DHIRAJLAL AND COMPANY,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 19(1), MUMBAI

Both the appeals pertain to the same assessee and arise out of different issues. Since the appeals were heard together, they are being disposed of by this common order for the sake of convenience; however, each appeal is adjudicated separately on its respective issues.

The brief facts of the case are that the assessee is a partnership firm carrying on business and manufacturing of automotive thinner. The assessee purchased various raw materials used for manufacturing of the finished products are sourced from refineries or through their authorized agent or through importers of such materials. The raw materials being liquid and are supplied in tankers. Such tankers are emptied at factory by transferring such raw material to barrels. The products manufactured by the assessee are being supplied to the automobile and engineering industries all across India. The major customers are Tata Motors, Tata Auto Plastics, Mahindra and Mahindra Escorts, etc. Apart from the said large consumers, supplies are also being made to various traders also. The assessee being a small scale industrial undertaking, had claimed deduction at the fact of 25% of eligible profits under provision u/s 80IB of the Act. The assessee had obtained the report as required under the provision u/s. 80IB vide Form No. 10CCB and attached with the return. The said report was filed during the course of assessment proceedings. The assessment was originally completed under section 143(3) of the Act on 15.12.2013 by assessing total income Rs 71,84,435/- after allowing deduction under section 80IB amount to Rs 25,14,152/-. The assessee was issued notice under section 148 dated 10.03.2014 and the same was served on 10.03.2014. During the reassessment proceeding, the Ld. AO found that the assessee purchased new barrels from M/s Vijay Barrel Company amount to Rs 48,92,058/-. The Ld. AO had considered the entire purchase as a bogus, so the said purchase was added back with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A), but the Ld. CIT(A) upheld the impugned reassessment order. Being aggrieved, assessee has challenged the impugned appellate order before us through the appeal bearing ITA No. 955/M/2026. Further, the assessee's case was initiated for reassessment under section 147 and the notice was issued under section 148 of the Act, related to the loss claimed by the assessee amount to Rs 3,00,362/- incurred by the assessee in derivatives segment of the capital market on the ground of client code modification. The Ld. AO on basis of the information from DDIT Investigation had issued the notice under section 148 and completed the reassessment proceeding with the addition amount to Rs 3,00,362/- with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A), but the Ld. CIT(A) upheld the impugned reassessment order. Being aggrieved, assessee filed another appeal before us through ITA No. 956/M/2026.

The Ld. AR filed two combined paper books comprising pages 1 to 345 and pages 1 to 66 which have been placed on record. The Ld. AR contended that during the assessment proceeding the assessee had complied the notice of the Ld. AO and filed the relevant documents related to the purchase from the entity, M/s Vijay Barrel Company (VBL). The following list of documents are submitted before the Ld. AO which are also annexed in assessee's paper book as follows:

The Ld. AR argued that the assessee had duly established the genuineness of the transactions and the identity of the parties before the revenue authorities. In support thereof, the assessee had furnished copies of road challans, purchase bills, ledger accounts and quantitative details of stock before both the Ld. AO and the Ld. CIT(A). The Ld. AR further contended that, for AY 2009–10, the assessment was completed by the Ld. Income Tax Officer, 19(1)(4), Mumbai, under section 143(3) r.w.s. 147 of the Act vide order dated 03.02.2015, wherein an identical issue relating to purchases from the same party, M/s VBL, was considered and the addition was restricted to 12.5% of the alleged purchases. The Ld. AR further submitted that an identical issue arose in AY 2011–12, wherein the Ld. AO had made an addition of the entire amount of the alleged purchases. The matter was carried in appeal before the Ld. CIT(A). The Ld. Commissioner of Income Tax (Appeals), ADDL/JCIT(A)-1, Bangalore, vide order dated 24.12.2025 passed under section 250 of the Act, considered the assessee's contentions and restricted the addition to 12.5% of the alleged bogus purchases. The Ld. AR also submitted that, in respect of AY 2009–10, the assessee had not preferred any further appeal against the addition sustained at 12.5% of the alleged bogus purchases and had, therefore, accepted the said addition.

The Ld. DR supported the orders of the revenue authorities.

We have heard the rival submissions and considered the documents available on record. The assessee's case was reopened under section 147 of the Act. In the reassessment proceedings, the Ld. AO made an addition in respect of purchases from M/s VBL amounting to Rs.48,92,058/-. During the assessment proceedings, the assessee furnished relevant documentary evidence, including purchase bills, transport documents, quantitative details and bank statements evidencing the payments. However, the Ld. AO was not satisfied with the evidence so furnished and added the entire amount of the purchases to the total income of the assessee. It was further brought to our notice that, for AY 2009–10, an identical issue involving purchases from the same party had arisen in the assessee's own case, wherein the Ld. AO restricted the addition to 12.5% of the alleged purchases. Similarly, for AY 2011–12, the Ld. CIT(A), while considering an identical issue, relied upon the judgments of the Hon'ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises Pvt. Ltd. reported in 372 ITR 619 (Bom) and the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Sheth, reported in 356 ITR 451 (Guj), and restricted the addition to 12.5% of the alleged bogus purchases. The Ld. AR further submitted that the assessee had not preferred any appeal against the addition restricted to 12.5% for AY 2009–10. In the year under consideration, the assessee has placed on record documentary evidence in support of the purchases, including purchase bills, transport documents, ledger accounts, bank statements and quantitative details of stock. It was also submitted that the purchases from the said party did not pertain to raw materials but comprised steel containers, both new and old. Considering the aforesaid facts and the treatment accorded to identical transactions involving the same party in the assessee's own case for AYs 2009– 10 and 2011–12, and respectfully following the judicial precedents referred to above, we restrict the addition to 12.5% of the alleged bogus purchases. Accordingly, the order of the Ld. CIT(A) is set aside to this extent, and the Ld. AO is directed to restrict the addition to 12.5% of the purchases made from M/s VBL. Accordingly, the Ground No. IV (c) of assessee’s appeal is allowed.

With regard to Ground Nos. VI(a) and VI(b), we find that the Ld. CIT(A) had duly adjudicated the issue and restored the matter to the file of the Ld. AO for fresh consideration. Considering the findings of the Ld. CIT(A), as well as the relief granted by us in respect of the alleged bogus purchases, the assessee's claim for deduction under section 80-IB of the Act requires fresh consideration, being consequential in nature. Accordingly, we restore the issue to the file of the Ld. AO with a direction to examine the assessee's claim on the basis of the evidence furnished and adjudicate the same afresh in accordance with law. The Ld. AO shall afford the assessee a reasonable opportunity of being heard before deciding the issue. Accordingly, Ground Nos. VI(a) and VI(b) raised by the assessee are allowed for statistical purposes.

The Ld. AR contended that the assessee had regularly traded in the stock exchange. Further, the assessee had no knowledge of any alleged Client Code Modification. The transactions were carried out through broker, M/s Stockastics Securities Private Limited, which, vide its letter dated 28.11.2016, duly confirmed that the assessee was not involved in any Client Code Modification (CCM). Further, the Ld. AR submitted documents in support of the assessee's claim before the Ld. AO as well as the Ld. CIT(A). However, the Ld. AO finally admit the addition, and the said addition was also confirmed by the Ld. CIT(A). The Ld. AR contended that the identical issue was duly considered by the coordinate bench of ITAT Mumbai in the case of ACIT v. Suman Gandhi reported in (2026) 183 taxman.com 217 (Mumbai-Trib). The relevant paragraphs 7 to 10 of the order of coordinate bench are reproduced as below: “7. We have considered rival submissions and perused the materials on record. As could be seen from the observations of the first appellate authority, the assessee's books of accounts of the impugned assessment year indicates that she had total purchases of Rs.9,34,96,345/- and sales of Rs.9,53,59,139/- and shown gross profit of Rs.18,72,794/-through transactions undertaken in NSEL. There is a categorical finding of fact by the first appellate authority that the transactions of purchase and sale at NSEL are pair trade, meaning thereby, against each purchase transaction there is a corresponding sale transaction. Therefore, against each alleged Client Code Modification transaction there is equal quantity of either purchase or sale, hence, only resultant profit/loss arising for such transaction has to be considered. Another crucial factor which has to be borne in mind is, the broker M/s. AnandRathi Commodities Ltd. through whom the assessee had undertaken the transactions had stated before the A.O. that though it had undertaken Client Code Modification, however, it was done without any instructions of the assessee and was done to save time as the trade was punched on a single client code and then shifted to the client on whose name the trade was done. Thus, the statement of broker, unequivocally demonstrates that Client Code Modification, if any, was neither in the knowledge of the assessee, nor she had instructed the broker to do so. Further, A.O. has not specified the details of transactions undertaken by the assessee where client code is modified. Thus, when the Client Code Modification, if any, was undertaken by the broker, without any involvement or knowledge of the assessee, the assessee cannot be punished for such conduct of the broker that too when there is no specific allegation that the assessee derived any positive gain through such transactions. In case of AashishNiranjan Shah v. UOI [2024] 167 taxmann.com 561 (Bombay), the Hon'ble Jurisdictional High Court while dealing with the identical issue has held as under: 24. It is a matter of public knowledge that client codes entered by a stock broker at the time of execution of the trades are permitted to be modified within a stipulated time after execution, if the stock broker finds that there has been any error in entering the correct client code. In the instant case, there is nothing to show whether such modification had been effected by the stock broker to deal with his errors in execution or whether the modification has been effected under instructions of the Petitioner. Besides, every transaction executed under the Petitioner’s client code and thereby captured in his books of accounts have been subjected to scrutiny assessment. If someone else's client code had been entered by the stock broker and that had been changed to the Petitioner's client code, the transaction would get captured in the Petitioner's books and would be part of the material scrutinized. If it is the Petitioner's client code that had been originally entered by the stock broker, leading to it being modified after execution, it would have no bearing on the income of the Petitioner, since it would be the person whose client code was entered upon modification, whose taxation would be impacted. Therefore, fore, without any basis to show that there had been a failure on the Petitioner's part in making a full and truthful disclosure of material facts, the very jurisdiction to initiate reassessment as provided for in Section 147 would not be attracted. 8. In case of Pr. CIT v. Pat Commodity Services Pvt. Ltd. (IT Appeal No. 1257 of 2016, dated 15-1-2019] the Hon'ble Jurisdictional High Court has held as under:

The Ld. DR relied upon the orders of the revenue authorities. 12. We have heard the rival submissions and carefully considered the material available on record. The assessee originally filed its return by declaring loss of Rs.3,00,362/-/-. On the merits of the addition, we find that the revenue has treated the assessee as a beneficiary of alleged Client Code Modification (CCM) transactions and made additions with the total income. However, the issue is no longer res integra. The Coordinate Bench of the ITAT, Mumbai, in Suman Gandhi (supra). has categorically held that, in the absence of cogent material establishing the assessee's involvement in the alleged CCM arrangement, additions cannot be sustained merely on the basis of information received from the Investigation Wing. The Tribunal further held that unless there is evidence to establish the assessee's participation in the alleged manipulation, together with corroborative material demonstrating that the impugned transactions were sham or collusive, no addition can be made. In the present case, except for the information received from the Investigation Wing, the revenue has not brought any independent or corroborative evidence on record to establish that the assessee was a party to any fraudulent CCM activity. The relevant confirmatory letter from broker is also placed on record which is mentioned that the assessee is not involved / beneficiary in CCM. No material has been placed before us to demonstrate any collusion between the assessee and the broker or any other beneficiary, nor has any evidence been brought on record to show that the impugned transactions were fictitious or that the assessee received any accommodation entries. Significantly, the Ld. DR was also unable to distinguish the decision of the Coordinate Bench relied upon by the Ld. AR or cite any contrary judicial precedent. Respectfully following the decision of the Coordinate Bench in Suman Gandhi (supra), we hold that the addition of Rs.3,00,362/- is unsustainable in law.

In the result, the appeal of the assessee bearing ITA No.955/Mum/2026 is partly allowed for statistical purposes and ITA No. 956/Mum/2026 is allowed.