2019 (2) TMI 109 - AT - Income Tax

Reopening of assessment u/s 147 - assessee has misused the facility of client code modification provided to stock brokers to avail contrived loss - Held that - We find the AO, on the basis of the information received in the shape of the report of the Investigation Wing of Ahemdabad, reopened the assessment u/s 147 on the ground that assessee has misused the facility of client code modification provided to stock brokers to avail contrived loss. There is no dispute to the fact that the assessee in the instant case has traded at the stock exchange through the broker M/s. Gaurav Investment and Consultancy Private Limited. There is also no dispute to the fact that the Assessing Officer during the course of assessment proceedings has called for certain information from the said broker who has replied to the queries raised by the Assessing Officer in response to notice u/s 133 (6) and there is no allegation by the Assessing Officer in his findings that there was any connivance between the assessee and the broker. Since in the instant case action has been taken us/ 147 after completion of the assessment u/s 153A/ 143 (3) on the basis of report of the Investigation Wing and the Assessing Officer has not conducted any enquiry on the same, therefore, hold that reassessment proceedings initiated in the instant case are not in accordance with law. Accordingly the same is quashed. Since the assessee succeeds on the legal ground, the grounds of appeal challenging the addition on merit become academic in nature for which these are not being adjudicated. - Decided in favour of assessee.

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the IT Act.
2. Addition of ?31,90,855/- as undisclosed income.
3. Levy of interest under Sections 234B and 234C of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147 of the IT Act:

The assessee challenged the reassessment proceedings on the grounds that the reasons for reopening the assessment were not provided during the course of the assessment proceedings, and the proceedings were initiated based on a mere change of opinion without any tangible and relevant material. The Tribunal observed that the Assessing Officer (AO) reopened the assessment based on information from the Investigation Wing, Ahmedabad, which indicated misuse of the Client Code Modification (CCM) facility by the assessee to avail contrived loss. The Tribunal found that the AO did not conduct any independent enquiry and mechanically relied on the report from the Investigation Wing. The Tribunal referred to various judicial precedents, including the Delhi High Court’s decision in the case of Pr. CIT v. G&G Pharma India Ltd., which emphasized that the AO must apply his mind to the material and form a reason to believe that income has escaped assessment. The Tribunal concluded that the reassessment proceedings were initiated without proper application of mind and were thus invalid. Consequently, the reassessment proceedings were quashed.

2. Addition of ?31,90,855/- as Undisclosed Income:

The AO made an addition of ?31,90,855/- to the assessee's income, alleging that the assessee misused the CCM facility to manipulate losses. The CIT(A) upheld this addition. The assessee contended that the loss incurred was genuine and supported by documentary evidence, including contract notes and payment of applicable taxes. The Tribunal noted that the AO had not established any connivance between the assessee and the broker for manipulating the client code. The Tribunal referred to several decisions, including those of the Jaipur Bench in DCIT Vs. Gyandeep Khemka and the Delhi SMC Bench in Radiance Stock Traders Pvt Ltd Vs. ITO, which held that CCM is a facility provided to rectify genuine errors and that misuse of this facility requires connivance among the parties involved. The Tribunal found that the AO did not provide any specific evidence of such connivance or manipulation. Therefore, the addition was not justified and was based on mere speculation and assumptions. Consequently, the Tribunal ruled in favor of the assessee on this issue.

3. Levy of Interest under Sections 234B and 234C of the IT Act:

The assessee also challenged the levy of interest under Sections 234B and 234C of the IT Act. The Tribunal did not specifically address this issue in detail, as the primary grounds of reassessment and addition were resolved in favor of the assessee. Since the reassessment proceedings were quashed and the addition was not sustained, the levy of interest under these sections would automatically be rendered invalid.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the reassessment proceedings and setting aside the addition of ?31,90,855/- as undisclosed income. The Tribunal emphasized the necessity for the AO to apply his mind and have tangible material before initiating reassessment proceedings and making additions to the income.

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