The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessment cannot be reopened beyond four years merely on the basis of information concerning client code modification when the Assessing Officer has failed to record that the taxpayer did not fully and truly disclose all material facts necessary for the assessment.

The Bench of Pawan Singh (Judicial Member) and Girish Agrawal (Accountant Member) dismissed the department’s appeal challenging the relief granted to the taxpayer by the Commissioner of Income Tax (Appeals).

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The dispute pertained to Assessment Year 2010-11 and involved an addition of ₹13.48 lakh on the allegation that losses had been claimed through the misuse of the client code modification facility. A consequential addition of ₹26,961, representing alleged commission expenditure, was also made by the Assessing Officer.

The taxpayer had filed his return of income declaring a total income of ₹18.53 lakh. The assessment was subsequently reopened, and an order under Section 143(3), read with Section 147 of the Income Tax Act, was passed in March 2014, determining the total income at ₹24.37 lakh.

The Income Tax Department later received information from its Investigation Wing regarding alleged fictitious transfers of profits and losses through client code modifications. On the basis of this information, the assessment was reopened for a second time through a notice issued under Section 148 on March 29, 2016.

The Assessing Officer alleged that the taxpayer had claimed a loss of ₹13.48 lakh by misusing the client code modification facility. The second reassessment resulted in additions aggregating ₹13.74 lakh, taking the assessed income to ₹32.12 lakh.

The CIT(A), however, invalidated the reopening after observing that the notice had been issued more than four years after the end of the relevant assessment year. The appellate authority found that the Assessing Officer had not established that income escaped assessment because of the taxpayer’s failure to fully and truly disclose the material facts.

On the merits, the CIT(A) also noticed that the Assessing Officer’s own data indicated that the taxpayer had shifted losses out of his account and consequently reported a higher income than he would have reported had the client code modifications not occurred. It further found no evidence of any cash transaction or financial benefit received by the taxpayer.

Accordingly, the CIT(A) deleted the addition of ₹13.48 lakh as well as the consequential commission addition of ₹26,961. The Revenue subsequently approached the ITAT.

Before the Tribunal, the Revenue contended that the taxpayer had accepted that profits were earned using client code modifications and had not denied that modifications were made. It argued that the Investigation Wing had gathered specific material through surveys and analysis of data obtained from the National Stock Exchange.

The Revenue also maintained that the absence of a separate inquiry by the Assessing Officer would not invalidate the addition when tangible information was available from the Investigation Wing. According to the Department, the client code modification transactions constituted a colourable device for transferring fictitious profits and losses and reducing tax liability.

The Tribunal examined the reasons recorded by the Assessing Officer for reopening the assessment. Those reasons referred to information received from the Investigation Wing and stated that the taxpayer had undertaken modifications in trades through his broker, resulting in the alleged inflation of profit or loss by ₹13.48 lakh.

However, the ITAT found that the recorded reasons contained no reference to any failure by the taxpayer to fully and truly disclose the material facts necessary for the assessment.

The Tribunal explained that while Section 147 empowers an Assessing Officer to reassess income believed to have escaped assessment, the proviso applicable at the relevant time restricted reopening beyond four years where an assessment had already been completed under Section 143(3). Such a reopening could be undertaken only when the escapement of income resulted from the taxpayer’s failure to make a full and true disclosure.

In the present case, the Section 148 notice was issued on March 29, 2016, more than four years after the end of Assessment Year 2010-11. Moreover, an earlier reassessment had already been completed under Section 143(3), read with Section 147, on March 24, 2014.

The ITAT noted that information relating to the taxpayer’s transactions in shares and securities was disclosed in the return of income, computation of income and documents furnished during the earlier assessment proceedings.

The Assessing Officer had raised specific queries concerning the taxpayer’s share-trading activities, including transactions conducted through broker Ashwin M. Shah. The taxpayer had furnished replies and supporting documents on several occasions during the earlier proceedings.

These documents included details of share-trading income, futures and options transactions, disallowance calculations under Sections 14A, 94(7) and 94(8), scrip-wise closing stock, broker summaries and holding statements.

The Tribunal observed that these disclosures established that detailed inquiries into the share-trading transactions had already been conducted. Therefore, initiating another reassessment on the same material amounted to a change of opinion and an impermissible review of the earlier assessment.

The taxpayer had also produced documents relating specifically to the client code modification transactions. These included the details supplied by the Assessing Officer, the taxpayer’s working based on those details, the particulars of NSE futures and options transactions and the relevant ledger accounts maintained by both the taxpayer and the broker.

The Revenue relied upon the Calcutta High Court’s decision in PCIT v. Seaside Projects (P) Ltd., where reopening based on client code modification information was upheld because the taxpayer had failed to produce evidence showing that it was not a beneficiary.

The ITAT, however, distinguished that ruling. It observed that, unlike the taxpayer in the Calcutta High Court case, the present taxpayer had furnished the required documentary evidence concerning the transactions and the disputed addition.

The Tribunal concluded that the reassessment primarily failed because the Assessing Officer did not comply with the mandatory requirement under the proviso to Section 147. The recorded reasons did not allege any failure by the taxpayer to disclose fully and truly the material facts relevant to the assessment.

The ITAT further found that no fresh tangible material had been brought on record apart from the material already examined during the earlier assessment proceedings. Reopening the assessment in such circumstances amounted to a change of opinion, which was not permissible under the Income Tax Act.

Finding no infirmity in the CIT(A)’s conclusion on the validity of the reassessment, the Tribunal dismissed the Revenue’s grounds on the jurisdictional issue. Since the reassessment itself was held invalid, the grounds concerning the merits of the additions were treated as academic and were not adjudicated.

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