2022 (8) TMI 576 - AT - Income Tax

Reopening of assessment u/s 147 - investment in trade market through broker and manipulated his income by shifting in losses / shifting in profit - HELD THAT - As the reopening was done on the basis of information received from the Investigation Wing as has been accepted by the AO and the CIT(A) in their respective orders, therefore, in the absence of independent application of mind by the AO, the reopening in the instant case under section 147 r.w.s 148 of the Act was not justified. Investigation Wing supplied the information to the AO that there was a client code modification to manipulate the profit as was the case in the aforesaid referred to case of Shri Tulsi Dass, Laxmi Nagar, Delhi 2019 (1) TMI 1985 - ITAT DELHI - Therefore for the same reasoning the reassessment order in the case of the assessee also deserves to be quashed. AO acted only on the basis of suspicion and acted on the basis of information received from the Investigation Wing therefore the reassessment proceedings was not valid. Moreover in the reasons recorded, copy of which is placed of the assessee s paper book. AO categorically stated that the AO had reason to believe on the basis of observation of the Directorate of Investigation that the assessee had probably shows bogus profit to adjust unaccounted money generated from business or elsewhere and he had reason to believe on that basis that the amount had escaped assessment within the meaning of Section 147. From the aforesaid notings of the AO in the reasons recorded it is clear that the AO was not sure as to whether income escaped the assessment. Since the word probably has been used, and there was no application of his own mind by the AO who depended only on the information received from the Investigation Wing. We therefore by considering the totality of the facts as discussed herein above are of the view that the reopening in the instant case on the basis of borrowed information by the AO from the Investigation Wing without applying his independent mind was not justified. Accordingly the subsequent reassessment proceedings framed by the AO is quashed. - Assessee appeal allowed.

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Addition of Rs. 49,99,423/- based on Client Code Modification (CCM).

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:

The primary issue raised by the assessee was the validity of the reopening of the assessment under Section 147 of the Income Tax Act. The assessee contended that the reopening was based on vague information from the Investigation Wing, which did not constitute "reasons to believe" that income had escaped assessment. The assessee argued that the reasons recorded were merely reasons to suspect, not reasons to believe, and that the reopening was based on non-application of mind by the Assessing Officer (AO).

The facts revealed that the AO initiated the reassessment proceedings based on information received from the ADIT (Investigation)-II Ludhiana, indicating that the assessee had engaged in Client Code Modification (CCM) to create artificial losses/profits. The AO recorded that the assessee had probably shown bogus profits to adjust unaccounted money, leading to the belief that income had escaped assessment.

The assessee challenged this by citing several judicial precedents emphasizing that the AO must have tangible material to form a belief that income had escaped assessment, not merely act on borrowed satisfaction from the Investigation Wing. The assessee also pointed out that the AO's reasons included the word "probably," indicating a lack of certainty.

The Tribunal noted that the AO's reopening was solely based on information from the Investigation Wing without independent application of mind. The Tribunal referred to various judgments, including those from the Supreme Court and High Courts, which held that reopening based on mere suspicion or borrowed satisfaction is not permissible under law. The Tribunal concluded that the reopening was invalid as it lacked independent application of mind by the AO and was based on incorrect facts, such as the alleged search on the broker, which did not occur.

2. Addition of Rs. 49,99,423/- Based on Client Code Modification (CCM):

The second issue was the addition of Rs. 49,99,423/- made by the AO on the grounds that the assessee was involved in transferring fictitious profits/losses through CCM. The AO's reasoning was based on the information that brokers misused the CCM facility to create artificial losses/profits for clients, including the assessee.

The assessee argued that CCM is a permissible practice for brokers to rectify genuine errors and that the assessee, as a client, did not directly engage in CCM. The assessee contended that any CCM done by the broker was within the permissible limits set by SEBI and that the assessee had no role in manipulating profits/losses.

The Tribunal observed that the AO's addition was based on information from the Investigation Wing without concrete evidence linking the assessee to the alleged manipulation. The Tribunal noted that the AO did not independently verify the information and relied solely on the Investigation Wing's report. The Tribunal also highlighted that the AO did not confront the assessee with the material/evidence used against them, violating the principles of natural justice.

The Tribunal referred to judicial precedents where similar additions based on CCM were quashed due to lack of independent verification and reliance on borrowed information. The Tribunal concluded that the addition was unjustified and based on conjectures and surmises.

Conclusion:

The Tribunal quashed the reassessment proceedings under Section 147, holding that the reopening was invalid due to lack of independent application of mind by the AO and reliance on incorrect and borrowed information. Consequently, the addition of Rs. 49,99,423/- based on CCM was also deleted, as it was not supported by concrete evidence and violated principles of natural justice. The appeal of the assessee was allowed.

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