2023 (1) TMI 22 - AT - Income Tax

Revision u/s 263 by CIT - validity of Reopening of assessment - transaction in share/F O and taken benefit illegally by modifying the client code - As per CIT assessee is one of the beneficiaries who had taken profit through client code modification facility as provided by NSE, which is not a genuine transaction - HELD THAT - In the present case, it is undisputed that reassessment proceedings were initiated under section 147 of the Act on the very same issue of alleged fictitious profits earned by the assessee through the process of client code modification. In the reasons recorded for reopening the assessment, it was alleged that the assessee is a beneficiary of transaction in shares/F O and has taken benefit illegally by modifying the client code of another person with its client code. During the reassessment proceedings, as is evident from the submission assessee merely provided the contract notes of the 2 brokers viz. J.L. Shah Securities Pvt. Ltd and Ashvin M Shah to substantiate its submission that the said transaction in shares/F O belongs to the assessee. It is evident from the record that the AO has made no enquiry to examine the source of investment or the genuineness of the profit earned by the assessee. AO also did not examine the original clients whose codes were alleged to have been modified to show the fictitious profit in the hands of the assessee. The AO merely proceeded to accept the contract notes of 2 brokers submitted by the assessee without appreciating the fact that in the alleged transaction of client code modification these brokers would have been actively involved and their statement cannot be treated as the gospel truth. Thus, in the present case, it cannot be said that the AO has carried out the enquiry/verification that would have been carried out by a prudent officer. The lack of investigation/enquiry by the AO, particularly when the assessment has been reopened on the very same issue and the information was received in this regard from the Investigation Department, would render the assessment order amenable to revision under section 263 of the Act, in the peculiar facts of the present case. This case is also covered under Explanation 2 to section 263 of the Act. Therefore, the assumption of jurisdiction under section 263 of the Act is upheld. We further find that the learned PCIT has straight away directed the AO to tax the amount of Rs. 35,47,821 as assessee s income from undisclosed sources under the head income from other sources . However, since the assessment order has been set aside, we are of the considered view that the AO should conduct a proper investigation/enquiry and pass a fresh order on this issue as per law. Further, as regards the direction to not allow the set off of income against the earlier years brought forward business losses, we are of the considered view that the allowability of claim of set-off of losses should be decided in terms of the law applicable during the year under consideration. To this extent, the directions in the impugned order are modified. Direction vide impugned order to examine the applicability of section 14A read with rule 8D - As we find that this issue was not examined by the AO, therefore, assumption of jurisdiction under section 263 of the Act on this issue and the direction in the impugned order is upheld. Appeal by the assessee is dismissed.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Jurisdiction under section 263 of the Income Tax Act, 1961.
3. Assessment of income from undisclosed sources.
4. Allowability of set-off of losses.
5. Applicability of section 14A read with rule 8D.

Condonation of delay in filing the appeal:
The assessee filed an appeal challenging an order passed under section 263 of the Income Tax Act, 1961. The appeal was filed after the statutory time limit of 60 days. The assessee claimed that they were under the impression that the order was not appealable before the Tribunal until fresh assessment proceedings were completed. The Tribunal considered the application seeking condonation of delay and the affidavit submitted by the partner of the assessee firm. It was noted that due to improper professional guidance, the appeal was not filed within the limitation period. The Tribunal held that there was sufficient cause for not presenting the appeal within the prescribed limitation period and thus condoned the delay in filing the appeal.

Jurisdiction under section 263 of the Income Tax Act, 1961:
The Principal Commissioner of Income Tax issued a notice under section 263, setting aside the assessment order and directing fresh assessment. The Tribunal upheld the assumption of jurisdiction under section 263, as the original assessment order was alleged to be erroneous and prejudicial to the interest of the Revenue. The Tribunal found that the AO had not conducted a proper investigation into the alleged fictitious profits earned by the assessee. Due to lack of enquiry and verification, the assessment order was considered amenable to revision under section 263. The Tribunal directed the AO to tax the undisclosed income and to conduct a proper investigation before passing a fresh order.

Assessment of income from undisclosed sources:
The Tribunal upheld the direction to tax the undisclosed income of the assessee and modify the order to allow the AO to conduct a proper investigation before passing a fresh order. The Tribunal emphasized the importance of thorough investigation and enquiry into the alleged transactions to determine the genuineness of the profits earned by the assessee.

Allowability of set-off of losses:
The Tribunal modified the direction to not allow the set off of income against earlier years' brought forward losses. It was decided that the allowability of the claim of set-off of losses should be decided in terms of the law applicable during the year under consideration.

Applicability of section 14A read with rule 8D:
The Tribunal upheld the direction to examine the applicability of section 14A read with rule 8D, as this issue was not examined by the AO. The Tribunal found that the assumption of jurisdiction under section 263 on this issue was valid and upheld the direction in the impugned order.

In conclusion, the appeal by the assessee was dismissed, and the Tribunal pronounced the order in open court on 02/12/2022.

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