MANMOHAN DAULAL RATHI,MUMBAI V. WARD 23(2)(6), MUMBAI

ITA 868/MUM/2024

AI Insights

The case revolves around an appeal by Manmohan Daulal Rathi against the order of the CIT(A), which upheld the assessment made by the Assessing Officer (AO) regarding alleged tax evasion through client code modification. The AO had issued a notice under section 148 of the Income-tax Act based on information from the Addl. DIT (Inv), Ahmedabad, suggesting that the assessee had benefited from client code modifications to book artificial losses and reduce tax liability. The CIT(A) upheld the AO's decision, leading to the present appeal. The Tribunal, after examining the evidence and the legal precedents, particularly the decision of the Bombay High Court in Coronation Agro Industries Ltd. vs. DCIT, found the AO's actions to be without jurisdiction as they lacked a reasonable basis to believe that income had escaped assessment due to the alleged modifications.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 473972 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Other Referred Cases: Coronation Agro Industries Ltd. vs. DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital Gains; Reason to believe; Bogus
• Section: 147; 148; 271(1)(c); 133A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH MUMBAI BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 868/MUM/2024 Assessment Year: 2010-11 Manmohan Daulal Rathi, J.K. Enterprises – 342, 3rd floor, Kalbadevi Road, Mumbai – 400 002 (PAN : AACPR2404H) Vs. Ward 23(2)(6), Mumbai (Appellant) (Respondent) Present for: Assessee : Ms. Ridhisha Jain, CA and Shri Karan Jain, Advocate Revenue : Ms. Monika H. Pande, Sr.DR Date of Hearing : 31.12.2024 Date of Pronouncement : 24.03.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide order no. ITBA/NFAC/S/250/2023-24/1060329879(1), dated 31.01.2024 passed against the assessment order by the WARD 18(2)(3), Mumbai, u/s. 147 r.w.s. 144 of the Income-tax Act (hereinafter referred to as the “Act”), dated 13.12.2017 for Assessment Year 2010-11. 2. Grounds taken by the assessee are reproduced as under: “1. On the facts and in the circumstances of the case and in law the Hon’ble CIT(A) erred in upholding that issue of notice u/s. 148 of the IT Act 1961 by the Ld AO is valid and the reasons assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 2 ITA No.868/MUM/2024 Manmohan Daulal Rathi, AY 2010-11 2. On the facts and in the circumstances of the case and in law the Hon’ble CIT(A) erred in upholding the ex-parte order passed u/s. 144 of the IT Act 1961 by the Ld AO without giving proper opportunity and the reasons assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 3. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding addition of Rs.21,98,570/- made by the Ld AO to the returned income by treating genuine loss on purchase and sale of shares as ingenuine by holding that the appellant is beneficiary of artificial loss booked through client code modification and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 4. On the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the penalty initiated by the Ld. AO u/s. 271(1)(b) & u/s 271(1)(c) of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.” 3. Facts as culled out from records are that assessee filed his return of income on 25.05.2010 reporting total income at Rs.91,52,500/-. Ld. Assessing Officer received information from Addl. DIT (Inv), Ahmedabad that assessee has adjusted an amount of Rs.21,98,750/- against his income through client code modification by shifting of losses relevant to the Assessment Year. Based on this information, notice u/s.148 was issued on 30.03.2017. On the reasons to believe recorded by the ld. Assessing Officer, assessee submitted that allegations by the ld. Assessing Officer, of assessee being a beneficiary of availing benefit of Rs.21,98,750/- on account of client code modification through Tirupathi Equity Ltd., is baseless, null and void. The reasons to believe, recorded are reasons to suspect and are therefore bad in law. Ld. Assessing Officer noted that a survey u/s.133A was carried out by Addl. ADIT (Inv), Ahmedabad at the premises of 12 brokers and few of their clients across the country. From the documents and computer backups seized from the said survey operations, it was ascertained that these clients had taken fictitious profits to cover up their undisclosed income or set off these profits against losses. 3 ITA No.868/MUM/2024 Manmohan Daulal Rathi, AY 2010-11 3.1. In this respect, it is important to take note of the reasons to believe, recorded by the ld. Assessing Officer for the purpose of impugned re-assessment proceedings which are taken from para – 2 of the said order. “The Addl. DIT (Inv) Unit -1, Ahmadabad through E-Mail shown that the assessee Shi Milan Kapadia has suppressed his income to the extent of Rs. 1,73,640 by way of booking loss through client Code modification entry obtained from Mis. Tirupati Equities Ltd relating to AY 2010-11 The Ahmadabad Directorate of Investigation carried out Survey u/s. 133A of the Income tax Act 1961 at the premises of 12 brokers and few of their client across India The losses and profits were given to different clients/beneficiaries according to their requirements. These clients had taken fictitious losses to set off against their profits with a view to reduce their tax liability as well as took fictitious profits to cover up their undisclosed income or set off these profits to huge losses The above assessee is one of the beneficiaries availed the benefit of such transaction from M/s Tirupati equities Ltd to the tune of Rs 21.98.750/- Since the assessee has not disclosed all material facts forty & truly in respect of his income returned this case comes in the ambit of Sec. 147 of Income-tax Act, 1961 Therefore, I have reason to believe that, income chargeable to tax to the extent of Rs.21,98,750/- and after verifying any other income that may be detected during the course of assessment proceedings would be chargeable to tax also will be escaped assessment within the meaning of provision of Sec 147 of Income Tax Act, 1961 Therefore it is proposed to reopen the assessment for the AY 2010-11 by issues of notice U/s 148 of the IT Act.” 3.2. Ld. Assessing Officer rejected the objections raised by the assessee on the initiation of the re-assessment proceedings. Against the show cause notice issued by the ld. Assessing Officer for furnishing explanation and documentary evidences, to justify the claim of the assessee, assessee submitted that membership of Tirupathi Equities Ltd. was surrendered and last trade executed by it was on 26.03.2009. To corroborate this, assessee furnished a letter issued by Securities Exchange Board of India (SEBI) which confirmed this fact. Extract of the said letter is reproduced as under: 4 ITA No.868/MUM/2024 Manmohan Daulal Rathi, AY 2010-11 “Reply to Query: The surrender of membership of M/s. Tirupati Equities Limited (INB231151334/INF231151334) was approved by NSE on December 21, 2009 and the last trade of the member was on March 26, 2009, It is, also informed that SEBI vide its letter dated February 10, 2010 had approved the surrender of registration of the broker w.e.f. December 21, 2009.” 3.3. On the strength of this confirmation by SEBI, assessee submitted that he could not have carried out any transaction through Tirupathi Equities Ltd. during the year under consideration as alleged by the ld. Assessing Officer in the reasons so recorded. However, submissions made by the assessee were rejected and addition was made. 4. From the order of the ld. CIT(A), it was pointed out that conclusion drawn by ld. CIT(A) are based on surmises and presumptions without any cogent material brought on record. It is pointed out that ld. CIT(A) notes on page 6 that “The benefit obtained by the appellant may have been organised by M/s. Tirupathi Equities Ltd., through any other brokers. It is not necessary that M/s. Tirupathi Equities Ltd., itself should have executed the orders of purchase and sale on behalf of the appellant……There are several cases in the recent past, where certain assessee’s have claimed bogus exemption u/s.10(38) of the Act on the long term capital gains (ltcg)……There were many cases, where the purchase of the shares was shown to have been made in cash and the shares were stated to be lying in the common pool of the trader/broker. Thus, it is not necessary that the appellant should have taken over the loss of any of the clients of M/s. Tirupathi Equities Ltd., The said concern may have simply facilitated obtaining of such loss from any other brokers/entities.” (emphasis supplied by us by underline) 4.1. From the above observations of ld. CIT(A), it is evident that the ground raised by the assessee was dismissed on surmises and 5 ITA No.868/MUM/2024 Manmohan Daulal Rathi, AY 2010-11 presumption with any specific fact brought on record with corroborative evidence against the assessee. 4.2. Further to this, reliance was placed by the assessee on the decision of Hon’ble Jurisdictional High Court of Bombay in the case of Coronation Agro Industries Ltd. vs. DCIT in writ petition No.2627 of 2016, dated 23.11.2016, wherein issue relating to benefit obtained from a client code modification was dealt by the Hon’ble Court. In para 3 of this judgement, in respect of reasons recorded for re-opening, it is noted that “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.” In para-4, while concluding Hon’ble Court noted that there is no link with the material on record to conclude that client code modification was done by the broker of the assessee. Prima facie, according to the Hon’ble Court, this appears to be a case of reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. Accordingly, owing to lack of reasons to believe, the notice issued u/s.148 was held to be without jurisdiction. Relevant para-4 and 5 from the said judgement are extracted below: “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 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. 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 to tax has escaped assessment.” 6 ITA No.868/MUM/2024 Manmohan Daulal Rathi, AY 2010-11 5. In the present case, before us, from the reasons to believe recorded by the ld. Assessing Officer, as extracted above, we note that there is nothing specific as to which client code was modified against that of the assessee and against which scrip. Further, the letter issued by SEBI, confirming the status of the broker, who is alleged to be the broker through whom assessee has undertaken the transaction for availing the benefit, confirms that its activity was surrendered and therefore no transaction could have been undertaken in the impugned year under consideration. 5.1 In these given set of facts and jurisprudence of Hon’ble Jurisdictional High Court of Bombay in the case of Coronation Agro Industries (Supra), we find that the addition made by the ld. Assessing Officer is not sustainable as it only reflects surmises and conjectures. Accordingly, we delete the addition so made. In the result, grounds raised by the assessee in this respect are allowed. 6. In the result, appeal of the assessee is allowed. Order is pronounced in the open court on 24 March, 2025 Sd/- Sd/- (Sandeep Gosain) (Girish Agrawal) Judicial Member Accountant Member Dated: 24 March, 2025 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 5 Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "