By TIOL News Service

CHANDIGARH, MAY 09, 2018: THE ISSUE IS - Whether reopening proceedings initiated on basis of 'borrowed satisfaction' should not be nullified on ground of jurisdiction, if there was independent application of mind by ITO on the information received from Investigation Wing. YES IS THE VERDICT.

Facts of the case:

The Assessee, an individual, was engaged in trading in shares through his broker M/s Competent Finman Pvt. Ltd. During AY 2009-10, he filed his return showing NIL income, after claiming trading loss of Rs.46,56,820/-. In the meanwhile, the PR DIT(Investigation) conducted a survey at the premises of twelve brokers, wherein it was found that Client Code Modification was being used as a tool for tax evasion. The losses were being shifted out of the profit of the clients. Consequently, a notice u/s 148 was served upon the assessee, on the ground that he had been engaged in trading of shares through his broker M/s Competent Finman Pvt. Ltd. and during the relevant period had shifted-in losses amounting to Rs. 46,56,820/- through his broker, which resulted in reduction of his profits from trading in shares. Opposing the said notice, the assessee raised objections as to the jurisdiction of CIT in issuing notice u/s 148. These objections were rejected and the CIT held that there was sufficient material to form belief that taxable income of assessee had escaped assessment.

High Court held that,

++ the letter from the PR DIT(Investigation) addressed to the Chief CIT, referred to survey report in respect of Client Code Modification being forwarded regarding the dissemination of beneficiary clients who have taken losses and shifted out profits. The letter explains that modification of the client code is a practice under which brokers change the client code in sale and purchase orders of securities after the trades are conducted. It further rightly explains that while it is permissible to rectify inadvertent errors, there were concerns that modifications could be made to manipulate the activities in the market. Thus, for instance, if a particular transaction is undertaken in the name of a client, it cannot be shifted to the name or account of another client unless it was on account of an inadvertent error. Accordingly, details regarding alleged sham transactions between the assessee and his broker M/s Competent Finman Pvt. Ltd. was recorded. What is important to note is that within a period of about nine months, there were 74 modifications. This undoubtedly justifies the need to investigate the transactions and the manner in which they have been recorded by the broker;

++ the next question is whether the CIT considered this evidence himself or whether he initiated the proceedings for re-opening on the directions of Pr DIT(Investigation). A reading of the reasons as a whole indicate that the CIT applied his own mind to the information furnished to him and was satisfied himself that the material is sufficient to warrant initiation of proceedings u/s 147 and 148. The reasons do record that information has been received. They also record the nature of the information, namely that it pertained to the modus operandi adopted by the share brokers during Modification of Client Code. The Assessee's counsel relied upon the letter, by which the CIT sought certain information from the broker of assessee, including the Client Code of assessee, the number of times the Client Code had been changed, the total investment made and a complete copy of the contract notes and copy of the account of the assessee in the books of the broker. She contended that the information having been sought after the reasons indicated that the decision to re-open the assessment was not passed on any material. This would be a narrow reading of the letter, and infact this indicates that the AO intends considering the case on merits before passing the final assessment order. It is evident that the AO before issuing the notice had applied his mind independently to the information received from the Investigation Wing. Thus although the information may be borrowed the satisfaction was not;

++ it is also not necessary that the AO must know or be certain that income has escaped assessment. The AO must have reason to believe it has. He may finally accept the assessee's case. That would make no difference to the validity of the invocation of sections 147 and 148. In Income-Tax Officer Vs. Purushottam Das Bangur and another, the Supreme Court rejected the contention of assessee that the information received from the Deputy Director, Directorate of Inspector (Investigation) was not a definite information and should not be acted upon by the ITO for taking action u/s 147. It was held that the information contained in the letter could form the basis for forming an opinion that there was reason to believe that income had escaped assessment without any further verification. This judgment clearly applies to the present case. In the present case, there is a direct nexus between the material coming to the notice of the AO, namely the said material submitted by the Investigation Wing, and the formation of the AO's belief that there has been escapement of income. The Assessee's counsel's contention that information from the broker was sought after issuance of the notice shows that there was no enquiry prior to the issuance of the notice and hence, the proceedings are bad, is not well founded. Once it is held that the proceedings u/s 147 and 148 have been validly initiated, the AO is not prevented from looking into the matter further, including by gathering further information. He in fact is bound to do so;

++ this brings to Assessee's counsel's next contention that the satisfaction recorded by Pr CIT u/s 151 was mechanical. However, from a perusal of the record, it is evident that the section has been duly complied with and he has not signed on the dotted line. If he approves the reasons he is not bound to reiterate the same. That would be an empty formality. Reasons to believe are there. The reasons are based on tangible material. The return and account books of assessee had not undergone scrutiny at the time of assessment. The information is specific and not vague. A reasonable person can form an opinion on the basis of the material. The information received could form the basis of reason to believe that income has escaped assessment and the re-opening is not on mere suspicion. Hence, the assumption of jurisdiction is in accordance with law.

(See 2018-TIOL-856-HC-P&H-IT)