2020 (1) TMI 286 - AT - Income Tax

Reopening of assessment u/s 147 - Addition towards set off of fictitious losses through Client Code Modification - HELD THAT - DIT that the assessee had taken loss adjustment entries worth of ₹ 1,55,31,999/- in F O and Cash Segment by way of CCM, re-opened the assessment by issuing notice u/s. 148 of the Act. The assessee vide letter dated 15.10.2015 filed objection against the said notice u/s.148. The AO rejected the objection by an order dated 05.02.2016. The Hon ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. 2007 (5) TMI 197 - SUPREME COURT analyzed the distinction between the acceptance of a return u/s 143(1) and an assessment which is framed u/s 143(3) of the Act. In the former case, the AO would have much wider latitude to reopen the assessment. Thus in the instant case, the AO has rightly issued notice u/s 148 for reopening the return of income processed u/s 143(1) of the Act. Accordingly we dismiss the grounds raised by the assessee against the re-opening done by the AO. On merit we find that the assessee is not a registered broker on the Stock Exchange and only registered brokers can modify Client Code of their own clients. Hence, the observations by the AO that the assessee having done or resorted to CCM is incorrect. It is seen that nothing has been brought on record by the AO to show that instruction for CCM was given by the assessee. In fact, the assessee cannot be held responsible for CCM done at the end of the broker. In the instant case, there is no incriminating statement from the brokers of the assessee i.e. Mansi Share Stock Advisors Pvt. Ltd, Bonanza Portfolio Ltd and KM Jain Share Brokers Pvt. Ltd. Further, no evidence is brought on record by the AO of any action by SEBI on assessee or its brokers for CCM. The data provided by NSE nowhere states that loss suffered by assessee is non-genuine. In the assessment order dated 31.03.2016, the AO has stated the modus operandi of creation of fictitious profits and /or losses with a malafide intention of escaping taxes, but he has neither proved nor led any evidence in case of any single transaction, while making addition to the income of the assessee. Addition made by the AO is based on general propositions, which cannot be sustained. - Decided in favour of assessee.

Summary

Issues:
- Addition made towards set off of fictitious losses through Client Code Modification

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the deletion of an addition made towards set off of fictitious losses through Client Code Modification for the assessment year 2010-11.

2. The assessee-company filed its return of income declaring a total income of ?42,43,345 for the A.Y. 2010-11. The Assessing Officer (AO) issued a notice u/s.148 after receiving information about loss adjustment entries made through Client Code Modification (CCM). The AO disallowed the fictitious loss of ?1,55,31,999 based on the belief that the entries were used to cover up profits and gains from the segment.

3. The Commissioner of Income Tax (Appeals) observed that the AO's addition was solely based on enquiries by the DIT and that there was no specific evidence showing malafide intention behind the client code modifications. The CIT(A) also highlighted that CCM is permissible by SEBI and is under the broker's control, not the client's.

4. The CIT(A) deleted the addition based on the ITAT, Ahmedabad's decision in a similar case, emphasizing that the modification of client code is the broker's responsibility, and the assessee cannot be penalized for others' actions.

5. During the appeal hearing, the Departmental Representative argued that the entries were used to cover up profits, while the assessee's counsel contended that the reopening of assessment was invalid and that the assessee was not involved in CCM.

6. The Tribunal dismissed the grounds against the reopening but found that the assessee, not being a registered broker, could not have modified client codes. No incriminating statements from the assessee's brokers were provided, and no evidence of SEBI action was presented. The AO's addition lacked specific evidence for any single transaction, leading to the confirmation of the CIT(A)'s order.

7. The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the AO's general propositions lacked substantiation, and the addition of ?1,55,31,999 was not sustainable. Consequently, the appeal filed by the revenue was dismissed on 25.10.2019.