2022 (9) TMI 1094 - AT - Income Tax

Validity of re-opening of assessment u/s 147 - Disallowance of loss in trading in shares and derivatives - whether the information received regarding client code modification could be a reason for reopening of assessment? - HELD THAT - We hold that the reopening of assessment is bad in law. On merits also, we notice that the claim of the assessee is duly supported by various evidences and further the code modifications carried out by the stock broker should not affect the claim of the assessee unless it is proved that the assessee has colluded with the stock broker in carrying out the modification, which is not the case here. Accordingly, we are of the view that the AO could not have disallowed the loss claimed by the assessee. Accordingly, we quash the orders passed by the tax authorities. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Disallowance of loss in trading in shares and derivatives.
2. Validity of re-opening of assessment u/s 147 of the Act.

Issue 1: Disallowance of loss in trading in shares and derivatives

The assessee, an individual trader and investor in shares and commodities, challenged the disallowance of a loss amounting to Rs.1,24,17,318 in trading. The AO reopened the assessment based on information alleging fictitious transactions to generate the loss. The assessee maintained proper books of accounts and submitted that all trading transactions were supported by broker notes. The contention was that any modifications were done by the stock broker and not the assessee. The Ld CIT(A) confirmed the disallowance, leading to the appeal before the Tribunal.

In the appellate proceedings, the assessee argued that the loss was genuine, supported by evidence, and not a result of collusion with the broker. The Ld A.R contended that client code modification by the broker should not impact the assessee's claim unless collusion was proven. Citing a Bombay High Court decision, the Ld A.R argued against the suspicion-based reopening of assessment. The Ld D.R supported the CIT(A)'s order, suggesting a re-examination by the AO.

The Tribunal found that the AO's reopening of assessment lacked jurisdiction, following the Bombay High Court's decision. It was held that the claim was supported by evidence, and the broker's modifications should not impact it without collusion proof. Consequently, the Tribunal quashed the tax authorities' orders and allowed the assessee's appeal.

Issue 2: Validity of re-opening of assessment u/s 147 of the Act

The AO reopened the assessment based on information suggesting fictitious loss generation through client code modification. The Tribunal referred to a Bombay High Court decision, emphasizing the need for a genuine reason to believe income escapement for valid reopening. It was noted that the client code modifications by the broker did not automatically imply income escapement unless collusion was proven. Consequently, the Tribunal held the reopening of assessment as bad in law, leading to the quashing of tax authorities' orders and allowing the assessee's appeal.

In conclusion, the Tribunal ruled in favor of the assessee, highlighting the importance of genuine reasons for reopening assessments and the need for collusion proof to impact claims based on broker modifications. The decision emphasized adherence to legal standards and evidence-based assessments in tax matters.