2019 (6) TMI 990 - AT - Income Tax

Reopening of assessment u/s 147 - AO held the F O loss as fictitious loss being inflicted by manipulative client code modification - in DIT (Inv.) report the assessee was listed as one of beneficiaries - return was originally processed u/s 143(1) - notice u/s 148 was issued within four years from the end of the assessment and hence first proviso to Section 147 is not applicable - HELD THAT - In the instant case, the AO received information from learned DIT(I CI), Mumbai through learned PCIT, Mumbai that the assessee is beneficiary of obtaining fictitious F O Loss from broker which was manipulated losses by modifying client code modifications. It had come to notice that many brokers were indulging in the tax evasions through modification in client code modifications in FY 2009-10 wherein fictitious profit/losses were created which was given by these brokers to their clients/beneficiaries in consideration of brokerage income which was also not disclosed to Revenue but when enquiry was conducted u/s 131(1A), these brokers surrendered these brokerage income from undisclosed sources. Further, the AO itself conducted enquiries prior to issuance of notice u/s 148 by issuing notice u/s 133(6) to Broker Inventure and the said broker never gave specific replies but gave general and evasive replies. Thus, the AO also applied independent mind before reopening of concluded assessment u/s 147 . This sudden spurt in client code modifications undertaken by Brokers in the month of March 2010 was subject to probe by SEBI and NSE as well by Income-tax Department. As we will see later in this order, there is mention of this sudden spurt in client code modifications in the month of March 2010 in various judicial orders pronounced by Courts/tribunal. It is also pertinent to mention here about the client code modification facility allowed by Stock Exchanges which is permitted in accordance with framework of SEBI/Stock Exchanges rules/regulations and circulars which are issued from time to time The assessee had also suffered F O Loss of ₹ 31,98,597.50 through Broker Inventure for transactions undertaken through NSE in the month of March 2010 which were inflicted by client code modifications undertaken by Brokers with Stock Exchanges and which were held to be fictitious losses by authorities below. The assessee transactions in F O segment also happened in the month of March 2010. The transactions inflicted through client code modification incurred through Broker Inventure in the month of March 2010 itself were as high as 92.2% of total transactions executed by assessee with broker Inventure on quantum of loss ratio basis. We hold that re-opening of the concluded assessment by the AO u/s 147 Act was valid and is therefore upheld/ sustained . Further , based on our above discussions on touch stone of preponderance of probabilities we hold that additions made by the AO to the income of the assessee by holding F O loss to the tune of ₹ 31,98,657.50 as fictitious loss being inflicted by manipulative client code modification was validly done by the AO and hence additions to the tune of ₹ 31,98,657.50 as was made by the AO which was later confirmed by learned CIT(A) by treating aforesaid F O loss as bogus loss is upheld. Further, we upheld the additions to the tune of 1% of the said fictitious losses to the income of the assessee by way of commission paid by the assessee to the brokers for arranging these fictitious losses. - Decided against assessee.

Summary

Issues Involved:

1. Legality of reopening the assessment.
2. Disallowance of F&O Loss of ?31,98,597.
3. Addition of ?31,986 as unexplained expenditure.

Detailed Analysis:

1. Legality of Reopening the Assessment:

The assessee challenged the reopening of the assessment, claiming it was "bad in law, invalid and liable to be quashed." The grounds included that the reasons recorded for reopening were "reason to suspect and not reason to believe," the reopening was based on directions from a third party (borrowed reasons), there was no tangible material available, and there was no proper application of mind by the AO.

The Tribunal upheld the reopening, noting that the AO received specific tangible information from the Director of Income Tax (Intelligence & Criminal Investigation) through the Principal Commissioner of Income Tax (PCIT), indicating that the assessee was a beneficiary of fictitious F&O losses created through client code modifications. The AO conducted independent inquiries with brokers and NSE before issuing the notice under Section 148, demonstrating an independent application of mind. The Tribunal emphasized that at the stage of issuing notice under Section 148, what is required is a "prima facie belief" based on tangible information that income has escaped assessment, not conclusive proof.

2. Disallowance of F&O Loss of ?31,98,597:

The AO disallowed the F&O loss of ?31,98,597, considering it fictitious and manipulated through client code modifications. The assessee argued that the broker confirmed the transactions as genuine and that the client code modifications were genuine mistakes. However, the AO and CIT(A) found the broker's replies to be evasive and general, failing to provide specific reasons for the client code modifications.

The Tribunal upheld the disallowance, noting that there was a sudden and massive spurt in client code modifications in March 2010, which was investigated by SEBI and NSE and found to be aimed at tax evasion. The assessee's transactions with the broker Inventure were found to have a high ratio of client code modifications (92.21%), indicating manipulative intent. The Tribunal also referenced similar cases and judicial precedents supporting the conclusion that such transactions were not genuine and were aimed at tax evasion.

3. Addition of ?31,986 as Unexplained Expenditure:

The AO added ?1,59,930 as undisclosed income, being 5% of the alleged bogus F&O losses towards commissions paid to the broker. The CIT(A) reduced this addition to ?31,986, being 1% of the alleged bogus F&O losses, considering it a reasonable estimate for commission expenditure incurred for obtaining fictitious losses.

The Tribunal upheld the addition of ?31,986, agreeing with the CIT(A) that there was an element of commission expenditure involved in obtaining the fictitious F&O losses, and 1% was a reasonable estimate.

Conclusion:

The Tribunal dismissed the appeal of the assessee, upholding the reopening of the assessment, disallowance of the F&O loss of ?31,98,597, and the addition of ?31,986 as unexplained expenditure. The Tribunal found that the AO had valid reasons based on tangible information to reopen the assessment and that the assessee failed to prove the genuineness of the F&O losses and the absence of commission expenditure.