2017 (1) TMI 904 - HC - Income Tax

Reopening of assessment - basis for forming the belief is the report from the Principal Director of Income Tax and the application of mind to the report of the Assessing Officer along with the record available with him - Held that - We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice a broker in the stock exchange makes modifications in the client code on sale and / or purchase of any securities after the trading is over so as to rectify any error which may have occurred while punching the orders. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of a genuine error originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee s broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. In the above view prima facie we are of the view that the impugned notice is without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment. - Decided in favour of assessee

Summary

Issues:
Challenge to notice under Section 148 of the Income Tax Act, 1961 for reopening assessment for Assessment Year 2009-10 based on client code modification leading to reduction of taxable income.

Analysis:
The petition challenges a notice issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the year 2009-10. The impugned notice is based on information received from the Principal Director of Income Tax, alleging that the petitioner benefited from a client code modification resulting in a profit shift of ?22.50 lakhs by the petitioner's broker, leading to a reduction in taxable income. The Assessing Officer formed a belief that there was an escapement of income and failure to fully disclose material facts based on this information. However, it was noted that the reasons provided in the notice did not establish a link between the client code modification and an intentional escape of income. The court observed that the reasons presented only raised a suspicion rather than a reasonable belief that income chargeable to tax had escaped assessment.

The court highlighted that the reasons in support of the notice acknowledged that client code modifications by brokers in the stock exchange were a regular business practice to rectify errors post-trading. However, the basis for the Assessing Officer's belief that the modification in this case was not due to a genuine error leading to income escapement was not adequately demonstrated. The court opined that the available material suggested a reason to suspect rather than a reason to believe that income had escaped assessment. Consequently, the court concluded that the notice lacked jurisdiction as it failed to establish a reasonable belief that income chargeable to tax had indeed escaped assessment.

In light of the above analysis, the court granted interim relief in favor of the petitioner, indicating that the impugned notice was without jurisdiction due to the absence of sufficient grounds to support the belief that income chargeable to tax had escaped assessment.