2023 (5) TMI 215 - AT - Income Tax

Reopening of assessment u/s 147 - assessee was one of the beneficiary of Client Code Modification (CCM) by some broker - reason to suspect v/s reason to believe - HELD THAT - We find that the reasons recorded by the ld AO for reopening of the assessment in the instant case are very vague without having any live link to form a reasonable belief that the income of the assessee had escaped assessment. The reasons recorded and the assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reasons recorded only gives way to reason to suspect and not reason to believe . The very same issue was even subject matter of adjudication of this tribunal in the case of Stratagem Portfolio (P) Ltd 2020 (9) TMI 813 - ITAT DELHI as held there is no material to infer that such client code modification has been done with malafide purpose of shifting of the profit or evasion of the tax. There is no material before the Assessing Officer to form such a belief that income had escaped due to such client code modification and thus there is no live link between the material before the Assessing Officer and inference made. Thus, we have no hesitation in quashing the reassessment proceedings as they are not sustainable in the eyes of law. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147/148.
2. Confirmation of disallowance of Rs. 46,07,275/-.
3. Assessment of income at Rs. 2,22,86,425/- against the returned income of Rs. 1,76,79,150/-.
4. Procedure and conditions prescribed under the statute for reassessment.
5. Use of material collected at the back of the assessee without providing a copy or opportunity to rebut.

Summary:

1. Validity of Reopening of Assessment:
The assessee challenged the reopening of the assessment under Section 147/148 of the Income Tax Act, arguing that the conditions and procedures prescribed under the statute were not satisfied. The Tribunal noted that the reasons recorded for reopening were vague and lacked a live link to form a reasonable belief that the income had escaped assessment. The Tribunal referenced the case of Stratagem Portfolio (P) Ltd Vs. DCIT, highlighting that the reasons recorded only led to a 'reason to suspect' and not 'reason to believe'. The Tribunal concluded that the reassessment proceedings were not sustainable in the eyes of law and quashed the reopening on technical grounds.

2. Confirmation of Disallowance:
The assessee contended that the disallowance of Rs. 46,07,275/- claimed as expenses under 'Loss on derivative (F&O)' was erroneous. The Tribunal observed that the lower authorities did not address the assessee's contentions regarding the calculation and basis of the alleged artificial loss. The Tribunal found that the reasons recorded for reopening the assessment were vague and did not specify whether the broker through whom the assessee had carried out the transaction was involved in any malpractices.

3. Assessment of Income:
The Tribunal noted that the assessee's income was assessed at Rs. 2,22,86,425/- against the returned income of Rs. 1,76,79,150/-. The reassessment proceedings were initiated based on information that the assessee was a beneficiary of Client Code Modification (CCM) by some broker, which was revealed during a survey in another case. However, the Tribunal found that the reasons recorded for reopening were not specific and lacked tangible material to support the belief that the income had escaped assessment.

4. Procedure and Conditions for Reassessment:
The Tribunal emphasized that the reasons recorded for reopening the assessment must be specific and based on reliable and tangible material. The Tribunal referenced several judicial precedents, including the case of Coronation Agro Industries Ltd. vs. DCIT, to support its conclusion that the reasons recorded in the instant case did not constitute a valid reason to believe for initiating reassessment proceedings.

5. Use of Material Collected:
The assessee argued that the disallowance was made based on material collected at the back of the assessee without providing a copy or opportunity to rebut the same. The Tribunal observed that the lower authorities did not address the assessee's contentions regarding the calculation and basis of the alleged artificial loss. The Tribunal concluded that the reassessment proceedings were not sustainable in the eyes of law and quashed the reopening on technical grounds.

Conclusion:
The Tribunal quashed the reassessment proceedings on the grounds that the reasons recorded for reopening were vague and lacked tangible material to support the belief that the income had escaped assessment. The Tribunal allowed the appeal of the assessee, emphasizing that the reassessment proceedings were not sustainable in the eyes of law.