HARENDRA PRATAPRAY DOSHI (HUF),MUMBAI vs. ITO WARD 41(2)(2), MUMBAI

On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in considering the assessment made u/s.147 r.w.s.143(3) as valid in spite of the fact that it was being done by the Assessing Officer without issuing the notice u/s.143(2).

On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in invoking the provisions of Section 292BB without appreciating the fact that it does not apply in a case where the Assessing Officer has failed to issue the notice.

On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in upholding the reopening of the assessment u/s.147. 4. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of 90,87,025 which was being made on the ground that the appellant had shifted profits to that extent through client code modification.

On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has failed in appreciating the fact that the modification in the client code was being made for genuine purpose (rectifying the error of punching the trade in the appellant's code instead of his wife's code) and, in any case, the trades in which the client code was modified had in fact resulted into a loss of Rs.27,155 otherwise.

We take up ground nos.4 and 5 first involving merits of the case. These grounds pertain to the addition of Rs 90,87,025/- on account of alleged profit element shifted out of assessee's code through Client Code Modification(CCM).The AO noted that it had indulged in availing contrived losses. The broker of the assessee had misused CCM facility and created non-genuine losses. The assessee had taken fictitious losses to set off against his profit with a view to reduce the tax liability. Accordingly, he added the said sum to the total income.

Before the ld.CIT(A), it was contented by the assessee that CCM in its case was genuine and was carried out for rectification of genuine punching error of code within family accounts.It was done only once and that too immediately on noticing the error of punching. The assessee had obtained a written confirmation in this regard from the broker M/s Sharekhan Ltd. However, the CIT(A) rejected the contention by observing that enquiries by the Investigation wing of the Department Ahmedabad revealed the above loss by CCM through its broker who carried out 8 precise transactions on 23.05.2011, thereby profit earned by the assessee of Rs.90,87,025/- were transferred out to the codes of Mrs. Jalpa Doshi. Similarly, in respect of her, losses were transferred to the code of the assessee. The said broker has been fined by SEBI for irregularities in manipulating client codes. Further, it is impossible to make an error eight times and that too within the codes of family members.The two codes of family members were different and to have an error was intriguing. Accordingly, he dismissed the ground and upheld the addition.

Before us, the ld.AR has contented that the assessee is a trader in F&O on NSE and traded through M/s Sharekhan Ltd. There were 273 days on which trades were executed by it during the year in F&O. On each of these days multiple trades were executed and thus total number of trades during the entire year was very high at least 1000.The assessee had incurred losses of Rs 12,44,955/- from these trades which were included in the computation of income as business loss. Details showing item wise trades was submitted to the AO in 7 pages with 212 items.Out of this volume of transactions, there was CCM in only 8 trades on 23.05.2011.Although modification is allowed within an extended period even after closure of trading hours, the modification in this case was done within a time lag of not more than three minutes from the original trade. Mrs.Jalpa Doshi is the wife of Harendra Joshi who is karta of the assessee HUF. Details of trades are narrated in paras 8 to 17 of the appellate order. It is also submitted that the whole approach of the AO alleging shifting of profit was erroneous and contrary to the modus operandi adopted in other cases as per the assessment order. The broker's confirmation was not appreciated.The said broker was also not involved in enquiries conducted by the Wing as emanating from the contents of the AO who has referred to ‘some brokers' / ‘12 brokers' of a 'few clients' etc. Reliance has been placed on various coordinate bench decisions involving similar issue decided in favour of the assessees. Without prejudice, it was also submitted that these trades resulted in aloss of Rs 27,155/- in the hands of Mrs. Jalpa Doshi which defies the conclusion that profit was shifted by the assessee to her. The ld.DR has placed reliance on the orders of authorities below.

We have carefully considered the rival submissions and perused the records. The moot point for adjudication is whether, on the given facts and circumstances, the above derivative transaction in Futures and Options by the assessee on the recognized stock exchange was a genuine financial transaction or it was a colourable device solely aimed at claiming substantial tax benefit in the hands of the assessee. On careful perusal of evidence brought on records, we find that the assessee had satisfactorily discharged the primary onus cast upon it to substantiate the impugned transactions by furnishing all the relevant material evidences. In the course of assessment proceedings, the AO has merely doubted transactions undertaken on the recognized stock exchange, primarily relying upon the report of the Investigation wing and has brushed aside the explanation of the assessee and the documentary evidences furnished. Further, the AO has not made any independent enquiry/verification during the assessment proceedings with regard to allegation of impugned transaction being colourable device to avoid the tax. It is not disputed that all the transactions in derivatives segment had taken place on the platform of recognized Stock Exchange through registered stock broker and payments have been made/received through banking channel. It is also noted that the assessee regularly undertakes such transaction in the normal course of its business and these were not the only transactions. Further, we note that all the transactions were duly accounted for in the books of account and AO has not pointed out any mistake/wrongdoing in such transaction. The ld.CIT(A) upheld the action of the AO mainly relying on the observations and findings of the AO and without appreciating the contentions of the assessee and the cited decisions relied upon in proper perspective.

1 We find that on similar facts, the coordinate bench in the case of Gokul Fuelchen Pvt Ltd., ITA No. 187/Mum/2024 dated 29.07.2024 has held that trading loss on account of derivatives currency transaction on the recognized stock exchange could not be denied on in the absence of any specific findings by the AO. In the case of Abans Commodities(I) Pvt. Ltd. Mumbai ITAT, in ITA no.3315/Mum/2024, it was held that derivatives loss on recognized stock exchange could not be denied on the basis of general report of the Investigation Wing unless the AO has independently analysed the transactions and has arrived the findings. We would also like to place reliance on a latest decision of the coordinate bench in the case of Hasmukh Khetshi Shah in ITA No. 5932/Mum/2024 dated 23.04.2025 in which also similar decision was rendered in favour of the assessee as under:

Following questions are raised for our consideration: - (i) Whether in law and on the facts and circumstances of the case, was the Tribunal justified in upholding the deletion of the addition being the profits of the Company on account of the large scale client code modifications; the said be undertaken to transfer the profits of the company to other clients for the purposes of adjustment of their incomes to evade payment of tax? (ii) Whether in law and on the facts of the instant case, was the Tribunal in error in upholding the deletion when the AO had established that the motive of the client code modification was to indulge in circular trading to enable the generation of either profits or losses as required by clients at the end of the financial year?

The respondent Assessee is a private limited company engaged in the business of providing commodity services to its clients. In the return of income filed by the Assessee for the Assessment Year 2006- 07, the Assessing Officer noticed that there were instances of client code modifications. The Assessing Officer believed that the same was done to indulge in circular trading to pass on profits or losses to the clients of the Assessee company as per requirements. After hearing the Assessee, the Assessing Officer made additions in the income of the Assessee on such basis. The issue eventually reached to the Tribunal. The Tribunal did accept the Revenue's theory of misuse of client's code modification facility. However, the Tribunal accepted the Assessee's explanation and discarded the Revenue's theory that profit of the Assessee's company were passed on to the clients. It was also noticed that the Revenue has not contended that the client code modification facility is often misused by the Assessee to pass on losses to the investors, who may have sizable profit arising out of commodity trading against which such losses can be set off. The Revenue normally points out number of such instances of client code modifications as well as nature of errors in filling of the client code. At any rate, what can be taxed in the hands of the present Assessee is the income escaping assessment. Even if the Revenue's theory of the Assessee having enabled the clients to claim contrived losses, the Revenue had to bring on record some evidence of the income earned by the Assessee in the process, be it in the nature of commission or otherwise. In the present case, the Assessing Officer has added the entire amount of doubtful transactions by way of Assessee's additional income, which is wholly impermissible. We do not know the fate of the individual investors in whose cases, the Revenue could have questioned the artificial losses. Be that as it may, we do not think entertaining these appeals would serve any useful purpose."

Considering the aforesaid peculiar facts and circumstances in totality and the decisions rendered by the Co-ordinate Benches of the Tribunal, as well as by the Hon'ble Juri ictional High Court in the identical issue, as involved in the instant appeal, we are inclined to delete the addition under consideration, hence, the same is deleted.

2 We find that entire premise of the AO for treating the transaction is based on the Investigation wing report. The assessee was a regular trader in option / currency derivatives and had worked through brokers in the past as well as during the year and had shown profits from transaction with some brokers while losses in other transactions. The income/loss declared in the return of income had neither been doubted nor the AO carried out any enquiry to dislodge the authenticity of the trades done through any broker. In view such facts, it cannot be stated that only a few isolated transactions were pre-meditated only to incur loss. Once the assessee has filed copies of contract notes in respect of the transactions of the derivative trading, copy of bank statements, reflecting payment of requisite margin money to the brokers, copy of statement of accounts of the broker in the books of the assessee company etc., the AO should have brought some material, carried out enquiry to bring any adverse material on record. With regard to the transactions done through M/s Share khan, the assessee has provided all the necessary documents which have not been rebutted by the AO. The assessee had also filed a confirmation of this broker dated 04.12.2019 in which he fully explained the impugned transactions in detail emphasising that it was a case of genuine error in the system whereby the trade got wrongly executed in client code no.10216 of the assessee instead of the client code no.9620 of Mrs. Jalpa H. Doshi where the actual position of the trade was already initiated and open before 23.05.2011 which was immediately rectified once noticed and shifted to the right client code as per previous open position. A copy of the said confirmation has also been placed before us. It is evident that both of the lower authorities have not taken due cognizance of the confirmation and have also failed to rebut the same by brining on any contrary findings. As such this vital piece of clarification has been brushed aside without any consideration. There is no iota of evidence w.r.t. action taken by SEBI or the Income Tax Department in the case of such counter party and the underlying motive of those parties behind such transactions. Moreover, the allegation of the AO that the impugned profit was shifted for reducing tax liablity, we find that the assessee HUF has disclosed returned loss of Rs 10,70,573/- which has been carried forward as per the return, so there is no question of shifting of profit arises through unfair practice of CCM. We also find merit in the contentions of the assessee that no purposes was served in shifting the profit since in the case of Mrs. Jalpa Doshi, the income was below taxable limit during the relevant year as it was just Rs 1,42,401/-being income from F&O trading profit which was below taxable limit. Thus, there appears to be no gain to either of the parties in any case which further strengthens the claim of the assessee that the impugned transactions were genuine and not fictitious as alleged.

After taking into account all relevant facts of the case and also in the light of coordinate bench decisions(supra), we do not find any merit in the conclusion drawn by the ld.CIT(A) which is therefore, set aside. The AO is directed to delete the impugned addition. Consequently, above grounds of appeal of the assessee are allowed.

Ground nos.1 to 3 relating to the issue of notice u/s 143(2) are academic as we have deleted the addition on merit. Hence, we deem it appropriate not to delve into the legal aspects of the case, as adjudication of the same, would prove futile exercise.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 08/10/2025. ANIKESH BANERJEE (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 08.10.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/