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TMI Blog2021 (2) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... iled objections to the reopening of the assessment and explained before AO that M/s SMC Global Securities Ltd. broker has not done anything for assessee and assessee did not deal with such broker, therefore, there is no question of loss claimed through this broker. The assessee further explained that assessee had carried out transactions through M/s Mansukh Securities Finance Limited. AO recorded incorrect and wrong facts in the reasons for reopening of the assessment. Though the AO rejected the objections of the assessee but in the rejection order confirmed that assessee carried out the transactions through Mansukh Securities Finance Limited, therefore, there is no question of assessee arranging any loss through transaction involving CCM through SMC Global Securities Broker. The reasons do not indicate the basis for the Assessing Officer to come to reasonable belief that there has been any escapement of income on the ground that the modifications done in the client code was not on account of genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by assessee broker which fact is also incorrect and there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner. Since AO recorded non-existing and factually incorrect reasons and did not apply independent mind on the information so received, therefore, reopening of the assessment is invalid and bad in law. The addition is made without any basis. The Ld. CIT(A), however, dismiss the appeal of the assessee. 5. Ld. Counsel for assessee referred to PB 2 to 4 which are reasons recorded for reopening of the assessment. He has submitted that AO in the form for the reasons in para 7 mentioned that reopening done under the provisions of Section 147(b) of the Act which fact is incorrect because such section does not exist in the statute. He has further submitted that AO has mentioned name of the broker as M/s SMC Global Securities Limited which fact is also incorrect. The Ld. Pr. CIT without giving any reasons gave approval by merely mentioning "yes, I am satisfied". Ld. Counsel for assessee referred to objections filed before AO challenging the reopening of the assessment, PB 11 to 16 in which the assessee has contended that assessee has never dealt with the broker SMC Global Securities Limited as mentioned in the reasons. The assessee has carried out transaction with M/s Mansukh Securities Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invalid and deserve to be quashed as such. 2. That the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in sustaining an aggregate addition of ₹ 6,47,201/- representing loss claimed and incurred by allegedly misusing the client code modification mechanism by the broker of the appellant 2.1 That further more the learned Commissioner of Income Tax (Appeals) has proceeded to sustain the addition on mere speculation, generalized statements, theoretical assumptions and allegations and assertions, mechanically 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments electronically along with synopsis. The Learned DR has also filed written submission electronically. 4. The ground No. 1 to 1.4 of the appeal relates to validity of the reassessment proceeding. In the ground No. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 12.4.2019 Kamal Kishoree Aggarwal vs. ACIT (pages 92-111 of JPB) 4. ITA No. 4395/D/2019 dated 27.2.2020 AKG Securities & consulting Ltd. vs. ITO (pages 112-127 of JPB) 5. ITA No. 825/D/2019 dated 25.07.2019 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 reop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiating proceedings u/s 147 of the Act. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions, the assessee's income was reduced by ₹ 5,96,176/-. 11. We find that there is no material which has been brought out in 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 selfcontained 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-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 broke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the 1st day of April, 2011. The amendment required the stock exchanges 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of tax evasion by setting of such selectively shifted losses 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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 client and losses are shifted in when the client is modified client. This trend show that the CCM has been carried out for nongenuine purposes in the case of assessees. The other important finding of the survey is that most of the brokers admitted that CCMs have been done for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 proceeding, we are not adjudicating other ground of the appeal challenging validity of the reassessment as well as on the merit of the additions. 6. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 15th September, 2020." 6. On the other hand, Ld. DR relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oker which fact is also incorrect and there is no link from there to conclude that it was done to escape assessment of a part of its income. ITAT Delhi Division Bench in the case of M/s Stratagem Portfolio Pvt. Ltd. (supra) considering the identical issue in the light of Judgment of Bombay High Court and other decisions of the Tribunal came to the conclusion that assessment cannot be opened validly on the basis of the above reasons recorded in absence of any tangible material to infer income escaped in the case of the assessee and quashed the reopening of the assessment. The issue is, therefore, covered by the aforesaid decision of the Tribunal in favour of the assessee. Further as noted above AO has also recorded incorrect and wrong facts in reopening of the assessment, therefore, AO did not apply his mind to the report of investigation wing and, as such, there were no justification to reopen the assessment. In such circumstances, the reopening of the assessment is bad in law and approval granted is also in most mechanical manner. Thus, the reopening of the assessment cannot be justified. In support of above findings, I rely upon following decisions: 1. Judgment of Punjab & Hary ..... 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