2023 (10) TMI 390 - AT - Income Tax

Validity of Reopening of assessment u/s 147 - Assessee argued that reasons recorded did not reveal any material or information in the possession of the AO on the basis of which he formed belief of escapement of income and non-application of mind by the AO while recording satisfaction for escapement of income - HELD THAT - It is an admitted fact that the reasons supplied to the assessee did not disclose either material or information in the possession of the AO, which revealed to him that the assessee had resorted to CCM to shift profits/loss in trading of shares so as to evade payment of tax. Also, the reasons as noted by me, show no application of mind by the AO, relying merely on the information available with him. This information, as noted, neither reveals the material nor the source from where it came, nor it specifies scrip on which CCM was resorted to by the assessee to earn loss. In the absence of the specific information available with the AO, there was no scope for the AO to apply his mind on it independently, and check the information available with him so as to arrive at his own satisfaction of the income of the assessee being escaped the assessment. Therefore we are in complete agreement with the ld. counsel for the assessee that the jurisdiction assumed by the AO to reopen the case of the assessee is de hors the satisfaction of the AO of any income of the assessee having escaped the assessment and was clearly in violation of the condition prescribed under section 147 of the Act for assuming valid jurisdiction to frame assessment. The assessment order passed, as a consequence is, liable to quashed. The contention of the ld. DR that there was a separate reasons recorded by the AO which revealed the source of information or the material with the AO leading to his belief of escapement of income, is of no assistance to the validity of the re-assessment proceedings, since admittedly, this reason was never confronted to the assessee. The Hon ble Supreme Court in the case of GKN Driveshafts (India) Ltd . 2002 (11) TMI 7 - SUPREME COURT has categorically laid down the procedure to be adopted during reassessment proceedings, taking note of the principle of natural justice embedded in any proceedings, that the AO is required to supply copy of the reasons to the assessee, entertain his objection on the same, deal with the objections, and thereafter proceed with the reassessment proceedings - Therefore, the requirement of the assessee for being supplied with copy of the reasons before proceeding to frame assessment is a mandatory requirement and a brief or cryptic reason supplied to the assessee, with the original being held back by the AO, will not suffice to fulfill this mandatory requirement of law. For this reason, reject the arguments of the ld. DR. Throughout the re-assessment proceedings, and even in the appellate proceedings, the assessee was never confronted with the information with the AO regarding CCM indulged in by the assessee nor the details of the specific scrip in which the assessee had purportedly done CCM. There is no reference anywhere in the order both of the AO and the CIT(A) of the specific scrip in which the CCM was resorted to. In the absence of the assessee being confronted with the specific details of the adverse information in the possession of the Revenue department, on the basis of which the addition was made to his income, there is no case at all for upholding the order of the ld. CIT(A). Assessee appeal allowed.

Summary

Issues:
The issues involved in this legal judgment include delay condonation application for filing appeal, addition made to the income of the assessee on the basis of client code modification, challenge to the validity of assessment framed under section 147 of the Income Tax Act, 1961.

Delay Condonation Application:
The appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals) after a delay of 14 days. The Tribunal, considering the interest of substantial justice, condoned the delay and proceeded to adjudicate the appeal.

Addition on Account of Client Code Modification:
The primary grievance of the assessee was the confirmation of the addition made to their income on the basis of client code modification (CCM) to evade tax. The assessee contended that the Assessing Officer (AO) failed to provide concrete proof of tax evasion through bogus transactions and did not establish the modification of contract notes. The Tribunal found that the reasons recorded for the addition lacked specific information and did not demonstrate independent application of mind by the AO, leading to the quashing of the assessment order.

Validity of Assessment under Section 147:
The assessee raised an additional ground challenging the validity of the assessment framed under section 147 of the Act. The Tribunal admitted this ground for adjudication, emphasizing that it was a legal issue not requiring further investigation. The Tribunal found that the reasons recorded by the AO did not disclose material or information justifying the belief of income escapement, leading to the conclusion that the jurisdiction assumed by the AO to reopen the case was not in accordance with the law. The assessment order was deemed liable to be quashed.

Conclusion:
The Tribunal allowed the additional ground challenging the validity of the assessment under section 147, as the reasons provided to the assessee did not meet the legal requirements. The appeal of the assessee was allowed, and the addition made on account of client code modification was also set aside due to lack of specific details provided to the assessee during the proceedings. The order was pronounced on 29th August, 2023, at Ahmedabad.