2025 (6) TMI 1493 - HC - Income Tax

Bogus loss on client code modification - assessee failed to prove the genuineness of the transactions relating to bogus loss - Validity of reopening of assessments u/s 143 147 and 148 - ITAT deleted addition - HELD THAT - As per the data there are total 219 brokers who have made 54565 client code modification and the volume of sale and purchase transaction is Rs.6311 crore. AO specifically recorded that the brokers and the client in whose favour client modification are made are spread all over India and the assessee is also one of the clients whose name if included in the list of modified clients in the details provided by NSEL. The other relevant details with regard to the privity of contract existed between the clients and their respective brokers were also brought on record. Thus AO would state that a comprehensive investigation/enquiry and verification of data processed by the Department and after due application of mind the AO has reasons to believe that the assessee is a beneficiary by way of client code modification during the financial year 2011-12 relevant to the assessment year 2012-13. Hence on the basis of the information collated and the analysis done by the Assessing Officer he was of the view that the assessee company has not disclosed the true and full income. Thus the Assessing Officer proceeded to issue notice under Section 148 of the Act for which approval was obtained from the Principal CIT-2 Kolkata. Therefore the Tribunal committed an error in holding that the Assessing Officer did not record any satisfaction nor conduct any enquiry or investigation before issuing notice u/s 148 of the Act. Therefore this contention raised by the Tribunal and accepted by the Tribunal is incorrect and therefore the revenue should succeed on the said point. Onus was on the assessee to establish that they were not the beneficiary on account of the modification of the client code despite opportunity being granted to the assessee did not produce any evidence either during the course of assessment proceedings nor at the first appellate stage to show that he is not the beneficiary of the client code modification. Thus we are of the view that the Tribunal committed an error in allowing the assessee s appeal. Decided against assessee.

Summary

The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, pertain to the validity and correctness of the Income Tax Appellate Tribunal's order deleting an addition of Rs. 27,93,150/- made by the Assessing Officer on account of alleged bogus loss arising from client code modification transactions. The principal issues examined include: (i) whether the Tribunal was justified in law to delete the addition despite the assessee's failure to prove the genuineness of the transactions; (ii) whether the Tribunal was correct in holding that the Assessing Officer's reasons for reopening the assessment were mechanical and lacked objective satisfaction; (iii) whether the Tribunal failed to appreciate the facts properly in light of the alleged bogus loss transactions and the preponderance of probabilities; (iv) whether the Tribunal erred by not passing a speaking order considering available materials, thereby resulting in perversity; and (v) whether the Tribunal should have remanded the matter to the Assessing Officer for fresh verification in absence of verification, in violation of Rule 46 of the Income Tax Rules.

Regarding the first and second issues, the Court analyzed the legal framework governing reopening of assessments under Sections 143, 147, and 148 of the Income Tax Act. The Assessing Officer's power to reopen an assessment is predicated on recording "reasons to believe" that income has escaped assessment. The Court examined the Assessing Officer's reasons recorded on 28.3.2019, which detailed the investigation by the Serious Fraud Investigation Office (SFIO) into client code modifications in the National Spot Exchange Limited (NSEL) case, involving multiple brokers and clients nationwide, including the assessee. The Assessing Officer relied on comprehensive data obtained from NSEL showing 54,565 client code modifications involving 219 brokers and transactions aggregating Rs. 6311 crore. This formed the basis of the belief that the assessee had benefited to the tune of Rs. 27,93,150/- through such modifications and had not disclosed the true income.

The Court rejected the Tribunal's conclusion that the Assessing Officer's reasons were mechanical and lacked objective satisfaction. It held that the Assessing Officer had conducted a detailed enquiry and investigation, including verification of data and information from the SFIO and NSEL, before arriving at the satisfaction necessary to issue the notice under Section 148. The Court emphasized that the Tribunal erred in holding otherwise and that the revenue succeeded on this point.

On the issue of the assessee's failure to prove the genuineness of the transactions, the Court noted that the onus lay on the assessee to demonstrate that it was not a beneficiary of the client code modifications. Despite opportunities granted during assessment and appellate proceedings, the assessee did not produce any evidence to rebut the presumption of escapement of income. The Court found that the Tribunal failed to appreciate this crucial fact and the preponderance of probabilities that weighed against the assessee.

Regarding the Tribunal's alleged failure to pass a speaking order and the claim of perversity, the Court found no merit. The impugned order of the Tribunal was considered to have sufficiently dealt with the issues, and the Court did not find any perversity in the reasoning. The Court also addressed the contention related to Rule 46 of the Income Tax Rules, which mandates verification of evidence before admitting it. The Court held that the Tribunal was not justified in refusing to remand the matter for fresh verification, as the Assessing Officer had already conducted a thorough investigation and recorded satisfaction accordingly.

Applying the law to the facts, the Court concluded that the Assessing Officer had valid reasons to reopen the assessment and rightly made the addition of Rs. 27,93,150/- on account of bogus loss on client code modification. The Tribunal's deletion of the addition was therefore erroneous. The Court restored the assessment order dated 13.12.2019 passed under Sections 143(3)/147 read with Section 142, as affirmed by the appellate authority, and allowed the revenue's appeal.

In its significant holdings, the Court underscored that the Assessing Officer's recording of reasons to believe must be based on a comprehensive and objective enquiry, which was fulfilled in the present case. The Court held: "The Assessing Officer would state that a comprehensive investigation/enquiry and verification of data processed by the Department and after due application of mind the Assessing Officer has reasons to believe that the assessee is a beneficiary to the tune of Rs. 27,93,150/- by way of client code modification during the financial year 2011-12 relevant to the assessment year 2012-13."

The Court further established the principle that the burden to disprove such additions lies on the assessee once the Assessing Officer has made out a prima facie case based on investigation and data. The failure of the assessee to produce evidence to negate the addition justifies the sustaining of the addition. The Court's final determination was that the Tribunal erred in deleting the addition and in holding that the Assessing Officer's reasons for reopening were mechanical and unsubstantiated.

Consequently, the substantial questions of law were answered in favor of the revenue, the Tribunal's order was set aside, and the assessment order restored, affirming the validity of the addition on account of bogus loss arising from client code modifications.