ACIT CIRCLE 4(3)(1), MUMBAI, MUMBAI V. JOHNSON DYE WORKS PVT LTD, MUMBAI

ITA 1118/MUM/2024

AI Insights

The case involves Johnson Dye Works Pvt. Ltd., which was reassessed by the ACIT based on information related to Client Code Modification transactions linked to the NSEL scam. The reassessment added substantial income to the assessee's books, which was contested. The CIT(A) allowed the appeal, deeming the reassessment invalid, relying on precedents that questioned the validity of such reassessments based solely on Client Code Modifications without concrete evidence of income escapement. The revenue challenged this decision, leading to the current tribunal appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312355 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2012-2013
• Other Referred Cases: Coronation Agro Industries Ltd. vs. DCIT, Rakesh Gupta vs. CIT, Pr. CIT \\u2013 13 Vs Pat Commodity Services Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: JAYESH DADIASAMIR SHAH; AJAY SINGH
• Keywords: Set aside; Business income; Accommodation entries; Transactions in derivatives; Reason to believe; Tangible material; Bogus
• Section: 148; 143(3); 142(1); 133(6)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE MS. KAVITHA RAJAGOPAL, JM AND SHRI. PRABHASH SHANKAR, AM ITA No. 1118/Mum/2024 (Assessment Year: 2012-13) ACIT Circle 4(3)(1), Mumbai Aayakar Bhavan, M. K. Road, Churchgate – 400020. Vs. Johnson Dye Works Pvt. Ltd. Ground Floor, New Era House, Mogul Lane, Matunga (W), Mumbai – 400016. PAN/GIR No. AAACJ2082J (Assessee) : (Respondent) Assessee by : Shri. Jayesh Dadia/Samir Shah Respondent by : Shri. Ajay Singh (Sr. DR) Date of Hearing : 04.02.2025 Date of Pronouncement : 30.04.2025 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals) Delhi (‘ld. CIT(A)’ for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s. 250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2012-13. 2. The revenue has raised the following grounds of appeal along with additional grounds of appeal: “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting transactions of Rs. 2,12,42,250/-in NSEL Exchange as Client Code Modification Transaction for shifting of profit/ loss added to the income of the assessee relying on the decision in the case of Coronation Agro Industries Ltd. vs. DCIT 390 ITR 464 (Bom.) without going into the merits of the case? ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 2 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting commission at 5 percentage of the client code modification transaction at Rs. 10,62,113/ relying on the decision in the case of Coronation Agro Industries Ltd. vs. DCIT 390 ITR 464 (Bom.)?” Additional Grounds of appeal \"Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the appeal relying on the interim relief granted in the case of M/s Coronation Agro Industries Ltd. v/s DCIT-6(2)(1) Mumbai without going into the merits of the case.\" 3. The brief facts are that the assessee company is engaged in the business of share trading and letting out immovable property. The assessee had filed its return of income and scrutiny assessment u/s. 143(3) of the Act was completed on 18.02.2015, where the learned Assessing Officer (‘ld. AO’ for short) determined the total income at Rs. 2,70,40,880/-. The assessee’s case was then reopened based on the information from PDIT(Inv.)-2, Mumbai that the Serious Fraud Investigation Office (SFIO) had conducted detail investigation into the National Spot Exchange Limited (‘NSEL’ for short) scam which reveal that paired contracts were sold by brokers to investigators to finance cash strapped entities which assured income in the range of 14 to 22 percent on the investments by Client Code Modification on NSEL. It was observed that the brokers had utilized the said fund for creating contracts for commodity transaction in the guise of trading in commodity on NSEL in which it was found that the assessee company was also one such investor having made substantial investment through broker M/s. Anand Rathi Commodities Limited. The ld. AO further observed that the assessee has certain modified transaction resulting in transfer in of buy contracts amounting to Rs. 2,59,20,000/- and sell contracts of Rs. 2,65,14,000/- with a net addition of Rs. ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 3 5,94,000/- declared as business income by the assessee. It is also observed that there was transaction which were originally booked in the Client code of the assessee and subsequently, modified to other parties involved buy transaction of Rs. 38,73,750/- and sell transactions of Rs. 1,73,68,500/-. The assessee was served with notice u/s. 148 dated 30.03.2019 and in response to the same, the assessee had e-filed its return of income dated 10.05.2019, declaring total income at Rs. 2,54,13,080/-. Notice u/s. 143(2) dated 19.07.2019 was issued and served upon the assessee and notice u/s. 142(1) were also issued and served upon the assessee. The ld. AO issued notice u/s. 133(6) of the Act to M/s. Anand Rathi, NSEL and Allahabad bank. The ld. AO then passed the assessment order u/s. 143(3) r.w.s. 147 of the Act, dated 27.12.2019, determining total income at Rs. 4,93,45,240/-, after making an addition of Rs. 2,12,42,250/- towards the Client Code Modification transaction (speculative business) and commission on accommodation entry amounting to Rs. 10,62,113/-. 4. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 12.01.2024 had allowed the appeal on the ground that the assumption of jurisdiction to reassess the income of the assessee merely on the basis of information on Client Code Modification does not warrant reassessment by relying on the decision of the Hon'ble Jurisdictional High Court in the case of M/s. Coronation Agro Industries Ltd. vs. DCIT Circle – 6(2)(1), in Writ Petition No. 2627 of 2016,, order dated 23.11.2016, thereby holding the reassessment be invalid and bad in law. 5. The revenue is in appeal before us, challenging the impugned order of the ld. CIT(A). ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 4 6. The learned Departmental Representative ('ld. DR' for short) for the revenue contended that the ld. CIT(A) has erred in allowing the assessee’s appeal by relying on the decision of M/s. Coronation Agro Industries Ltd. (supra) which was on interim relief granted to the assessee without getting into merits of the case. The ld. DR further stated that the Hon'ble Punjab and Haryana High Court in the case of Rakesh Gupta vs. CIT [2018] 405 ITR 213 has held that if the reasons of reopening are based on tangible material and when the information is specific and not vague, the information received can be based for the reason to believe that the income has escaped assessment, thereby making a reopening valid and in accordance with law. The ld. DR stated that the said decision was passed by the Hon'ble High Court 2 years after the decision of M/s. Coronation Agro Industries Ltd. (supra) by the jurisdictional High Court which was only on interim relief. The ld. DR further stated that the ld. AO has not merely relied on the information received from PDIT (Inv.) but has also enquired and investigated by issuing notice u/s. 133(6) of the Act. The ld. DR concluded that as there are contrary decisions of two High Courts and since the jurisdictional High Court is on interim relief, the ld. CIT(A) has erred in relying on the said decision and therefore prayed that the ld. CIT(A)’s order be set aside and ld. AO’s order be upheld. 7. The learned Authorised Representative ('ld. AR' for short) for the assessee on the other hand controverted the said fact and contended that the jurisdictional High Court decision is a conclusive decision, where the Hon'ble High Court has categorically held that mere information for Client Code Modification done by the assessee’s broker does not conclusively state that there has been escapement of income and the same is merely ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 5 suspicion that income has escaped and not belief that income has escaped assessment. The ld. AR further stated that the Hon'ble Jurisdictional High Court has held that the reassessment notice on the said ground is without jurisdiction and had given relief on this ground. The ld. AR further reiterated that the Hon'ble Jurisdictional High Court has dealt this issue in hand and has finally decided on the legality of the notice and when there are contrary decisions of a jurisdictional High Court and non-jurisdictional High Court, the jurisdictional High Court decision would prevail. The ld. AR also relied on the subsequent decisions of the Hon'ble Jurisdictional High Court in the case of Pr. CIT – 13 Vs Pat Commodity Services Pvt. Ltd., in I.T.A. Nos 1257 of 2016 and 1383/Mum/2016 (Mum), order dated 15.01.2019 in support of the assessee’s contentions. 8. We have heard the rival submissions and perused the materials available on record. The moot issue here is whether the ld. CIT(A) was right in holding the reassessment proceeding to be bad in law by relying on the decision of the Hon'ble Jurisdictional High Court in the case of M/s. Coronation Agro Industries Ltd. (supra). 9. It was observed that the information regarding Client Code Modification that assessee company has carried out modification in client code amounting to Rs. 5,24,34,000/- has been done in both purchase as well as sale transaction and Client Code Modification in favour of Zylog Commercial Private Limited on transaction valued of sale amounting to Rs. 2,65,14,000/- has been noticed for which the ld. AO issued show cause notice seeking why the turnover involved in the said Client Code Modification transaction and the commission of 5% for providing accommodation entry should not be added to the ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 6 total income of the assessee. The assessee vide its letter dated 23.12.2019 and 24.12.2019 submitted that the assessee was not involved in the Client Code Modification and was also unaware of the transaction between the broker and the exchange. The assessee further contended that it had recorded its transaction of purchase and sales in its books based on the bills received from M/s. Anand Rathi Commodities Limited along with the payments made and received from them. This explanation of the assessee was not to the satisfaction of the ld. AO, where it was observed that the Serious Fraud Investigation Office had information that some of the brokers have taken undue advantage of the Client Code Modification and has benefited out of the contracts offered at NSEL on the assurance of fixed return ranging from 12% to 14% to the investors. It was also observed that these entities/individuals had booked bogus speculative and non-speculative gains and loss by trading on NSEL platform. The assessee’s client code was also utilized prior to or subsequent to the modification and the details such as the contract notes of the transaction, computation of income along with the other details was perused, where it was found that the client code of the assessee was used initially for the transactions and subsequently modified to another person’s code for 31 such transactions involving 8 buy orders and 23 sell orders. Further, the client code of some other person was utilized initially and then subsequently modified to the code of the assessee pertaining to 62 transactions, where 30 buy orders and 32 sell orders are reflected. From the later transaction, the assessee has shown gain in all the transactions in its books with no loss. The ld. AO discussed modus operandi of the said transaction where the stock exchange permits such Client ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 7 Code Modification for rectifying the genuine punching errors which has been misused by brokers and clients for providing accommodation entries of profits and loss to various parties. Securities and Exchange Board of India (SEBI) vide its order dated 10.04.2012 WTM/PS/09/DNPD/APRIL/2012 against the NSEL introduced stringent penalties w.e.f. 05.07.2011, where there was drastic reduction in the number of Client Code Modification. It is also held by the SEBI that Client Code Modification are allowed to rectify inadvertent errors in punching the orders as per its circular dated 06.02.2003, such modifications are expected to be distributed over the months where number of modified orders should remain more or less uniform across the months except with some deviations there has been significant variation in the immediate months around March, 2010 creating genuine doubt where the same was for rectification of genuine errors and the reason for the sudden increase in Client Code Modification during the said period was also not explained by NSEL. It has mandated that the stock exchanges should keep a strict vigil on such case of Client Code Modification with the liberty to impose monetary penalty and to take necessary action against the members who keep repeating such changes. It has permitted modification only on genuine mistakes for the purpose of rectification. The relevant extract of the SEBI circular dated 06.02.2003 is reproduced hereinunder for ease of reference: \"NSE has submitted in its reply that it is not possible to discern with certainty any specific cause for the difference in the incidence of client code modifications across the segments and across the months of a year. NSE has also submitted that it has a rigorous and narrow time frame for the modification of the client codes, which approach is important to ensure speed, finality and accuracy for the client code entry. It understand that modification of client codes is allowed to rectify inadvertent errors in punching the orders, as directed by SEBI vide Circular dated February 06, 2003, and hence such modifications are expected to be randomly distributed over months. Therefore, the number of modified orders should have remained more or less uniform across months with some deviations either to positive ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 8 or negative side, under normal circumstances. However, the significant variation in the modification of client codes in the immediate months around March, 2010 as brought out in table B above gives rise to a genuine doubt whether the modifications have been carried out for purposes other than those to rectify genuine errors. It may be noted that NISE 18 silent on the reasons for sudden increase in client code modifications during the month of March, 2010. Before proceedings further, the relevant extract of SEBI Circular dated February 05, 2003, relating to the modification of client code is being reproduced hereunder for convenience: \"The stock exchanges shall not normally permit changes in the Client ID and would keep a strict vigil on cases of client code modification and would implement a monetary penalty structure that would escalate with the number of such incidences Besides, the exchange may take necessary action against members making repeated changes. However, genuine mistakes may be allowed to be rectified.\" 10. The NSE practices “scrutiny of Client Code Modification on a postfacto basis” with monetary penalties proportionate to the quantum of incidence with compliance of the SEBI circular. The ld. AO also observed that the NSE has stated to SEBI that it is not possible to inform the intent of the modification as there are innumerable orders entered in a day and the reasons stated by the client will be accepted at its face value where the SEBI noticed that no reasons have been extended from the clients to NSE inspite of sufficient opportunity and that NSE does not have any provision to penalize repeat offenders. 11. From the above facts, it could be inferred that the ld. AO has reopened the assessee’s case based on the information from the investigation wing pertaining to Client Code Modification of NECL, for the reason of income to the tune of Rs. 2,12,42,250/- has escaped assessment. It is observed that beyond the said information, the ld. AO did not have any concrete evidence to establish that the assessee has indulged in the said scam and in case of the year under consideration being unabated assessment there can be no reopening merely based on a general information that the Client Code Modification was ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 9 done in many cases to accommodate and transfer the losses and gains to different entities on the basis of their requirement and benefits. For this we would place our reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Coronation Agro Industries Ltd. (supra) and Pat Commodity Services Pvt. Ltd. (supra), where it was held that on identical facts of Client Code Modification, the ld. AO does not have the jurisdiction to reopen the assessment merely on presumption and surmises that income has escaped assessment. The relevant extract of the decision of the Hon’ble Jurisdictional High Court in the case of Coronation Agro Industries Ltd. (supra) is cited herein under: “3. The reasons in support of the impugned notice relies upon the information received from the Principal Director of Income Tax that the petitioner has benefited from a client code modification by which a profit of Rs.22.50 lakhs was shifted out by the petitioner's broker, resulting in reduction of the petitioner's taxable income. The only basis for forming the belief is the report from the Principal Director of Income Tax and the application of mind to the report of the Assessing Officer along with the record available with him. This information and application of mind has led the Assessing Officer to form a reasonable belief that there is not only an escapement of income but there has been failure to truly and fully disclose all material facts and information as the modus operandi of shifting profits was not known to the Revenue as not disclosed by the petitioner when the Assessing Officer passed the order in regular assessment proceedings. 4. We note that the reasons in support of the impugned notice accept the fact that as a matter of regular business practice, a broker in the stock exchange makes modifications in the client code on sale 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. 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, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. 5. In the above view, prima facie, we are of the view that the impugned notice is without jurisdiction as it lacks reason to believe that income chargeable to tax has escaped assessment.” ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 10 12. From the above, it is observed that where in the course of regular business practice there could be Client Code Modification on sale or purchase of securities by the broker for the purpose of rectifying an error while punching the orders and merely on the basis of the said information without any cogent link of the assessee with its broker cannot be a reason to reopen and it is only mere suspicion or doubt that income has escaped assessment. Though the ld. DR has relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of Rakesh Gupta (supra) which has taken a contrary view that on identical facts it had upheld the assumption of jurisdiction by the ld. AO, we are bound to follow the decision of the Hon’ble Jurisdictional High Court on the same issue subsequent to the decision of the Hon’ble Punjab and Haryana High Court and the relevant extract of the said decision is cited herein under. “3. The respondent assessee is a private limited company engaged in the business of providing commodity services to its clients. In the return of income filed by the assessee for the Assessment Year 2006-07, the Assessing Officer noticed that there were instances of client code modifications. The Assessing Officer believed that the same was done to indulge in circular trading to pass on profits or losses to the clients of the assessee company as per requirements. After hearing the assessee, the Assessing Officer made additions in the income of the assessee on such basis. The issue eventually reached to the Tribunal. The Tribunal did accept the Revenue's theory of misuse of clients code modification facility. However, the Tribunal accepted the assessee's explanation and discarded the Revenue's theory that profit of the assessee's company were passed on to the clients. It was also noticed that the Revenue has not contended that the client code 2 of 3 Uday S. Jagtap 1257-16-ITXA-19-C==.doc modification facility is often misused by the assessee to pass on losses to the investors, who may have sizable profit arising out of commodity trading against which such losses can be set off. The Revenue normally points out number of such instances of client code modifications as well as nature of errors in filling of the client code. At any rate, what can be taxed in the hands of the present assessee is the income escaping assessment. Even if the Revenue's theory of the assessee having enabled the clients to claim contrived losses, the Revenue had to bring on record some evidence of the income earned by the assessee in the process, be it in the nature of commission or otherwise. In the present case, the Assessing Officer has added the entire amount of doubtful transactions by way of assessee's additional income, which is wholly impermissible. We do not know the fate of the individual investors in whose cases, the Revenue could have questioned the artificial losses. Be that as it may, we do not think entertaining these appeals would serve any useful purpose.” ITA No. 1118/Mum/2024 (A.Y. 2012-13) Johnson Dye Works Pvt. Ltd. 11 13. By respectfully following the same, we hold that there is no infirmity in the order of the ld. CIT(A) in holding that the reassessment is invalid and bad in law. As we have quashed the reassessment proceeding, the grounds on merits raised by the revenue requires no further adjudication. 14. In the result, the appeal filed by the revenue is hereby dismissed. Order pronounced in the open court on 30.04.2025 Sd/- Sd/- (PRABHASH SHANKAR) (KAVITHA RAJAGOPAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated: 30.04.2025 Karishma J. Pawar (Stenographer) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "