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TMI Blog2019 (6) TMI 990X X X X Extracts X X X X X X X X Extracts X X X X ..... rage income which was also not disclosed to Revenue but when enquiry was conducted u/s 131(1A), these brokers surrendered these brokerage income from undisclosed sources. Further, the AO itself conducted enquiries prior to issuance of notice u/s 148 by issuing notice u/s 133(6) to Broker Inventure and the said broker never gave specific replies but gave general and evasive replies. Thus, the AO also applied independent mind before reopening of concluded assessment u/s 147 . This sudden spurt in client code modifications undertaken by Brokers in the month of March 2010 was subject to probe by SEBI and NSE as well by Income-tax Department. As we will see later in this order, there is mention of this sudden spurt in client code modifications in the month of March 2010 in various judicial orders pronounced by Courts/tribunal. It is also pertinent to mention here about the client code modification facility allowed by Stock Exchanges which is permitted in accordance with framework of SEBI/Stock Exchanges rules/regulations and circulars which are issued from time to time The assessee had also suffered F O Loss of 31,98,597.50 through Broker Inventure for transactions undertaken through NS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT(A) erred in confirming the reopening of the assessment without appreciating that the reopening of the assessment is bad in law, invalid and liable to be quashed in as much as- a) reasons recorded for reopening of the assessment are reason to suspect and not reason to believe. b) reopening is upon direction of third party and therefore borrowed reasons; c) without any tangible material available; and d) without any proper application of mind and even the amount referred in the reasons recorded is incorrect. Without prejudice to the above, on merits: B) Disallowance of part of F & O Loss - ₹ 31,98,597/- 2. The learned CIT(A) erred in confirming the disallowance of F & O loss of Rs,31,98,597/- only on the reason that there was Client Code Modification (CCM) done by the broker in respect of the transactions where loss of ₹ 31,98,597/ is incurred and hence, only on assumption and presumption the disallowance of loss of ₹ 31,98,597/- is without any justification and liable to be deleted. 3. The learned CIT(A) failed to appreciate that the broker through whom the transactions were carried out gave response to the summons issued by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the AO that these Loses and Profits were given by these brokers to their different clients/beneficiaries according to their requirements. The AO observed that clients had taken fictitious loses to set off against their profits with a view to reduce their tax liability. As per information received by the AO, the assessee was one of the beneficiary of the Client Code Modification as the name of the assessee also appeared in the beneficiaries list who had taken fictitious F&O Loses through the broker Inventure Growth & Securities Ltd. (hereinafter called "Inventure") , during the financial year 2009-10 relevant to AY 2010-11, to the tune of ₹ 31,98,597.50, which income as per AO had escaped taxation , the details of which are as hereunder:- Original Client Name PAN Profit to original client because of client code modification Modified client name PAN loss to modified client because of client code modification G F L FINANCIALS INDIA AABCG0597Q 31,98,597.50 TIME MEDIA AND ENTERTAINMENT PVT. LTD AAACT1581C 31,98,597.50 3.3 The assessee case was reopened by the AO by invoking provisions of Section 147 of the 1961 Act for framing reassessment after obtaining due ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less than 1% of the total trading volume." 3.7. The AO considered the aforesaid reply of the Broker Inventure and observed that they have not answered the specific question despite specifically asked to explain reasons and nature for such client code modifications in respect of the F&O transactions entered into by the assessee with them. The AO was of the view that the reply of the broker Inventure is evasive and general wherein specific replies were not given by Inventure.It is pertinent to mention that the enquiries with Brokers including Inventure was made by the AO after receipt of aforesaid information from learned DIT(I & CI) received through learned PCIT but before issuance of notice u/s 148 of the 1961 Act. 3.8 The AO also observed that spot verifications u/s 131(1A) of the 1961 Act was carried out by Revenue on brokers who were indulging in client code modifications and they have confirmed that they misused the facility of client code modification in order to create fictitious loses/profits. 3.9 The assessee was asked by the AO during the course of reassessment proceedings u/s 147/148 of the 1961 Act to prove the genuineness of these F&O Loses . The assessee in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, but while so far as alleged commissions paid to broker Inventure on alleged bogus F&O Losses which were added as undisclosed income of the assessee by the AO to the tune of 5% of alleged bogus F&O Less, the learned CIT(A) was pleased to reduce the additions to the tune of 1% of the alleged bogus F&O Losses as against additions to the tune of 5% of alleged bogus F&O Losses made earlier by the AO in reassessment order, vide appellate order dated 31.07.2017 passed by learned CIT(A) , wherein learned CIT(A) held on merits as under:- "3.2 I have considered the finding of the Assessing Officer, rival submission of appellant and perused the evidence on record. I find that assessee has shown loss under Futures and Options of ₹ 97,44,423/- out of which loss of ₹ 31,98,597/- has been shown by way of Client Code Modification without any valid reason. The information received from the office of the DIT(I&CI) , Mumbai by letter dated 27.02.2015 demonstrated the modus operandi of such brokers, misusing Client Code Modification facility of NSE and thereby giving entry of profit or losses in F&O trading. In this case Assessing Officer has made the enquiry from the broker who has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged reopening of the concluded assessment by the AO u/s 147 of the 1961 Act by raising additional grounds, which legal challenge to reopening of concluded assessment by the AO u/s 147 of the 1961 Act raised by the assessee also stood dismissed by learned CIT(A) , vide appellate order dated 31.07.2017 passed by learned CIT(A), wherein learned CIT(A) was pleased to hold as under: "5.5. I have considered reason for reopening for assessment, counter representation of Ld. Assessing Officer and Ld. Authorised Representative, carefully. I find that in this case there was no regular assessment u/s 143(3), but Return of Income was simply processed u/s 143(1) of the IT. Act. , hence no scrutiny was made nor was any disclosure of income of Client Code Modification. Subsequently information obtained by the then DIT(I&CI), Mumbai through investigation was communicated to Assessing Officer through Pr.CIT-16. On the basis of specific information that brokers were misusing Client Code Modification facility to provide entry of profit or losses to such assesses willing to obtain such entries and assessee had procured such benefit from the broker, so as to suppress its taxable income, hence it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue u/s. 143(1) of the Act . It was submitted by learned counsel for the assessee that impugned assessment year under consideration before the tribunal is AY 2010-11 and notice dated 23.03.2015 was issued by the AO to the assessee u/s. 148 of the Act, for reopening of the concluded assessment which is within four years from the end of the assessment year. The learned counsel for the assessee relied upon the decision of Hon‟ble Bombay High Court in the case of Coronation Agro Industries Limited v. DCIT reported in (2017) 390 ITR 464(Bom. HC). It was submitted by learned counsel for the assessee that all trades in F&O were done in the month of March 2010. The learned counsel for the assessee also relied upon the decision of Ahmadabad-tribunal in the case of Smt. Sunita Jain & Ors. v. ITO in ITA no. 501 & 502/Ahd./2016 vide orders dated 09.03.2017. It was submitted by learned counsel for the assessee that complete details were given to the AO as to the total F&O losses incurred by the assessee. It was submitted by ld. Counsel for the assessee that the AO made enquiries with brokers and there is no incriminating material before the AO to come to conclusion that these F&O losses w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of perpetrating any fraud on Revenue as the window for client code modification is available only for 30 minutes from the time of trade. 5.3. The Ld. DR submitted that assessee had indulged in F&O transactions wherein there were client code modification undertaken by the assessee in collusion with Brokers namely Inventure , with a view to defraud revenue wherein bogus fictitious loss in F&O to the tune of 31,98,579.50 was claimed as set off against other income‟s of the assessee. It was submitted by learned DR that the information was received from Director of Income-tax ( Intelligence & Criminal Investigations), Mumbai that the assessee is beneficiary of bogus F&O loss through client code modifications undertaken in F&O trades. It was submitted that reasons for reopening of the concluded assessment were recorded by the AO based on incriminating information received from Director of Income-tax ( Intelligence & Criminal Investigations), Mumbai and after making enquiries . It was submitted by learned DR that originally no scrutiny assessment was framed by Revenue u/s 143(3) read with Section 143(2) of the 1961 Act and the return of income was originally processed u/s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited(supra) is placed and it was submitted by learned DR that Coronation Agro India Ltd.(supra) was a case wherein original assessment was framed by Revenue u/s. 143(3) while in the instant case the return was originally processed u/s 143(1) of the 1961 Act wherein no scrutiny assessment was framed by Revenue u/s 143(3) of the 1961 Act in the instant appeal before the tribunal. It was submitted by learned DR that in case of Coronation Agro(supra) the notice u/s 148 was issued beyond four years from the end of assessment year and the first proviso to Section 147 was applicable. It was submitted by learned DR that in the case of Smt. Sunita Jain(supra) relied upon by learned counsel for the assessee reopening of the concluded assessment by invoking provisions of Section 147 was not done with respect to client code modification and hence this case is also distinguishable. It was submitted by learned DR by referring to page 143 of paper book which is ledger account of Inventure in the books of accounts of the assessee that all transaction took place in the month of March 2010. It was submitted that inquiries were made by AO from NSE which also revealed that there was a misuse of clie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai through learned PCIT and prior to issuance of notice u/s 148 to the assessee, the AO conducted enquiries with broker Inventure by issuing notices u/s 133(6) of the 1961 Act asking as to client code modification entered in the F&O trade entered into by the assessee in financial year 2009-10 relevant to impugned assessment year 2010-11. The said broker gave reply vide letter dated 15.03.2015 which as per the AO the said reply filed by Broker Inventure was a general and evasive reply wherein specific query asked by the AO vis-a-vis client code modification entered into with reference to trade by assessee through the said broker was not answered by Inventure. The reply of the said broker Inventure vide letter dated 15.03.2015 is reproduced hereunder: "We are SEBI registered Stock Broker having more than 40000 clients and more than 1000 trading location. We have given the right to operate the trading terminal functions such as entering the order modifying the order, cancelling the order etc. to our Sub Broker/Authorized Person /Dealers, who are executing the trades on behalf of our clients. Some clients have family account with us and execute large order in one code in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat income has escaped assessment. There is a requirement of live link between the tangible incriminating material received by the AO and the formation of belief that the income of the assessee has escaped assessment before invoking provisions of Section 148 of the 1961 Act. There is also requirement of independent application of mind of the AO before reopening of the concluded assessment u/s 147 of the 1961 Act. In the instant case, the AO received information from learned DIT(I&CI), Mumbai through learned PCIT, Mumbai that the assessee is beneficiary of obtaining fictitious F&O Loss from broker which was manipulated losses by modifying client code modifications. It had come to notice that many brokers were indulging in the tax evasions through modification in client code modifications in FY 2009-10 wherein fictitious profit/losses were created which was given by these brokers to their clients/beneficiaries in consideration of brokerage income which was also not disclosed to Revenue but when enquiry was conducted u/s 131(1A), these brokers surrendered these brokerage income from undisclosed sources. Further, the AO itself conducted enquiries prior to issuance of notice u/s 148 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then records this data as client code modification data. As per letter received from Pr. CIT-16, Mumbai No. PCIT-16/CCM/2014-15 dated 10-03-2015 along with a copy of letter No. DIT(I&CI)/CCM/2014-15 dated 27.02.2015 of Director of Income-tax(Intell. & CR INV.), Mumbai , it has emerged that many assesses have engaged in Tax evasion through client code modification during F.Y.2009-10 , with the help of brokers who have misused this facility of CCM for creating artificial losses/profits and providing such fictitious profit/losses to various clients by charging some commission. Since the clients have used the fictitious losses for the purpose of reducing their taxable income, the claim of losses needs to be included in their income. As per the details received, M/s Time Media & Entertainment Pvt. Ltd. (PAN AAACT1581C) is one of the Beneficiary of CCM as per the List of Beneficiaries under the Jurisdiction of Pr. CIT-16, Mumbai, whose PAN is under this jurisdiction. Therefore , in view of the above, the amount of ₹ 1,19,69,919/- (₹ 5,98,49,597-₹ 4,78,79,678)have escaped from assessment." (Emphasis supplied by us) Thus, as could be seen from the reasons re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is noted from the policy laid down by Bombay Stock Exchange that these client code modifications are allowed till 4 PM of the same day (NSE till 4.15 PM) in which securities trade is executed i.e. 30 minutes till after closure of trading hours. There is an further longer time extended for client code modifications with respect to currency derivatives with which we are not presently concerned. Say, if trade is executed on 01.01.2019 at 10.0 AM on stock exchange by Mr. A in buying 100 share of Company "X‟ through Broker "L‟ and the staff of the broker punches the client code of Mr. B while buying 100 shares of Company "X‟ , the client code modifications are allowed for genuine errors by BSE till 4 PM i.e. 30 minutes after closure of trading session of the same day which closes at 3.30 PM in securities market, wherein it was allowed to modify the trade to reflect 100 shares of Company "X‟ being bought by Mr. A by modifying client code of Mr. B to that of Mr. A. Thus, contention of the assessee that client code modification are allowed within 30 minutes of the executing of the trade on stock exchange is not correct rather the same is allowed till 30 minutes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 34,67,657.96 in F & O segment suffered by the assessee with respect to its trade with Broker Inventure , the F&O loss of ₹ 31,98,657.50 was inflicted with client code modifications and was held by the authorities below to be fictitious F&O Loss. The ratio of transactions of the assessee in F & O segment inflicted with client code modifications undertaken with Broker Inventure is as high as 92.21%. The said broker Inventure claimed in its reply to AO vide letter dated 15.03.2015, that its turnover is ₹ 97,000 crores and client code modifications undertaken by it is less than 1% but it failed to explain the reasons for undertaking client code modifications in the case of the assessee as high as 92.2% of the transactions with in short spell in the month of March 2010 itself which month incidentally was the last month of the fiscal year 2009-10 relevant to impugned assessment year 2010-11 where there could be an incentive to bring down income-tax by adopting unfair and illegitimate means and secondly this month of March 2010 also saw a sudden / massive spurt in the client code modifications to the tune of ₹ 48,794 crores undertaken at NSE which was reporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t code modifications undertaken by Brokers on NSE in the month of March 2010, as under:- "13. In this regard, a letter dated 08.03.2016 from the Principal Director of Income-Tax (Investigation) Ahmedabad, is of vital importance. The letter was addressed to the Chief Commissioner of Income-tax, Panchkula. The subject of the letter referred to a survey report in respect of Client Code Modification (CCM) being forwarded regarding the dissemination of beneficiary clients who have taken losses and shifted out profits during the financial years 2008-09 to 2011-12. The letter explains that modification of the client code is a practice under which brokers change the client code in sale and purchase orders of securities after the trades are conducted. It further rightly explains that while it is permissible to rectify inadvertent errors, there were concerns that modifications could be made to manipulate the activities in the market. Thus, for instance, if a particular transaction is undertaken in the name of a client, it cannot be shifted to the name or account of another client unless it was on account of an inadvertent error. The letter stated that SEBI had conducted a probe into the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all such modifications in the format prescribed under Rule 6DDA(v) of the Income Tax rules separately for institutional and non institutional clients. (ii) Details of trade time stamp for each transaction where modifications have been carried out. (iii) Details of all done in the modified and original client code (even those where code were not changed) for relevant dates: (iv) KYC copy of the clients included in the above where value of transaction exceeds Rs. One crore. The replies received from the NSE is as under:- "The number and value of modifications in the client code have gone up dramatically in the month of March, 2010 compared to earlier and succeeding months. This is illustrated in the following table and pertains to Non-institutional clients only in the equity derivatives segment (there is no change in the number of modifications in Institutional accounts consisting mainly of Mutual Funds and FIIs). Month No. of modifications Value of modifications in crore of rupees December 2009 2.75 lakhs 21,896 January 2010 3.36 lakhs 28,860 February 2010 4.05 lakhs 35,241 March 2010 6.18 lakhs 48,794 April 2010 1.62 lakhs 11,882 (ii) The increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done to set off a trade which has already taken place. (ix) There has always been practice on Dalal Street of booking artificial profits or losses in March to Impact tax liabilities. This requires buying or selling stocks intra-day so as to consciously incur a loss and use that as a tax offset. (Or conversely to create a profit where carried forward or current year losses are available). This is normally done during normal trading hours using synchronized trades (called 123 trades: where orders are placed at the same time in system.) x) The role of code modifications comes when these synchronized trades do not work due to market volatility. To clarify, suppose there are two clients, A that wants to book a loss and B that want to book a gain. (xi) So A buys stock 'x' from, B at ₹ 100 a share in anticipation that the closing market price will be ₹ 90 rupees. But instead the stock, thanks to a volatile market, moves up and closes at a price of ₹ 110 if the position is squared at the end of the day. A would end up with a ₹ 10 profit instead of a Rs.l0 loss and B is left holding a loss instead of the anticipated profit. (xii) What the helpful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading sessions on 4th, 5th, 9th, 10th , 11th, 15th, 22nd,23rd and 25th of March., 2010. (g) This is absolutely very strange on part of any broker or an employee of a broker to so many human errors within a span of just 9 trading sessions in a particular pattern and timing involving such huge money and stakes in crores of rupees without the connivance of the broker and the client. (h) A list of transactions as reported in the NSE with regard to the above stated client code modifications are enclosed and forming part of this order as annexure -A to this order. (i) It could be seen from the above Annexure -A, the modifications are done in the trading hours which is against the normal trading trends and practices. Normally the genuine errors could be traced only at the end or towards the end of the trading session and corrected or modified under intimation to the exchange." The assessee in response to notice dated 18-03-2013 issued by the AO did not file any reply before the AO rather sought directions from the Addl. CIT u/s 144A to the AO to not making any disallowance of loss incurred through the transactions of client code modifications, who observed that large number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page No. 20 to 24 to come to conclusion that these are not genuine transactions but sham and colorable transactions with objective of evading taxes. The A.O. accordingly disallowed the loss claimed of ₹ 3,67,83,146/- and added the same to total income of the assessee, vide assessment order dated 28-03-2013 passed u/s 143(3) of the 1961 Act. The learned CIT(A) while deciding first appeal observed that directions were issued by learned Addl. CIT u/s 144A to AO to cause verifications from NSE as to factual position as per submissions of the assessee and to ascertain correct facts on the basis of information so gathered afterwards from various sources which was not done by the AO . The learned CIT(A) observed that the AO was also directed by learned Addl. CIT vide orders dated 22-03-2013 u/s 144A to determine whether client code change which has appeared in large number in the month of March 2010 , had the effect of reducing the tax payable by the assessee and to see whether the same was adopted as an device for tax avoidance. It was observed by learned CIT(A) that the AO has not made any further investigation or enquiry nor caused any verification from the brokers namely Anug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing powers to enhance assessment, after following due procedures as contemplated by law. Attention is drawn to Section 251(1)(a) and 251(2) of the 1961 Act which provides as under : "Powers of the [Commissioner (Appeals)]. 251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or 7 annul the assessment [(aa) ****** (b) ****** (c) ****** (2) The [Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.-In disposing of an appeal, the [Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the [Commissioner (Appeals)] by the appellant." If the powers of the learned CIT(A) are co-terminus to the powers of the AO including the power of enhancement, the same cannot be used in an arbitrary manner but need to be exercised in a manner to achiev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (iii) The number of client code modifications in the currency derivative segment in March, 2010 was 19395 and the value thereof was ₹ 13282 crores while the comparative figures for January, 2010 was 863 modifications for a total value of ₹ 461crores. (iv) The above facts would indicate that the modifications made were part of an organized tax evasion racket which should be dealt with firmly. (v) the important point to note is that client codes of deals carried out were changed by the brokers after the close of normal trading hours. The income tax act u/s 43(5) normally considers any transaction in which a contract for purchase or sale of any commodity including shares is settled other than by actual delivery or transfer as a speculative transaction. One of the exceptions to this position is contained in proviso (d) to S. 43(5) which states that an eligible transaction in respect of trading in derivative referred to in clause (act) of section 2 of the Securities Contracts Regulation Act, 1956 (42 of 1956) carried out in a recognized stock exchange) shall not be deemed to be a speculative transaction. An eligible transaction is one which is carried out. electro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not conducted any enquiry nor directed AO to conduct any enquiry during appellate proceedings. The powers of learned CIT(A) are co-terminus with the powers of the AO including power of assessment. When the powers are granted by statute, the same need to be exercised in a manner to achieve the mandate of the 1961 Act to compute correct taxes in the hands of tax-payer. The powers cannot be used in an arbitrary manner otherwise the orders passed in pursuance of such arbitrary use of powers will enter the arena of perversity. The learned CIT(A) was fully aware that the AO could not comply with directions of learned Addl. CIT issued u/w 144A to conduct relevant enquiry, examination and verification as was directed by learned Addl. CIT due to matter getting time barred on 31-03-2013 as direction were issued only on 22-03-2013, it was incumbent on the learned CIT(A) to conduct the necessary enquiry , examination and verifications as were directed by learned Addl. CIT or should have directed AO to conduct such enquiry and furnish remand report to the learned CIT(A) before any relief could be granted by learned CIT(A)). The AO after relying on large number of judicial precedents held the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the case of the assessee all the client code modifications being accorded and ascribed to punching errors cannot be mere chance to say that it is in the realm of suspicion or speculation .Rather the circumstances seen cumulatively takes it to a higher pedestal than being mere a suspicion. We are conscious of the fact that suspicion howsoever strong cannot take the place of proof. The liability to tax under the provisions of the 1961 Act is required to be fastened on the touchstone of preponderance of human probabilities , and strict proof / evidences as required under Indian Evidence Act, 1872 may not be pressed to fasten the tax-liability. No-doubt the assessee has placed on record broker confirmations but perusal of these conformations to suggest that such a large magnitude of client code modifications were carried out in the last month of the previous year i.e. March 2010 and that too in 9 trading sessions and all being ascribed to punching errors do not inspire confidence rather it clearly suggest a collusive, manipulative rigged action by persons acting in concert to evade and avoid taxes which needed further probe to fasten tax-liability on the assessee. We have also gon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant circulars which are placed in paper book/page 68-72, we have observed that the said circulars clearly allows only ‗genuine' client code modifications of transactions in the stock exchange. If the transaction is held to be ‗non-genuine', we are afraid circulars of NSE/SEBI relied upon will not be applicable. Reference is drawn to circular no 663 dated 29-07-2010( Ref. No.: NSE/INVG/2011/184840 issued by NSE wherein it is clearly stipulated as under(relevant portion is extracted below): " The Exchange has provided the facility of client code modification only to rectify genuine errors. Further, as per point 2(a) and 3(B) of the SEBI circular date dated July 5, 2011 , the following client code modifications would be considered as genuine modifications , provided there is no consistent pattern in such modifications; i) Where original client code/name and modified client code/name are similar to each other but such modification are not repetitive. ii) Where original client code and modified client code belong to a family. ( Family for this purpose means spouse, dependent parents, dependent children and HUF)" The assessee case does not fall under the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 148 of the 1961, wherein Hon'ble jurisdictional High Court held that the notice u/s 148 of the 1961 Act was without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment and on facts it was held that the AO is suspecting income to have escaped assessment rather having reasons to believe that income has escaped assessment. These cases relied upon by the assessee were clearly distinguishable and are not relevant for deciding the instant appeal wherein facts are materially different as set out above. For Now, we are of the considered view, the appellate order of the learned CIT(A) cannot be sustain in the eyes of law as it is suffering from serious flaw and is perverse as indicated by us as above, and hence we are inclined to set aside the order of learned CIT(A) and restore the matter to the file of the learned AO for fresh adjudication of the issue on merits in accordance with law and in compliance with directions issued by Addl. CIT vide orders dated 22-03-2013 passed u/s 144A of the 1961 Act . Needless to say proper and adequate opportunity of being heard shall be granted by the AO to the assessee in accordance with principles of natura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court." It is important to note that the Supreme Court found in that case that there was no material or fact which had been stated in the reasons for starting the proceedings for re-opening the assessment. In the case before us, as already discussed, this is not so. 22. As we will now indicate it is not necessary that the AO must know or be certain that income has escaped assessment. The AO must have reason to believe it has. He may finally accept the assessee's case. That would make no difference to the validity of the invocation of sections 147 and 148. 23. In ITO v. Purushottam Das Bangur [1997] 90 Taxman 541/224 ITR 362 (SC), relied upon by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year and the assessee was required to deliver to him a return in the prescribed form of his income for the said year. Feeling aggrieved by the said notice, the assessee filed Writ Petition No. 1177 of 1974 in the Rajasthan High Court. ** ** * * On the basis of the information contained in the letter of Shri Bagai and the documents annexed to it, the Income Tax Officer could have had reason to believe that the fair market value of the shares was far more than the sale price and the market quotations from Calcutta Stock Association shown by the assessee at the time of original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment. It could not be said that the information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the Income Tax Officer for taking action under Section 147 (b) of the Act. Ms. Gauri Rasgotra, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the Income- tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In challenge to initiation of proceedings the Court has to prima facie satisfy itself regarding existence of reasons to believe. It is not for this Court to go into the sufficiency of the reasons. Even the final outcome of the proceedings is not relevant. Reliance was rightly placed on the following decisions of the Hon'ble Apex Court to justify the proceedings under Sections 147/148 in view thereof. 26. In Kantamani Venkata Narayana & Sons v. First Addl. ITO AIR 1976 SC 587, the Supreme Court held as under :- "The High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment of income and consequent escapement of income from assessment and tax could be recorded in the proceedings before them. It certainly was not within the province of the High Court to finally determine that question. The High Court was only concerned to decide whether the conditions which invested the Income Tax Officer with power to re-open the assessment did exist, and there is nothing in the Judgment of the High Court which indicates that they disagreed with the view of the Trial Court that the conditions did exist.&quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147 (a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Supreme Court in ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC): "11. As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in Section 34 of the Act of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material coming to the notice of the AO, namely the said material submitted by the Investigation Wing, and the formation of the AO's belief that there has been escapement of income. We have already referred to this aspect of the matter. Suffice it to recollect that details of the CCM were furnished in the information. The information was in respect of several brokers. The information pertaining to the petitioner's broker was culled out and tabulated. There were 74 cases of the petitioner's broker having modified the petitioner's transactions. The information was directly on the issue of the transactions. It cannot by any stretch of imagination be said to be vague, indefinite or distant. For the reasons we have already stated, this was not a case where the AO merely had reason to support that income had escaped assessment. 35. The judgment of the Delhi High Court in CIT v. SFIL Stock Broking Ltd. [2010] 325 ITR 285 is clearly distinguishable. In that case, the reasons themselves recorded that the AO had been directed to get notices issued under Section 148 by the Deputy Director (Investigation) and subsequently by the Additional CIT. The judgment was based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances that the Supreme Court held that the ITO could not have reason to believe that by reason of the omission to disclose fully and truly all the material facts necessary for assessment for the year in question, income chargeable to tax had escaped assessment. This decision, therefore, is distinguishable and does not support the petitioner's case. 39. Mrs. Suri's contention that information from the broker was sought after issuance of the notice shows that there was no enquiry prior to the issuance of the notice and hence, the proceedings are bad is not well founded. Once it is held that the proceedings under Sections 147 and 148 have been validly initiated, the AO is not prevented from looking into the matter further, including by gathering further information. He in fact is bound to do so. 40. Mrs. Suri placed strong reliance upon the judgment of a Division Bench of the Gujarat High Court in Harikishan Sunderlal Virmani v. Dy. CIT [2017] 88 taxmann.com 548/394 ITR 146. Firstly, in that case, the assessment was under Section 143 (3) whereas in the case before us, it was under Section 143 (1). The reasons furnished in that case and the finding of the court we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dified to other client the details of such case are as under :- OC OCC MC MCC Distance as per Levenshte in distanced analysis Net reduction in income due to CCM Harikishan Sunderlal Virmani WW/2647 Nomau R. Chaturvedi WW/2108 3 ₹ 1,19,848 In order to verify the genuineness of the error, the Levenshtein distance analysis or digit edit analysis utility is also provided by the investigation Wing. This utility gives a clear indication as to whether the code is wrongly typed or is completely replaced. If the number of digits changed from original code to modified code is 1, then it can be reasonably argued that the OCC (Original Client Code) may have been typed wrongly by mistake. Similarly, if the number of digits changed is more say 4 or 5, it cannot be genuine mistake but a deliberate change. To this extent, Levenshtein distance analysis or digit edit analysis act as a clear indicator for genuineness in client code modification. In short, the longer the distance (i.e. number of digits changed), the lesser the chance of genuineness. 3. Hence, the editing of client code above it is termed as deliberate change and establishes the non-genuineness and contrived na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here cannot be any reassessment proceedings. However, after considering the information/material received from other source, the Assessing Officer is required to consider the material on record in case of the assessee and thereafter is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mechanically relying upon the information received from other source, there cannot be any reassessment for the verification. 3.4. At this stage it is required to be noted that even in the reasons recorded, there is no allegation that there was any failure on the part of the assessee in not disclosing truly and fully material facts necessary for assessment. Under the circumstances, the assumption of the jurisdiction to reopen the assessment beyond the period of four years in exercise of powers under section 147 of the Act is bad in law and contrary to the provisions of section 147 of the Act. Under the circumstances, on the aforesaid ground alone, the impugned reassessment proceedings deserve to be quashed and set aside.' 41. Firstly, there is a significant difference between that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the assessee in disclosing truly and fully the material facts necessary for assessment, the test would be met. Admittedly, there was no analysis or application of mind in respect thereof. The assessment was under Section 143 (1) in any event. Thus, in any view of the matter, the decision to reopen the assessment is valid and well founded. 43. This brings us to Mrs. Suri's contention that the satisfaction recorded by the Principal Commissioner of Income Tax, Panchkula, under Section 151 of the Act was mechanical. We do not agree. From a perusal of the record, it is evident that the section has been duly complied with and he has not signed on the dotted line. If he approves the reasons he is not bound to reiterate the same. That would be an empty formality. Mr. Putney's reliance upon the following observations of the Calcutta High Court in ITO v. Mahadeo Lal Tulsian [1977] 110 ITR 786 is well founded :- "... He has contended that there had been no due compliance with the provisions of section 151 (2) of the said Act since the Commissioner of Income-tax had failed to arrive at a bona fide satisfaction or record the same. Here again, the issue has to be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 148. Before issuing a notice under Section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of these assessee to make a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or (b) of Section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under Section 148. From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material' facts necessary for his assessment for the accounting year in question, income chargeable to tax ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that indicates that he did not apply his mind to the reasons furnished by the AO. 45. Reasons to believe are there. The reasons are based on tangible material. The return and account books of assessee had not undergone scrutiny at the time of assessment. The information is specific and not vague. A reasonable person can form an opinion on the basis of the material. The information received could form the basis of reason to believe that income has escaped assessment and the re-opening is not on mere suspicion. Hence, the assumption of jurisdiction is in accordance with law. 46. In this view of the matter it is not necessary to consider Mr. Putney's other submissions on behalf of the Revenue. 47. The writ petition is dismissed." Thus , in our considered view , the additions have been rightly made by the authorities below and we are inclined to sustain the same both on legal ground as well on merits . We summarise reasons for our conclusions holding in favour of Revenue , as under: 1. There was an unexplained massive spurt in client code modifications undertaken by Brokers in the month of March 2010 to the tune of ₹ 48,794 crores in NSE( refer to decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1961 Act to the assessee. This reflected application of mind by the AO independently before reopening of the concluded assessment u/s 147 of the 1961 Act. 5. This led the AO to reopen the concluded assessment by invoking provisions of Section 147 of the 1961 Act by issuance of notice dated 23.03.2015. 6. The enquires were conducted by the AO with NSE who confirmed in its reply that these client code modifications were undertaken by brokers with stock exchanges to evade taxes. 7. The assessee has opened new account for undertaking F&O transaction with Broker Inventure, in the month of March 2010. 8. In quick succession in the month of March 2010 itself F&O transactions were undertaken by the assessee in this new account opened by assessee with Inventure which led to the losses to the tune of ₹ 34,67,657.96 in F & O segment suffered by the assessee , the F&O loss of ₹ 31,98,657.50 was inflicted with client code modifications and was held by the authorities below to be fictitious F&O Loss. The ratio of transactions of the assessee in F & O segment inflicted with client code modifications undertaken with Broker Inventure is as high as 92.21% based on quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007) 291 ITR 500(SC). 14. The re-opening of the concluded assessment was done by the AO u/s 147 of the 1961 Act by issuance of notice u/s 148, dated 23.03.2015 which was done within four years from the end of the assessment year and the first proviso to Section 148 is not applicable. Thus, based on our above discussions, we hold that re-opening of the concluded assessment by the AO u/s 147 of the 1961 Act was valid and is therefore upheld/sustained . Further , based on our above discussions on touch stone of preponderance of probabilities we hold that additions made by the AO to the income of the assessee by holding F&O loss to the tune of ₹ 31,98,657.50 as fictitious loss being inflicted by manipulative client code modification was validly done by the AO and hence additions to the tune of ₹ 31,98,657.50 as was made by the AO which was later confirmed by learned CIT(A) by treating aforesaid F&O loss as bogus loss is upheld. Further, we upheld the additions to the tune of 1% of the said fictitious losses to the income of the assessee by way of commission paid by the assessee to the brokers for arranging these fictitious losses. We also note that learned DR has corre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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