DY. COMMISSIONER OF INCOME TAX-3(3)(1),MUMBAI, MUMBAI vs. SARTHAK INDUSTRIES LTD., MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by revenue is directed against the order of ld. CIT(A)/NFAC dated 15.10.2025 for AY 2012-13. The revenue has raised following grounds of appeal: “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 10,84,62,500/- made under section 69 despite the presence of specific and tangible information from the Directorate of Investigation regarding misuse of Client Code Modification (CCM) facilities by the assessee's broker, which constituted valid incriminating material for drawing adverse inference?. 2. Whether the Ld. CIT(A) erred in law by holding that the transactions recorded in the assessee's books automatically establish genuineness, without appreciating that entries in books do not preclude application of section 69 when transactions are found to be non-genuine or fictitious based on credible investigation inputs? 3. Whether the Ld. CIT(A) was justified in deleting the addition solely on the ground of lack of cross-examination, without appreciating that circumstantial and investigative evidence relating to CCM misuse carries evidentiary value and that the assessee failed to produce any independent verification, broker confirmation, or NSEL records to rebut the findings? 4. Whether the Ld. CIT(A) failed to appreciate that the AO had rightly invoked section 69C to estimate unexplained expenditure at 2% of the accommodation entry value, considering the well-established practice of commission payments in such entry-providing transactions?. 5. Whether the Ld. CIT(A) erred in deleting additions on the ground that the AO did not conduct "independent verification", despite the AO relying on official exchange data and Investigation Wing findings that constitute valid material for forming a reasonable belief under section 147 and making additions under sections 69 and 69C. 6. The appellant craves leave to add, amend and/or vary grounds of appeal before or during the course of hearing.” 2. Brief facts of the case are that the assessee is a company engaged in the manufacturing and fabrication of LPG Cylinders and merchant trading. The assessee filed its return of income for assessment year (AY) 2012-13 on 28-09-2012, declaring income of Rs. 1.31 crore. Initially, the assessment was completed under section 143(3) on 25-03-2015, assessing total income at Rs. 1.33 crore. Subsequently, the case of the assessee was reopened under section 147. Notice under section 148 dated 29-03-2019 was issued to the assessee. The case was reopened on the basis of information received from DDIT, Investigation Wing-6(3), Mumbai that the assessee is one of the beneficiaries of client code modification (CCM). As per the information, client code modification was made in the name of the assessee by its broker, namely, Sincere Commodities and Derivatives Market, in respect of certain transactions.On the basis of such information, 2 the Assessing Officer (AO)recorded reasons for reopening and issued notice under section 148. In response to the notice under section 148, the assessee filed its return of income on 22-04-2019, declaring income of Rs. 1.33 crore. The reasons recorded were provided to the assessee by the AO vide his letter dated 12-07-2019. The assessee filed its objections, which were disposed of by speaking order dated 01-10-2019. Thereafter, the AO proceeded for reassessment proceedings.The AO, after recording the details of the information in para 6.1 of the assessment order, on the basis of which the AO was of the view that there was a transaction of Rs. 10.84 crore. In para 6.2 of the assessment order, the AO recorded the general modus operandi of client code modification and the findings of SFIO (Serious Fraud Investigation Office), as well as the involvement of Anand Rathi Commodities Limited in such client code modification. The AO also recorded that many brokers accepted/charged commissionat the rates varying from 0.5% to 2% on the amounts of accommodation entries.The AO issued a show-cause notice as to why the transaction of Rs. 10.84 crore, in respect of which client code modification, in the name of the assessee was carried out by its broker, should not be added to the taxable income in the hands of the assessee.In para 6.5 of assessment order, the AO recorded the contents of the reply filed by the assessee. In the reply, the assessee stated that they are not aware of any kind of client code modification transaction carried out by the broker. The assessee objected that an addition could not be made merely on the basis of client code modification unless and until corroborative evidence of generation of cash in lieu of profit was proved by the Department. Otherwise, the act of client code modification is legal. Both National Commodity & Derivatives Exchange Limited (NCDEX) and MCX closely monitor the transactions undertaken by brokers and penalise them if there is any substantial alteration in the client code modification.There was no evidence that the assessee had carried out any such modification. The reply of the assessee was not accepted by the AO. In para 6.8 of the assessment order, the AO recorded that the brokers haveperformed rampant client code modification where the dummy client codes were used to book trades and later the client codeswere modified. The assessee is one of the beneficiaries of such client code modification. The assessee has not provided any details despite allowing ample opportunity. The AO added Rs. 10.84 crore under section 69 and 2.00% commissions expenses on such transaction thereby further added Rs. 21,69,250/-, in the assessment order dated 29.11.2019 passed under section 143(3) r.w.s. 147. 3. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before the learned CIT(A), the assessee filed detailed written submissions and also relied upon certain case laws.The assessee, in its submissions, submitted that no opportunity of cross- examination was provided to the assessee despite a specific written request made to the AO. In the assessment order, the AO merely reproduced a portion of the Investigation Wing report and the statements of the brokers allegedly recorded. Neither the report of the Investigation Wing nor the statements of the brokers were provided. The material obtained behind the back of the assessee was used without communicating the same to them. Addition based on such material is invalid.The assessee also relied on the decision of the Hon'ble Apex Court in Dhakeswari Cotton Mills Limited vs. CIT, 26 ITR 775, wherein it was held that suspicion, however strong it may be, cannot replace evidence and material, and the material relied upon must be communicated to the assessee.The assessee also relied on the decision of Hon'ble Apex Court in KishinchandChellaram vs. CIT, 125 ITR 713 (SC), and the decision of the Gujarat High Court in CIT vs. Adhinath Industries, 252 ITR 476 (Gujarat), wherein it was held that it is the duty of the AO to make proper inquiry before drawing an adverse conclusion.The assessee also contended that Sections 68 and 69 are to be invoked if there is an unrecorded investment or unexplained money. All the transactions are duly recorded in the audited books of accounts. Invoking Section 69 in respect of book- recorded transactions is legally untenable.The AO relied on general information and the modus operandi of client code modification. The assessee also explained the process of client code modification and relied on CBDT Circular No. 3 of 2018, wherein it was clarified that, on large- scale information received from the Investigation Wing regarding client code modification, mere occurrence of client code changes within the permissible time limit allowed by the stock exchange shall not by itself, be treated as evidence of tax evasion.Client code modification is a routine facility intended to correct punching or typographical errors, and the addition should not be made in a mechanical manner without bringing on record cogent material establishing mala fide intention or collusion between the assessee and the broker. The assessee also relied upon the decision of the Tribunal wherein client code modification made within the permissible time was held to be valid.No consequential effect of the alleged client code modification on the taxability of income in the hands of the assessee has been shown by the AO. The entire transaction value of Rs. 10.84 crores has been treated as unexplained investment without showing that the turnover resulted in any real income or tax advantage to the assessee. There is no finding of any actual cash inflow, unaccounted income, or suppression of profit. 4. The learned CIT(A), on considering the submissions of assessee and assessment order held that the addition made by the AO on account of the alleged client code modification transactions are not supported by any cogent evidence or independent verification. The AO relied solely on a general investigation report without establishing any direct nexus between the assessee and the alleged misuse of the client code modification facility.There is no finding to show that the assessee's transactions were fictitious, manipulated, or carried out with any melafide intention. The AO has not demonstrated as to how the alleged client code modification resulted in escapement of taxable income or any real benefit to the assessee. The AO added the entire turnover mechanically without showing any consequential effect on taxability.The action of the AO is contrary to law, CBDT Circular No. 3 of 2018, and various judicial principles that suspicion, however strong, cannot replace proof. The learned CIT(A) also referred to and relied upon the decisions of Apex Court in Kishan ChandChellaram (supra) and Andaman Timber Industries vs. CCE, 281 CTR 241 (SC), and deleted the addition of Rs. 10.84 crores and the alleged 2.00% commission expenses of Rs. 21,69,250/-.Aggrieved by the order of the learned CIT(A), the Revenue has filed the present appeal before the Tribunal. 5. We have heard the submissions of the learned Commissioner of Income Tax – Departmental Representative (CIT-DR) for the Revenue and the learned AR of the assessee. In addition to the oral submissions, the learned CIT-DR) has also filed a short-written synopsis along with reliance on certain case laws.The learned CIT-DRfor the revenue submits that the case of the assessee was reopened on the basis of information received from the DDIT, Mumbai, regarding client code modification data, broker- wise client code modification details, transaction-wise records, and other relevant material. The PAN of the assessee appeared in such data furnished by the Investigation Wing. Based on such information and the analysis thereon, it emerges from the material that the assessee is a beneficiary of artificial profit or loss shifting through non-genuine client code modification transactions.The learned CIT(A) deleted the addition on the basis of the submission of the assessee that there was no evidence regarding any benefit arising from such client code modification. The addition was not based on mere suspicion, general information, or estimation, but rather on the basis of the Investigation Wing report.The AO, in his order, has reproduced the transaction-wise name of the original client, modified name of the client, value of the transaction, buy/sell position, and jurisdictional AO details. The name originally recorded was subsequently modified in the name of the assessee. It was not merely a case of a clerical or punching error, but amounted to the transfer of a transaction from one PAN holder to another PAN holder.On the issue of not allowing cross-examination, the learned CIT-DR submitted that the AO made the addition on the basis of independent investigation findings, exchange data, broker-wise client code modification analysis, documentary evidence, and surrounding circumstances establishing that the assessee is a beneficiary of bogus client code modification.The assessee failed to furnish details regarding the transactions carried out on the National Spot Exchange Limited (NSEL) platform. The AO categorically recorded that, in the absence of any transaction-wise details or supporting evidence from the assessee, the request for remuneration was not physical. To support his submission, the ld. CIT-DR relied upon the decision of Punjab & Haryana High Court in Rakesh Gupta vs CIT (2018) 93 taxmann.com 271 (P&H) and Kolkata High Court in PCIT vs Seaside Projects (P) Ltd. (2025) 175 taxmann.com 891 (Calcutta). 6. On the other hand, the learned AR of the assessee strongly relied on the decision of the learned CIT(A). The learned AR submitted that, while passing the assessment order, the assessee had made the entire aggregating of the purchase value of the commodity as well as the sale value of the commodity, aggregating to Rs. 10.84 crore. Further, there is nothing in the alleged investigation report specific to the assessee. The assessee has no connection with Anand Rathi, the share broker. The assessee specifically denied his involvement in client code modification or deriving any benefit from such client code modification. Client code modification, if any, was permissible within the prescribed time limit. The AO made the addition on the basis of general information without bringing any adverse material on record. The learned AR submitted that he relied on all the case laws which were filed before the learned CIT(A). 7. We have considered the rival submissions of the parties and have gone through the orders of lower authorities carefully.We find that the AO made addition on the basis of general information about the the general modus operandi of client code modification and the findings of SFIO as well as the involvement of Anand Rathi Commodities Limited in such client code modification. The while making addition also held that many brokers accepted/charged commissionat the rates varying from 0.5% to 2% on the amounts of accommodation entries.We find that the assessee in its reply specifically contended that they are not aware of any kind of client code modification transaction carried out by the broker. The assessee objected that an addition could not be made merely on the basis of client code modification unless and until corroborative evidence of generation of cash in lieu of profit was proved by the Department. Otherwise, the act of client code modification is legal. Both National Commodity & Derivatives Exchange Limited (NCDEX) and MCX closely monitor the transactions undertaken by brokers and penalise them if there is any substantial alteration in the client code modification.There was no evidence that the assessee had carried out any such modification. We find that the AO without making any specific or independent investigation of facts about the involvement of assessee or hits broker made addition of Rs. 10.84 crore, on account of client code modification.We find that before ld CIT(A), the assessee specifically stated that submitted that no opportunity of cross- examination was provided to the assessee despite a specific written request made to the AO. The AO reproduced a portion of the Investigation Wing report and the statements of some broker brokers, neither the report of the Investigation Wing nor the statements of the brokers were provided. The assessee also relied on the decision of the Hon'ble Apex Court in Dhakeswari Cotton Mills Limited (supra), wherein it was held that suspicion, however strong it may be, cannot replace evidence and material. The assessee relied on CBDT Circular No. 3 of 2018, wherein it was clarified that, on large-scale information received from the Investigation Wing regarding client code modification, mere occurrence of client code changes within the permissible time limit allowed by the stock exchange shall not by itself, be treated as evidence of tax evasion. Client code modification is a routine facility intended to correct punching or typographical errors, and the addition should not be made in a mechanical manner without bringing on record cogent material establishing mala fide intention or collusion between the assessee and the broker. The assessee also relied upon the decision of the Tribunal wherein client code modification made within the permissible time was held to be valid. 8. We find that the ld CIT(A) held that the AO relied solely on a general investigation report without establishing any direct nexus between the assessee and the alleged misuse of the client code modification facility.It is specifically held that there is no finding to show that the assessee's transactions were fictitious, manipulated, or carried out with any melafide intention. The AO has not demonstrated as to how the alleged client code modification resulted in escapement of taxable income or any real benefit to the assessee. The simply added the entire turnover mechanically without showing any consequential effect on taxability. It was also held that that the action of the AO is contrary to law, CBDT Circular No. 3 of 2018, and various judicial principles that suspicion, however strong, cannot replace proof. 9. We find that the assessee was not itself a stock broker and, therefore, could not undertake CCM independently. The modifications, if any, which is otherwise permissible under certain rules and norms, were carried out at the broker's end. The Revenue has not brought on record any material to establish that the assessee instructed the broker to modify the client codes, or that the broker had acted pursuant to any pre understanding with the assessee for shifting profits or losses. The AO hassimply relied upon the information and investigation conducted by the Investigation Wing regarding alleged misuse of CCM by certain brokers.The Revenue has not brought on record any material to establish that either the assessee instructed their broker to modify the client codes, or that the broker had acted pursuant to any pre-arranged manner. We find that the AO added the entire turnover mechanically without showing any consequential effect on taxability, which is contrary to law and CBDT Circular No. 3 of 2018. Hence, on our independent appreciation of facts, we do not find any merits in the grounds of appeal raised by the revenue. The ratio of decisions relied by the ld. CIT-DR for the revenue in Rakesh Gupta vs CIT (supra)

and Kolkata High Court in PCIT vs Seaside Projects (P) Ltd. (supra) are not applicable on the issue before us. The said decisions are related to the validity of reopening under section 147. Rather, we are dealing with the validity of the additions made solely on the basis of report of investigation wing. In the result, the grounds of appeal raised by the revenue are dismissed. 10. In the result, the appeal of the revenue is dismissed. Order was pronounced in the open Court on 27/08/2026. /- /- Sd/- /- Sd/- Sd/- PRABASH SHANKAR PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 27/08/2026 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order

Assistant Registrar ITAT, Mumbai