TMI Blog2021 (2) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is no link from there to conclude that it was done to escape assessment of a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve for assumption of jurisdiction u/s 147 of the Act 1.4 That in absence of any valid approval obtained under section 151 of the Act, initiation of proceedings u/s 147 of the Act and assessment framed u/s 147/143(3) of the Act are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30/12/2017 after making addition of ı 6,47,201/- under section 68 of the Act and ı 12,944/- under section 69C of the Act. Aggrieved, the assessee filed appeal before the Learned CIT(A) challenging finding of the Assessing Officer on legal ground as well as on the merit, however, assessee could not succeed before the Learned CIT(A). Aggrieved with the finding of the Learned CIT(A), the assessee is in appeal before the Income-Tax Appellate Tribunal (in short the Tribunal ) raising grounds as reproduced above. 3. Before us, the parties appeared through videoconferencing facility. The Learned Counsel of the assessee filed a paper-book containing pages 1 to 68 and other documents 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed are thus factually incorrect too, or the learned Assessing Officer was not sure about that, the appellant claimed loss or profit by misuse of the CCM. 5.3 He also submitted that there is no live link or direct nexus between alleged material and, inference drawn by the Assessing Officer. The learned Counsel relied on decision of Hon ble Bombay High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT reported in 390 ITR 464 and following decisions of the Tribunal to support his contentions: 1. ITA No. 6809/D/2018 dated 22.10.2019 Simmi Sethi vs. ITO (pages 53- 56 of JPB) 2. ITA No. 4542/D/2018 dated 29.11.2018 Radiance Stock Traders (P) Ltd. vs. ITO (pages 1-25 of JPB) 3. ITA No. 6628/D/2018 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 cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted only on the basis of the tangible material and not on the basis of assumptions and presumptions. The recondition u/s. 147 of the Act is reason to believe and, the expression is stronger than the word satisfied . The belief entertained by the AO must not be arbitrary or irrational, however, it must be reasonable In other words, it must be based on reasons which are relevant and material. The existence of tangible and relevant material is a precondition for assuming jurisdiction, as has been held in the case of CIT vs. Kelvinator of India Ltd. reported in 320 ITR 561 (SC) and ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. reported in 291 ITR 500 (SC). Hence, in this case the proceedings have been initiated on the basis of no material much less 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 informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho have taken contrived losses and shifted out profits during the F.Y.2008-09 to 2011-12 . 8. We find that in the case of M/s. Prashant Agencies Pvt. Ltd. And PPN Properties Pvt. Ltd. Vs ITO in ITA Nos. 3059 3060/Del/2018,order dated 16.01.2019, the Tribunal dealt with the similar issuance of notice u/s 148 of the Act by following the decision of the Hon ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs. DCIT 390 ITR 464 (Bom.). In that case, the reasons recorded were asunder: . 10. A perusal of the above, shows that Client Code Modification is legally permissible in case of mistake. In the instant case, the observation of the Assessing Officer is to the effect that due to Client Code Modification in two transactions, 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when or a wrong code is punched in by the broker whilst executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code, the facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade. 3.1 Over a period of time, some persons, in connivance with brokers started using Client Code Modification for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains 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 pract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y.- 2010-11 and paid taxes accordingly. The report of I CI clearly established that the racket of brokers and beneficiaries foul played and misused CCM for tax-evasion. 6. An action was also undertaken by Ahmedabad Directorate of Investigation Wing. The wing had called for reports from different exchanges and the data was duty analysed. After analysis, 12 Brokers and their related entities/main clients were identified for survey where the pre-survey analysis indicated more quantum of tax-evasion. Based upon data analysis coordinated surveys u/s 133A of the Income Tax Act, 1961 were carried out at-the premises of 12 brokers across India on 23.03.2015. 7. Income-Tax (First Amendment) Rules. 2011 were amended vide Notification No. 14/2011 [F. No. 142/25/2008-So(TPL)], Dated 9-3- 2011. The amendment came into force 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 modif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a given scrip with same expiry on a given date, shifted in (in case of MCC) shifted out (in case of OCC) were taken in a pair of clients. For illustration in case from client X(OCC) transactions of 500 buy orders and 500 sell orders of Nifty with expiry 28.03.2020 modified on 06.03.2010 to client Y(MCC), then in such case the difference in buy and sell trades is taken to be profit/loss shifted from X to Y. All other transactions say where 500 buy and 200 sell trades are shifted front X to Y have been ignored. The transactions where exact buy and sell transaction were transferred from one client to another NO PRICE RISK EVER was borne by the client who received the transactions through CCM. Thus such ASCERTAINED LOSSES shifted through CCM for which no price risk ever was borne by a client are non-genuine losses shifted with the motive 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/profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s I 13 FAMK S FBHA 3 FDDI 8 FJRD 9 FKA1 3 TOTAL 44 (ii) Now let us examine the situation in MCC i.e. when some other's OCC was modified to the assessee's code. The assesses did one transaction in which he got OCC of someone else modified to its Code to gather losses. The original codes of 99 were replaced by assesses s codes of FSTP. This resulted in shifting in of losses of ₹ 4,420/- c) Levenshtein Distance or edit distance is that it 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 I. then it can 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escaped assessment in case the of M/s Stratagem Portfolio P Ltd for the A.Y. 2010-11 within the meaning of Section 147/148 of Income-tax Act, 1961. 5.4 On perusal of the above reasons, it is evident that the material suggests that client code modification has been carried out by the broker in the case of the assessee. According to the information available in the reasons recorded, client code modification is allowed to the brokers by the stock exchange, within a limited window of time after business hours, for rectification of any mistakes in punching of the client code while carrying out transaction of purchase and sale on behalf of the customers. The Learned Assessing Officer, however has alleged in the reasons recorded that client code modification has been done for shifting of the profit or loss by the assessee. But there is no material to infer that such client code modification has been done with 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 Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasons merely mentioned yes I am satisfied The assessee filed 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. Thus, the 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 modif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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