M/S. AFFLUENCE SHARES AND STOCKS PVT. LTD V. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3)

SCA/20954/2017

AI Insights

The case involves M/S. Affluence Shares and Stocks Pvt. Ltd, a private limited company engaged in share broking, which challenged the reopening of its income assessment for the assessment year 2010-2011 by the Assistant Commissioner of Income Tax, Central Circle 2(3). The reopening was based on information received from the BSE indicating that the company had made numerous client code modifications during the financial years 2009-10 to 2011-12, which were suspected to be non-genuine and aimed at providing contrived losses or profits. The court dismissed the petitions, agreeing with the Assessing Officer that there was sufficient tangible material to justify the reopening of the assessment.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 694384 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 20-03-2018
• Assessment Year: misc
• Other Referred Cases: Chintan Jadavbhai Patel v. Income-tax Officer, Assistant Commissioner of Income-Tax v. Rajesh Jhaveri Stock Brokers Prvt. Limited, Inductotherm [India] Private Limited v. M. Gopalan, Deputy Commissioner of Income-Tax, Raymond Woolen Mills Limited v. ITO & Ors.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: MANISH BHATT; MAUNA BHATT
• Assessee Lawyers: B S SOPARKAR
• Keywords: Client Code Modification; Income escaped assessment; Reopening of assessment; Undisclosed income
• Section: 147; 148; 143(1); 143

Judgement Text

"C/SCA/20954/2017 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION No. 20954 of 2017 With R/SPECIAL CIVIL APPLICATION No. 21759 of 2017 With R/SPECIAL CIVIL APPLICATION No. 21760 of 2017 With R/SPECIAL CIVIL APPLICATION No. 21761 of 2017 ============================================================== M/S. AFFLUENCE SHARES AND STOCKS PVT. LTD Versus ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3) ============================================================== Appearance : Mr B S SOPARKAR, Advocate for the PETITIONER(s) No. 1 Mr MANISH BHATT, Sr Advocate with Mrs MAUNA M BHATT, Advocate for the RESPONDENT(s) No. 1 ============================================================== CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Mr. JUSTICE B.N. KARIA 20th March 2018 COMMON ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) All these four petitions arise in the common factual background. We may record the facts from Special Civil Application No. 20954 of 2017. The petitioner has challenged notice dated 29th March 2017 issued by the respondent-Assessing Officer seeking to re-open the petitioner’s assessment for AY 2010-2011. The petitioner is a private limited company and is engaged in the business of share broking. For the assessment year 2010-2011, Page 1 of 11 C/SCA/20954/2017 ORDER the petitioner had filed return of income on 31st July 2010 declaring total income of Rs. 9,02,730/=. Such return was processed under Section 143 of the Income-tax Act, 1961 [“the Act” for brevity] and accepted without any scrutiny. To reopen such assessment, the Assessing Officer issued the impugned notice. In order to do so, he had recorded the following reasons : “In this case the return of income for A.Y 2010-11 was filed on 31/07/2010 declaring total income of Rs. 9,02,730/=. The return was processed under Section 143 [1] of the Act. The assessee company is a registered member [Code No. 3032] of BSE. This office subsequently received information from the BSE through the DDIT [Investigation] Unit 1 [2], Ahmedabad that the above named assessee / broker has made Client Code Modification in 11028 trades/contacts of various clients during the period 01.04.2009 to 31.03.2012. From the data obtained, it is seen that the assessee has made client code modification in number of trades contracts involving different clients during FY 2009-10 to 2011-12 and the total amount involved in client code modification is Rs. 70,00,62,400/=. Further analysis shows that during the year under consideration ie., in FY 2009-10, the assessee made client code modification in 2557 trades involving an amount of Rs. 20.43 Crores. It has been observed in number of cases that for making client code modification and thereby providing contrived losses/ profit normally the broker charges 0.5% to 1% of such losses/profits. 1.1 In this regard, it is mentioned that the DIT [I&CI] sought expert opinion from NSE to broadly distinguish a genuine CCM and non genuine CCM. As per NSE, the following constituted genuine CCM. Page 2 of 11 C/SCA/20954/2017 ORDER [1] Error due to communication and/or punching or typing such that original client code/name and the modified client code/name are similar to each other. [2] Modification within relatives. [3] Any similar genuine error. 1.2 Some of the most popular non genuine client code modification constituted as under :- [1] Percentage of modified traded value is significantly higher than the total traded value of any trading member/clients. [2] Number of modified traded is significant to total number of trades of any trading members/clients. [3] Profit/loss arising on account of all modification by trading members/client is significant in comparison to the profit/loss in the trades where no modifications have been carried out. [4] Profit/loss arising due to modification is significant. [5] Trades have been modified to unrelated parties. [6] Both buy and sell leg of different trades have been modified to same client. [7] The same sets of clients are observed to be making profit/loss due to the modifications carried out. [8] Total number of trade modifications increased before closing of the financial year. 2. These non genuine CCMs have been observed while analyzing the data in the case of assessee. The above detail/data clearly reveal that the assessee was indulged in providing contrived losses/profit to his clients for getting additional/extra commission income in addition to regular brokerage. The assessee Page 3 of 11 C/SCA/20954/2017 ORDER has not disclosed the above income in the return of income filed by him for the relevant assessment year. I have therefore reason to believe that the income exceeding Rs. 1 lac [even if it is considered 0.5% of the CCM] has escaped assessment within the meaning of Section 147 of the Act. A notice under Section 148 of the Act is therefore required to be issued to the assessee for the year under consideration ie., A.Y 2010-11.” Upon being supplied with such reasons, the petitioner raised objections to the notice of reopening under a communication dated 29th May 2017. These objections, however, were rejected by the Assessing Officer by an Order dated 8th August 2017. Hence, these petitions. Taking us through the reasons recorded, counsel for the petitioner submitted that the Assessing Officer had no tangible material to enable him to form a belief that income chargeable to tax has escaped assessment. The Assessing Officer has proceeded on presumption and surmises before coming to the conclusion that the assessee had earned undisclosed income. Counsel submitted that reopening of the assessment cannot be permitted for roving or fishing inquiries or on the basis of mere suspicion. In this respect, counsel relied on a judgment of Division Bench of this Court in the case of Chintan Jadavbhai Patel v. Income-tax Officer, reported in [2017] 246 Taxman 361 [Gujarat] in which the Court Page 4 of 11 C/SCA/20954/2017 ORDER was of the opinion that there was no tangible material available with the Assessing Officer to even prima facie show that the assessee had received any money in cash by way of sale consideration of the land. The Court eventually quashed the notice of reopening. Learned counsel Shri Manish Bhatt for the Department, however, opposed the petition contending that the Assessing Officer has recorded proper reasons. On the basis of reliable material on record, he formed a belief that income chargeable to tax in the hands of the assessee had escaped assessment. The return filed by the assessee was accepted without scrutiny. The notice of reopening is, therefore, valid. We may recall that the return filed by the assessee was processed under Section 143 [1] of the Act and accepted without scrutiny. Since in such a case, as held by the Supreme Court in the case of Assistant Commissioner of Income-Tax v. Rajesh Jhaveri Stock Brokers Prvt. Limited, reported in [2007] 291 ITR 500 [SC], the Assessing Officer had not formed any opinion, in the context of reopening of the assessment, the principle of change of opinion would have no applicability. At the same time, even in the case where return is accepted without scrutiny, reopening of assessment cannot be made in absence of tenable material at the Page 5 of 11 C/SCA/20954/2017 ORDER command of the Assessing Officer enabling him to form a belief that income chargeable to tax has escaped assessment. In case of Inductotherm [India] Private Limited v. M. Gopalan, Deputy Commissioner of Income-Tax, reported in [2013] 356 ITR 481 [Guj.], Division Bench of this Court in this context had made the following observations :- “16. It would, thus, emerge that even in case of reopening of an assessment which was previously accepted under section 143(1) of the Act without scrutiny, the Assessing Officer would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. However, as held by the Apex Court in the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., (supra) and several other decisions, such reason to believe need not necessarily be a firm final decision of the Assessing Officer. 17. If we accept such proposition, the petitioner's apprehension that the Assessing Officer would arbitrarily exercise powers under section 147 of the Act to circumvent the scrutiny proceedings which could not be framed in view of notice under section 143(2) having become time barred, would be taken care of. To reiterate, even for reopening of an assessment which was accepted previously under section 143(1) of the Act without scrutiny, the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment.” Page 6 of 11 C/SCA/20954/2017 ORDER With this background in mind, we may analyze the reasons recorded by the Assessing Officer. As per these reasons, according to him, the assessee had during the period between 1st April 2009 to 31st March 2012 carried out as many as 11028 client code modifications [“CCM” for short]. The total amount involved in such CCMs was close to Rs. 70 Crores. During the financial year 2009-2010 ie., relevant to AY 2010-2011, the assessee had made as many as 2557 CCMs involving total amount of Rs. 23.43 Crores. The Assessing Officer noted that it is observed that, “it is observed that in number of cases, for making such CCMs and thereby providing contrived losses or profit, normally, the broker charges 0.5% to 1% of such losses/profits.” The reasons further record that Investigating Wing of the Department had sought expert opinion from National Stock Exchange to broadly distinguish between a genuine and non genuine CCM. As per the Stock Exchange, the following categories would fall within genuine CCMs viz., [i] Where error occurs due to communication or punching or typing so that the original client codes or names are similar to each other; [ii] Modifications within relatives; [iii] Such similar genuine error. Page 7 of 11 C/SCA/20954/2017 ORDER As against this, the non-genuine instances of CCMs are those where percentage of modified traded value is significantly higher than the total traded value of any trading member or client; number of modified trades is significant to the total number of trades of any trading member or clients; profit or loss arising out of the modified transactions is significant in comparison with non modified transactions; profit or loss arising due to modification is significant; modifications in relation to unrelated parties, etc. Analysis of the data in case of the assessee showed that the CCMs were non genuine. According to the Assessing Officer, therefore, this showed that the assessee was indulging in providing contrive losses or profits to his clients by charging commission in addition to regular brokerage which he had not disclosed in the return of income. Since such undisclosed income was likely to exceed Rs. 1 lakhs, he was of the opinion that reopening of assessment was necessary. It is undoubtedly true and settled through series of judgments that reopening of the assessment cannot be made on mere suspicion for fishing or roving inquiries. The term “reason to believe” signifies entirely different meaning then “reason to suspect.” The Assessing Officer must have some tangible material at his command to enable him to form a belief that income Page 8 of 11 C/SCA/20954/2017 ORDER chargeable to tax has escaped assessment. Nevertheless, the concept of reason to believe cannot be equated with actual additions being made or sustained which can be only within the realm of assessment. The Supreme Court in case of Rajesh Jhaveri Stock Brokers Prvt. Limited [Supra] in this context had made the following observations : “Section 147 authorizes and permits the Assessing Officer to assess or re-assess income chargeable to tax, if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Limited v. ITO [1991] ITR 662, for initiation of action under section 147(a) [as the provision stood at the relevant time] fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the Page 9 of 11 C/SCA/20954/2017 ORDER escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction [see ITO v. Selected Dalurband Coal Company P Limited [1996 217 ITR 597 (SC); Raymond Woolen Mills Limited v. ITO [1999] 236 ITR 34 (SC)].” In case of Raymond Woollen Mills Limited v. Income Tax Officer & Ors., reported in [1999] 236 ITR 34 (SC), the Apex Court has held and observed as under : “In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the Court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceedings. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.” Page 10 of 11 C/SCA/20954/2017 ORDER Going by the reasons recorded by the Assessing Officer, the assessee had during the year under consideration, carried out 2557 CCMs representing total value of Rs. 21.43 Crores. The CCMs were analyzed. Different instances of non genuine and genuine client code modifications, as per the input provided by NSE were applied, which according to the Assessing Officer showed that the CCMs in question were not genuine and from which the assessee would have earned sizeable unaccounted income as a broker. At this stage, we do not find that the reasons recorded lack validity or that the Assessing Officer could not have formed a belief that income chargeable to tax had escaped assessment. Whether the additions can be made or eventually made by the Assessing Officer would sustain or not is not germane for our purpose. At this stage, we are mainly concerned with the question whether re- assessment should be allowed to go ahead. In the result, all the four writ petitions are dismissed. Notice issued in each case stands discharged. Interim relief vacated. Needless to state that we have not made any observations with respect to the proposed additions. All the issues on merit of re- assessment are kept open. {Akil Kureshi, J.} {B.N Karia, J.} Prakash Page 11 of 11 "