2024 (1) TMI 1073 - AT - Income Tax

Reopening of assessment u/s 147 - Reason to believe - notice issued beyond the period of 4 years - as alleged assessee was one of the beneficiary of Client Code Modification (CCM) by some broker - HELD THAT - The assessee filed objections for the reasons recorded and these objections were not disposed of by the speaking order by the AO thereby violating the guidelines provided by the Hon ble Supreme Court in the case of GKN Driveshafts Ltd 2002 (11) TMI 7 - SUPREME COURT . AO had initiated the re-assessment proceedings way back on 31.3.2016 itself and had been waiting for the assessee to file a return in response to notice u/s 148 of the Act by offering the alleged profit earned by the assessee due to CCM . There is no information provided in the reasons as to in whose hands, a survey u/s 133A of the Act was conducted by Ahmedabad Investigation wing. The reason only speaks that some survey in Ahmedabad conducted revealted that some broker was involved in misusing the CCM facility of NSE and engaged in providing non-genuine losses and profits. The reason does not specify whether the broker through whom the assessee had carried out the transaction of trading of shares and securities was involved in such malpractices. Infact during the course of re-assessment proceedings, the ld. AO even sought to examine the broker of the assessee M/s S S Corporate Securities Ltd u/s 133(6) of the Act and that the said broker had duly replied directly to the ld. AO confirming the fact of CCM being carried out by them for their clients due to punching errors committed by their staff but had never confirmed that their actions had enabled the assessee to shift the losses or profits. Dispute is squarely covered by the decision of Globus Power Generation Ltd 2023 (5) TMI 215 - ITAT DELHI as held 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. Hon'ble Supreme Court 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. 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. Also see Coronation Agro Industries Ltd 2017 (1) TMI 904 - BOMBAY HIGH COURT Decided against revenue.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 148 of the Income Tax Act, 1961.
2. Confirmation of addition of Rs. 4,36,644/- for alleged profit shifting through Client Code Modification (CCM).

Summary:

Issue 1: Validity of Reopening of Assessment under Section 148 of the Act

The assessee challenged the reopening of the assessment under Section 148, asserting that the notice was issued without fulfilling the conditions laid down under the section. The Tribunal noted that the reopening was based on information from the Assistant Director of Income Tax (Investigation), Ahmedabad, regarding the misuse of Client Code Modification (CCM) by brokers to shift profits and losses. The Tribunal observed that the reasons recorded for reopening did not specify whether the broker through whom the assessee conducted transactions was involved in such malpractices. The Tribunal emphasized that the reasons recorded must have a live link to form a reasonable belief that income had escaped assessment. Citing precedents, the Tribunal concluded that the reasons recorded in this case only gave rise to a 'reason to suspect' rather than a 'reason to believe.' Consequently, the reassessment proceedings were quashed as they were not sustainable in the eyes of law.

Issue 2: Confirmation of Addition of Rs. 4,36,644/- for Alleged Profit Shifting through CCM

The assessee contested the addition of Rs. 4,36,644/-, arguing that the CIT(A) erred in confirming the addition by alleging profit shifting through CCM without considering the submissions and evidence placed on record. The Tribunal reviewed the broker's confirmation that CCM was carried out due to clerical errors and not for shifting profits or losses. The Tribunal referred to its decision in the case of Globus Power Generation Ltd., where it was held that reasons for reopening must be based on tangible material and not mere suspicion. The Tribunal found that there was no material evidence linking the assessee's transactions to the alleged misuse of CCM for tax evasion. Accordingly, the addition of Rs. 4,36,644/- was not justified, and the reassessment proceedings were quashed.

Conclusion:

The Tribunal quashed the reassessment proceedings on the grounds that the reasons recorded for reopening lacked a live link to form a reasonable belief of income escapement and were based on mere suspicion. Consequently, the addition of Rs. 4,36,644/- was also not upheld. The appeal of the assessee was allowed.