2018 (5) TMI 1489 - HC - Income Tax

Reopening the assessment u/s 147 after processing of return u/s 143 - assessee is a broker and has made Client Code Modification CCM - normally a broker charges 0.5% to 1% of losses/profits - as per AO CCM were not genuine and from which the assessee would have earned sizeable unaccounted income as a broker - Held that - the reasons recorded by the AO does not lack validity and AO have reason to form belief that income chargeable to tax had escaped assessment - thus the issue on reassessment are kept open - decided against the assessee

Issues Involved:
1. Validity of the notice for reopening the assessment.
2. Tangibility of the material used for forming the belief of escaped income.
3. Distinction between genuine and non-genuine Client Code Modifications (CCMs).
4. Legal principles governing the reopening of assessments.

Detailed Analysis:

1. Validity of the notice for reopening the assessment:
The petitioner challenged the notice dated 29th March 2017 issued by the Assessing Officer to reopen the assessment for AY 2010-2011. The petitioner argued that the reopening was based on mere suspicion and lacked tangible material. The court noted that the return filed by the assessee was processed under Section 143(1) of the Income-tax Act, 1961, without scrutiny, and therefore, the principle of change of opinion did not apply. However, even in such cases, reopening cannot be made in the absence of tenable material.

2. Tangibility of the material used for forming the belief of escaped income:
The Assessing Officer received information from the BSE indicating that the assessee had made Client Code Modifications (CCMs) in numerous trades, involving significant amounts. The officer believed that the assessee earned additional commission income through these non-genuine CCMs, which was not disclosed in the return. The court emphasized that the term "reason to believe" requires tangible material, not mere suspicion. The court referred to the Supreme Court's judgment in Rajesh Jhaveri Stock Brokers Pvt. Ltd., which stated that the Assessing Officer must have cause or justification to suppose that income had escaped assessment.

3. Distinction between genuine and non-genuine Client Code Modifications (CCMs):
The court analyzed the reasons recorded by the Assessing Officer, which included expert opinions from the NSE distinguishing genuine CCMs (e.g., errors due to communication or typing, modifications within relatives) from non-genuine CCMs (e.g., significant percentage of modified traded value, modifications to unrelated parties). The data showed that the assessee's CCMs were non-genuine, leading to the belief that the assessee earned unaccounted income.

4. Legal principles governing the reopening of assessments:
The court reiterated that reopening of assessment cannot be made on mere suspicion or for fishing inquiries. The Assessing Officer must have tangible material to form a belief of escaped income. The court cited several judgments, including Inductotherm (India) Pvt. Ltd. and Raymond Woollen Mills Ltd., emphasizing that at the stage of issuing notice, the question is whether there was relevant material for a reasonable person to form the requisite belief.

Conclusion:
The court found that the reasons recorded by the Assessing Officer were valid and that the officer could form a belief that income chargeable to tax had escaped assessment. The petitions were dismissed, allowing the reassessment to proceed. The court clarified that it made no observations on the merits of the proposed additions, leaving all issues open for the reassessment process.

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