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TMI Blog2023 (5) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... against return income of Rs. 1,76,79,150/-. 2. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (CIT (A)} is bad, both in the eye of low and on facts. 3. On the facts and circumstances of the case, the learned CIT (A) has erred, both on facts and in low in confirming the order under Section 147 read with Section 148, ignoring the fact that the same was bad in the eye of low as the conditions and procedure prescribed under the statute have not been satisfied and complied with. 4. On the and circumstances of the case, the Id. CIT(A) has erred, both on facts and in law in rejecting the contention of the assessee that the reassessment proceedings by the learned AO are bad in the eye of low as the reasons recorded for the issue of notice under Section 148 are bad in the eye of low and are contrary to the facts. 5. On the facts and circumstances of the case, the Id. CIT(A) has erred, both on facts and in low in confirming the disallowance made on the basis of the material collected at the back of the assessee without providing copy of the same & providing opportunity to rebut the same. 6. The Learned Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent clients. After analysis of data received from NSE and after considering the contention of brokers, it was established that the brokers had misused client code modification as a tool for tax evasion and created non-genuine losses and profits. It was revealed that these losses and profits were given to different client/ beneficiaries and the beneficiaries had taken fictitious losses to set off against their profits with a view to reduce their tax liability. The client also took fictitious profits to cover up their undisclosed income or to set off these profits against huge losses. 3. As per the above information and list of beneficiaries provided therein, it is seen that the assessee company is one such beneficiary who has availed of such non-genuine client code modification services from brokers and booked net non-genuine losses to the tune of Rs.46,07,275/- for AY 2009-10." 6. After recording the aforesaid reasons and obtaining requisite approval u/s 151 of the Act, the ld. AO issued notice u/s 148 of the Act on 30.03.2016 to the assessee. The assessee vide submission dated 12.04.2016 stated that the return filed on 30.09.2009 be treated as return filed in response to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the assessee had escaped assessment. The reasons recorded and the assessment order only talk about modus operandi how the client code modification facility could be misused by some broker. Nowhere, neither the assessee nor its brokers were even impleaded in the said reasons. The reasons recorded only gives way to 'reason to suspect' and not 'reason to believe'. The very same issue was even subject matter of adjudication of this tribunal in the case of Stratagem Portfolio (P) Ltd Vs. DCIT in ITA No. 7878/Del/2019 dated 15.09.2020 and the operative portion of the said tribunal order is reproduced hereunder:- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 25.7.2019 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs.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 Rs.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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectify 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 practice to book artificial profits or losses in March to impact tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 Ministr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 nongenuine 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/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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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