2022 (1) TMI 673 - AT - Income Tax

Addition on account of client code modification done by the broker to shift the profit - whether such client codes were modified at the instance of the assessee or there was some punching error at the end of the share broker? - HELD THAT - Admittedly client codes were modified of the assessee as per the information received from the investigation wing - It is because the stock exchange permits the share broker to rectify the mistakes occurred while punching the data. If that be so, then there cannot be any fault which can be attributed to the assessee for the mistakes committed by the share broker. The client code modifications give rise to the doubt/ suspicion which requires detailed investigations from the parties concerned to reveal the truth. Merely, there were client codes modifications carried out by the broker cannot the basis to draw an inference against the assessee. In fact, in the case of client code modification the code of the other party is entered at the place of the assessee. Thus, the other party also required to be investigated whether the other party was involved in such transaction. Besides this other corroborative evidence has to be brought on record suggesting that there was the exchange of cash among the parties involved in such client code modification transaction. But we note that no such exercise has been carried out by the authorities below. As such there is no whisper in the order of the authorities below that there was the cash transfer between the parties for transferring the income of the assessee to the other party or shifting in the losses. Furthermore, in majority of the cases, the client code medication was carried out by the broker with the relative of the assessee and thus it is very unlikely that the assessee shall manipulate the income/loss with them for the reason that there would be consequential effect on their income too. Meaning thereby, as a whole, there would not any effect on the income of the assessee and her associates unless some contrary evidence are brought on record. Thus in the absence of such verification/examination carried out by the authorities below, we are not inclined to uphold their findings. We are not inclined to uphold the findings of the authorities below. Accordingly we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment under section 147 of the Income Tax Act, 1961.
2. Confirmation of the addition made by the Assessing Officer (AO) on account of client code modification.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:

The first issue raised by the assessee was the validity of the assessment order framed under section 147 of the Income Tax Act, 1961. The assessee contended that the Learned Commissioner of Income Tax (Appeals) [CIT(A)] had erred in confirming the action of the AO in reopening the assessment. The assessee argued that the ratio of the judgment of the Hon'ble Supreme Court in the case of GKN Driveshaft (India) Ltd. was not followed in its letter and spirit, thereby rendering the consequential reassessment order liable to be quashed.

However, the tribunal noted that the issue raised by the assessee on merit had been decided in her favor regarding the addition made by the AO. Given this, the tribunal refrained from deciding the issue on the validity of the assessment order framed under section 147, as it became infructuous. Therefore, the technical issue raised by the assessee was dismissed as infructuous.

2. Confirmation of Addition Made by the AO on Account of Client Code Modification:

The second issue was regarding the confirmation of the addition of ?29,66,471 made by the AO on account of client code modification done by the broker to shift the profit. The assessee argued that the AO made the addition arbitrarily and did not provide specific transaction-wise breakup of the modification. The assessee also contended that the client code modifications were mistakes committed by the broker's staff, and no adverse inference should be drawn against the assessee.

The CIT(A) confirmed the AO's order, observing that the appellant had indulged in client code modification (CCM) to shift in losses and set off against taxable income. The CIT(A) noted that the AO had concrete information and scientific analysis showing that CCMs were not carried out to rectify genuine errors but to completely replace one client code with another. The CIT(A) also highlighted that the appellant failed to refute the allegations and did not provide any evidence to show that the appellant had not benefited from these transactions.

Upon appeal, the tribunal examined the facts and noted that the client codes were modified as per the information received from the investigation wing. The tribunal emphasized that client code modifications give rise to suspicion, requiring detailed investigations to reveal the truth. The tribunal found that no such detailed investigation was carried out by the authorities. Moreover, the tribunal observed that in most cases, the client code modification was carried out with the assessee's relatives, making it unlikely that the assessee would manipulate the income/loss with them.

The tribunal concluded that the authorities below did not carry out the necessary verification/examination and thus set aside the findings of the CIT(A). The tribunal directed the AO to delete the addition made by him, allowing the ground of appeal of the assessee.

Conclusion:

In the combined result, both appeals filed by the different assessee were partly allowed. The tribunal set aside the findings of the CIT(A) regarding the addition made on account of client code modification and directed the AO to delete the addition. The issue of the validity of the assessment order framed under section 147 was dismissed as infructuous. The order was pronounced in the court on 08/11/2021 at Ahmedabad.