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TMI Blog2020 (9) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Jhaveri Stock Brokers (P) Ltd. [ 2007 (5) TMI 197 - SUPREME COURT] has held that for validity of reason recorded it is essential that there should be a relevant material on which a reasonable person could make requisite belief. In the case of M/s. Coronation Agro Industries Ltd. [ 2017 (1) TMI 904 - BOMBAY HIGH COURT] we are of the opinion that the assessment cannot be reopened validly on the basis of the above reasons recorded in absence of any tangible material to infer that income escaped in the case of the assessee. We, accordingly, quash the reassessment proceedings and set aside the order of the Learned CIT(A) on the issue in dispute. Ground of the appeal of assessee allowed. - ITA No. 7878/Del./2019 - - - Dated:- 15-9-2020 - Shri Bhavnesh Saini, Judicial Member And Shri O.P. Kant, Accountant Member For the Appellant : Shri Gautam Jain, Adv. For the Respondent : Shri Jagdish Singh, Sr.DR ORDER PER O.P. KANT, AM: This appeal has been preferred by the assessee against the order dated 30/07/2019, passed by the Learned CIT(Appeals)- XXV, New Delhi [in short the Ld. CIT(A) ] for assessment year 2010-11 raising following grounds: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anically borrowed and, lifted from report of investigation wing without any inquiry of his own and, then addition made without there being any supporting direct or indirect or circumstantial evidence is not in accordance with law. 2.2 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in failing to appreciate the written submissions furnished by the appellant and overlooking the judicial pronouncements relied upon by the appellant. 2.3 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that all transaction of appellant were supported by documentary evidence in the shape of contract notes, account payee transactions and therefore addition made on surmises, conjectures and suspicion and without bringing on record any specific evidence establishing that claim made is not genuine or incorrect is highly arbitrary, unjustified and untenable. 2.4 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in recording ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.1, the assessee has challenged reason to believe on the ground that same are not specific and lacking reliable and tangible material. 5. In support of the ground, the Learned Counsel of the assessee referred to the reasons recorded, which has been reproduced by the Assessing Officer in the impugned assessment order. He submitted that in the reasons recorded, the Assessing Officer has recorded about process of Client Code Modification (CCM) by the brokers under the facility provided by the stock exchanges for rectification of error in punching of the client code while carrying out transaction of purchase and sale of the shares. He further referred to para-12 of the said reasons and submitted that the Assessing Officer has reproduced number of events, where assessee s code was modified by the broker. The learned Counsel submitted that the Assessing Officer on the basis of modification in the client code of the assessee, has jumped to believe that it had been done for shifting of profit of ₹ 6,42,781/- and shifting of loss of ₹ 4,420/-. According to Learned Counsel, this belief of the Assessing Officer is without any tangible material to support that such client c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No. 825/D/2019 dated 25.7.2019 Sanjay Kumar Jain vs. ITO (pages 57-91 of JPB) 5.4 The Learned DR, on the other hand, submitted that the reasons have been recorded on the information received from the Director of Income Tax (Investigation), Ahmadabad, which is a credible source of the information. He further relied on the order of the lower authorities to support that reasons have been recorded validly. 5.5 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In the instant case, the dispute is whether there is any tangible material to infer that by way of the client code modification, the assessee has escaped the income and evaded the Income-tax. The Learned Counsel of the assessee has referred to the various decisions mentioned above, wherein cases were reopened on the basis of the information of client code modification. In the case of M/s. Coronation Agro Industries Ltd. vs. DCIT (supra), the Hon ble Bombay High Court quashed reopening of assessment on identical issue. It has been held in the said judgment as under: 4. We note that the reasons in support of the impugned notice accept the fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is a case of reason to suspect' and not reason to believe. 6.2 I further note that the action of the AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind . 6.3 I further note that in the reasons recorded assessee has relied upon the information by the Investigation Wing, Ahmedabad, the AO has stated that having perused and considered the information received from Investigation Wing he has reason to believe that income of the assessee has escaped which has not been conformed to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recorded reasons to show that Client Code Modification in the instant case was malafide or the assessee received ₹ 5,96,176/- in cash in lieu of the said Client Code Modification. Thus, the above recording at best is a reason to suspect only. 12. It is an established position of law that the validity of reopening is to be decided on the basis of recording made u/s 148(2) of the Act alone and nothing can be added thereto. The recording should be self-contained to withstand the validity of the reopening made. 13. In the circumstances, respectfully following the decision of the Hon ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs DCIT (supra) and the above quoted decision of the Tribunal, in our considered opinion, the reasons recorded in the instant case does not satisfy the requirement of law and the same does not constitute the reason to believe for escapement of any income from tax. Therefore, the reason is not valid. The consequential order of reassessment passed in pursuance thereto cannot be sustained. We, therefore, set aside the impugned order of reassessment passed u/s 147 of the Act and allow this ground of appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book entries were then used to evade taxes. 4. Non genuine CCM were carried out to book contrived losses. In some cases, this facility was used by brokers to transfer gains or losses from one party to another by modifying client codes in the guise of rectifying an error. It became a practice to book artificial profits or losses in March to impact lax liabilities. It is generally done by buying or selling stocks intra-day so as to say consciously incur a loss and use that as a tax offset. 4.1 Client code modification (CCM) especially in the Futures and Options Segment (F O) was being used a device to evade taxes wherein the client codes were modified for booking artificial profits or losses at the fag end (Jan to March of the Financial year when the book profits/losses of various clients have crystallized. This is done with an intention to impact the tax liabilities of the pair of clients whose codes are modified. 5. Enquiries were conducted by DIT (I CI) Mumbai: On the spot verification u/s 131 (IA) of the Act was conducted in the cases of few brokers. The brokers admitted misuse of Client code modification receipt of commission of 0.5 to 2%. In addition, following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges to ensure that the transactions (in respect of cash and derivative market) once registered in the system are modified only in cases of genuine error and maintain data regarding all transactions tin respect of cash and derivative market) registered in the system which have been modified and submit a monthly statement in Form No. 3BB to the Director General of Income-tax (Intelligence), New Delhi within fifteen days from the last day of each month to which such statement relates. 8. SEBI conducted a probe into 'modification of client ended by brokers, pursuant to observations by the Finance Ministry about many such modifications taking place in derivatives transactions at the NSE during March 2011). With regard to the client code modifications, the trading activities under scanner of SEBI mostly took place between 2009 and 2011 after which SEBI tightened its norms to put a full-stop to such manipulations. Before tightening of the norms, the Indian markets were seeing diem code modifications to the tune of ₹ 50,000 ₹ 60,000 crore a month, which came down to just about ₹ 100 crore soon after SEBI action. Quantum of such modifications was much higher dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against other income. Working on the said logic has been made in both scenarios, i.e., when a given client was original client (OCC) and when the client was modified client(MCC). It has been seen with regard to all the clients, so identified to have obtained losses/profits consequent to such working on the NSE data, that when a client has received losses as MCC. It has shifted out profits when it was OCC and its code was modified. Thus, the total losses obtained by the client through CCM would be the sum of the losses received as MCC and profits shifted out to other clients as OCC. As per the said working, year-wise and client-wise lasses computed for all the diems of different brokers is enclosed al Annexture B, to this report. The final figures of the profits and losses shifted due to CCM are at Annexure B to this report, 11. The submissions were requested from the brokers by the Investigation Wing and were duty considered. In case the submission had merits, these were duly honoured. The final set of beneficiaries as compiled contained only such beneficiaries for whom no tenable contention remains standing. To counter the contention of the Brokers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be reasonably argued that the OCC (Original Client Cade) may have been typed wrongly by mistake But if the number of digits changed is more surely it cannot be a genuine typing mistake but a deliberate change. To this extent Levenshtein Distance Analysis or digit edit analysis acts as a clear indicator for genuineness in client code modification. The longer the distance (i.e. number of digits changed), the lesser the chances at genuineness. The analysis of Levenshtein Distance or digit edit analysis, when clubbed with the parameters mentioned in this report establishes the non-genuineness and contrived nature at the code change. Levenshtein Distance Analysis or digit edit analysis in case of the assessee shows that in all transactions the value was 2 or more. (d) Beneficiaries who shift out their profits and at the same time, they have also taken losses from others. These tactics are generally resorted to by the persons who already have taxable income in their books and they want to set it off against contrived losses through CCM. An important finding of the survey is trend analysis The trend analysis show that the profits are shifted out when the person is original cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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. The Hon ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 has held that for validity of reason recorded it is essential that there should be a relevant material on which a reasonable person could make requisite belief. In the circumstances, in view of the above decision of the Hon ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. (supra) and decisions of the Tribunal (supra), we are of the opinion that the assessment cannot be reopened validly on the basis of the above reasons recorded in absence of any tangible material to infer that income escaped in the case of the assessee. We, accordingly, quash the reassessment proceedings and set aside the order of the Learned CIT(A) on the issue in dispute. The ground No. 1.1 of the appeal is accordingly allowed. 5.5 Since we have already quashed the reassessment proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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