2021 (10) TMI 357 - AT - Income Tax

Reopening of assessment u/s 147 - eligibility of reasons to believe - addition made on the basis of the report of the Investigation Wing - HELD THAT - In the reasons for reopening of the assessment, it is clearly stated that not all client code modifications are in genuine. Otherwise, the same we would not have given a window of halfan- hour to the brokers to modify the client codes to correct the genuine errors. AO without any allegation has presumed that assessee has entered into nongenuine client code modification activities. Neither the brokerage examined nor the assessee is examined. In fact the non-genuine client code modification activities could be established on the basis of analysis of Levenshtein Distance of Digit Edit analysis where there are edits ranging from three to five in the client code, then it is obvious that the code is not modified but actually replaced. There is no such allegation on finding of AO. There is no allegation in the reasons recorded by AO that there is any failure on part of the assessee to disclose fully and truly material facts of computation of the total income. It could not have been the duty of the assessee to disclose that there are client code modification made by the broker, when in fact profit or loss has been shown by the assessee before the assessing officer and same was scrutinized u/s 143 (3) of the act. It would be the duty of AO to decipher any inference, which he would like to draw. AO has considered the addition by combining the profit earned by the assessee on account of client code modification and further a loss on account of client code modification. Therefore, in fact assessee has earned profit as well as loss because of client code modification whereas the learned assessing officer has considered both these figures as income of the assessee. Addition stating that assessee has failed to provide any substantial evidence that can corroborated that the client code modification was bona fide it was the duty of the learned assessing officer to show that the client code modification made by the broker of the assessee which has resulted into the Under assessment of income of the assessee because of evidences in the possession of the learned assessing officer. We find that there is no reference of any such evidences but merely a fact that there is a client code modification wherein which has resulted into income as well as loss to the assessee. Also noted that assessee has incurred a loss of ₹ 11.36 crores, the contrived loss even if it is presumed to be a bogus loss, it is merely ₹ 273,631 which would not have made any difference or saving in any tax to the assessee as assessee has assessed loss of more than ₹ 11.34 crores. This is not a clinching fact but it is a supportive fact to show that there is no intention of the assessee of saving of any tax even if the loss is held to be bogus. Merely on such facts the reopening or addition could not have been held invalid, but looking at the composite facts coupled with the other facts, it clinches the issue. There is no examination of broker of the assessee to determine whether the client code modification is genuine as falling into the allowable definition given by SEBI or nongenuine. In absence of either extracting these facts by examining the broker or by the assessee, we do not find any reason that addition can be sustained on the merits of the case also. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of notice issued under Section 148 of the Income Tax Act.
2. Justification for reopening the assessment under Section 147 of the Income Tax Act.
3. Legitimacy of the addition of ?2,73,631 based on client code modification.
4. Assessment of interest levied under Sections 234A/B/C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued under Section 148:
The assessee contended that the notice issued under Section 148 was invalid as it was based on surmise and conjectures, without any tangible material. The notice was challenged on the grounds that the assessment was already completed under Section 143(3) and all material facts were disclosed during the original assessment. The Tribunal found that the notice was issued beyond four years from the end of the assessment year, and there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, the notice under Section 148 was deemed invalid.

2. Justification for Reopening the Assessment under Section 147:
The reopening of the assessment was based on information received from the ADIT, Investigation Wing, Ahmedabad, regarding client code modification resulting in a loss of ?2,73,631. The Tribunal observed that the reasons recorded for reopening did not indicate any failure on the part of the assessee to disclose material facts. The Tribunal emphasized that the Assessing Officer did not examine the brokers or provide substantial evidence to prove that the client code modifications were non-genuine. The Tribunal concluded that the reopening was unjustified as it was based on presumptions rather than concrete evidence.

3. Legitimacy of the Addition of ?2,73,631 Based on Client Code Modification:
The Assessing Officer added ?2,73,631 to the income of the assessee, alleging that the assessee was involved in transferring fictitious profits/losses through client code modification. The Tribunal found that the assessee had incurred an overall loss of ?11.36 crores, and the alleged bogus loss of ?2,73,631 would not have made any significant difference to the returned income. The Tribunal noted that there was no examination of the broker to determine the genuineness of the client code modifications. Consequently, the addition of ?2,73,631 was deemed unsustainable on merits.

4. Assessment of Interest Levied under Sections 234A/B/C:
The assessee challenged the interest levied under Sections 234A/B/C of the Income Tax Act. However, the Tribunal did not provide a specific ruling on this issue, as the primary grounds for reopening the assessment and the addition of ?2,73,631 were already resolved in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, reversing the orders of the lower authorities. The reopening of the assessment under Section 147 and the subsequent addition of ?2,73,631 were both deemed invalid. The Tribunal emphasized the lack of concrete evidence and the failure to establish non-genuine client code modifications, leading to the conclusion that the actions of the Assessing Officer were unjustified. The appeal was allowed in favor of the assessee.