TMI Blog2022 (8) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s paper book. AO categorically stated that the AO had reason to believe on the basis of observation of the Directorate of Investigation that the assessee had probably shows bogus profit to adjust unaccounted money generated from business or elsewhere and he had reason to believe on that basis that the amount had escaped assessment within the meaning of Section 147. From the aforesaid notings of the AO in the reasons recorded it is clear that the AO was not sure as to whether income escaped the assessment. Since the word probably has been used, and there was no application of his own mind by the AO who depended only on the information received from the Investigation Wing. We therefore by considering the totality of the facts as discussed herein above are of the view that the reopening in the instant case on the basis of borrowed information by the AO from the Investigation Wing without applying his independent mind was not justified. Accordingly the subsequent reassessment proceedings framed by the AO is quashed. - Assessee appeal allowed. - ITA NO. 1206/Chd/2019 - - - Dated:- 5-8-2022 - Shri. N.K.Saini, VP And Shri. Sudhanshu Srivastava, JM For the Assessee : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through authorised brokers appointed by the B.S.E. and N.S.E. not directly involved himself in any client code modification. Thus any profit/loss arising after modification can by no stretch of imagination be considered in the hands of the assessee. 3. That client code modification if any done by the broker in the case of the assessee that has been done as per permissible clauses laid down by SEBI as per circular No. NSCCL/SCE/2004/0464 dated 31-05-2004. 4. That the order is contrary to law and facts of the case. 5. That the Appellant craves leave to add, amend or alter any grounds of Appeal before the Appeal is heard and disposed off. 3. Vide Ground Nos. 1(a), (b) (d) the grievance of the assessee relates to the reopening of the assessment by initiation of proceedings under section 147 of the Income Tax Act, 1961 (hereinafter referred to as Act ). 4. The facts related to this issue in brief are that the assessment in this case was completed under section 143(3) of the Act on 18/03/2013 at an income of Rs. 11,18,26,820/- by making the addition of Rs. 27,48,340/-. Later on the AO on the basis of information received from the office of ADIT(Inv.)-II Ludhiana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s significant to total number of trades of any members/clients. c) Profits/loss 'arising on account of all modifications by trading member/client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. d) Profit/loss arising due to modification is significant. e) Trades have been modified to unrelated parties. f) Both buy and sell leg of different trades have been modified to same client. g) The same sets of clients are observed to be making profit/loss due to the modifications carried out. II) Total number of trade modifications increased before closing of the financial year. 5. The modus operandi 5.1 The, whole process can be explained with an example: Broker executes following trade in morning on a particular day let's say at 10.08 AM in customer XYZ's account as shown in Table 1. TABLE 1: Trade in morning in account of M/s XYZ. Trade Number Type Script Price Qty. Total value- A Buy Rel Cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil Nil Nil Nil Net Qty 0 Net Profit/Loss 0 TABLE 5: Account of M/s. XYZ (After Client Code Modification) Trade Number Type Script Price Qty Total value A Buy , ReI Cap 1560 550 8,58,000 D Sell Rei Cap 1824 550 10,03,200 Net QTY 0 Net Profit/Loss 1,45,200 TABLE 6: Account of M/s. PQR (After Client Code Modification) Trade Number Type Script Price Qty- Total value B Buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised computation of income and paid taxes for A.Y. 2010-11 (relevant for F. Y.2009-10). The names and particulars of such brokers are indicated in annexure A enclosed herewith. 8. Based on the statement of brokers. Investigation were also conducted in a few cases of beneficiaries/clients When confronted with the client code modification data and the statements of brokers, these clients admitted having taken bogus loss from the brokers. They also have revised their computation of income and paid taxes for A.Y.2010-11 (relevant for F.Y.2009-10). 9. Notable patterns: 9.1 On the basis of investigation made on the different brokers as well as beneficiaries, the following patterns/features were noticed: i. Number and percentage of modified trades/traded value is significantly higher in the total number of trades/ traded value of particular client involving into CCM. ii. Profit/loss arising on account of all modifications by client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. iii. Trades have been modified to unrelated parties indicating that they are non-genuine. iv. Both buy and sell le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 of the Act on 25/03/2015. In response to the said notice the assessee e-filed his return of income on 13/05/2015 and also furnished the letter on 18/09/2015 requesting the reasons on the basis of which proceedings were initiated. In response the AO provided the reasons for reopening under section 148 of the Act. The assesee thereafter furnished the detailed reply on 27/01/2016 to the reasons for reopening the assessment, by filing the objection to the same. The AO mentioned in para 6 of the assessment order that the objections of the assessee were disposed off vide speaking order passed on 11/03/2016 and various information s were called for. 4.2 The AO framed the assessment at an income of Rs. 11,68,26,820/- instead of returned of income of Rs. 11,18,26,820/- which was assessed earlier vide order dt. 18/03/2013 under section 143(3) of the Act. 5. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and challenged the jurisdiction for initiating the reassessment proceedings under section 147 of the Act and submitted as under: ISSUE OF NON APPLICABILITY OF PROVISIONS OF SECTION 148 OF THE INCOME TAX ACT It is humbly submitted that Provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verification. It is basic requirement of Section 147 of the Income tea Act that Ld. Assessing Officer should apply his mind in order to form reasons to believe that income had escaped assessment had not been fulfilled. That Ld. Assessing Officer would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. Although the AO may have entertained a suspicion that the Assessee s income has escaped Assessment, such suspicion could not form the basis of initiating proceedings under Section 147 of the Act. A reason to believe - not reason to suspect - is the precondition for exercise of jurisdiction under Section 147 of the Act. It was settled by the Hon'ble High court in the case of Agya Ram v. CIT (supra), it was emphasized that the reasons to believe should have a link with an objective fact in the form of information or material on record... It was further emphasized that mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere basis of probality from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments. Further It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Deputy Commissioner of Income Tax WRIT PETITION NO. 2627 OF 2016 Relevant portion of the petition filed is hereby quoted as under: That reasons in support of notice issued u/s 147 of the Income Tax Act 1961 accept the fact that as a matter of regular practice, a broker in the stock exchange makes modifications in the client code on sale and purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. 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 a genuine error, originally occurred while punching the trade. The material available is that there is a client code modification done by the Assessee's broker but there is no link from there to conclude that it was done to escape assessment of a part of its income. Prima facie, it is a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. We are of the view that notice issued is without jurisdictional as it l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: In the instant case, the Assessing Officer had not examined and corroborated the information received from DDIT (Investigation)-III, Ludhiana before recording his satisfaction of the escaped income and initiating the re-assessment proceedings. In my opinion, the Assessing Officer has thus acted on the basis of suspicion and he has also not applied his mind before recording the reasons for reopening of the assessment. In view of the above discussion, I hold that reopening of the assessment was not valid under the law and, hence I quash the impugned orders of the authorities below. It is also important to mention that the proceedings u/s 147/148 for Asstt. Year 2009-10 initiated on the same issue i.e client code modification were dropped after satisfying as per submissions submitted by the assessee during the course of assessment proceedings. (That copy of notice issued u/s 148 dated 1403-2016 for reasons of reopening the assessment alongwith copy of assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act 1961 dated 29-12-2016 in which no addition was made on account of client code modification by the Ld. Assessing Officer are hereby enclosed for your ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and / or purchase of any securities, after the trading is over so as to rectify any error which may have occurred while punching the orders. That after such modification of client code is made, all detail has been duely submitted with the stock Exchange arid records this data as client code modification .That client code modification if any done by the broker in the case of the assessee that has been done as perpermiss'ible clauses laid down by SEBI. It is clear that client code modification if done that has been done in genuine manner . As per SEBI circular No NSE/INBG/2011/596, there was no penalty for code change modification upto 1% of the total trades. Which means the regulator consider client code modification upto 1% as genuine error at the part of the broker due to technical nature of business. In assessee's case there were 113644 trades done by the assessee in the National Stock Exchange's Future and Option Segment. Out of these, CCM was done by the broker, only in 367 trades, which comprises of a mere .32% of the total trades. It is further relevant to mention that As per a daily scheme of events prescribed by the NSE, the assesse regularly receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .70% Jul-09 2.84% Aug-09 7.58% Oct-09 19.91% Nov-09 12.32%, Dec-09 11.69% Jan-10 11.22% Feb-10 1.26% Mar-10 7.27% It is further submitted that there is clear indication of instances of CCM resulting In profit and loss, both thereby indication the randomness and genuineness in the nature of CCM. Since it is not always loss or always profit as mentioned in observation, the genuineness is proved. There are 4 instances of pfofitKb4ing transferred in books of the assesse due to instances of CCM. That effect of CCM has -resulted in increase in the taxable income in the books of assesse. Here it is very much evident that the transactions are random and general in nature owing to the voluminous and technical nature of business and do not have any purpose of evading tax. Further after consulting the broker namely Competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any penalty. That the Assessing Officer has not given -hny reasonon what basis he presumed the client code modifications to be unusually high. In the light of the MCX circular, we are of the opinion that the client code modification was quite nominal and not unusually high as alleged by the Assessing Officer. Therefore, we are unable to find out any justification for the allegation of the Assessing Officer that the client code modification was with the malafide intention. In support of contention of the assessee, following judgment is hereby quoted as under: IN THE INCOME TAX APPELLATE TRIBUNAL, M/s. Noble Securities vs. The ITO ITA No. 911/JP/2016, Assessment Year : 2010-11 Relevant portion of the judgment is hereby reproduced. As per Circular No. MCX/T S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intraday i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less that 1 per cent of the total trading transactions, cannot be said to be unusua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT(A) after considering the submissions of the assessee observed that the AO on the basis of information available with the Department that the assessee had made investment in trade market through broker and manipulated his income by shifting in losses / shifting in profit amounting to Rs. 49,99,423/- and reopened the case under section 147 of the Act. 5.2 The Ld. CIT(A) opined that the assessee had not been able to satisfactorily explained the reasons and logic of client code modification carried out and also failed to completely to furnish the details and need of modification carried out in the case of assessee through its broker M/s Competent Finman Ltd. He further observed that the assessee was explicitly confronted with the information available with the AO with regard to modalities and change in client code modification during the assessment proceedings. 5.3 The Ld. CIT(A) also observed that the inference drawn by the AO was in the light of the facts available from the information received by him from Investigation Wing and the facts wherein, the searches had been carried out by different brokers including, in the case of M/s Competent Finman Ltd. across India o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his own mind, therefore reopening of the assessment was not justified and deserves to be quashed. Reliance was placed on the following case laws: M/s Coronation Agro Industries Ltd. Vs. DCIT in Writ Petition No. 2627 of 2017 vide order dt. 23/11/2016 (Bom) Shri Tulsi Dass Vs. ACIT in ITA No. 6806/Del/2017 vide order dt. 23/01/2019 (Del Trib) Kamal Kishoree Aggarwal Vs. ACIT in ITA No. 6628/Del/2018vide order dt. 12/04/2019 (Del Trib) CIT, Delhi Vs. Kelvinator of India Ltd. in Civil Appeal Nos. 2009-2011 of 2003vide order dt. 18/01/2010 (SC) CIT Vs. Paramjit Kaur [2009] 311 ITR 38 (P H) Ashok Goel Vs. The ITO in ITA No. 110/Chd/2016 vide order dt. 19/05/2016 (Chd Trib) 7.2 It was further submitted that the reasons recorded by the AO were wrong as he was not sure as to whether there was an escapement of income because he used the word the probably . It was further submitted that even on the basis of similar reasons recorded for reopening of the assessment on the basis of information that some brokers had misused client code modification facility on transfer of Profit Loss, on account of share transaction from the client to others, the issue has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. During the investigation the Directorate found various transactions of assessee Sh. Rajnish Garg in which the client code had been modified. The details as procured from the Directorate are as below:- ADQPM80888 MAHESHWARI TECHNICAL FINANCIAL SERVICES LTD. F O 3,115 3,272,102 1,441,201,906 10. From the above inference can be drawn that the assessee has modified the client code for many transactions which are of significant amount. Also the condition of SEBI that the client codes should be similar so as to show that these are due to punching error is also not true in this case since the client codes are completely different. 9.1 It is also noted that the Ld. CIT(A) in the impugned order categorically stated in para 5.4 of the impugned order that the inference was drawn by the AO, in the light of the fact available from the information received by him from investigation wing and that the search had been carried out in different brokers cases including in the case of M/s Competent Finman Ltd. across India on 23/03/2015, the relevant findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer in the assessment order which has been duly confronted to the assessee during the course of assessment proceedings. From the aforesaid notings of the Ld. CIT(A) as well as the AO, it is clear that the reassessment proceedings under section 147 r.w.s 148 were initiated by the AO only on the basis of the information received from the Investigation Wing and there was no independent application of mind by the AO, and moreover there was no search in the case of broker of the assessee i.e; M/s Competent Finman Ltd. on 23/03/2015, in this regard one certificate has been given by the said company, copy of which is placed at page no. 58 of the assessee s compilation. Therefore the reasons for initiating the reassessment proceedings were also based on the wrong facts other than the facts available on the recod. 9.1 On a similar issue the ITAT Chandigarh SMC Bench Chandigarh in the case of Ashok Goel, Mullanpur Vs. ITO III(2), Ludhiana in ITA No. 110/Chd/2016 for the A.Y. 200506 vide order dt. 19/05/2016 held as under: It is observed that the expression appearing in section 147 is 'reason to believe', which refers to the belief. The same prompts the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reason to believe. Inspite of the wide power, the exercise of power must meet this requirement that there was relevant material and ground for the Assessing Officer to form a tentative or prima facie opinion that the income as escaped assessment which includes non assessment or under assessment. But, it is not the requirement that the Assessing Officer should have finally ascertained the fact of escapement of income by recording findings or conclusion. This final ascertainment takes place when the final assessment order is passed. The Assessing Officer has to show tentatively or prima facie that income has escaped assessment. There should be some material or basis for the said formation of belief (refer Assistant Commissioner of Income Tax v Rajesh Jhaveri Stock Brokers, (2008) 14 SCC 208; ITO v. Selected Dalurband Coal Co. (P) Ltd. (1997) 10 SCC 68; Raymond Woollen Mills Ltd. v. ITO, (2008) 14 SCC 218). 10. In the above case, the Hon'ble Delhi High Court has categorically stated that under section 147 of the Act, it is the requirement that the Assessing Officer must record 'reason to believe'. This requirement mandates that the Assessing Officer must state in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be ignored. Recently, Division Bench of this Tribunal in the case of Shri Subhash Chander Goel Vs. ITO, Chandigarh in ITA No.282/Chd/20i4 relating to assessment year 2006-07 held that statement recorded by the police officer under section 161 of CrPc, 1983 is neither given on oath, nor it is tested by cross examination and, therefore, such a statement cannot be treated as substantive evidence to reopen the assessment proceedings. Injjigjnstant case., the . Assessing Officer had not examined and corroborated the information received from DDIT (Investigation)-III, Ludhiana before recording his satisfaction of the escaped income and initiating the reassessment proceedings. In my opinion, the Assessing Officer has thus acted on the basis of suspicion and he has also not applied his mind before recording the reasons for reopening of the assessment. Thus in my considered opinion, the statement made by Ms.Sarika Jain under section 161 of CrPc cannot be treated as relevant material for reopening proceedings under section 147 of the Act. 11. In view of the above discussion, I hold that reopening of the assessment was not valid under the law and, hence I quash the impugned orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: that the Assessing Officer had not examined the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings. The Assessing Officer had thus acted only on the basis of suspicion and it could not be said that it was based on belief that the income chargeable to tax had escaped income. The Assessing Officer had to act on the basis of reason to believe and not on reasons to suspect . The Tribunal rightly concluded that the Assessing Officer had failed to incorporate the material and his satisfaction for reopening the assessment and therefore the issuance of notice under section 148 of the Act for reassessment proceedings was not valid. 9.6 In the instant case also the AO acted only on the basis of suspicion and acted on the basis of information received from the Investigation Wing therefore the reassessment proceedings was not valid. Moreover in the reasons recorded, copy of which is placed at page no. 2 to 7 of the assessee s paper book. The AO categorically stated in para 12 that the AO had reason to believe on the basis of observation of the Directorate of Investigation that the a ..... 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