2021 (2) TMI 935 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Undisclosed client code modification - assessee provided fictitious loss to different clients as well as fictitious profit to other clients - HELD THAT - Reasons recorded clearly indicate that the reopening of assessments is on the basis of a letter received from DDIT (Inv.), Ahmedabad, wherein, it is alleged that some brokers are misusing the client code modification facilities to benefit their clients and in the process received commission varying between 0.5% to 2% of the amount of loss/profit transferred to the respective clients. It is noticed, on the basis of identical reasoning in assessee s own case for the assessment year 2010-11, assessment was reopened u/s 147 of the Act. The Tribunal while deciding the issue 2020 (2) TMI 1455 - ITAT MUMBAI following the decision of Hon ble Bombay High Court in case of M/s Coronation Agro Industries Ltd. vs. DCIT. 2017 (1) TMI 904 - BOMBAY HIGH COURT , held the reopening of assessment as invalid and accordingly, quashed the assessment orders. Reopening of assessment is invalid - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147 of the Income Tax Act:
The primary issue in these appeals is the challenge against the reopening of assessments under Section 147 of the Income Tax Act. The assessees, resident companies dealing in shares and securities, had their returns initially processed under Section 143(1). The Assessing Officer (AO) reopened the assessments based on information from the DDIT (Inv.), Ahmedabad, alleging tax evasion through client code modification. The AO completed the assessments under Section 143(3) read with Section 147, making various additions and computing commission income at 2%.

The learned Counsel for the assessee argued that the AO mechanically reopened the assessments solely based on information from the Investigation Wing without independent enquiry or application of mind. The Counsel highlighted that neither the reasons recorded for reopening nor the assessment order pointed out any instance of client code modification by the assessee. The Counsel referenced a Division Bench of the Tribunal's decision in the assessee's own case for the Assessment Year (AY) 2010-11, where similar reopening was held invalid.

The learned Departmental Representative acknowledged the Tribunal's decision in the assessee's own case for AY 2010-11 but mentioned that the department might have appealed against the High Court's decision relied upon by the Tribunal.

Upon consideration, it was undisputed that the reopening was based on information alleging misuse of client code modification to create fictitious profits and losses. The reasons recorded for reopening were identical to those in the assessee's case for AY 2010-11. The Tribunal had previously quashed the reopening, following the Bombay High Court's decision in M/s Coronation Agro Industries Ltd. vs. DCIT, which held that the notice under Section 148 lacked a "reason to believe" that income had escaped assessment.

The Tribunal observed that the reasons recorded for reopening in the present cases were identical to those in the earlier decision, except for the dates of the letters from the DDIT (Inv.). The Tribunal, bound by its previous decision, held that the reopening of assessments was invalid. Consequently, the assessment orders were quashed, and the orders of the learned Commissioner (Appeals) were set aside. The grounds raised on merits became infructuous and were not adjudicated.

Conclusion:
The appeals filed by the assessees were allowed, and the reopening of assessments under Section 147 was deemed invalid. The Tribunal's decision was pronounced in the open court on 18th January 2021.