Reasons for reopening were found to be nonexistent, and section 292B cannot be used to remedy the problem

Fact and issue of the case

The relevant facts germane to the adjudication of jurisdictional issue are as follows:

The assessee-company is engaged in the business of dealing in shares and securities in its own name and also acting as sub-brokers. The assessee company filed its return of income on 30.09.2010 declaring income at Rs.28,95,180/- for Assessment Year 2010-11 in question. Subsequently, certain information were statedly received by the AO from the office of Principal Director of Income Tax (Inv.) Ahmedabad vide letter dated 08.03 .2016 that assessee has under-reported its taxable income to the extent of Rs.21,31,154/- for Assessment Year 2010-11 by misusing the ‘client code modification’ (CCM) facility available for correction of punching mistakes. Consequently, the case was reopened under Section 147 after recording of reasons and obtaining necessary approval from the superior authority. A notice under Section 147 was issued on 27.03.2017 and duly served on the assessee in this regard. The Assessing Officer subsequently issued corrigendum on 14th December, 2017 to rectify certain mistakes occurred in the reasons originally recorded.

The reasons for issuance of notice under Section 148(1) for reopening of assessment under Section 147 of the Act for Assessment Year 2010-11 as recorded under Section 148(2) of the Act is reproduced hereunder:

“The assessee is a company filed its return of income on 30.09.2010 declaring income of Rs.28,95,190/-. The details of the directors of the assessee company obtained from records are hereunder:

Thereafter, the return was processed under 143(1) of the I.T. Act. Subsequent to the processing completed U/s 143(1), information through email was received on 14/03/2016 from Asstt. Director of Income Tax [Investigation], Unit 1(3), Ahmedabad by which a Survey Report was disseminated in cases of beneficiary clients who have taken contrived losses & shifted out profits using Client Code Modification.

It is a detailed report of 589 pages. 1 have gone through the report and gathered that Client Code is a unique code which is assigned by a broker to its clients, A broker can issue just one code to a client. Client Code Modification means modification / change of the client codes after execution of trades. Vide Circular no. SMD/POL1CY/Cir-/03 dated February 6, 2003 SEBI mandated that the stock exchanges shall not normally permit changes in the client code except to correct for genuine mistakes. The client code modifications permit brokers to rectify human errors when a client inadvertently provides a wrong code or when a wrong code is punched in by the broker while executing the trade. The broker is allowed to change it between 3.30 pm and 4 pm to rectify a genuine error that may have occurred while entering the code. The facility ensures smooth functioning of the system and is to be used as an exception rather than routine. Client code modification means modification of client code after the execution of trade.

Over a period of time, some persons, in connivance with brokers started using Client Code Modifications for purposes other than genuine errors. Contrary to its motive, CCM facility was being misused and brokers transferred gains or losses from one person to another by changing the code, in the garb of correcting an error. These gain or loss-book entries were then used to evade taxes.

Observation of the court

In the light of aforesaid discussion, we hold that impugned notice issued under Section 148 suffers from inherent fundamental defects and does not meet the requirement contemplated under Section 147 of the Act. The notice issued under Section 148 is thus null and void and as a sequel thereto, re‑ assessment proceedings carried out in the instant case is without jurisdiction. Hence, in our considered opinion, the Assessing Officer has misdirected himself in law in initiating the re-assessment proceedings without any legal foundation.

In this view of the matter, impugned assessment made by the Assessing Officer under Section 143(3) r.w. Section 147 of the Act is liable to be set aside and cancelled. We do so accordingly.

As we have held that notice under Section 148 and re-assessment order under Section 147 is not sustainable in law. All other grounds raised by the assessee in the present appeal are rendered infructuous and academic and therefore does not call for adjudication thereon.

In the result, the appeal of the assessee is allowed.