KAUSSHAL BAGADIA HUF ,MUMBAI vs. ITO WARD 25(1)(1), MUMBAI

INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: H(SMC)

BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI JAGADISH, ACCOUNTANT MEMBER

ITA 903/MUM/2026 िनधा�रण वष�/Assessment Year: 2014-15) KAUSSHAL BAGADIA HUF ITO WARD 25(1)(1) 28, IRIS , CUFFE PARADE, ROOM NO. 236, 2ND MUMBAI-400005, FLOOR, KAUTILYA BHAVAN, MAHARASHTRA BANDRA KURLA COMPLEX Vs. BANDRA EAST MUMBAI-400051, MAHARASHTRA अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of AADHK2838R Assessee:

अपीलाथ� �ारा/Appellant represented by: Ms. Dinkle Hariya, Adv. ��थ� �ारा/Respondent represented by: Shri. Pravin Salunkhe, Sr.DR

सुनवाई की तारीख / Date of conclusion of hearing: 23-Jun-2026 घोषणा की तारीख / Date of pronouncement: 29/06/2026 आदेश / ORDER PER SMT. BEENA PILLAI, JUDICIAL MEMBER:

Present appeal filed by assesse arises out of the order passed by NFAC, Delhi [hereinafter referred to as “Ld.CIT(A)”] dated 06/11/2025 for A.Y. 2014-15 on following grounds of appeal:-

“1. THE ORDER IS BAD IN LAW, ILLEGAL AND WITHOUT JURISDICTION 1.1 In the facts and the circumstances of the case, and in law, the appellate order u/s. 250 of the Income-tax Act, 1961 ['the Act'] framed and passed on 06.11.2025 by the Commissioner of Income-tax (Appeals) National Faceless Appeal Centre (NFAC), Delhi ['Ld. CIT (A)'] is bad in law, illegal and without jurisdiction, as the same is framed in breach of the statutory provisions of the Act and the scheme and as otherwise also is not in accordance with the law. 1.2 Without prejudice to the generality of the above, the appellate order so passed is bad in law, illegal and void as the same is arbitrary and perverse. 2. VIOLATION OF PRINCIPLES OF NATURAL JUSTICE

2.1 In the facts and the circumstances of the case, and in law, the appellate order so framed is bad in law and illegal, as the same is framed in breach of the principles of Natural Justice. 2.2 Without prejudice to the generality of the above ground, in the facts and the circumstances of the case, the Ld. CIT (A) erred in -

(i) not granting proper, sufficient, reasonable and fair opportunity of being heard to the Appellant while passing the appellate order; and

(ii) not granting an opportunity of personal hearing. 3. CHALLENGE TO REASSESSMENT

3.1 The Ld. CIT (A) erred in confirming the action of the A.O. in initiating the reassessment proceeding and framing the assessment of the Appellant by invoking the provisions of section 147 r.w.s. 148 of the Act. 3.2 While doing so, the Ld. CIT (A) failed to appreciate that:

(i) The case of the Appellant did not fall within the parameters laid down by section 147 r.w.s. 148, 149 & 151 of the Act;

(ii) The necessary preconditions for initiating the reassessment proceeding and completion thereof were not satisfied. 3.3 It is submitted that in the facts and the circumstances of the case, and in law, the reassessment framed is bad in law, illegal and without jurisdiction. WITHOUT PREJUDICE TO THE ABOVE:

5.1 The CIT(A) erred in confirming the action of the A.O. in making addition of an adhoc hypothetical amount of Rs. 15,98,000/- as income of the Appellant on the ground of alleged client code modification in respect of share transactions. 5.2 While doing so, the Ld. CIT(A) erred in -

(i) Basing his action only on surmises, suspicion and conjecture;

(ii) Taking into account irrelevant and extraneous considerations; and

(iii) Ignoring relevant material and considerations as submitted by the Appellant. 5.3 It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for. 5.4 Without prejudice to the above, assuming – but not admitting – that some addition was called for, the Ld. CIT (A) failed to appreciate that the computation of the addition made by the A.O. is not in accordance with the law, is arbitrary, and excessive. WITHOUT PREJUDICE TO THE ABOVE:

6.1 The CIT(A) erred in confirming the action of the A.O. in incorrectly assessing the total income of the Appellant at Rs. 40,94,840/- in the computation sheet annexed to the assessment order as against the assessed income of Rs. 24,96,840/- arrived at in the assessment order. 6.2 While doing so, the Ld. CIT(A) failed to appreciate that the computation of income under the head 'Income from Other Sources' of Rs. 32,28,315/- is a typographical error, in place of Rs. 32,315/-.

6.3 It is submitted that in the facts and the circumstances of the case, and in law, the computation of the assessed income in the computation sheet is incorrect. 7. LIBERTY The Appellant craves leave to add, alter, delete or modify all or any the above ground at the time of hearing.” 2. Brief Facts of the case are as under:

The assessee, filed his return of income for the year under consideration on 28.11.2014, declaring total income of ₹8,98,840/. Subsequently, the case of the assessee was reopened under section 147 of the Act based on information received from the investigation wing concerning Client Code Modification. As per the information received from NSEL, after analysis of the data and examination of the brokers, it was found that several brokers had carried out client code modifications involving substantial transactions.

2.1. The assessee was identified as one of the clients whose name appeared in the list of modified clients provided by NSEL. The assessee had allegedly undertaken transactions through M/s. Anand Rathi Commodities Ltd., wherein client code modifications were carried out. The information suggested that the assessee had undertaken sale transactions amounting to ₹15,92,000/- and purchase transactions amounting to ₹2,58,34,870/- through the said broker, and the sale transactions were allegedly not disclosed in the return of income.

2.2. Based on the aforesaid information, the Ld.AO recorded reasons to believe that income chargeable to tax exceeding ₹1 lakh had escaped assessment and accordingly issued notice under section 148 of the Act dated 30.03.2021 after obtaining necessary approval from the competent authority.

2.2.1. In response to the notice under section 148, the assessee filed return of income on 26.04.2021, declaring total income of ₹8,98,840/-. Subsequently, notice under section 143(2) and notices under section 142(1) of the Act were issued from time to time seeking details and explanations from the assessee.

2.3. During the reassessment proceedings, the assessee submitted that it had not carried out any client code modification and had no control over any such modifications undertaken by the broker. The assessee denied having given any oral or written instructions for modification of client codes and furnished supporting documents such as contract notes, demat statements, and bank statements. The assessee also explained that during FY 2013-14 it was engaged in financing, brokerage activities and commodity trading on the NSEL platform through M/s Anand Rathi Commodities Ltd.

2.4. The assessee stated that the transactions on NSEL commenced from 06.05.2013 and were undertaken based on the understanding that there existed a price difference between spot and futures markets, enabling arbitrage profits. The trades were executed through the broker on telephonic instructions, and the assessee claimed that the subsequent NSEL crisis occurred within a short span of commencement of trading. The assessee reiterated that it had no role in or knowledge of any client code modifications.

However, the Ld.AO, after considering the information received from NSEL and the submissions of the assessee, observed that the assessee had undertaken sale transactions amounting to ₹15,92,000/- which were not reflected in the return of income or corroborated by the documents submitted. According to the Ld.AO, the client code modifications resulted in shifting of transactions and the assessee had failed to disclose fully and truly all material facts relevant to the assessment year.

2.5. Accordingly, the Ld.AO treated the undisclosed sale transactions of ₹15,92,000/- as income escaped from assessment and added the same to the total income of the assessee under section 147 read with section 143(3) of the Act.

Aggrieved by the order passed by the Ld.AO, the assessee preferred appeal before the Ld.CIT(A).

2.6. The Ld.CIT(A), after considering the facts of the case, the assessment order, and the submissions made by the assessee, upheld the action of the Ld.AO. The Ld.CIT(A) observed that the information received from NSEL regarding client code modifications constituted tangible material leading to a reasonable belief of escapement of income. The Ld.CIT(A) held that the assessee failed to satisfactorily explain the transactions reported by NSEL and did not establish that the client code modifications were beyond its knowledge or control. Accordingly, the addition of ₹15,92,000/- made by the Ld.AO on account of alleged undisclosed sale transactions was confirmed.

Aggrieved by the order passed by the Ld.CIT(A), the assessee preferred appeal before this Tribunal.

The Ld.AR submitted that the addition of ₹15,92,000/- made 3. by the Ld.AO and confirmed by the Ld.CIT(A) is unsustainable in law and on facts, as the same has been made merely on the basis of information received from NSEL regarding alleged client code modifications. The Ld.AR submitted that the Ld.AO has proceeded on the presumption that since the name of the assessee appeared in the list of modified clients, the sale transactions represented undisclosed income of the assessee. However, no independent material has been brought on record to establish that the assessee had earned any income on account of such alleged client code modifications or had received any amount outside the books of account.

3.1. The Ld.AR submitted that the assessee had categorically explained that it had not carried out or instructed any client code modification either orally or in writing. The transactions were executed through M/s Anand Rathi Commodities Ltd., a registered broker, and the assessee had no control over the internal systems or processes followed by the broker. Any client code modification, if undertaken by the broker, was beyond the knowledge and control of the assessee. The Ld.AR submitted that in the absence of any evidence establishing the involvement or connivance of the assessee, no adverse inference can be drawn merely on the basis of an action performed by the broker.

3.1.1. The Ld.AR submitted that the assessee had duly explained that it had commenced trading on the NSEL platform 7 from 06.05.2013 and the transactions were undertaken in the normal course of business based on the understanding that there existed an arbitrage opportunity between spot and futures markets. The transactions were carried out through the broker and were supported by relevant documentary evidences such as contract notes, demat statements and bank statements. It was submitted that the assessee was merely a participant on the exchange platform and the subsequent issues relating to NSEL cannot automatically lead to the conclusion that every client who traded on the platform had indulged in any irregularity.

3.2. The Ld.AR further submitted that the Ld.AO has failed to bring any evidence on record to demonstrate that the assessee had received any undisclosed benefit on account of the alleged client code modifications. There is no material to show that any amount was paid by any other person to the assessee, that any accommodation entry was provided, or that the transactions undertaken by the assessee were fictitious or non-genuine. It was submitted that the addition has been made solely on the basis of information received from NSEL without any independent verification or corroboration.

3.2.1. The Ld.AR submitted that the Ld.AO has erred in treating the entire sale consideration of ₹15,92,000/- as income of the assessee. A sale transaction represents gross turnover and cannot be equated with taxable income. It was submitted that even assuming, without admitting, that the said transaction was attributable to the assessee, only the real income or profit element arising from such transaction could be considered for taxation after examining the corresponding purchase cost and expenses. The Ld.AO has failed to consider the corresponding purchase transactions amounting to ₹2,58,34,870/- undertaken through the same broker and has mechanically added the entire sale value.

3.3. The Ld.AR submitted that the assessee had disclosed the nature of its business activities during the relevant financial year, including financing, brokerage and commodity trading. The transactions were undertaken through a recognised broker and through regular banking channels. Therefore, there was no concealment of the existence of the trading activity. It was submitted that the dispute raised by the Revenue is only regarding the manner in which client code modification was carried out by the broker, which by itself cannot result in treating the disclosed business transactions as undisclosed income.

3.3.1. The Ld.AR further submitted that the Ld.AO has relied upon third-party information without confronting the assessee with any specific adverse material demonstrating that the assessee was the beneficiary of any alleged modification. No statement of the broker or any other person implicating the assessee has been brought on record. It was submitted that in the absence of any direct evidence linking the assessee with the alleged irregularities, the addition cannot be sustained merely on the basis of general investigation findings.

3.4. The Ld.AR submitted that the assessee had entered into the transactions in good faith through a registered broker on a recognised platform. Any subsequent irregularity or alleged misconduct by the broker cannot automatically result in fastening 9 tax liability upon the assessee unless the Revenue establishes that the assessee knowingly participated in such activity and derived an undisclosed benefit therefrom.

3.5. The Ld.AR placed reliance on the decision of the Hon’ble Bombay High Court in the case of Aashish Niranjan Shah Vs. Union of India reported in (2024) 167 taxmann.com 561, wherein Hon’ble Court considered the issue relating to transactions arising from alleged client code modifications and held that additions cannot be sustained merely on the basis of general information or investigation reports without establishing the actual earning of income by the assessee. The Ld.AR further relied upon the decision of the Hon’ble Bombay High Court in the case of Coronation Agro Industries Ltd. Vs. DCIT reported in (2017) 390 ITR 464, wherein it was held that the addition cannot be made merely on the basis of third-party information unless the same is supported by independent corroborative evidence. It was submitted that the ratio laid down in the aforesaid decisions squarely applies to the facts of the present case, as no material has been brought on record to establish that the assessee had earned any undisclosed income on account of the alleged client code modification.

3.6. In view of the above submissions, the Ld.AR submitted that the addition of ₹15,92,000/- made by the Ld.AO and confirmed by the Ld.CIT(A) deserves to be deleted, as the same is based only on presumptions and unverified third-party information without any cogent evidence establishing that the assessee had earned any undisclosed income.

3.7. The Ld.DR submitted that the addition made by the Ld.AOwas justified as it was based on specific information received from NSEL regarding client code modifications and the assessee’s name was appearing in the list of modified clients. It was submitted that the assessee had undertaken transactions through M/s Anand Rathi Commodities Ltd., wherein sale transactions amounting to ₹15,92,000/- were reported but not disclosed in the return of income.

3.7.1. The Ld.DR submitted that the explanation of the assessee that it had no control over client code modification was not acceptable, as the assessee was the beneficiary of the modified transactions. It was submitted that the assessee failed to substantiate the genuineness of the transactions or explain the source of the impugned amount with supporting evidence.

3.7.2. The Ld.DR submitted that the Ld.AO had considered the information received from NSEL, the details of transactions and the submissions of the assessee before making the addition. Therefore, the addition of ₹15,92,000/- and the order of the Ld.CIT(A) confirming the same were justified and the appeal of the assessee deserved to be dismissed.

We have perused the submissions advanced by both sides in light or records placed before us.

From the facts on record, it is observed that the addition was made on the basis of information received from NSEL regarding alleged client code modifications, wherein the assessee’s name appeared as one of the modified clients. The Ld.AO treated the sale transactions of ₹15,92,000/- as undisclosed income of the assessee on the ground that the same were not disclosed in the return of income.

4.1. The assessee, consistently contended that it carried out commodity transactions through M/s.Anand Rathi Commodities Ltd., a registered broker, in the normal course of business. The assessee also explained that it had no control over any client code modification carried out by the broker and had neither given any oral nor written instruction for such modification. The assessee furnished supporting documents including contract notes, bank statements and other details to substantiate the genuineness of the transactions.

4.2. We find merit in the contention of the Ld. AR that merely because the name of the assessee appeared in the list provided by NSEL, the same cannot automatically lead to the conclusion that the assessee had earned undisclosed income. The Revenue has not brought on record any independent evidence to establish that the assessee was the beneficiary of any alleged client code modification or had received any amount outside the books of account. There is also no material to demonstrate any collusion between the assessee and the broker.

4.3. Further, the Ld.AO treated the entire sale consideration of ₹15,92,000/- as income of the assessee. It is a settled principle that 12 gross receipts or turnover cannot be treated as income unless the real income element is established. The corresponding purchase transactions and the overall nature of commodity trading activity undertaken by the assessee through the broker have not been properly examined before making the addition.

4.4. We take note of the fact that the assessee had disclosed the commodity trading activity and the transactions were undertaken through a recognised broker. The subsequent developments relating to NSEL and alleged irregularities in client code modifications by brokers cannot, by themselves, justify an addition in the hands of the assessee in the absence of any specific evidence establishing that the assessee derived any undisclosed benefit.

4.5. The reliance placed by the Ld.AR on the decision of Hon’ble Bombay High Court in the case of Aashish Niranjan Shah Vs. UOI (supra) and Coronation Agro Industries Ltd. Vs. DCIT (supra) supports the proposition that additions cannot be sustained merely on the basis of third-party information or investigation reports without corroborative evidence establishing the actual accrual of income in the hands of the assessee.

4.6. In view of the above facts and circumstances, we are of the considered view that the addition of ₹15,92,000/- made by the Ld.AO is based merely on information received from NSEL and is not supported by any independent corroborative evidence demonstrating that the assessee had earned any undisclosed income. Accordingly, the addition made by the Ld.AO and confirmed by the Ld.CIT(A) is deleted.

Accordingly Ground no.5 raised by the assessee stands allowed.

We direct the Ld.AO to recompute the correct income in the hands of the assessee based on the observation herein above.

Accordingly Ground No.6 raised by the assessee stands allowed.

In respect of Ground Nos. 1-4, they now become academic as we have considered the issue on merits of the case.

In the result the appeal filed by the assessee stands allowed.

Order pronounced in the open court on 29/06/2026.

Sd/- Sd/-

JAGADISH BEENA PILLAI ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated: 29/06/2026 SC, Sr. P.S.

Copy to:

KAUSSHAL BAGADIA HUF , 28, IRIS , CUFFE PARADE, 1 MUMBAI-400005, MAHARASHTRA

ITO WARD 25(1)(1), ROOM NO. 236, 2ND FLOOR, 2 KAUTILYA BHAVAN, BANDRA KURLA COMPLEX BANDRA EAST, MUMBAI-400051, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE