AI Insights
The case involves M/s. Hitesh Jawrilal Jain, the appellant, who challenged the reassessment order for the assessment year 2010-11. The reassessment was initiated based on information from the Directorate General of Income Tax (DGIT) (Investigation), Ahmedabad, alleging that the assessee had obtained accommodation entries through Client Code Modification (CCM). The Assessing Officer (AO) added a fictitious loss of Rs. 4,63,904 to the assessee's income, which was confirmed by the Commissioner of Income Tax (Appeals). The Tribunal found procedural lapses in the reassessment process, including the failure to provide reasons for reassessment in a timely manner and the lack of a speaking order on the objections raised by the assessee. The Tribunal also noted that the AO relied on borrowed satisfaction rather than his own, which is against the principles laid down by the Supreme Court.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 301359 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-08-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
SMC
Next Hearing Date
12-07-2023
Assessment Year
2010-2011
Appeal Filed On
27-04-2023
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “SMC”, MUMBAI SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No. 1450/M/2023 Assessment Year: 2010-11 M/s. Hitesh Jawrilal Jain, A-18, Nandan Co. Op. Hsg. Soc., 224, Veer Savarkar Marg, Mahim, Mumbai- 400 016 PAN: ABOPJ6744M Vs. Income Tax Officer, Ward-21(1)(4), Piramal Chambers, Lalbaug, Parel, Mumbai-400 012 (Appellant) (Respondent) Present for: Assessee by : Shri Ketan Vajani, A.R. Revenue by : Shri B. Laxmi Kanth, D.R. Date of Hearing : 13 . 07 . 2023 Date of Pronouncement : 29 . 08 . 2023 O R D E R Per : Kuldip Singh, Judicial Member: The appellant, M/s. Hitesh Jawrilal Jain (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 23.03.2023 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2010-11 on the grounds inter-alia that :- “OBJECTION AGAINST THE REASSESSMENT MADE IN VIOLATION OF THE PRINCIPLES OF LAW (a) On the facts and in the circumstances of the case, the Commissioner of Income- tax (Appeals) - NFAC, hereinafter referred to as the CIT(A), has erred in confirming the validity of the reassessment made by the assessing officer in violation of the principles of law. ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 2 (b) The appellant respectfully submits that the reassessment made in its case is made only on borrowed satisfaction of the assessing officer and therefore the same is not justified as per settled principles of law. The appellant also submits that the reassessment has been made in his case merely on conjectures, surmises and suspicions and therefore the same is not justified. (c) The appellant, therefore, prays that the impugned reassessment shall please be quashed. II. OBJECTION AGAINST ADDITION OF Rs. 4,63,904/- ON ACCOUNT OF ALLEGED FICTITIOUS LOSS ARISING OUT OF CLIENT CODE MODIFICATION (a) Without any prejudice to Ground - I above, the CIT (A) has erred in confirming the order of the assessing officer, wherein the assessing officer has made an addition of Rs. 4.63.904/- on account of alleged fictitious loss arising out of client code modification. b) Your appellant respectfully submits that the impugned addition is based merely on conjectures, surmises and suspicions and that the assessing officer has not brought any material on record to support the impugned addition. (c) Your appellant further submits that both the assessing officer and the CIT (A) has erred in not appreciating various factual aspects of the matter and have passed their order on the basis of irrelevant and incorrect factors. (d) In view of the above, the appellant submits that the impugned addition is not justified. The appellant, therefore, prays that the same shall please be deleted.” 2. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is an individual tax payer into the business of trading in future derivatives and options, trading and speculations in shares. On the basis of information received from Directorate General of Income Tax (DGIT) (Investigation), Ahmedabad that assessee has obtained accommodation entries through Client Code Modification (CCM), during the year under consideration assessment was reopened by initiating the proceedings under section 147/148 of the Income Tax Act, 1961 (for short ‘the Act’) after recording the reasons for ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 3 reopening. Notice under section 148 dated 31.03.2016 was issued and in response thereto assessee attended the proceedings from time to time and filed necessary details. Reason for reopening was provided to the assessee which was disposed of vide order dated 14.12.2016. Declining the contentions raised by the assessee that CCM is permissible in case of genuine error and that the assessee has no access to the CCM, the Assessing Officer (AO) proceeded to hold that the assessee by trading in 30 scrips had derived income of Rs.2,60,037/- and by modifying the CCM converted the same into loss of Rs.2,03,867/- which is not possible in the normal circumstances, hence fictitious loss of Rs.4,63,904/- is added to the income of the assessee by framing the assessment under section 143(3) read with section 147 of the Act. 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal. 4. I have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. Ground No.1 5. At the very outset the assessee has challenged the validity of the reassessment on the ground that the AO has reopened the ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 4 assessment only on the basis of borrowed satisfaction which is based upon conjectures, surmises and suspicion. 6. The Ld. A.R. for the assessee challenging the validity of reassessment contended inter-alia that the reassessment in this case has been made in violation of the guidelines laid down by the Hon’ble Supreme Court in case of GKN Driveshafts Ltd. vs. ITO 263 ITR 19 (SC) that the assessee has not been provided with reasons recorded for reassessment within a reasonable time nor the objections raised by the assessee have been disposed of prior to the issuance of statutory notices; that reassessment has been made on the basis of borrowed satisfaction as received from investigation wing of Income Tax, Ahmedabad; that in the reason it is nowhere recorded that CCM was not on account of genuine mistake to be corrected by the broker of the assessee; that reassessment has been made on the basis of mere suspicion and the objections raised by the assessee have been disposed of by non speaking order. 7. However, on the other hand, to repel the arguments addressed by the Ld. A.R. for the assessee, the Ld. D.R. for the Revenue contended that for reopening the AO should have prima- facie material and having sufficient prima-facie material the AO has rightly reopened the assessment and relied upon the order passed by the Ld. CIT(A). 8. It is a matter of record that the assessment was reopened by the AO on the basis of information received from DGIT (Inv.), Ahmedabad. It is also not in dispute that notice under section 148 of the Act was issued on 31.03.2016 and in response thereto the assessee opted to treat his return of income already filed on ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 5 26.09.2010 as return in response to notice under section 148 of the Act. It is also not in dispute that the reasons recorded were supplied to the assessee on 06.09.2016 i.e. after issuance of the notice under section 148 of the Act on 31.03.2016 which is extracted as under for ready perusal: “ OFFICE OF THE Asst. Commissioner of Income Tax-21(1), Mumbai Room No.116, 1 st Floor. Piramal Chambers, Lalbaug, Mumbai-400012 Tel 24124568 e-mail id. mumbai.deit211@incometax gov.in No ACIT-21(1)/Re-assessment/2016-17 Date: 06.09.2016 PAN: ABOPJ6744M To Mr. Hitesh B. Jain, A-18 Nandan-224, Veer Savarkar Marg, Mahim Mumbai-400016 Sir. Sub: Re-assessment proceedings for AY 2010-11 in the case of Mr. Hitesh B. Jain-reg- Please refer to the above. In this case the assessment was reopened u/s 147 by issuing notice u's.148 of LT Act dated 31:03 2016. In response to the same, M/s. Rohit Savla & Associates CA's your representative vide letter dated 07.04.2016 which is received in this office on 07.04.2016 has stated that the return of income originally filed on 26.09.2010 may be treated as return in response to notice u's 148 of the IT Act Further, he has also asked to provide the reasons for which the case was reopened. In this regard it is stated that your case is reopened for the following reasons- “In this case information was received regarding tax evasion through client code modification FY 2009-10 According to the same, the assessee is beneficiary of entries fictitious losses/profits booked by brokers by using the facility of client code modification. The brokers used the facility of client code modification to their requirement The beneficiaries had taken fictitious losses to set off against their profits with a view of reduce tax liability Fictitious profits entries were taken to cover p unclosed income or to set of these profits against huge ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 6 losses. The net reduction in income due to client code modification is Rs 4.63,905/- Based on the above facts I have reason to believe that income has escaped assessment in the case of assessee and hence the assessee's case needs to be reopened for AY: 2010-11 by sue of notice u/s 148. In view of the above I have reason to believe that the income which hay escaped assessment amount to likely to mount to more than Rs 1 lakh Hence to issue ice to 14% of the IT Act 961 for the A1 2010-11 approval of PCIT-21. Mumbai is needed as per the provision of section 1512) the Tax Act. 1961 It is also stated that notice u/s. 148 of the IT Act, 1961 was issued after obtaining prior approval of Pr CIT 21. Mumbai.” 9. Thereafter the assessee filed objections against the reasons for reopening of the assessment dated 09.12.2016 available at page 24 to 29 of the paper book. The AO disposed of the objections vide order dated 14.12.2016 available at page 31 to 32 of the paper book, operative part of which is extracted as under: “3.You have raised the objection on the re-opening of your case for AY 2010-11, in view of the order passed by Hon'ble Bombay High Court in writ petition no. 2627 of 2016 in the case of M/s Coronation Agro Industries Ltd. Vs DCIT-6(2)(1), Mumbai. On perusal of this order, it is observed that the Hon'ble Bombay High Court has given the interim relief to the petitioner in writ petition no. 2627 of 2016. So far as the objection raised by you on the basis of above interim order of Hon'ble Bombay High Court, it is pertinent to mention here that on the identical issue, Hon'ble Bombay High Court in the recent order dated 07 12.2016 in writ petition no. 2495 of 2016 in the case of M/s Paramount Enterprises Vs ACIT 20(2), Mumbai, held that: "We note that the letter dated 28 March 2016 addressed by the Principal Commissioner of Income Tax [enclosing the communication dated 8 March, 2016 from the Principal Director of Income Tax (Investigation), Ahmedabad] only states reopening of cases for financial year 2008-09 is getting barred by limitation of time on 31 March 2016 and therefore to give top priority to these cases for necessary action. This observation cannot lead to the conclusion that the assessing officer is acting on directions of his superior All that the above observation means is that the assessing officer should expeditiously examine the facts, and if necessary, act before 31 March 2016 Therefore, we do not find merit in the above submission.” ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 7 Further, in para 11 of the above order, Hon'ble Bombay High Court further held that "We are satisfied that the assessing officer on the basis of reasons recorded to issue impugned notice dated 30 march 2016, had reasonable belief to come to the conclusion that income chargeable to tax has escaped assessment. The petitioner can during the assessment proceedings establish that no amount has escaped assessment." 4. In view of the above, your objections is rejected and disposed off. You are requested to submit the reply of the show caused issued dated- 02.12.2016 latest by 19.12.2016, failing which, it will be assumed that you have nothing to say and the case shall be disposed on merit.” 10. When I examine the contentions raised by the assessee that reassessment proceedings initiated by the AO under section 147/148 of the Act are not valid being in violation of guidelines of guidelines laid down by Hon’ble Supreme Court in case of GKN Driveshafts Ltd. (supra), the contention raised by the assessee is sustainable. 11. Hon’ble Supreme Court of India in case of GKN Driveshafts Ltd. (supra) while deciding the issue in controversy as to how and when the reasons recorded are to be supplied to the assessee and thereafter as to how the objections filed by the assessee are to be disposed of by returning findings: “There was justifiable reason to interfere with the under under challenge. However, it was clarified that when a notice under section 145 listed the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing notice. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order In the instant case, as the reasons had been disclosed in the proceedings, the Assessing Officer so dispose of the objections, filed by passing a speaking order before proceeding with the assessment.” ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 8 12. In view of the decision rendered by the Hon’ble Supreme Court in case of GKN Driveshafts Ltd. (supra) the AO was bound to furnish the reasons to the assessee within a reasonable time and thereafter the assessee was at liberty to file objections to the issuance of notice which were bound to be disposed of by passing a speaking order. 13. In the instant case notice under section 148 of the Act was issued on 31.03.2016 and thereafter assessee immediately opted vide letter dated 07.04.2016 to treat his original ITR dated 26.09.2010 as reply to the notice under section 148 of the Act. However, the AO has not provided “the reasons recorded” to the assessee till 06.09.2016, despite the fact that the assessee had made a specific request for supply of reasons recorded vide letter dated 07.04.2016 available at page 20 of the paper book. The AO has actually provided the reasons recorded on 06.09.2016 which cannot be a reasonable time by any stretch of imagination even. 14. Thereafter the AO has rejected/disposed of the objections filed by the assessee in a cursory manner without passing any speaking order by relying upon the decision rendered by Hon’ble Bombay High Court in case of M/s. Coronation Agro Industries Ltd. vs. DCIT in writ petition No.2627 of 2016 cited as (2017) 82 taxmann.com 75 (Bombay). 15. I am of the considered view that rejecting the objections filed by the assessee by passing non speaking order merely by relying upon the decision rendered by Hon’ble Bombay High Court without going into the facts of the case is not permissible under the law. Because in the instant case the assessee has not been supplied ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 9 with “reasons recorded” within a reasonable time rather after five months from the date of making request for supply of the reasons. Reasons recorded are mandatorily required to be supplied to the assessee within reasonable time and are required to be disposed of by way of speaking order as per the decision rendered by Hon’ble Supreme Court in case of GKN Driveshafts Ltd. (supra). 16. Furthermore, reasons recorded need to be supplied to the assessee prior to the issuance of the statutory notice under section 143(2) and 142(1) so as to provide effective opportunity to the assessee to raise objections but in the instant case the AO has not supplied the reasons recorded within a reasonable time nor he has disposed of the same by passing a speaking order which makes the reopening invalid. 17. Furthermore, when I examine the reasons recorded by the AO for reopening it is apparently clear that the AO has not applied his mind for reopening the assessment rather relied upon the borrowed satisfaction/information received from DGIT (Inv.), Ahmedabad. Even in the reasons recorded it is nowhere recorded by the AO that the CCM was not made by the broker of the assessee on account of genuine mistake. It is a settled principle of law that CCM can be made in case of genuine mistake but these facts have never been examined by the AO if the CCM was for genuine reasons or for malafide reasons in order to evade the tax or otherwise. Hon’ble Bombay High Court in case of PCIT vs. Shodiman Investments (P.) Ltd. (2018) 93 taxmann.com 153 (Bombay) held that “Where Assessing Officer had issued a reassessment notice on basis of intimation from DDIT (Inv.) about ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 10 a particular entity entering into suspicious transactions, this was clearly in breach of settled position in law that re-opening notice has to be issued by Assessing Officer on his own satisfaction and not on borrowed satisfaction”. 18. In the instant case reason itself shows that the assessment has been reopened merely on the basis of information received from DGIT (Inv.). So the reassessment initiated by the AO also fails to withstand the judicial scrutiny. Reliance placed by the AO on the decision rendered by Hon’ble Gujarat High Court in case of Sahakari Khand Udyog Mandal Ltd. vs. ACIT 370 ITR 107 (Guj.) is misconceived which is not applicable to the facts of the case and circumstances of the case because in the instant case there was inordinate delay on the part of the AO to provide the reasons for reassessment. 19. In these circumstances time lines suggested by the Hon’ble Gujarat High Court in case of Sahakari Khand Udyog Mandal Ltd. (supra) is not applicable. Even otherwise AO was required to dispose of the objections by way of speaking order as has been held by Hon’ble Bombay High Court in case of Asian Paints Ltd. vs. DCIT 296 ITR 90 (Bom.) wherein it is held that disposal of objections by the AO has to be by way of speaking order. So in these circumstances, I am of the considered view that reopening of assessment by the AO is itself invalid. In view of the matter, ground No.1 is decided in favour of the assessee. Ground No.2 20. So far as question of making addition on merits is concerned, no doubt CCM is permitted in order to correct genuine mistake ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 11 during trading hours. The AO considered total number of transactions of the assessee resulting into CCM as 49 whereas the assessee has made total transactions of 17677 during the year as has been recorded at page 12 of the impugned order under the submissions of the assessee. So by taking into account the total transactions done by the assessee during the year under consideration CCM was made merely in 0.28% of the total transactions. Even otherwise the AO has not recorded any findings if the assessee has received any cash or paid any cash to any person for effecting this CCM or the CCM has been made with malafide intention at the instance of the assessee. The AO has not investigated the issue by calling the details from the broker of the assessee namely Manubhai Mangaldas Securities nor has issued any notice to the broker to verify the facts. 21. Co-ordinate Bench of the Tribunal in case cited as Dy. CIT vs. Kaizen Stock Trade (P.) Ltd. 191 ITD 222 (Ahd.) held that where CCM was in less than 1% of the total transactions carried out by the assessee such CCM could not be called a colourable device adopted for shifting out and shifting in profit & loss and as such deleted the addition. So in these circumstances the entire addition has been made by the assessee on the basis of conjectures and surmises which is not sustainable. In view of the matter, ground No.2 is decided in favour of the assessee. 22. In view of what has been discussed above, the appeal filed by the assessee is hereby allowed. Order pronounced in the open court on 29.08.2023. ITA No. 1450/M/2023 M/s. Hitesh Jawrilal Jain 12 Sd/- (KULDIP SINGH) JUDICIAL MEMBER Mumbai, Dated: 29.08.2023. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.
