct connection between the material and the belief. The AO's reasons for reopening the assessment were based on information from the Pr DIT (Investigation) regarding misuse of Client Code Modification (CCM) by brokers. The CIT(A) found that the AO did not independently verify the information and merely relied on external sources, which led to a "reason to suspect" rather than a "reason to believe." The Tribunal agreed, citing various judicial pronouncements, including the Delhi High Court's decision in Signature Hotels Pvt. Ltd. vs. Income Tax Officer, which emphasized that reassessment proceedings initiated merely on suspicion are invalid.

2. Confirmation of the Addition of ?5,96,177/- by Treating Certain Share Transactions as Bogus:
The AO added ?5,96,177/- to the assessee's income, treating certain share transactions as bogus due to Client Code Modifications (CCM). The CIT(A) upheld this addition, noting that the AO had received definite information from the Investigation Wing, Ahmedabad, regarding misuse of CCM to evade taxes. The AO found that the assessee's Client Code was modified 188 times during the year, resulting in a loss of ?5,96,176/-. The CIT(A) concluded that the AO had material to initiate reassessment proceedings and upheld the addition. However, the Tribunal found that there was no material to show that the CCM was malafide or that the assessee received cash in lieu of the CCM, thereby treating the reasons recorded as a "reason to suspect" rather than a "reason to believe."

3. Recognition of Client Code Modification (CCM) as a Rectification of Genuine Errors:
The assessee argued that the CCM was done to rectify genuine errors made by the broker and that the assessee was not responsible for these errors. The CIT(A) noted that the AO had received information from the Investigation Wing that CCM was misused to evade taxes, and the AO had analyzed the data to conclude that the errors were not genuine. The Tribunal, however, found that the AO did not provide any material to show that the CCM was malafide, thereby treating the reasons recorded as insufficient to justify the reassessment.

4. Failure of the Assessing Officer to Provide Details of the Transactions Where Client Code was Modified:
The assessee contended that the AO failed to provide details of the transactions where the Client Code was modified. The CIT(A) found that the AO had detailed the facts in the assessment order and had applied his mind to the findings of the Investigation Wing. However, the Tribunal noted that the reasons recorded by the AO did not provide sufficient material to show that the CCM was malafide, thereby treating the reasons recorded as a "reason to suspect" rather than a "reason to believe."

5. Initiation of Penalty Proceedings Under Section 271(1)(c) Read with Section 274 of the Income Tax Act, 1961:
The assessee argued that the AO erred in initiating penalty proceedings under Section 271(1)(c) read with Section 274. The Tribunal did not specifically address this issue in detail, as it found that the reassessment proceedings themselves were invalid. Consequently, the Tribunal's decision to set aside the reassessment order rendered the penalty proceedings moot.

Conclusion:
The Tribunal allowed the appeal, setting aside the reassessment order passed under Section 147 of the Income Tax Act, 1961, finding that the reasons recorded did not constitute a "reason to believe" for escapement of income from tax. The Tribunal's decision rendered the other grounds of appeal academic in nature.

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