ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 6(4), MUMBAI, MUMBAI vs. L7 HITECH PRIVATE LIMITED, MUMBAI

These cross-appeals by the assessee and the Revenue are directed against the common order dated 12.04.2025 passed by the learned Commissioner of Income Tax (Appeals)-54, Mumbai ["Ld. CIT(A)"] for Assessment Years 2021-22, 2022-23 and 2023-24. The assessee has also filed cross-objections for Assessment Years 2021-22 and 2023-24. As the matters arise from the same search in the Ravi Agrawal Group, involve common evidence and were disposed of by a common first appellate order, they were heard together and are disposed of by this consolidated order. Assessment Year 2022-23 is taken as the lead year and, wherever applicable, our findings shall apply mutatis mutandis to the other years.

The assessee has raised the following effective grounds of appeal for Assessment Year 2022-23:

The Revenue has raised the following effective grounds of appeal:

The assessee company is engaged in the business of trading in shares, securities, commodities and derivatives through recognised stock exchanges. A search and seizure action under section 132 of the Income-tax Act, 1961 was conducted on 10.05.2023 in the case of Ravi Agrawal Group, which also covered the assessee company. During the course of search, electronic devices, cloud data, WhatsApp chats and other digital records were seized and examined. Statements under section 132(4) of Shri Ravi Agrawal, Shri Pratik Sangpal, Shri Khemraj Parate, Shri Deepak Singh and other persons connected with the group were also recorded.

On analysis of the seized material, the Assessing Officer formed a view that the Ravi Agrawal Group was operating an organised mechanism whereby HNI investors were permitted to undertake trading in futures, options and commodities through Sub-IDs mapped to the exchange memberships of group entities. According to the Revenue, such investors deposited part of the required margin in cash, the balance margin was funded by the group concerns, interest was charged on such funding and commission was earned for use of the Sub-ID platform. The Revenue further alleged that the resulting

The principal material relied upon by the Assessing Officer comprised:

According to the Assessing Officer, the cumulative effect of the above material established a parallel business outside the regular client-registration mechanism, through which unidentified HNI clients traded using the assessee's exchange infrastructure.

The Assessing Officer thus, on the basis of the aforesaid material, completed the assessment by making, inter alia, the following additions for Assessment Year 2022-23:

The assessee carried the matter in appeal before the Ld. CIT(A). The Ld. Commissioner examined the assessment records, the seized digital material, the statements recorded during search, the retraction affidavits and the voluminous written submissions filed by the Assessee. The Ld. Commissioner concurred with the Assessing Officer that the digital evidence recovered during search, namely the WhatsApp chats, OneDrive Excel sheets and statements recorded under section 132(4), collectively established that the Assessee group was facilitating trading through multiple Sub-IDs for HNI clients. He also held that the subsequent retractions did not efface the evidentiary value of the statements inasmuch as the same stood independently corroborated by the seized electronic records.

The Ld. Commissioner broadly accepted the Revenue's case regarding the existence of cash margin arrangements but found that the methodology adopted by the Assessing Officer in estimating cash margin at 30% of the total margin utilisation was not fully supported by the seized material. He therefore independently on the basis of excel sheet found during search, WhatsApp communications and other seized records, and concluded that the evidence justified sustaining the addition only to the extent of Rs.175.65 crore as against Rs.247.54 crore made by the Assessing Officer.

The Ld. Commissioner further held that once the seized material established margin funding, charging of interest thereon constituted a natural consequence of such business activity. Likewise, having regard to the organised Sub-ID mechanism evidenced by the seized material, he confirmed the addition towards commission income. However, he deleted the addition made under section 69C on the ground that although the existence of the Sub-ID mechanism stood established, there was no direct evidence 7

Being aggrieved, both the Assessee as well as the Revenue are in further appeal before us. The Assessee disputes the additions sustained by the Ld. Commissioner, whereas the Revenue challenges the relief granted by him. Since all the additions arise from the same alleged Sub-ID mechanism and the same body of incriminating material, it would be appropriate to first examine the evidentiary value of the seized documents, the statements recorded under section 132(4) and the legal principles governing search assessments before dealing with each addition separately

The Ld. Counsel for the Assessee submitted that though certain WhatsApp chats, Excel sheets, digital workings and statements recorded u/s 132(4) of the Act were found during the course of search, the same may, at the highest, indicate the existence of a Sub-ID trading mechanism, but do not establish either ownership of the alleged cash margin by the Assessee or actual payment of the trading profits to the alleged HNI clients. The Ld. Counsel further submitted that all the trades were executed through recognised stock exchanges and the purchases, sales, settlement obligations, receipts from the clearing corporation and resultant trading profits were routed through disclosed banking channels and duly recorded in the regular books of account. The AO has neither treated the exchange transactions as fictitious nor rejected the books of account and has, in fact, assessed the resultant trading profits as business income of the Assessee.

The Ld. Counsel further submitted that no bank account has been identified in which the alleged cash margins were deposited, no money trail 8

Coming to the statements recorded u/s 132(4) of the Act, the Ld. Counsel submitted that the retracted statements could not, by themselves, sustain the impugned additions unless the particular income was supported by incriminating material. Reliance was placed upon CIT v. Harjeev Aggarwal [2016] 70 taxmann.com 95 (Delhi), wherein it was held that a statement recorded u/s 132(4), though relevant, cannot on a standalone basis sustain a block assessment unless it has nexus with evidence or material found during search, and CIT v. Jagdishprasad Mohanlal Joshi [2018] 99 taxmann.com 287 (Bom.)/259 Taxman 343 (Bom.), wherein deletion of an addition founded upon a third-party confessional statement was upheld in the absence of corroborative material; the Revenue's SLP was dismissed, reported in 259 Taxman 342 (SC).

The Ld. Counsel accordingly contended that though the seized material may be relevant for examining the alleged modus operandi, the quantum of the additions cannot be determined by applying estimated percentages or extrapolating such material beyond what is specifically evidenced by the documents found during search.

On the contrary, the Ld. DR strongly relied upon the assessment order and submitted that the WhatsApp chats, OneDrive Excel sheets, client-wise margin workings, diary maintained by Shri Deepak Singh and the statements recorded u/s 132(4) of the Act constitute contemporaneous and mutually corroborative evidence establishing an organised parallel trading mechanism under which HNI clients were permitted to trade through Sub-IDs provided by the Assessee group. According to the Ld. DR, the material also establishes 9

The Ld. DR further submitted that a statement recorded on oath u/s 132(4) remains relevant evidence and is not effaced merely by a subsequent retraction, particularly where it is corroborated by material found during search. Reliance was placed upon Pr. CIT v. Roshan Lal Sancheti [2023] 150 taxmann.com 227 (Raj.), wherein a belated retraction of admissions recorded u/s 132(4) and subsequently confirmed u/s 131 was not accepted; the SLP was dismissed in Roshan Lal Sancheti v. Pr. CIT [2023] 150 taxmann.com 228 (SC). Reliance was also placed upon CIT v. O. Abdul Razak [2013] 350 ITR 71 (Ker.)/[2012] 20 taxmann.com 48 (Ker.), wherein it was held that a statement recorded u/s 132(4) has evidentiary value and a self-serving retraction, unsupported by material showing the admission to be erroneous, factually incorrect or involuntary, does not by itself displace such admission, particularly where it is corroborated by seized material.

In rejoinder, the Assessee’s Ld. Counsel submitted that even assuming that the seized material establishes existence of an undisclosed Sub-ID facilitation mechanism, every addition must nevertheless independently satisfy the statutory ingredients of the provision, under which it has been made. According to him, proof of a modus operandi cannot substitute proof of ownership of money for section 69A or proof of actual expenditure for section 69C.

We have heard the parties, perused the material available on record and given thoughtful consideration to the rival submissions. We have also examined the seized WhatsApp chats, OneDrive Excel sheets, margin workings, diary entries, statements recorded u/s 132(4) of the Act and the subsequent retractions. Since several additions arise from the same alleged Sub-ID mechanism, it is necessary first to record our common findings regarding the evidentiary value of the material and thereafter to test each addition independently under the statutory provision invoked by the AO.

To this limited extent, therefore, we concur with the authorities below that the search material establishes and explains the broad modus operandi of the Sub-ID activity. This conclusion, however, is confined to the existence and working of the alleged mechanism and does not, by itself, determine the ownership of the alleged cash margin, the factum of any cash expenditure, or the exact amount of interest or commission chargeable to tax.

The second common question concerns the evidentiary effect of the statements recorded u/s 132(4) of the Act, which were subsequently retracted. The Ld. Counsel contended that a retracted statement cannot, without independent incriminating material, form the sole basis of an addition. The Ld. DR, on the other hand, submitted that a statement recorded on oath remains relevant evidence and a subsequent retraction does not efface it, particularly where the statement is corroborated by contemporaneous material found during search.

The authorities referred to by the parties shows that the evidentiary value of a statement u/s 132(4) and the effect of its retraction depend upon the surrounding material. In O. Abdul Razak (supra), and similarly in Roshan Lal Sancheti (supra), the admissions were not permitted to be neutralised by an unsupported or belated retraction, particularly where the statements were 11

Applying the above principles to the present case, the statements cannot be discarded in toto because they are supported, at least in relation to the broad Sub-ID mechanism, by WhatsApp chats, Excel sheets, margin workings and the seized diary. At the same time, the statements cannot be extended beyond the incriminating material, so as to presume ownership, expenditure or quantum which the material itself does not establish. We therefore accept the statements as corroborative evidence for understanding the alleged mechanism, but not as an automatic substitute for transaction- specific proof.

It is equally material that the AO has not held the transactions executed on the recognised stock exchanges to be fictitious, has not rejected the regular books of account and has assessed the resultant trading profits as business income of the Assessee. Purchases, sales, settlement obligations and receipts from the clearing mechanism were admittedly routed through disclosed banking channels and recorded in the books. Consequently, where the Revenue seeks to superimpose an allegation of parallel cash receipts, cash payments, interest or commission upon those recorded transactions, the allegation has to be established by material having a reasonable nexus with the particular amount sought to be taxed.

Thus, for the common issues, we uphold the finding that the seized digital material and corroborated statements establish the existence of the Sub-ID mechanism and may legitimately be used for examining the related transactions. We simultaneously hold that the sustainability and quantum of every consequential addition must be determined separately with reference 12

We have carefully considered the rival submissions and perused the material placed before us on the issue/addition in hand. The AO invoked section 69A by proceeding on the premise that approximately 30% of the total margin requirement for the trades undertaken through the alleged Sub- ID mechanism represented cash margin received from HNI clients. On that basis, the AO worked out the alleged cash margin at Rs.247,54,50,000/- and brought the same to tax as unexplained money. The Ld. Commissioner accepted the existence of the Sub-ID mechanism but found that the estimation adopted by the AO was not fully supported by the seized material.

The Ld. Commissioner specifically examined the seized Excel sheet relating to 24 clients, which contained separate columns for MCX margin, F&O margin, total margin, deposit margin, deposit percentage and interest rate. While the aggregate margin reflected in that sheet was approximately Rs.825.15 crore, the deposit margin recorded in the same document was Rs.175.65 crore. Treating the latter figure as the amount evidenced by the seized material, the Ld. Commissioner restricted the addition u/s 69A to Rs.175,65,00,000/-.

The Assessee challenges even the reduced addition. The Ld. Counsel submitted that the Revenue's own case is that the alleged margin was contributed by the HNI clients for enabling their trades and that the Assessee funded only the balance requirement. According to him, the alleged cash, even if received or handled in connection with the mechanism, could not be assessed as unexplained money of the Assessee unless the Revenue first established ownership thereof in the hands of the Assessee. The Ld. Counsel also emphasized that no cash was found from the Assessee corresponding to

The Ld. DR relied upon the seized Excel sheet, WhatsApp communications, diary entries and the statements recorded during search. The Ld. DR also submitted that these materials, read cumulatively, established not only the Sub-ID mechanism but also receipt of cash margins from the HNI clients. According to the Ld. DR, once the seized material itself quantified the deposit margin, the Ld. Commissioner was justified in sustaining the addition at least to the extent of Rs.175,65,00,000/- and the Revenue was further justified in challenging the restriction of the addition from the amount computed by the AO.

Section 69A applies, where an assessee is found to be the owner of money, bullion, jewellery or other valuable article not recorded in the books of account, if any, maintained by him, and offers no satisfactory explanation regarding its nature and source. Therefore, before examining the explanation regarding the source, the Revenue must establish the foundational fact that the money sought to be assessed was owned by the Assessee.

Tested on this statutory requirement, the Revenue’s own case presents a fundamental difficulty. The alleged modus operandi proceeds on the basis that the HNI clients intending to trade through the Sub-IDs contributed a part of the required margin, while the group concern funded the balance. Thus, according to the Revenue itself, the initial cash margin represented money brought by the HNI clients for facilitating their trading activity.

If the alleged cash margin was contributed by the HNI clients, the mere fact that the Assessee received, handled or utilized such money in the course of the alleged mechanism would not, without further material, establish its ownership in the hands of the Assessee. The Revenue cannot proceed on the premise that the HNI clients contributed the margin and, at the same time, treat that amount as unexplained money owned by the

We have also considered the diary maintained by Shri Deepak Singh and the seized Excel sheet relied upon by the Revenue. Though these documents support the existence of cash dealings forming part of the wider Sub-ID mechanism, they do not establish ownership of the alleged cash margin in the hands of the Assessee. The diary records cash receipts and payments, whereas the Excel sheet contains deposit-margin particulars; neither document establishes the necessary nexus between the handling of money and its ownership by the Assessee.

There is also a material evidentiary gap. The transactions undertaken on recognised stock exchanges, the settlement obligations and the resultant trading profits were routed through disclosed banking channels and recorded in the books. However, the AO has not identified any specific bank account in which the alleged cash margin was deposited, any intermediary account through which it was converted into banking funds, or any corresponding cash deposit relatable to the exchange-settlement obligations. Thus, the movement of the alleged cash into the banking and exchange-settlement mechanism remains untraced.

The AO estimated the addition at Rs.247,54,50,000/- by applying 30% to the total margin requirement, whereas the Ld. Commissioner restricted it to Rs.175,65,00,000/- on the basis of the deposit margin reflected in the seized Excel sheet. However, the controversy is not merely one of quantification. A precise figure appearing in the seized material cannot sustain an addition u/s 69A unless the foundational requirement that the money was owned by the Assessee is first established.

Since the ownership of the alleged cash margin in the hands of the Assessee has not been established, the competing methods of quantification become immaterial. Quantification cannot cure the absence of an essential statutory ingredient. Consequently, the addition u/s 69A is unsustainable in

Consequently, the grounds raised by the Assessee on this issue are allowed, whereas the corresponding grounds raised by the Revenue seeking restoration of the higher addition, is dismissed.

We clarify that this finding is confined to the applicability of section 69A to the alleged cash margin and does not disturb our common finding regarding the existence of the Sub-ID mechanism, nor does it predetermine the separate taxability of interest, commission or any other amount, which shall be examined independently on its own statutory and evidentiary footing.

We shall now deal with the addition sustained by the Ld. CIT(A) towards interest income alleged to have been earned by the assessee on funding the balance margin requirement of the HNI clients. The Assessing Officer observed that whenever the margin initially brought by the HNI client was insufficient for maintaining the trading positions, the balance margin was provided by the assessee group. According to the Assessing Officer, such funding constituted a commercial activity and interest was charged from the concerned HNI clients. Relying upon the seized WhatsApp communications, Excel sheets and the statements recorded during the course of search, the Assessing Officer estimated the interest income by applying a uniform rate on the total amount of funding worked out by him. The Ld. CIT(A), while agreeing with the Assessing Officer that the assessee had indeed earned interest on margin funding, substantially confirmed the addition.

The Ld. AR on this point/addition submitted that the addition sustained by the Ld. CIT(A) deserves to be deleted in its entirety as the same is based on estimation. It was contended that neither the Assessing Officer nor the Ld. CIT(A) has identified the actual amount of interest received by the assessee. According to him, the authorities below merely proceeded on the 16

On the contrary, the Ld. DR submitted that the assessment order reproduces several seized WhatsApp chats and digital workings which specifically refer to charging of interest from clients on margin funding in para 7.5.2.7 to para 7.5.2.13 of the assessment order. The seized Excel sheets also contain client-wise computation of interest and, therefore, the existence of interest income stands conclusively established. He submitted that the Assessing Officer has merely quantified the income arising from the seized material and the Ld. CIT(A) was justified in sustaining the addition.

We have carefully examined the assessment order as well as the seized material reproduced therein. The present addition does not rest merely upon an inference drawn from the alleged modus operandi. The assessment order itself reproduces in para 7.5.2.7 to para 7.5.2.13 several incriminating documents recovered during the course of search which specifically refer to charging of interest on balance margin funded by the assessee. The WhatsApp conversations extracted in the assessment order contain contemporaneous discussions regarding funding of margin, the rate of interest chargeable, the period for which interest was to be computed and the amount recoverable from various clients. Similarly, the seized Excel sheets recovered from the OneDrive backup contain client-wise workings of interest recoverable on funded margins. These digital workings are not mere projections prepared by the Assessing Officer but constitute contemporaneous electronic records maintained during the ordinary course of the undisclosed business.

The assessment order has also reproduced relevant portions of the statements recorded under section 132(4), wherein Shri Ravi Agrawal, Shri Pratik Sangpal and other key employees have explained that whenever the margin initially brought by the HNI client was insufficient, the balance margin 17

We have already held, while adjudicating the earlier grounds that the subsequent retractions do not completely obliterate the evidentiary value of the statements, particularly when such statements stand independently corroborated by contemporaneous digital records. The seized WhatsApp chats, OneDrive Excel sheets and interest workings constitute independent evidence demonstrating that interest was indeed charged on the balance margin funded by the assessee. Consequently, the contention of the learned Authorised Representative that no interest income whatsoever accrued to the assessee cannot be accepted.

The next question which arises is regarding the quantum of such interest income. The seized material discovered during the course of search itself contains specific client-wise interest calculations. Once the Revenue is in possession of actual contemporaneous workings recovered during search, there was no justification for the Assessing Officer to travel beyond such evidence and estimate interest by applying a uniform rate on the entire funding worked out by him. Search assessments are founded upon incriminating material actually discovered during the course of search. The Assessing Officer cannot improve upon such material by adopting hypothetical assumptions or by extrapolating the figures beyond what the seized documents themselves reveal.

In our considered opinion, there is an important distinction between the existence of income and its quantification. The seized material conclusively establishes that the assessee earned interest on margin funding. To that extent, the findings recorded by the authorities below deserve to be upheld. However, the seized material equally provides the documents with 18

It is a settled principle that where direct evidence of income is available, estimation must necessarily give way to actual evidence. The Revenue cannot ignore the contemporaneous workings recovered during the search and substitute them with a broader estimate merely because such estimate yields a higher addition or it is simple to compute. The assessment must remain co-terminus with the incriminating material unearthed during the course of search. Any addition beyond the seized evidence would amount to taxation based on conjecture rather than evidence.

We are, therefore, of the considered opinion that only such interest income as is specifically reflected in the seized WhatsApp communications, OneDrive Excel sheets and other contemporaneous interest workings recovered during the course of search can be brought to tax in the hands of the assessee. The estimation adopted by the Assessing Officer and sustained by the Ld. CIT(A.) by applying a uniform rate on the entire funding is unsustainable. We accordingly set aside the order of the Ld. CIT(A.) on the issue of quantification and direct the Assessing Officer to recompute the interest income only on the basis of the seized documents recovered during the course of search.

We observe that this conclusion is entirely consistent with the legal principles governing search assessments. We have accepted the existence of the undisclosed activity because the same stands established by contemporaneous evidence. Equally, we have restricted the taxable income to the extent evidenced by the very same material. In our considered opinion, this approach alone gives due effect to the incriminating evidence actually found during the search while at the same time avoiding additions founded merely upon assumptions and extrapolations. 19

We shall now consider the addition made on account of commission income allegedly earned by the assessee from permitting HNI clients to undertake trading through Sub-IDs. The Assessing Officer observed that the assessee was not merely providing funding for the balance margin but was also charging commission for allowing utilisation of its exchange membership and Sub-ID platform. During the course of search, several incriminating documents were recovered from the mobile phones, laptops and OneDrive backup, which, according to the Assessing Officer, specifically referred to commission payable by various clients. The assessment order also reproduces relevant WhatsApp conversations and digital workings indicating commission rates @Rs 20 per one crore for every trading done through Sub Id holders agreed with different HNI clients. Reliance was further placed upon the statements recorded under section 132(4), wherein the key persons explained that apart from interest on funded margins, commission was separately charged for providing trading access through the Sub-ID mechanism. Based upon the seized material, the Assessing Officer quantified the commission income and brought the same to tax. The Ld. CIT(A.) confirmed the addition by holding that the incriminating material conclusively established earning of commission from the parallel business.

The Ld. AR vehemently assailed the addition. It was submitted that there is no reliable evidence demonstrating receipt of commission by the assessee. According to him, the WhatsApp chats merely contain negotiations between various persons and cannot be construed as evidence of actual receipt of commission. The seized Excel sheets, according to him, are merely internal workings and do not establish accrual of income. It was argued that once the Revenue has already assessed the entire trading profits in the hands of the assessee, no separate commission income can be assumed without establishing that such commission was actually received over and above the disclosed business income.

Per contra, the Ld. DR strongly supported the findings recorded by the authorities below. He invited our attention to the seized WhatsApp chats reproduced in the assessment order wherein commission percentages payable by various clients have been specifically mentioned. He also referred to the seized Excel sheets containing client-wise commission workings and submitted that the statements recorded under section 132(4) clearly explain the manner in which commission was earned by the assessee from permitting utilisation of the Sub-ID platform. According to him, unlike the addition under section 69A, the present addition is directly supported by contemporaneous incriminating material recovered during search.

We have carefully considered the rival submissions and examined the assessment order, the seized documents reproduced therein and the findings recorded by the Ld. CIT(A.). In our considered opinion, the commission income stands on an entirely different footing from the addition made under section 69A. In the case of section 69A, the Revenue was required to establish ownership of the alleged cash by the assessee. We have already held that such jurisdictional requirement was not satisfied. The present addition, however, relates to business income allegedly earned by the assessee from carrying on the undisclosed facilitation business. The question before us is therefore whether the seized material establishes that the assessee earned commission for providing the Sub-ID platform.

The answer, in our considered opinion, is in the affirmative. The assessment order does not merely proceed on commercial probability. The 21

Hence, we are unable to accept the contention of the Ld. AR that the commission addition rests merely upon presumption. On the contrary, the incriminating material itself records commission rates, commission calculations and operational discussions regarding recovery of commission from the clients. Therefore, the existence of commission income is not inferred by the Assessing Officer but directly flows from the contemporaneous documents discovered during search.

We accordingly find no infirmity in the order Ld. CIT(A) and uphold the addition towards commission. The grounds raised by the assessee are, accordingly dismissed.

We shall now advert to the addition made under section 69C of the Act on account of alleged cash payment of trading profits to the HNI clients. This issue forms the principal grievance of the Revenue in its appeal as the Ld. CIT(A) has deleted the addition in its entirety. The Assessing Officer proceeded on the premise that although the trades were executed in the books of the assessee through its exchange membership, the actual beneficiaries of the profits were the HNI clients who traded through the Sub- ID platform. According to the Assessing Officer, after closure of the trading

The Ld. CIT(A), after an elaborate appreciation of the seized material, deleted the addition holding that although the evidence recovered during search established the existence of the Sub-ID mechanism, there was no direct evidence demonstrating that the trading profits reflected in the books of account had actually been withdrawn in cash and paid to the HNI clients. According to the Ld. CIT(A), the Assessing Officer had proceeded entirely on presumption without identifying any specific payment, any specific recipient or any contemporaneous record evidencing actual disbursement of profits.

The Ld. DR assailed the aforesaid finding and submitted that the Ld. CIT(A) failed to appreciate the cumulative effect of the incriminating material recovered during the course of search. According to him, once the Revenue has established that the HNI clients were the real beneficiaries of the trades executed through the assessee's Sub-IDs, the inevitable consequence is that the trading profits must have been returned to them. It was contended that the diary maintained by Shri Deepak Singh, the WhatsApp communications and the statements recorded under section 132(4) sufficiently establish the cash settlement mechanism and therefore the Assessing Officer was justified in invoking section 69C.

Per contra, the Ld. AR strongly supported the order of the Ld. Commissioner and submitted that the Revenue had sought to treat an inference regarding the alleged business model as proof of actual expenditure. No seized document evidences payment of trading profits to any identified HNI client; nor has the Revenue established the recipient, date or amount of any such payment or its correlation with a particular trading transaction. The diary maintained by Shri Deepak Singh merely records cash movements and does not state that such cash represented trading profits

The Ld. AR further submitted that the Revenue had adopted mutually inconsistent positions by treating the trading profits as business income of the Assessee while simultaneously alleging that those very profits belonged to the HNI clients and were paid to them in cash. In the absence of evidence establishing any actual cash outflow towards such payment, it was submitted that no addition u/s 69C could be sustained.

We have carefully considered the rival submissions. The Assessee has offered a net profit Rs. 343,33,29,008/-, Rs. 173,44,03,920/- and Rs. 147,29,06,651/- in respect of financial years 2020-21, 2021-22 and 2022-23 respectively, which includes the profit through Sub-Id. The Assessing Officer has attempted to tax the profit generated through Sub id again under the guise of unexplained expenditure under section 69C. In our considered opinion, the reasoning adopted by the Ld. CIT(A) deserves to be affirmed as the Assessing Officer has accepted the trading profits arising from the exchange transactions as the business income of the assessee. Those profits have been assessed to tax in the hands of the assessee. The Revenue has never excluded those profits from the computation of the assessee's income. Having adopted such a position, the Revenue cannot simultaneously proceed on the premise that the very same profits belonged to the HNI clients and were thereafter paid to them in cash. The two propositions are mutually inconsistent.

If the profits genuinely belonged to the HNI clients, they could not have been assessed as the assessee's business income in the first place. Conversely, once the profits have been assessed in the hands of the assessee, the Revenue cannot again presume that the identical profits were paid away in cash and seek to tax the same amount as unexplained expenditure. Such an approach results not merely in double taxation of the same stream of income but also in taxation founded upon contradictory factual assumptions. 24

The common issues arising in all the appeals are disposed of in the above terms.

The ground 2 raised by the assessee challenges the confirmation by the Ld. CIT(A) of the disallowance of ₹8,89,906/- out of stock exchange charges under section 37(1) of the Act. The Assessing Officer, on the basis of information obtained from NSE and MCX under section 133(6), treated the charges levied for shortfall in margin, breach of open position limits and other exchange-related defaults as penalty for violation of law and, accordingly, invoked the Explanation to section 37(1) of the Act.

Before the Ld. Commissioner, the Assessee contended that the impugned charges were compensatory in nature, arising from procedural/operational defaults in the ordinary course of share and commodity trading, and did not represent payment for commission of any offence or an act prohibited by law. The Ld. Commissioner, however, sustained the disallowance holding that the payments arose from violation of exchange regulations.

Before us, the Ld. AR reiterated that the nomenclature “penalty” used by the stock exchanges is not determinative and that the true nature of the levy is required to be examined. It was further submitted that no material exists to demonstrate commission of any offence or violation of any statutory prohibition by the Assessee.

We have heard the parties, perused the material available on record and given thoughtful consideration to the rival claims of the parties on the issue/addition under consideration. The Hon'ble Supreme Court in Prakash Cotton Mills Pvt. Ltd. v. CIT (1993) 201 ITR 684 (SC) has held that the nomenclature of a levy as penalty, damages or interest is not conclusive and its true character has to be examined to determine, whether it is compensatory or penal in nature.

More particularly, the Hon'ble Bombay High Court in CIT v. The Stock and Bond Trading Company, ITA No.4117 of 2010, order dated 14.10.2011, while dealing with payments to stock exchanges for defaults including failure to maintain margin and trading beyond exposure limits, relied on the judgment in the case of The Income Tax Commissioner Mumbai City-4 vs. Angel Capital & Debit Market Ltd. in Income Tax Appeal (L) No.475 of 2011 dated 28th July, 2011 and ultimately held that such payments for violation of exchange regulations were not on account of an offence or an act prohibited by law and, therefore, the Explanation to section 37(1) was not attracted.

In the present case also, nothing has been brought on record to demonstrate that the impugned charges were incurred for commission of any offence or for an act prohibited by law. The charges arose in the ordinary course of trading operations on account of margin/open-position and similar exchange-related defaults. Therefore, merely because the exchanges described such charges as “penalty”, the same cannot, by itself, attract the Explanation to section 37(1) of the Act.

Thus, respectfully following the aforesaid principles, we are of the considered view that the disallowance of Rs.8,89,906/- is unsustainable. The same is, accordingly, deleted.

Ground (c) in Revenue's Appeal relates to deletion of disallowance of loss of Rs.2,42,280/- on reversal trading. The Revenue is aggrieved by the deletion of the disallowance of loss of Rs.2,42,280/- arising from alleged reversal trading.

The Assessing Officer treated certain exchange trades as reversal trades intended to generate artificial losses and disallowed the aforesaid loss. The Ld. CIT(A), however, deleted the addition after noticing that the transactions were executed through recognized stock exchanges and that no material had been brought on record to establish any prior arrangement or manipulation.

Before us, the Ld. AR submitted that the allegation is based merely on trade pattern analysis, without any corroborative evidence. It was pointed out that the Assessee had undertaken trading transactions exceeding Rs.3.94 lakh crores during the year and the alleged reversal trades, constituted an insignificant fraction thereof. It was further submitted that exchange transactions are executed through anonymous screen-based systems where neither buyer nor seller knows the identity of the counterparty and, therefore, the allegation of synchronized reversal trading is without factual foundation. Reliance was placed on the written submissions and the judicial principles that additions cannot be sustained merely on suspicion or probabilities.

Having considered the rival submissions, we find no infirmity in the order of the Ld. CIT(A). Except drawing an inference from the trading pattern, the Assessing Officer has not brought any independent material to establish that the impugned transactions were sham or pre-arranged. The transactions were routed through recognized stock exchanges and duly recorded in the books of account. In the absence of any cogent evidence 27

On the basis of the foregoing discussion, our decision for Assessment Year 2022-23 is summarized below:-

Accordingly, ITA No.4019/Mum/2025 filed by the assessee is partly allowed and ITA No.4947/Mum/2025 filed by the Revenue is dismissed.

The Revenue in this appeal has raised following grounds :-

Grounds (a) to (d) involve the common Sub-ID issues adjudicated in the lead year. Consistent with those findings, Grounds (a) and (b) are partly allowed for statistical purposes and the Assessing Officer shall compute only such interest income as is directly evidenced by contemporaneous seized material pertaining to Assessment Year 2021-22, without applying a uniform rate or importing figures from another year. Ground (c), concerning the addition under section 69C, is dismissed. Ground (d) is allowed and the commission addition of Rs.71,51,964/- made by the Assessing Officer is restored. The existence of the activity and commission rate stand evidenced by the seized material, as discussed in the lead year.

Ground Nos. (e) and (f) raised by the Revenue challenge the action of the Ld. Commissioner in deleting the disallowance of Rs.241,94,86,513/-, being the loss claimed by the Assessee on sale of shares of Infibeam Avenues Ltd. The controversy is whether the loss arose as a consequence of genuine exchange-traded transactions surrounding a bonus issue, or whether the transactions formed part of a pre-arranged or synchronized mechanism designed to generate an artificial loss.

The AO treated the loss as artificial. In doing so, he referred to the substantial investment made by Shri Ravi Agarwal in the scrip, statements of Shri Ravindra Maloo, Shri Suraj Omprakash Agarwal and Shri Ajay Kejriwal, alleged synchronized trading through connected entities and common dealers, the proximity of the Assessee's purchases to the bonus record date and the fact that the resultant loss was set off against substantial profits from derivative trading. According to the AO, the cumulative circumstances indicated a structured transaction for generating a tax loss.

Before the Ld. Commissioner, the Assessee relied upon the stock- exchange trade data, demat records, contract notes, banking trail and statutory levies. The Assessee also submitted that the trades were executed through the recognised exchange and registered brokers and that none of the statements relied upon by the AO identified any specific buy or sell order of the Assessee as having been matched with a predetermined counter-party.

The Ld. Commissioner examined the transaction data and found that the allegation of sustained synchronized trading between the Assessee and Shri Ravi Agarwal was not borne out from the record. He noticed that there was no inter se purchase or sale between them from 09.08.2019 to 16.03.2021 and that the only possible overlap was on 17.03.2021. Even for that date, the overall market volume was substantial and no order-level data had been brought on record to establish matching of quantity, price and timing pursuant to a prior arrangement.

The Ld. Commissioner also examined the allegation of price manipulation. The NSE data noticed by him showed that the scrip traded

The Ld. DR assailed the above findings by submitting that the transactions could not be examined in isolation and that the search statements, timing and volume of trades, relationship between the concerned parties, use of common dealers and resultant tax effect had to be read cumulatively. Reliance was placed upon SEBI v. Rakhi Trading (P.) Ltd., Civil Appeal Nos. 1969, 3174-3177 and 3180 of 2011, decided on 08.02.2018 (SC), and Kaushik Chandravadan Parikh v. ACIT [2025] 172 taxmann.com 694 (Mumbai-Trib.), ITA No.2064/Mum/2023, decided on 26.07.2024. The Ld. DR also that where the trading pattern and surrounding evidence establish pre- arrangement or manipulation, the apparent exchange mechanism or formal documentation cannot, by itself, establish genuineness.

On the contrary, the Ld. Counsel submitted that the legal proposition advanced by the Revenue could apply only after the Revenue establishes the foundational facts of manipulation in the particular transactions. The Ld. Counsel also contended that there was no order-level matching, circularity, reversal pattern or predetermined counter-party demonstrated in the Assessee's trades. Reliance was placed upon CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC) and DCIT v. B.G. Mahesh [2014] 43 taxmann.com 158 (Bang.-Trib.).

We have considered the rival submissions. There can be no dispute with the general proposition that the apparent documentary form of a transaction is not conclusive, where contemporaneous evidence establishes that the trades were collusive, circular, reversal-based, synchronized or otherwise pre-arranged. Equally, however, such a conclusion must rest upon transaction-specific material and cannot be sustained merely because the timing or tax effect of the transaction appears unusual. 32

In the present case, no comparable transaction-level features have been demonstrated. The Revenue has not produced order-wise data showing matching of the Assessee's buy or sell orders with corresponding orders of Shri Ravi Agarwal or any predetermined counter-party in quantity, price and timing; nor has it demonstrated repeated reversal trades, circularity or artificial volumes. The factual foundation which supported the inference in Rakhi Trading (supra) and Kaushik Chandravadan Parikh (supra) is therefore absent. Mere simultaneous participation in the market, even when read with the wider search material, cannot by itself establish synchronization of the Assessee's impugned trades.

The statements relied upon by the AO also do not bridge this evidentiary gap. Shri Ravindra Maloo referred to his own alleged arrangement with Shri Ravi Agarwal; Shri Suraj Omprakash Agarwal referred broadly to investments associated with Shri Ravi Agarwal; and Shri Ajay Kejriwal, as recorded in the material before us, did not identify the specific orders of the Assessee which generated the impugned loss. None of these statements demonstrates a matched counter-party transaction corresponding to the Assessee's actual purchase or sale orders.

CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC) is relevant to the limited proposition that a genuine transaction does not become sham merely because it is pre-planned or results in a tax advantage; the statutory consequence has to follow unless the transaction itself is shown to be non-genuine or the statute specifically disallows the loss. The principle, therefore, does not prevent examination of a colourable or collusive arrangement, but it does require the Revenue to first establish that character by evidence.

DCIT v. B.G. Mahesh [2014] 43 taxmann.com 158 (Bang.-Trib.)/64 SOT 39 (Bang.-Trib.) specifically noticed that section 94(8), as it then stood, applied to 'units' and not to 'securities', and therefore did not authorise disallowance of loss arising on sale of original shares after a bonus issue merely as bonus stripping. The amendment extending section 94(8) to securities applies from 01.04.2023. Accordingly, for the period involved here, resemblance to bonus stripping, by itself, cannot sustain the disallowance unless the underlying share transactions are independently shown to be sham, collusive or manipulative.

We also notice that the remaining bonus shares were subsequently sold and the corresponding sale consideration was offered to tax and accepted. Though not decisive in isolation, this fact supports the conclusion that the acquisition, bonus allotment and subsequent disposals represented actual market transactions rather than fictitious book entries.

Thus, though a sham, collusive or colourable arrangement may be disregarded notwithstanding its documentary form, the foundational fact necessary for applying that principle—namely, that the Assessee’s transactions in Infibeam Avenues Ltd. were sham, circular, reversal, synchronised or manipulative—has not been established. Neither the search material concerning the wider group nor the tax advantage arising from the loss can substitute proof that the particular transactions giving rise to the loss were artificial.

We, therefore, find no infirmity in the findings of the Ld. Commissioner deleting the disallowance of Rs.241,94,86,513/- arising from the sale of shares of Infibeam Avenues Ltd.

Accordingly, Ground Nos. (e) and (f) raised by the Revenue are dismissed.

Ground No. (g) raised by the Revenue challenges the deletion of the protective addition of Rs.247,54,50,000/- u/s 69A. Since the substantive addition for A.Y. 2022-23 has itself been deleted on the ground that the Assessee’s ownership of the alleged cash margin was not established, the corresponding protective addition cannot survive. Accordingly, Ground No. (g) is dismissed.

Ground No.1(a) and 1(b) in the assessee's appeal contain a general challenge to the validity of the reassessment proceedings. No specific statutory infraction, jurisdictional fact or supporting material was advanced before us to sustain these grounds. They are accordingly dismissed. Ground No.2 concerns disallowance of stock-exchange charges of Rs.7,60,625/-. For the reasons recorded while deciding the identical issue in Assessment Year 2022-23, the charges are compensatory business expenditure and do not fall within the Explanation to section 37(1). The disallowance is deleted and Ground No.2 is allowed.

Accordingly, ITA No.4037/Mum/2025 filed by the assessee is partly allowed. ITA No.4948/Mum/2025 filed by the Revenue is partly allowed in the terms indicated above.

The Revenue in this appeal has raised following grounds: -

Grounds (a) to (e) involve issues adjudicated in the lead year. Consistent therewith, Grounds (a) and (b) are partly allowed for statistical purposes and the Assessing Officer shall compute only such interest income as is directly evidenced by contemporaneous seized material pertaining to Assessment Year 2023-24, without estimation or extrapolation. Ground (c), concerning section 69C, is dismissed. Ground (d) is allowed and the commission addition of Rs.51,72,698/- is restored. Ground (e), concerning reversal-trading loss of Rs.1,69,909/-, is dismissed because no independent material establishes that the exchange trades were sham or pre-arranged.

Ground Nos. (f) to (h) in the Revenue's appeal for A.Y. 2023-24 challenge the action of the Ld. Commissioner in deleting the addition of Rs.254,18,00,000/- made by the AO u/s 68 of the Act in relation to Optionally Fully Convertible Debentures (OFCDs). Since this issue arises specifically in A.Y. 2023-24, it is examined separately on its own facts.

During the year, the Assessee issued OFCDs aggregating to Rs.655 crore to M/s Teesta Retail Pvt. Ltd. at a face value of Rs.100/- per OFCD. The instruments carried zero coupon, had a tenure of 20 years and were convertible, partly or wholly, into equity shares on or after five years from the date of allotment. The instruments were issued in different tranches and were supported by valuation reports prepared by a registered valuer.

The AO noticed that the numerical values of the option components appearing in the valuation reports on different dates ranged approximately from Rs.58.43/- to Rs.75.81/- per OFCD, whereas the instruments were issued at Rs.100/- each. On this basis, the AO worked out an aggregate 38

The AO also relied upon the surrounding circumstances. He noticed that M/s Teesta Retail Pvt. Ltd. had utilized borrowed funds for subscribing to zero-coupon instruments; that the Assessee had commenced business from F.Y. 2019-20; that substantial loans from M/s Umang Trading Pvt. Ltd. were outstanding; and that the business of trading in shares, securities, commodities and derivatives involved uncertain returns. According to the AO, these factors made the investment commercially improbable.

The AO further relied upon the diary seized from the premises of Shri Deepak Singh, which contained cash entries aggregating to Rs.64.15 crore in the name of M/s Teesta Retail Pvt. Ltd. The early redemption of certain debentures separately issued by M/s Umang Trading Pvt. Ltd. to the same subscriber was also noticed. On cumulative consideration of these circumstances, the AO inferred that the OFCD subscription represented an arranged mechanism for routing unaccounted funds and made the addition u/s 68.

Before the Ld. Commissioner, the Assessee produced the debenture application forms, terms of issue, statutory filings including Form PAS-3, audited financial statements, bank statements, corporate approvals and the valuation reports. It was submitted that the entire subscription was received through banking channels and duly recorded in the books of both entities.

The Assessee further pointed out that the identity of M/s Teesta Retail Pvt. Ltd. was never disputed and that its financial capacity was demonstrated by its audited accounts. The AO himself had noticed the source of the funds, including borrowings from Reliance Strategic Business Ventures Ltd. According to the Assessee, therefore, both the immediate source and the source from which the subscriber obtained funds stood identified.

As regards valuation, the Assessee contended that the AO had relied selectively upon intermediate numerical values in the report while ignoring 39

The Assessee also denied any nexus between the cash entries in the diary and the OFCD subscription. It was pointed out that the diary figure of Rs.64.15 crore neither corresponded with the aggregate subscription of Rs.655 crore nor with the addition of Rs.254,18,00,000/-. No corresponding cash deposit, intermediary account or banking trail was identified to show that any cash moved to M/s Teesta Retail Pvt. Ltd. and thereafter returned to the Assessee through the OFCD subscription.

The Ld. Commissioner examined the documentary material and found that the identity of M/s Teesta Retail Pvt. Ltd. was undisputed; its audited financial statements demonstrated substantial resources; and the source of the subscription funds had itself been identified during the assessment. He further noticed that the same valuation report relied upon by the AO ultimately recommended issue at Rs.100/- per OFCD. The seized diary, though relevant, was found not to be connected by any money trail with the impugned subscription. On these findings, the Ld. Commissioner held that the Assessee had discharged the initial onus under section 68 and deleted the addition.

The Ld. DR assailed the aforesaid conclusion and submitted that corporate documentation and the routing of funds through banking channels are not conclusive where the surrounding material raises doubt regarding the real source and genuineness of the credit. Reliance was placed upon Pr. CIT v. Jaguar Buildcon Pvt. Ltd. [2025] 481 ITR 477 (Delhi)/177 taxmann.com 504 (Delhi), wherein it was held that proof of the investor’s identity alone does not discharge the onus u/s 68 if its creditworthiness, financial capacity, genuineness of the transaction and fund trail remain unproved. The SLP filed 40

On the contrary, the Ld. Counsel submitted that the Assessee had discharged the primary onus u/s 68 by producing contemporaneous material establishing the identity and financial capacity of M/s Teesta Retail Pvt. Ltd., the source of funds and the banking trail of the subscription. Reliance was placed upon CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 (SC), CIT v. Orchid Industries (P.) Ltd. [2017] 397 ITR 136 (Bom.)/[2017] 88 taxmann.com 502 (Bom.) and Pr. CIT v. Shree Rajlakshmi Textile Park (P.) Ltd. [2020] 268 Taxman 405 (Bom.)/[2020] 113 taxmann.com 2 (Bom.) to contend that where the assessee furnishes cogent evidence concerning the subscriber and the transaction, the addition cannot be sustained merely because the Revenue entertains suspicion or the investor does not personally appear.

We have also heard the parties on this issue, perused the material available on record and given thoughtful consideration to the rival submissions.

The enquiry u/s 68 is whether the nature and source of the credit have been satisfactorily explained. In the present case, it requires examination of whether the identity and financial capacity of the subscriber and the genuineness of the transaction stand established, or whether the seized material demonstrates that the apparent subscriber was merely a conduit for introducing the Assessee’s unaccounted money.

The authorities relied upon by the parties turn on their respective evidentiary records. Jaguar Buildcon (supra) and BST Infratech (supra) establish that identity or banking documentation alone cannot conclude the

Applying these principles, the identity of M/s Teesta Retail Pvt. Ltd. is not disputed. Its financial statements, as examined by the Ld. Commissioner, disclose substantial capital, reserves and borrowings. The immediate source of the subscription, including the borrowings utilized by the subscriber, was also identified during the assessment proceedings. Thus, this is not a case where the source remained untraceable or the subscriber was shown to lack the financial capacity to make the investment.

The use of interest-bearing borrowed funds for investing in zero- coupon convertible instruments may justify closer scrutiny of the commercial rationale. However, commercial imprudence, even if assumed, is not synonymous with an unexplained credit. Section 68 concerns the nature and source of the credit and the genuineness of the transaction; it does not authorize an addition merely because the AO considers the investment economically unattractive.

The valuation report must also be considered in its entirety. Although the AO relied upon the numerical values assigned to certain components in the report of the registered valuer, the same report ultimately recommended issuance of the OFCDs at their face value of Rs.100/- each. The intermediate valuation figures may justify scrutiny, but, in the absence of evidence of unaccounted consideration or an accommodation entry, the arithmetical difference cannot, by itself, be treated as unexplained money of the Assessee.

Further, no Director or Authorised Representative of M/s Teesta Retail Pvt. Ltd. is shown to have admitted that the OFCD subscription represented an accommodation entry or that the subscriber had received cash from the Assessee in consideration thereof. Thus, although the seized diary and surrounding circumstances justified a detailed investigation, no evidentiary nexus has been established between the alleged cash movement and the subscription recorded in the books.

The present case is, therefore, materially distinguishable from Jaguar Buildcon and BST Infratech (supra). Here, the subscriber’s identity is undisputed; its audited financial position and available funds were examined; the source of the subscription was identified; the issuance of OFCDs is supported by contemporaneous corporate and banking records; and the registered Valuer ultimately recommended their issuance at Rs.100/- per OFCD.

The evidentiary position is consequently closer to the principles applied in Orissa Corporation, Orchid Industries and Shree Rajlakshmi Textile Park (supra). Once the Assessee furnished primary evidence establishing the identity and financial capacity of the subscriber, the source of funds and the genuineness of the transaction, the Revenue was required to displace that evidence by material connecting the apparent credit with the alleged unexplained source. No such connecting evidence has been brought on record.

Consequently, Ground Nos. (f) to (h) raised by the Revenue are dismissed.

Ground (i) challenges deletion of the protective addition of Rs.247,54,50,000/- under section 69A. For the reasons recorded in the lead year, the substantive addition has been deleted since ownership of the alleged cash margin in the hands of the assessee was not established. The protective addition therefore cannot survive and Ground (i) is dismissed.

The sole substantive ground in the assessee's appeal concerns disallowance of stock-exchange charges of Rs.28,34,176/-. For the reasons recorded in Assessment Year 2022-23, the charges are compensatory business expenditure and do not attract the Explanation to section 37(1). The disallowance is deleted and the ground is allowed.

Accordingly, ITA No.4038/Mum/2025 filed by the assessee is allowed. ITA No.4949/Mum/2025 filed by the Revenue is partly allowed in the terms indicated above.

The cross-objections support the deletion of the protective additions and also challenge the evidentiary use of the statements and digital material. The protective additions have already been held unsustainable while deciding the Revenue's appeals, whereas the common evidentiary objections have been adjudicated in the lead year. No separate relief therefore survives in the

In the combined result: