2019 (1) TMI 1985 - AT - Income Tax

Reopening of assessment u/s 147 - Reason to believe or reason to suspect - disallowing genuine loss suffered on share trading treating the same as contrived on account of client code modification - HELD THAT - As 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 in a transaction in which client code modification was involved and earned profit- 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 modification was because of some malafide reason and the assessee has received cash in lieu of payment made for loss and profit in which client code modification was involved. Thus, the above recording does not satisfy requirement of law mandatory for assuming jurisdiction to reopen the assessment. My above view is supported by the decision of the Bombay High Court in the case of Coronation Agro Industries Ltd. Vs. DCIT 2017 (1) TMI 904 - BOMBAY HIGH COURT - Therefore, the reassessment order passed pursuant to the above recording is hereby quashed and ground of the appeal of the assessee is allowed.

Summary

Issues:
1. Reopening of assessment u/s 147/148 of the Income-tax Act, 1961 without cogent material.
2. Disallowance of genuine loss on share trading due to client code modification.

Issue 1: Reopening of Assessment:
The appeal challenged the initiation of proceedings u/s 147/148 of the Income-tax Act, alleging lack of cogent material for believing in income escapement. The Assessing Officer received information indicating misuse of client code modification by certain brokers, including the appellant, to reduce tax liability. The CIT(A) upheld the initiation citing specific details connecting the appellant to the scheme. The AR argued the reopening lacked a reason to believe, but the Assessing Officer's actions were deemed justified, as the information provided was sufficient to establish a basis for reopening. The AR's contention was dismissed, and the CIT(A)'s decision was upheld.

Issue 2: Disallowance of Loss on Share Trading:
The Assessing Officer disallowed a loss on share trading, treating it as contrived due to client code modification, resulting in an addition of Rs. 18,97,935. The appellant's objection to this disallowance was overruled by the CIT(A), who found the Assessing Officer's actions valid based on specific information linking the appellant to the scheme. However, upon review, the Tribunal found the reopening lacked a valid reason to believe, as there was no evidence of malafide client code modification. Citing a Bombay High Court decision, the Tribunal quashed the reassessment order and allowed the appellant's appeal, rendering other grounds moot.

This detailed analysis of the judgment highlights the issues of reopening assessment without adequate material and the disallowance of a loss on share trading due to client code modification. The Tribunal's decision to quash the reassessment order showcases the importance of meeting legal requirements for reopening assessments and substantiating claims of income escapement.