2020 (9) TMI 813 - AT - Income Tax

Reopening of assessment - Addition u/s 68 - client code modification - HELD THAT - Client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purchase and sale on behalf of the customers. AO has alleged in the reasons recorded that client code modification has been done for shifting of the profit or loss by the assessee. But there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. In the case of Rajesh Jhaveri Stock Brokers (P) Ltd. 2007 (5) TMI 197 - SUPREME COURT has held that for validity of reason recorded it is essential that there should be a relevant material on which a reasonable person could make requisite belief. In the case of M/s. Coronation Agro Industries Ltd. 2017 (1) TMI 904 - BOMBAY HIGH COURT we are of the opinion that the assessment cannot be reopened validly on the basis of the above reasons recorded in absence of any tangible material to infer that income escaped in the case of the assessee. We, accordingly, quash the reassessment proceedings and set aside the order of the Learned CIT(A) on the issue in dispute. Ground of the appeal of assessee allowed.

Issues Involved:
1. Validity of the reassessment proceedings under Section 147.
2. Sustaining the addition of ?6,47,201/- representing loss claimed and incurred by allegedly misusing the client code modification mechanism.
3. Sustaining the addition of ?12,944/- representing alleged income from commission on the sale of shares.

Detailed Analysis:

1. Validity of the Reassessment Proceedings under Section 147:

The primary issue raised by the assessee was the validity of the reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961. The assessee contended that the initiation was without jurisdiction and lacked specific, relevant, reliable, and tangible material to form a "reason to believe" that income had escaped assessment.

The Tribunal examined the reasons recorded by the Assessing Officer (AO), which were based on the process of Client Code Modification (CCM) by brokers. The AO believed that the CCM was used to shift profits and losses to evade taxes. However, the Tribunal found that the AO's belief was based on suspicion rather than tangible material. The Tribunal noted that there was no direct nexus or live link between the alleged material and the inference drawn by the AO.

The Tribunal referred to various judicial precedents, including the Hon'ble Bombay High Court's decision in M/s. Coronation Agro Industries Ltd. vs. DCIT, which quashed the reopening of assessment on identical grounds. The Tribunal concluded that the reassessment proceedings were initiated without any tangible material and hence were invalid. Consequently, the Tribunal quashed the reassessment proceedings and set aside the order of the Learned CIT(A) on this issue.

2. Sustaining the Addition of ?6,47,201/- Representing Loss Claimed and Incurred by Allegedly Misusing the Client Code Modification Mechanism:

The assessee challenged the addition of ?6,47,201/- made by the AO under Section 68 of the Act, which was sustained by the CIT(A). The AO alleged that the assessee misused the CCM mechanism to shift profits and losses, resulting in contrived profits artificially generated through CCM. The AO treated the profit as unexplained investment and added it to the total income of the assessee.

The Tribunal found that the AO's conclusion was based on generalized statements, theoretical assumptions, and allegations without any supporting direct or indirect evidence. The Tribunal emphasized that the AO acted only on the basis of suspicion and there was no tangible material to support the belief that the CCM was used for tax evasion. The Tribunal also noted that the reasons recorded by the AO were factually incorrect and there was no live link between the alleged material and the inference drawn.

Given the lack of tangible material and the reliance on mere suspicion, the Tribunal quashed the reassessment proceedings and did not adjudicate further on the merits of the addition.

3. Sustaining the Addition of ?12,944/- Representing Alleged Income from Commission on Sale of Shares:

The assessee also challenged the addition of ?12,944/- made by the AO under Section 69C of the Act, representing alleged income from commission on the sale of shares. The Tribunal did not specifically address this issue separately as it had already quashed the reassessment proceedings on the grounds of invalid initiation and lack of tangible material. Consequently, the addition sustained by the CIT(A) was also set aside.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the reassessment proceedings initiated under Section 147 of the Act due to the lack of tangible material and reliance on mere suspicion. The Tribunal set aside the order of the CIT(A) on the issue of reassessment validity and did not adjudicate further on the merits of the additions made by the AO. The appeal of the assessee was allowed in its entirety.

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