Reopening of Assessment and Client Code Modification Dispute in Crosslink Finlease vs ITO – ITA No. 6267/DEL/2019 (Assessment Year 2009-10)

Case Analysis: Crosslink Finlease Pvt. Ltd. vs ITO – ITA No. 6267/DEL/2019

Case Number: ITA 6267/DEL/2019

Appellant: Crosslink Finlease Pvt. Ltd., New Delhi

Respondent: ITO WARD – 6(4), New Delhi

Assessment Year: 2009-10

Order Type: Final Tribunal Order

Date of Order: 27th October 2022

Case Filed On: 24th July 2019

Bench: Shri Saktijit Dey, Judicial Member

Introduction

The case of Crosslink Finlease Pvt. Ltd. vs ITO concerns a dispute over the reopening of the assessment for the assessment year 2009-10 under Section 147 of the Income Tax Act, 1961. The primary issues in this case revolved around the legality of the reopening of the assessment based on information received from the Investigation Wing and the validity of the additions made by the Assessing Officer (AO) related to client code modification and disallowances under Section 94(7) of the Act.

Background of the Case

Crosslink Finlease Pvt. Ltd., a corporate entity based in New Delhi, filed its income tax return for the assessment year 2009-10 on 29th September 2009, declaring an income of Rs. 7,71,690. The return was processed under Section 143(1) of the Income Tax Act, meaning no detailed scrutiny was conducted initially. Later, the AO received information from the Investigation Wing indicating that the appellant was involved in manipulating its income by misusing the client code modification facility in the Futures and Options (F&O) segment of the National Stock Exchange (NSE).

Based on this information, the AO formed a belief that the appellant’s income chargeable to tax had escaped assessment, leading to the reopening of the assessment under Section 147. During the reassessment, the AO made several additions, including disallowances under Section 94(7) related to capital losses and dividend income.

Why the Case Was Filed

The appellant, Crosslink Finlease Pvt. Ltd., challenged the reopening of the assessment on the grounds that it was based solely on the information received from the Investigation Wing without the AO independently applying his mind to the facts of the case. The appellant argued that the reopening was invalid and that the additions made during the reassessment were unjustified.

Proceedings at the ITAT

The case was heard by the ITAT Delhi Bench ‘SMC’, with Shri Saktijit Dey presiding as the Judicial Member. The appellant was represented by Sh. Varun Gupta, Chartered Accountant, while the respondent (ITO) was represented by Sh. Om Parkash, Senior Departmental Representative.

The appellant raised several grounds of appeal, including:

• The reopening of the assessment under Section 147 was invalid as it was based merely on the report from the Investigation Wing without independent verification by the AO.
• The additions made by the AO related to client code modification were based on incorrect assumptions and lacked proper evidence.
• The disallowance under Section 94(7) related to long-term capital losses and dividend income was unjustified and excessive.

Tribunal’s Findings

Reopening of Assessment

The Tribunal first addressed the issue of the reopening of the assessment. It was observed that since the original return was processed under Section 143(1), there was no detailed scrutiny at that stage. The subsequent information from the Investigation Wing provided tangible material for the AO to believe that income had escaped assessment. The Tribunal noted that the Investigation Wing had conducted a thorough investigation and provided specific details indicating that the appellant had benefited from client code modifications. Therefore, the Tribunal held that the reopening of the assessment was justified and dismissed the appellant’s challenge on this ground.

Additions Related to Client Code Modification

The Tribunal then examined the additions made by the AO concerning the client code modification. The AO had added Rs. 1,20,732 as fictitious losses and Rs. 5,89,142 as fictitious profits, along with an additional amount of Rs. 14,197 as commission paid to the broker. The appellant argued that these additions were made without proper evidence and that the client code modifications were due to genuine punching errors.

However, the Tribunal found that the AO and the CIT(A) had thoroughly examined the facts and provided concurrent findings that the appellant had indeed manipulated its income through fictitious client code modifications. The Tribunal upheld the additions made by the AO, stating that the appellant had failed to provide conclusive evidence to refute the findings of the lower authorities.

Disallowance Under Section 94(7)

Regarding the disallowance under Section 94(7), the appellant argued that it was unable to furnish the necessary details to the AO due to time constraints. However, the Tribunal noted that the appellant had not provided the required details even before the CIT(A) or the Tribunal. As a result, the Tribunal restored the matter to the AO for fresh adjudication, giving the appellant another opportunity to provide the necessary documentation to substantiate its claim.

ITAT’s Conclusion and Order

After considering the submissions and the material on record, the ITAT concluded that:

• The reopening of the assessment under Section 147 was valid, as it was based on tangible material received from the Investigation Wing.
• The additions made by the AO related to client code modification were justified, and the appellant had failed to provide sufficient evidence to overturn these findings.
• The disallowance under Section 94(7) required further examination, and the matter was remanded to the AO for fresh adjudication with the direction to allow the appellant an opportunity to present its case.

The appeal was partly allowed for statistical purposes, with the disallowance under Section 94(7) being the only issue remanded to the AO.

Final Judgment

The final judgment in the case of Crosslink Finlease Pvt. Ltd. vs ITO (ITA No. 6267/DEL/2019) reaffirmed the validity of the reopening of the assessment under Section 147 and upheld the additions related to client code modification. The Tribunal’s decision to remand the issue of disallowance under Section 94(7) for fresh adjudication highlights the importance of providing accurate and complete documentation during assessment proceedings.

Bench: Shri Saktijit Dey, Judicial Member

Order Pronounced On: 27th October 2022

Result: The appeal is partly allowed for statistical purposes, with the issue of disallowance under Section 94(7) remanded to the AO for fresh adjudication.

Reopening of Assessment and Client Code Modification Dispute in Crosslink Finlease vs ITO – ITA No. 6267/DEL/2019 (Assessment Year 2009-10)