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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the revenue against the order of Learned Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)”], passed under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] dated 09.06.2025 for the A.Y. 2010-11. Page | 1 Manmohan Daulal Rathi S 2. The brief facts of the case are that the assessee is an individual and filed his return of income on 25.09.2010 for the year under consideration by declaring total income of Rs. 91,52,500/-. The AO received information from Addl. DIT(Inv.), Ahmedabad that the assessee has transferred an amount of Rs. 21,98,750/- thorough client code modification by shifting the lossess. Subsequently, the case was reopened after recording reasons and accordingly notice u/s 148 was issued and served upon the assessee. The assessment was completed u/s 147 r.w.s. 144 of the Act on 13.12.2017 by making addition of Rs. 21,98,750/- as undisclosed income on account of Client Code Modification and initiated the penalty proceedings u/s 271(1)(c) of the Act separately.
Aggrieved by the order of AO, assessee preferred the appeal before the Ld. CIT(A), who in turn confirmed assessment order made by AO. However, on appeal before ITAT, the „B‟ Bench of ITAT in for AY 2010-11 dated 24.03.2025 has set aside the quantum order made by the AO. Para 4 to 6 of the order of Coordinate Bench of ITAT are relevant and the same is extracted below:-
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 | 2 Manmohan Daulal Rathi S 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 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 Manmohan Daulal Rathi S 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.”
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 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.
In the result, appeal of the assessee is allowed.”
However, the AO on the basis of additions made, has imposed the penalty of Rs. 6,79,400/- on addition of Rs. 21,98,750/- (100% sought to be evaded) u/s 271(1)(c) of the Act. Para no. 3 of its order are relevant and the same are reproduced below:-
“3. In view of the above facts and circumstances of the case, I am satisfied that the assessee has furnished inaccurate particulars of its income and has concealed its income for the A.Y. 2015-16. Therefore, it is a fit case for levy of penalty u/s 271(1)(c) of the Income Tax Act. Accordingly, I propose to impose the penalty u/s 271(1)(c) of the Income Tax Act, 1951, which is computed as under:
Minimum penalty leviable - 100% of the tax sought (on addition of Rs. 21,98,570/-) to be evaded Rs.6,79,358/- Maximum penalty leviable 300% of the tax sought to be evaded- Rs.20,38,074/- Manmohan Daulal Rathi S Therefore a penalty of Rs. 6,79,400/- is imposed on the assessee. Which is 100% of the tax leviable on the amount of Rs. 21,98,570/- which is the amount of income sought to be concealed. The assessee is directed to pay the amount of penalty within 30 days of the service of demand notice.
This Order u/s 271(1)(c) of the Income Tax Act, 1961 is passed after obtaining approval from the Addl. CIT, Range-18(2), Mumbai vide order No. Addl.CIT-18(3)/ Manual Approval/2018-19, dated 27.06.2018.”
5. Aggrieved with this order of AO, assessee filed an appeal before Ld. CIT (A) and Ld. CIT(A) vide impugned order dated 09.06.2025 has set aside the order of AO and deleted the penalty vide para 4 (4.1 to 4.3) & 5 and the same are reproduced below:-
“4.0 Decision:
4.1 During the appellate proceedings, the appellant submitted the copy of the grounds of appeal, statement of facts, penalty order, submissions of the appellant and Form 35 which have been carefully considered and adjudicated as under:
4.2 The AO has initiated the penalty proceedings u/s.271(1)(c) of the Act and passed the penalty order on 28.06.2018 for concealment of income by levying a penalty of Rs.6,79,400/-. The appellant had filed this appeal against the penalty order. During the appellate proceedings, the appellant has submitted that the quantum assessment order u/s.147 r.w.s.144 was allowed by the Hon'ble ITAT and furnished the copy of the ITAT order dated 24.03.2025. Hence, the penalty proceedings initiated in consequent to the original assessment order have been rendered infructuous. On perusal of records, it is found that the AO has initiated penalty proceedings Page | 6 Manmohan Daulal Rathi S u/s.271(1)(c) of the act dated 28.06.2018 for concealment of income and levied a penalty of Rs.6,79,400/-. However, the quantum assessment u/s 147 r.w.s. 144 dated 13.12.2017 was allowed by the Hon'ble ITAT, vide its order dated 24.03.2025.
4.3 Under in these circumstances, it is hereby held that the relevant impugned penalty order passed in consequent to the original assessment order dated 13.12.2017, does not have any legal footing. Hence, this appeal filed against the said penalty order becomes infructuous and is therefore allowed.
5.0 As a result, the appeal of the appellant is allowed for statistical purpose.”
6. Aggrieved with the order of Ld. CIT(A), revenue is in appeal before us raising the following grounds:- “
1. "Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied of Rs. 6.79,400/- without appreciating the fact that The Addl. DIT(INV) Unit 1, Ahmedabad, carried out survey u/s 133A of the IT 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 assessee is one of the beneficiaries availed the benefit of much transaction from M/s Tirupati equities Ltd to the tune of Rs 21,98,750/-, to inflate the expenses and thereby suppress true profit and this act of the assessee itself established deliberate failure to furnish accurate particulars of the income, Manmohan Daulal Rathi S which attracts for imposition of penalty u/s 271(1)(c) of the Act, for concealment of income?" 2. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the levied penalty u/s.271(1)(c) of the Act. ignoring provisions of explanation 1 to that section and the fact that in quantum proceedings it has been clearly established that the assessee had made client code modification and the addition made in the assessment arose from such bogus claim of loss and it was not a case of simple estimation" 3. "Whether the Ld. CIT(A) has erred in not appreciating the legal position settled by the Hon'ble Supreme Court in Mak Data Pvt. Ltd. vs. CIT (2013) 358 ITR 593(SC) supports the imposition of penalty even in cases involving concealment through false claims, including client code modification." 4. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is perverse in not considering the recent judgement of Hon'ble Bombay High Court on this issue in case of Kanak Impex which is based on similar facts wherein assessee failed to prove genuineness of the transaction and claiming bogus loss ?" 5. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the penalty levied of Rs. 6,79,400/, by ignoring the fact that the undisclosed income during the year based on undisputed fact that the assessee has got benefitted by shifting the losses through Client Code Modification CCM resulting in lower income Thus amount of Rs 21,98,750/- is being added to the income declared by assessee for the assessment year as undisclosed income during the year. 6. "Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied, by ignoring the fact that there was a conscious concealment of particulars of income and a deliberate failure to furnish accurate particulars of the income and relevant evidences by the assessee, even at the penalty proceedings, which attracts the Manmohan Daulal Rathi S provision of section 271(1)(c) and explanation thereto, as held in the case of K.P. Madhusudhan Vs. CIT reported in 251 ITR
99. (SC) ?" 7. "Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied, without appreciating the decision of the Hon'ble Supreme court in case of Union of India Vs Dharmendra Textiles Processors & ors 306 ITR 277), wherein it was held that explanation appended to sec. 271(1)(c) of the Act, entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return and that the said section has been enacted to provide for a remedy for loss of revenue ?". 8. "Whether on the facts and circumstances of the case and in law, Ld. CIT(A( has erred in directing the AO to delete the penalty levied, without appreciating judgment on the decision of Hon'ble Delhi High Court in the case of CIT Vs Atul Kumar Gupta in which reinforces the Revenue Authority to impose penalties under section 271(1)(cl, in the cases where the assessee fails to provide accurate and satisfactory explanations for discrepancies in their accounts even if the addition is made of estimate basis?" 9. "Whether on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in not considering the fact that the direct and circumstantial evidences in view of the decision of Durga Prasad More (1971)
82. ITR 540 (SC) and Sumati Dayal [1995] 80 Таxmann 89(SC) [1995] 2014 ITR 801 (SC)/ (1995) 125 СTR 124(SC), rendered by the Supreme Court, where it was held that Hon‟ble Court and Tribunal have to judge the evidences before it by applying the test of probabilities, the surrounding circumstances which exercise had been done by the Assessing Officer?" 10. "Whether on the facts and circumstances of the case and in law, the Ld. CITA) has erred in deleting the penalty, by ignoring the fact that in such cases, where there was a suspicious or bogus trade, the onus is on the assessee to establish the genuineness of price hike and also to prove that the Manmohan Daulal Rathi S price of penny stock in which was traded to claimed LTCG/STCG or loses was not manipulated. The reliance is placed on judgment of Hon'ble Culcutta High Court's decision in the case of Pr. CITVs Swati Bajaj (I. A. No. GA/2/2022) in ITAT No 6 of 2022, Dated. 14.06.2022.
11. The Tax Effect involved in the instant case is Rs. 6,79,358/, which is below the prescribed limit as per CBDT's Circular F.No 279/Misc. 142/2007- ITJ(P) amended vide No 09/2024 dated. 17.09.2024 However, the case fall under one of the exceptions laid down in CBDT Circular No 05/2024 Dated 15.03.2021, wherein it is stated that in cases involving "organized tax evasion" the decision to file appeal/SLP shall be taken on merit without regard to the tax effect and the monetary limit. 12. "The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary.”
7. From the perusal of the grounds taken in the appeal, it is evident that the same are ambiguous. However the controversy /dispute before us is whether there is any illegalities with respect to deletion of penalty by Ld. CIT (A) on the ground that quantum appeal has already been decided in favour of the assessee and for that reason the penalty imposed by AO is not legally tenable?
8. At the outset, Ld. DR on behalf of the revenue submitted that quantum order passed by the Coordinate Bench of ITAT for AY 2010-11 in assessee‟s own case has not been accepted by the department and for that reason, the order of Ld. CIT(A) is not justified. On the other hand, it Manmohan Daulal Rathi S was submitted that once the quantum appeal has been decided in favour of the assessee and in view of the judgment of Hon‟ble Supreme Court in the case of K. C. Builder & another vrs. ACIT 265 ITR 562, the Ld. CIT (A) has rightly deleted the penalty and decided the appeal in favour of the assessee. Ld. AR has drawn our attention to the order of Hon‟ble ITAT in quantum appeal bearing for AY 2010-11 dated 24.03.2025 in assessee‟s own case, wherein the additions confirmed by Ld. CIT(A) were deleted and appeal of the assessee was allowed by Hon‟ble ITAT.
We have heard the rival submission and perused the orders of the Coordinate Bench of the Tribunal in assessee‟s own case in the quantum proceedings. We find that the quantum additions which were the basis of imposition of penalty in the present case has been deleted by the Tribunal and the revenue has not placed on record any material to show that in the appeal against the said order of the Tribunal, the order of ITAT has been stayed or set aside. Thus while following the judgment of Hon‟ble Supreme Court in the case of K. C. Builder & another vrs. ACIT 265 ITR 562, we find that the penalty has no legs to stand. It was held by Hon‟ble Supreme Court that „where the Manmohan Daulal Rathi S additions made in the assessment order, on the basis of which, penalty for concealment was levied, are deleted or set aside, there remains no basis at all for levying the penalty for concealment, therefore in such case, no penalty can survive and the same is liable to be cancelled.
Regarding the contention of revenue that the ITAT order in quantum proceedings has been challenged in Hon‟ble High Court, we are of the considered opinion, unless the order of ITAT is either stayed or set aside, the revenue is bound to follow the same.
Our view is also fortified by the decision of the Hon'ble Allahabad High Court, K. N. Agarwal Vs. Commissioner of Income Tax, order dated 11.01.1991, [1991] 189 ITR 769B (ALL) which says, “Indeed, the orders of the Tribunal and the High Court are binding upon the Assessing Officer and since he acts in a quasi-judicial capacity, the discipline of such functioning demands that he should follow the decision of the Tribunal or the High Court, as the case may be. He cannot ignore it merely on the ground that the Tribunal's order is the subject-matter of revision in the High Court or that the High Court's decision is under appeal before the Supreme Court. Permitting him to take such a view
From the above discussion, it becomes crystal clear that the order of the ITAT in quantum proceedings is binding upon the revenue unless and until the Hon‟ble High Court either set aside or stayed the same, which is not the case herein.
Therefore, while taking into consideration the principles laid down by the Apex Court in the case of K. C. Builder & another vrs. ACIT 265 ITR 562 and the decision of Hon’ble Allahabad High Court and in K . N. Agarwal’s case (supra), we find no reasons to interfere into the order passed by Ld. CIT(A). Thus we uphold the same and dismiss the grounds raised
by the revenue.
14. In the result, appeal filed by the revenue is dismissed. Order pronounced in the open court on 07.11.2025.