2022 (12) TMI 431 - AT - Income Tax

Validity of reopening of assessment u/s 147 - specific information from the Investigation Wing that through client code modification - HELD THAT - AO had no occasion to verify various claims made by the assessee in the return of income, including the profit/loss shown from share transaction. Subsequently AO received specific information from the Investigation Wing indicating that through client code modification, the assessee had artificially reduced its profit by converting it to loss. On a careful reading of the assessment order, it is observed that Investigation Wing of the department has carried out thorough investigation and found that through some unscrupulous brokers, various entities are fictitiously increasing or reducing their profit or loss from share transaction by availing client code modification. The investigation report clearly reveals that the assessee is one of the beneficiary of client code modification. Since, the details relating to assessee s share transaction was not examined due to processing of return u/s 143(1) of the Act, the report of the Investigation Wing, which was subsequently received by the AO, clearly constitutes a tangible material based on which the AO certainly can form a belief of escapement of income. In my view the decision of the Hon ble Bombay High Court in case of M/s. Coronation Agro Industries Ltd. 2017 (1) TMI 904 - BOMBAY HIGH COURT would not apply to the facts of the assessee s case, as, in that case there was already assessment made under section 143(3) of the Act. In view of the aforesaid, I do not find any merit in these grounds. Accordingly, ground nos. 1 and 2 are dismissed. Additions made on account of client code modification - HELD THAT - There is no dispute that the assessee has availed the facility of client code modification through a broker. Both the Assessing Officer and learned Commissioner (Appeals), after thoroughly examining the facts have given a concurrent finding that by availing the facility of fictitious client code modification the assessee has shifted out profit from share transaction and converted it to loss. Except the confirmation obtained from the broker, the assessee has been unable to furnish any other conclusive evidence, either before the departmental authorities or before me to dispel the adverse materials brought on record. In the aforesaid view of the matter, any reason to interfere with the decision of learned Commissioner (Appeals) on the issue. Therefore, the additions made on account of client code modification including the commission paid are upheld. Ground nos. 3, 4 and 6 are dismissed. Disallowance made u/s 94(7) - HELD THAT - On a reading of section 94(7) of the Act, it is quite clear that long term capital loss on purchase and sale of shares, securities etc. not exceeding the amount of dividend or income received or receivable of securities units etc. shall be ignored. However, the conditions enumerated in clause (a), (b) and (c) have to be fulfilled. Since, due to lack of proper compliance by the assessee, the factors enumerated in clause (a) and (b) could not be examined, I deem it appropriate to grant one more opportunity to the assessee to establish through proper documents its claim that disallowance made under section 94(7) of the Act is either unjustified or excessive. Accordingly, the issue is restored back to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

Summary

Issues:
1. Validity of reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Merits of the additions made in the assessment.
3. Disallowance made under section 94(7) of the Act.

Validity of Reopening of Assessment:
The appeal challenged the reopening of assessment under section 147 of the Income-tax Act, 1961. The Assessing Officer reopened the assessment based on information from the Investigation Wing, suspecting that the assessee had created fictitious profit and loss through client code modification in the National Stock Exchange segment. The appellant contended that the reopening lacked independent application of mind and was invalid. The tribunal noted that the investigation report provided tangible material for the Assessing Officer to form a belief of income escapement. The tribunal distinguished the case from a precedent cited by the appellant, stating that since no scrutiny assessment was conducted earlier, the reopening was valid. Consequently, the grounds challenging the reopening were dismissed.

Merits of Additions Made:
The additions made in the assessment were primarily related to client code modification. The Assessing Officer concluded that the profit/loss from share transactions shown by the assessee through client code modification was non-genuine. The appellant argued that the addition should be restricted to a specific amount and that there was insufficient material for adding commission paid. The tribunal upheld the Assessing Officer's and Commissioner (Appeals)'s findings, stating that the appellant failed to provide conclusive evidence to counter the adverse findings. Therefore, the additions related to client code modification were upheld, and the grounds challenging these additions were dismissed.

Disallowance under Section 94(7) of the Act:
The disallowance made under section 94(7) of the Act was contested by the appellant, claiming that due to time constraints, detailed information regarding long-term capital loss and dividend income was not provided. The tribunal observed that the appellant did not furnish the necessary documents despite reminders, leading to the disallowance. However, due to lack of proper compliance, the tribunal decided to grant the appellant another opportunity to substantiate its claim and directed the issue to be reconsidered by the Assessing Officer. Consequently, this ground was allowed for statistical purposes.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, dismissing some grounds while directing a reassessment on the disallowance issue under section 94(7) of the Act.