2019 (12) TMI 1228 - AT - Income Tax

Reopening of assessment u/s 147- estimate of diversion of profits due to modifications - HELD THAT - AO was in possession of the relevant information and material germane to the allegation to enable him to hold prima facie belief towards escapement of income. The report of the investigation wing would constitute relevant material unless such report or information is absolutely vague or based on unspecific information. However, whether material available before AO would conclusively prove the escapement is not the concern at the stage of reopening. The information available with the AO in the instant case provides specific estimate of diversion of profits due to modifications and is thus reliable in character. Such specific nature of information is capable to grant cause or justification or a supposition that income has escaped assessment and consequently would confer jurisdiction on the AO to reopen assessment. AO has acted upon credible information coupled with underlying material to initiate the action under s.147 of the Act. The reasons recorded were based on prima facie material which, in turn, clearly indicated the relationship between the formation of belief and the reasons for such belief. The belief entertained by AO is, in our view, not arbitrary or irrational. We thus see no error on the part of the AO to exercise the powers under s.147 of the Act. Ground No.1 of assessee s appeal concerning validity of jurisdiction under s.147 of the Act is accordingly dismissed. Additions made on account of losses shifted in/ profit shifted out from the hands of the assessee owing to modification carried out by the broker in the client code assigned to assessee and other corresponding client - HELD THAT - Modifications within the relatives were also regarded as genuine errors by SEBI as per the aforesaid circular. The shifting of trade in the correct client code falling in the Distance 1 category, thus, cannot be regarded as any kind of alleged misuse of CCM facility. We find considerable force in the aforesaid plea of the assessee. It is quite plausible that error of such type by way of wrong punch of client code could occur as normal incident of business while entering the orders on behalf of the client by the broker. Such errors are to be recognized as genuine error even in the light of SEBI Circular. Such error in punching of trade does not call for any adverse inference. Consequently, the AO is directed to delete the losses shifted in or profits shifted out owing to modifications in client code falling in Distance 1 category as tabulated above with regard to all captioned assessees. Shifting in of losses or shifting out of profits falling in Distance 2 category - Having regard to the peculiar facts that losses have not been purchased in last few months of financial year (December 2010 to March 2011) but the losses have arisen in the very beginning of the financial year, benefit of doubt, if any, would surely lean towards the assessee in such facts. AO is thus directed to delete the adjustment in the assessed income to the extent of amount attributable to trade transactions falling in Distance 2 category of CCM. Losses arising due to CCM falling in Distance 3 category - Market Regulator SEBI has also frowned hard on such modifications. Such substantial modification in client code would naturally involve some indulgence of mind with set purpose to shift in losses/shift out profit in the hands of an interested client. Such modifications in client code, in our view, do not fall within the league of bonafide error when seen on the touchstone of preponderance of probabilities. The concerted and systematic modification in client code to the advantage of assessee is an orchestrated affair to suppress profits generated on trades. We thus decline to interfere with the action of AO with reference to losses falling in Distance 3 category. Losses resulting from client code modification falling in Distance 4 category would automatically fall in highly doubtful category as a near impossibility. The client code of one client stands substituted by an altogether modified client code. Losses resulting in the hands of the assessee from such revamp in the client code, if permitted, will obfuscate ground reality of tax escapement arising from such modifications. Such fundamental modification in the client code lacks any tangible purpose but to accommodate a willing client by the broker in wrongful indulgence. Thus, the plea of the assessee in respect of losses from modification calling in Distance 4 category requires to be rejected outrightly. We thus decline to interfere with the action of Revenue in respect of losses falling in Distance 4 category. Having analysed the extent of modification distance-wise, the AO is directed to grant relief to the assessee in all captioned appeals in respect of losses attributable to Distance 1 and Distance 2 category.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act.
2. Merits of the additions made on account of losses shifted in/profit shifted out due to Client Code Modification (CCM).

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147 of the Income Tax Act:

The primary issue was whether the Assessing Officer (AO) had valid grounds to reopen the assessment under Section 147. The AO reopened the case based on information from the Investigation Wing regarding the misuse of the Client Code Modification (CCM) facility. The AO believed that the assessee had shifted profits and losses to reduce taxable income, thus leading to the escapement of income.

The Tribunal held that the AO had obtained specific and objective details showing systematic modifications in client codes, which indicated escapement of income. The AO's belief was based on persuasive and relevant material, not on mere rumors or suspicions. The AO had acted upon credible information and underlying material, thus justifying the reopening of the assessment. The Tribunal dismissed the assessee's objection on this ground, stating that the AO's belief need only be prima facie and not conclusive.

2. Merits of the Additions Made on Account of Losses Shifted In/Profit Shifted Out Due to CCM:

The second issue was whether the additions made by the AO on account of losses shifted in/profit shifted out due to CCM were justified. The AO had added ?1,16,078 to the assessee's income, alleging that the CCM was used to evade taxes.

The Tribunal analyzed the extent and magnitude of modifications in client codes using a distance-wise breakdown, categorizing them into 'Distance 1' (one digit difference), 'Distance 2' (two digits difference), 'Distance 3' (three digits difference), and 'Distance 4' (four digits difference).

- Distance 1: The Tribunal found that errors in this category could be genuine punching errors, especially when modifications involved relatives with similar client codes. The Tribunal directed the AO to delete the losses shifted in or profits shifted out owing to modifications in client codes falling in 'Distance 1' category.

- Distance 2: The Tribunal took a benign view, considering that such modifications could also be genuine errors. The Tribunal directed the AO to delete adjustments in the assessed income to the extent of the amount attributable to trade transactions falling in 'Distance 2' category.

- Distance 3: The Tribunal found substantial differences in client codes in this category, indicating that modifications were not bonafide errors but orchestrated to suppress profits. The Tribunal upheld the AO's action regarding losses in 'Distance 3' category.

- Distance 4: The Tribunal found modifications in this category highly doubtful and near impossible to be genuine errors. The Tribunal upheld the AO's action regarding losses in 'Distance 4' category.

The Tribunal directed the AO to grant relief to the assessee in respect of losses attributable to 'Distance 1' and 'Distance 2' categories, thus partly allowing the appeals.

Conclusion:

The Tribunal upheld the validity of reopening the assessment under Section 147, finding that the AO had acted on credible information. On the merits of the additions, the Tribunal provided relief for modifications falling in 'Distance 1' and 'Distance 2' categories, while upholding the AO's action for 'Distance 3' and 'Distance 4' categories. The appeals were partly allowed.