Viswanathan Securities Pvt. Ltd. Vs ACIT (ITAT Delhi)
ITAT Delhi held that AO drew belief on the reasons which were later found to be totally non-existent. Such defect in the reasons cannot be ascribed as a mere technical irregularity and consequently defect cannot be cured by applying Section 292B of the Income Tax Act.
Facts- The assessee-company is engaged in the business of dealing in shares and securities in its own name and also acting as sub-brokers. The assessee company filed its ROI on 30.09.2010 declaring income at Rs.28,95,180/- for A.Y. 2010-11.
Subsequently, certain information were statedly received by the AO from the office of Principal Director of Income Tax (Inv.) Ahmedabad vide letter dated 08.03 .2016 that assessee has under-reported its taxable income to the extent of Rs.21,31,154/- for Assessment Year 2010-11 by misusing the ‘client code modification’ (CCM) facility available for correction of punching mistakes. Consequently, the case was reopened u/s. 147 after recording of reasons and obtaining necessary approval from the superior authority. A notice u/s. 147 was issued on 27.03.2017 and duly served on the assessee in this regard. AO subsequently issued corrigendum on 14th December, 2017 to rectify certain mistakes occurred in the reasons originally recorded.
The proceedings u/s. 147 were accordingly initiated and the assessment was completed by AO u/s. 143(3) r.w. Section 147 of the Act wherein addition of Rs.21,31,154/- was made alleging profit shifting by the assessee in a clandestine manner by conniving in client code modification.
Conclusion- Fundamental defect in the basis for holding ‘reason to believe’ cannot be seen as a mere irregularity and thus cannot be cured with the aid of Section 292B of the Act. There is a marked distinction between want of basic or inherent jurisdiction and irregular exercise of jurisdiction. Defect on irregular exercise of jurisdiction alone can possibly be cured under Section 292B of the Act. The Assessing Officer, in the instant case, has drawn belief based on the transactions carried out through broker namely ‘S.S. Corporate Securities Ltd.’ which reason was later found to be totally non-existent. Such defect in the reasons cannot be ascribed as a mere technical irregularity and consequently defect cannot be cured by applying Section 292B of the Act. The instant case is the case of the jurisdictional defect which cannot be rectified by invoking the provisions of Section 292B of the Act.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-IX, New Delhi [‘CIT(A)’ in short], dated 15.10.2018 arising from assessment order by the Assessing Officer dated 16.10.2019 passed u/s 143(3) r.w. Section 147 of the Income Tax Act, 1961 (“the Act”) concerning Assessment Year 2010-11.
The grounds of appeal raised by the assessee reads as under:
“1. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)-9, New Delhi erred in law and on facts in upholding the order of the learned assessing officer in initiating the reassessment proceedings under section 147 by issuing notice under section 148 of the Income tax Act, 1961, without there being any application of mind by the learned assessing officer and further his such action was based just on suspicion, surmises and conjectures.
2. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)-9, New Delhi erred in law and on facts in upholding the order of the learned assessing officer firstly for issuing undated reasons for reopening of assessment and then issuing corrigendum on a subsequent date rectifying some fundamental issue mentioned in the original reasons to believe for reopening assessment. He has further erred in law in wrongly applying the provisions contained in section 292B of the Income tax Act, 1961 and thus such action of the learned assessing officer lacks jurisdiction and bad in law.
3. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)-9, New Delhi erred in law and on facts in upholding the order of the learned assessing officer in not passing a speaking order against the objections raised by the petitioner company as required in law and the speaking order stated to have been passed on 13-11-2017 against the objections filed, remains unsubstantiated and unverified.
4. That on facts and in the circumstances of the petitioner company’s case, the learned Commissioner of Income tax (Appeals)-9, New Delhi erred in law and on facts in upholding the order of the learned assessing officer in sustaining the addition of Rs. 21,31,154, allegedly on the ground that the petitioner company has shifted out its profits through client code modification, without bringing on record any material evidence whatsoever and also completing the assessment based on suspicion, surmises and conjectures alone.”
3. As per the grounds of appeal noted above, the assessee has inter alia challenged the jurisdiction of the Assessing Officer assumed under Section 147/148 of the Act and has assailed the order passed by the Assessing Officer under Section 143(3) r.w. Section 147 dated 28.12.2017 as bad in law. Since, the assessee has challenged the legality of reopening of assessment which has jurisdictional issue and goes to the root of the matter, it will be appropriate to adjudicate this aspect to begin with.
4. The relevant facts germane to the adjudication of jurisdictional issue are as follows:
4.1 The assessee-company is engaged in the business of dealing in shares and securities in its own name and also acting as sub-brokers. The assessee company filed its return of income on 30.09.2010 declaring income at Rs.28,95,180/- for Assessment Year 2010-11 in question. Subsequently, certain information were statedly received by the AO from the office of Principal Director of Income Tax (Inv.) Ahmedabad vide letter dated 08.03 .2016 that assessee has under-reported its taxable income to the extent of Rs.21,31,154/- for Assessment Year 2010-11 by misusing the ‘client code modification’ (CCM) facility available for correction of punching mistakes. Consequently, the case was reopened under Section 147 after recording of reasons and obtaining necessary approval from the superior authority. A notice under Section 147 was issued on 27.03.2017 and duly served on the assessee in this regard. The Assessing Officer subsequently issued corrigendum on 14th December, 2017 to rectify certain mistakes occurred in the reasons originally recorded.
4.2 The reasons for issuance of notice under Section 148(1) for reopening of assessment under Section 147 of the Act for Assessment Year 2010-11 as recorded under Section 148(2) of the Act is reproduced hereunder:
“The assessee is a company filed its return of income on 30.09.2010 declaring income of Rs.28,95,190/-. The details of the directors of the assessee company obtained from records are hereunder:
2. Thereafter, the return was processed under 143(1) of the I.T. Act. Subsequent to the processing completed U/s 143(1), information through email was received on 14/03/2016 from Asstt. Director of Income Tax [Investigation], Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted out profits using Client Code Modification.
3. It is a detailed report of 589 pages. 1 have gone through the report and gathered that Client Code is a unique code which is assigned by a broker to its clients, A broker can issue just one code to a client. Client Code Modification means modification / change of the client codes after execution of trades. Vide Circular no. SMD/POL1CY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when a wrong code is punched in by the broker while 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.
Over a period of time, some persons, in connivance with brokers started using Client Code Modifications 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
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 artificialrofits or losses at the far 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.
I have examined the 1TR and the record of the assessee in respect of F Y 2009-10 relevant to A.Y. 2010-11 and the following facts are noted:
a) The return of the assessee shows that during the year it has undertaken transactions in sale/purchase of shares, and its turnover could have included the transactions contrived by way of COM. In the relevant period, the assessee Uasnotclaimed any current year losses. During the period 01.04.2009 to 31.03.2010, it has undertaken transactions through M/s. SS Corporate Securities Limited.
b) The transactions which involved CCM, as per information received under the report of the Investigation Wing are as under:
