2021 (4) TMI 1118 - AT - Income Tax

Validity of reopening of assessment u/s 147 - basis of client code modification - HELD THAT - We note that the Hon ble Punjab and Haryana High Court has decided the issue in favour of the Revenue in the case of Shri Rakesh Gupta 2018 (5) TMI 445 - PUNJAB AND HARYANA HIGH COURT which was reopened under section 147 of the Act based on the same investigation report Income Tax Department. In view of the above, we do not find any merit in the case of the assessee. Accordingly we uphold the reopening made by the AO under section 147. Addition on account of client code modification done by the broker to shift the profit - HELD THAT - Admittedly client codes were modified of the assessee as per the information received from the investigation wing. However, the first question that arises whether such client codes were modified at the instance of the assessee or there was some punching error at the end of the share broker. It is because the stock exchange permits the share broker to rectify the mistakes occurred while punching the data. If that be so, then there cannot be any fault which can be attributed to the assessee for the mistakes committed by the share broker. The client code modifications give rise to the doubt/ suspicion which requires detailed investigations from the parties concerned to reveal the truth. Merely, there were client codes modifications carried out by the broker cannot the basis to draw an inference against the assessee. In fact, in the case of client code modification the code of the other party is entered at the place of the assessee. Thus the other party also required to be investigated whether the other party was involved in such transaction. Besides this other corroborative evidence has to be brought on record suggesting that there was the exchange of cash among the parties involved in such client code modification transaction. But we note that no such exercise has been carried out by the authorities below. As such there is no whisper in the order of the authorities below that there was the cash transfer between the parties for transferring the income of the assessee to the other party. Thus in the absence of such verification/examination carried out by the authorities below, we are not inclined to uphold their findings. We are not inclined to uphold the findings of the authorities below. We direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of assessment order under section 147 of the Income Tax Act.
2. Addition of income due to client code modification.

Issue 1 - Validity of assessment order under section 147:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the assessment order passed under section 143(3) read with section 147 of the Income Tax Act for the Assessment Year 2009-2010. The Assessee challenged the initiation of reassessment proceedings under section 147 of the Act. The Assessee argued that the reopening based on client code modification was not valid. The Assessee relied on previous orders to support this claim. The Revenue contended that the reopening was justified based on information from the investigation wing. The Tribunal noted a High Court decision supporting the Revenue's position and upheld the reopening under section 147, dismissing the Assessee's appeal on this ground.

Issue 2 - Addition of income due to client code modification:
The Assessee contested the addition of ?12,67,380 on account of client code modification by the broker to shift profit. The Assessee argued that the AO did not provide the investigation report used for the addition. The Assessee claimed that client code modifications were permissible within SEBI guidelines for genuine mistakes. The CIT (A) upheld the AO's decision, stating that the modifications were not inadvertent errors but systematic tax evasion. The Tribunal noted that client code modifications should be investigated thoroughly, including examining cash transfers between parties involved. As no such investigation was conducted by the lower authorities, the Tribunal set aside the CIT (A) decision and directed the AO to delete the addition. Consequently, the Assessee's appeal on this ground was allowed partially.

In conclusion, the Tribunal upheld the validity of the assessment order under section 147 but directed the deletion of the addition made due to client code modification, partially allowing the Assessee's appeal.