DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 6(4), MUMBAI, MUMBAI vs. PRARAMBH SECURITIES PRIVATE LIMITED, GUJARAT

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH
MUMBAI

BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER
&

SHRI ARUN KHODPIA, ACCOUNTANT MEMBER

ITA No.3890/Mum/2025 to 3892/Mum/2025
(Assessment Year :2021-22 to 2023-24)
B/H. Iscon Temple
Ambali-Bopal Road
Ahmedabad
Gujarat-
380059
Gujarat
PAN/GIR No.AAOCS6411N
(Appellant)
..
(Respondent)

Assessee by Shri Vijay Mehta, CA
Revenue by Shri R.A. Dhyani, CIT DR
Date of Hearing
10/09/2025
Date of Pronouncement
11/09/2025

आदेश / O R D E R

PER AMIT SHUKLA (J.M):

The aforesaid appeals have been filed by the Revenue against separate impugned orders of even date 28/03/2025
passed by ld. CIT(A)-54, Mumbai for the quantum of assessment passed u/s. 143(3) / 147 for the A.Y.2021-22 and u/s.143(3) for the A.Yrs 2022-23 and 2023-24. 2. The common ground raised in all these appeals are that the ld. CIT(A) had erred in deleting the disallowance made

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u/s.40(a)(ia) of the Act holding that assessee is not required to deduct TDS u/s.194C. for the sake of ready reference, grounds raised in A.Y.2021-22 reads as under:-
A) "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 5,78,73,486/ made u/s.40(a)(ia) of the Act by holding that the assessee is not required to deduct TDS u/s 1940 despite having an agreement with its clients for profit sharing an providing the Prarambh Securities' proprietary trading account for the trading activities to the clients.?"
b) "Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs.5,78,73,486/- made u/s.40(a)(ia) of the Act by holding that allowing traders to use Prarambh Securities proprietary trading account/portal for trading doesn't constitute contract and hence, there was no liability to deduct TDS u/s 1940 of the Act?"
c) "Whether, on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the disallowance of Rs.5,78,73,486/- made u/s.40(a)(ia) of the Act by holding that the assessee is not required to deduct TDS even u/s 194J without considering that the profit sharing arrangement of the assessee and the payments made to them for their expertise and knowledge of stock market falls under the ambit of provisions of section 194J of the Act?"
d) "Whether, on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance of Rs.5,78,73,486/ made u/s.40(a)(ia) of the Act for non-deduction of TDS without appreciating the fact that assessee had been regularly deducting TDS on profit sharing till A.Y 2020-2021.”
3. In 2022-23, the figure of disallowance to Rs.9,68,07,157/- u/s. 40(a)(ia) and in A.Y.2023-24 disallowance made is of Rs.4,57,28,885/-. Besides this in A.Y.2022-23 and 2023-24, the Revenue has also raised the issue of deletion of addition

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on account of trade reversal of Rs.5,02,882/- and Rs.1,08,118/- in A.Y.2023-24. 4. The brief facts are that the assessee is a stock broker and is engaged in the business and sale of shares on behalf of its clients and also in its proprietary capacity. For the sake of ready reference the appeal of the A.Y.2021-22 is taken up first and our finding given therein on the issue of disallowance u/s.40(a)(ia) would apply mutatis mutandis. The assessee has e-filed its return of income on 31/02/2022 declaring total income of Rs.22,83,11,800/- which was duly processed u/s.143(1) of the Act. A search and seizure action was carried out in the case of the assessee on 10/05/2023 and consequently, notice u/s.148 was issued on 04/03/2024, in response to which assessee filed its return of income on 28/05/2024 declaring the same total income. During the assessment proceedings the Assessing Officer observed that the assessee had entered into agreement with several traders wherein the trades were carried out by the said traders on the terminal of the assessee and the profits have been shared between traders and the assessee. One such agreement in the form of Memorandum of Understanding with one Mrs. Rohini
Bhagat (PBP1) was referred to on a sample basis. The said agreement provides for carrying out of trading activities through the assessee's proprietary trading account and sharing of the profit on a pre-determined profit-sharing ratio.
The Assessing Officer noted that the assessee had not deducted TDS on the amount paid to Mrs. Rohini Bhagat towards her share of profit. According to the Assessing

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Officer, provisions of Section 194C of the Act were applicable.
In response, the assessee filed a written submission contending that the provisions of section 194C of the Act were not applicable, since the arrangement did not fall within the ambit of a works contract or service contract as mandated by section 194C of the Act. However, the Assessing Officer rejected the assessee's contention and held that TDS ought to have been deducted under section 194C on the amounts paid towards profit-sharing Accordingly, the Assessing Officer disallowed Rs 5,78,73,486/-, being 30% of the expenditure claimed on account of profit-sharing u/s 40(a)(ia) of the Act.
The Assessing Officer further stated that, in any case, section 194J of the Act would apply and thus assessee was still liable to deduct TDS (Pg. 15) towards payments made to Mrs Rohını
Bhagat and other traders towards profit-sharing. The relevant observation and finding of the ld. AO for the sake of ready reference is reproduced hereunder:-
“(i) It is a fact that the assessee company has entered into MOU
(Memorandum of Understanding) with the clients to whom access to pro-book was allowed for trading. It is seen from the MOU that access to terminals (Pro-book) was allowed to clients and the profit sharing arrangements done with the clients was on the basis of certain terms & conditions.
(ii) On going through the profit sharing agreements, it is seen that the description and scope of arrangement has been clearly spelt out. Further, it is a well established preposition that when two entities/persons come together to perform a particular duty on certain terms & conditions, it constitutes a „Contract‟. A contract is an agreement between two parties that creates an obligation to perform a particular duty. The terms & conditions of the profit sharing agreements clearly defines the obligation to perform a particular duty in a prescribed manner. There is also scope of arbitration in the said arrangements in case of ITA No.3890/Mum/2025 and others
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dispute between the two parties. Therefore, MOU executed in respect of profit sharing arrangements are nothing but a legally-binding contract which outlines the terms & conditions of the contract. It also fulfils the requirement of section 10 of the Indian Contract Act. Hence, the assessee company was required to deduct tax at source (TDS) from the payments made in respect of profit sharing under the provisions of section 194C of the Act. However, the assessee company has failed to do so.

(iii) In response to SCN, the assessee has stated that “Any person responsible for paying any sum to any resident
(hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount……….”. In this regard this is to be stated that the assessee has entered into MOU
(Memorandum of Understanding) with the clients and access to terminals (Pro- book) was given to clients and the profit sharing arrangements done with the clients was on the basis of certain terms &
conditions. Contracts between the assessee and clients allows the traders to use the portal of the assessee and name of the assessee and traders do the business by using the portal of the assessee. This type of action comes under the purview of „services‟ and it is a contract. Further, MOU executed in respect of profit sharing arrangements is a legally-binding contract which specifies the terms & conditions of the contract.
Therefore, the MOU entered by the assessee and the clients are also fulfilled for the contract and the assessee company was required to deduct tax at source (TDS) from the payments made in respect of profit sharing under the provisions of section 194C of the Act. But the assessee company did not do the same.

(iv) Even if the contention of the assessee, for the time being is accepted, then also the profit sharing arrangement of the assessee and the payments made to them for their expertise and knowledge of stock market falls under the ambit of provisions of section 194J of the Act. Therefore, alternatively, the assessee was required to deduct TDS under the provisions of section 194J of the Act, as the payments made to them can

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be categorised as „fee for professional services‟
or „remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company‟. Thus, it has been found that even on the basis of the explanation of the assessee, TDS was required to be deducted on the payments made to the clients with who profit sharing agreements were executed.

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was carried out and as per MOU only profit is to be shared between the assessee company and traders. Reliance was placed upon the decision of Mumbai Bench of the Tribunal in the case of DCIT v. H. J Securities P. Ltd. The CIT(A) further held that the amount does not fall within the definition of professional services and, hence, 9. 194J of the Act is also not attracted. The relevant findings of the ld,. CIT(A) are reproduced hereunder:-

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the terminal was provided by the appellant company. The appellant further submitted that the MOU between the appellant company and the client was on principal to principal basis because traders traded on their own and they had no need to follow the instruction from the appellant company. The payment was made to clients after deducting the share of profit/loss of the appellant company and therefore, no expenses was involved. As payment was not for the expenses, therefore, there was no requirement to deduct TDS. The appellant also explained that the nature of business between the appellant company and the clients was like jobbers or arbitrators. To support the argument, the appellant relied upon the decision in the case of DCIT vs. M/s.Dhyan Stock Broking
Pvt. Ltd., 2015 (9) TMI 659 – ITAT, Mumbai, DCIT 4(1) vs. H.J.
Securities Pvt. Ltd. ITA No.2457/Mum/2009, Total Securities
Ltd vs. DCIT, 2010 (12) TMI 821 – ITAT, Mumbai, CIT vs.
Career Launcher India Ltd. 2012(4) TMI 440 (Delhi HC) and VLCC Healthcare Ltd. {TS-762-ITAT-2024(DEL).
2019(7) TMI 720 – ITAT Mumbai.

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such terminal. As per clause 4 of MOU, the broker would allow access to dealer terminals to the traders through their authorized representatives to enable the trader to execute transactions in Future & Options segments in proprietary account of broker. Thus, from MOU, it is seen that there was an arrangement between the appellant and the trader to execute transactions in Future & Options by utilizing terminal of the appellant company. The profit/loss share was to be calculated on daily basis and it was to be shared between the appellant company and the traders in the ratio of 25:75. The AO has held this arrangement as contract and, therefore, liable to TDS u/s.194C of the Act. It is seen that even though the MOU between the appellant company and the clients as a contract, it is not in respect of carrying out any work. The contract was sharing of profit on mutual understanding and it was on principal to principal basis. The appellant has provided facility of infrastructure/terminal to the clients to trade in Future and Options on their own. Thus, it could be said that no work was carried out by the appellant by providing access to the terminal to the client. As per MOU, only profit is to be shared between the appellant company and traders. Therefore, provisions of section 194C are not applicable.
2457/Mum/2009).The relevant paras of the decision of the Hon‟ble ITAT, Mumbai in this case are reproduced as under:

“………………………………………………………………………………
…………”

“The facts show that there were separate joint ventures entered into by the assessee with several jobbers/arbitragers and payments have been made to them under such agreements and the assessee's share in the profits has been taken to the Profit and Loss Account. In these circumstances the provisions of section 194C are not attracted because in essence and substance the amounts paid to the jobbers or ITA No.3890/Mum/2025 and others
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arbitragers did not in reality represent the expense of the assessee company but represented payment of the share of the jobbers/arbitragers under the agreement entered into with them. In such a case the assessee is right in saying that there was no question of deducting any tax at source. The above facts also establish that the relationship between the assessee and the jobbers/arbitragers was not of principal and agent but was that of principal to principal. Both had agreed to embark upon a joint venture to trade in shares and securities in the Stock Exchange and to share the profit / loss equally. We do not see how such payments can be termed as payments to contractors for any work to be carried out by them. We therefore uphold the finding of the CIT (A) that these payments do not attract section 194C and the assessee was not liable to deduct tax therefrom. Accordingly section 40(a)(ia) is also not applicable. The payments, in our view, were rightly allowed as deduction by the CIT (A). The grounds 7 to 10 are dismissed.”

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the disallowance of Rs.24,30,389/- (30% of Rs.81,01,297/-) made by the AO u/s.40(a)(ia) is deleted.
6. Before us ld. Counsel for the assessee first of all referred to Section 194C and submitted that the same is not applicable because the Section requires the tax is to be deducted if “any person responsible for paying any sum to any resident…………….for carrying out any work”. Thus, the statutory requirement for deduction of tax arises only in the case where contract is for carrying out any work. Even though there might be a contract but it is not a contract for work. He submitted that as per the terms of agreement, proper will execute the contract in the name of the broker (assessee) through brokers terminal / infrastructure. The resultant profit or loss is to be shared between the trader (75%) and broker (25%). Thus, the agreement aimed towards joint efforts for earning gain and sharing same determined ratio. There is no work carried out by the trader and neither tangible results have been achieved. In support of this proposition, he placed reliance on the decision of the Hon'ble Bombay High Court in the case of East India Hotels Ltd (320 ITR 526) (PBP 7) In this case, the Hon'ble Bombay High Court has reproduced (PBP
11) following passage from the decision of the Hon'ble
Supreme Court in the case of Birla Cement Works.
"The key words in section 1940 are carrying out any work.
Learned counsel for the appellant contended that a word of collection of words should fit into the structure of the sentence in which the word is used or collection of words formed. The contention is that in the context of section 194C, carrying out any work indicates doing something to conduct the work to completion or something which produces such result. The mere transportation of goods by a carrier does not affect the goods

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carried thereby. The submission is that by carrying the goods, no work to the goods is undertaken and the context in which the expression carrying out any work' has been used, makes it evident that it does not include in it the transportation of goods by a carrier.”
7. The reliance is also placed upon the following observations of the above decision of the Bombay High Court (PBP 13).
"Thus, from the above decision of the Apex Court, it is clear that the words carrying out any work in section 194C is limited to any work which on being carried out culminates into a product or result. In other words, the word 'work in section 194C is limited to doing something with a view to achieving the task undertaken or carry out an operation which produces some result.
As illustrated in the Circular No. 86, section 1940 would apply to payments for carrying out the work such as constructing buildings or dams or laying of roads and airfields or railway lines or erection or installation of plant and machinery, etc. In all these contracts, the execution of the contract by a contractor/sub-contractor results into production of the desired object or accomplishing the task under the contract
From the fact that the contracts for supply of labour to carry out any work has been specifically brought within the purview of section 1940 and the fact that four categories of service contracts have been specifically brought within the purview of section 1940 by inserting Explanation III to section 194C, it cannot be inferred that the services rendered by a hotel to its customers are also covered under section 194C of the Act.
It is true that the word 'work' in section 194C is not restricted to works contract only as held by the Apex Court in the case of Associated Cement Co. Ltd. (supra). However, as held by the Apex Court in the case of Birla Cement Works (supra) the word work in section 1940 has to be understood in a limited sense and would extend only to the service contracts specifically included in the said section by way of Explanation III”

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8. It would be worthwhile to note that, although clause (iv) of Explanation to Section 194C covers certain services, like advertising, broadcasting, carriage of goods etc., in the definition of 'work', the present case does not fall within such services. Further, in the above passages of Bombay High
Court reproduced hereinabove, it is clear that the Explanation de cover other services
9. Strong reliance was placed upon the decision of the Delhi
High Court in the case of CIT v Career Launcher India Ltd.
(358 ITR 179) (PBP 15). In a case involving sharing of profit through joint efforts, the Hon'ble Delhi High Court, in the above case, observed as under:-
36. Let us examine the real nature of the agreement between the assessee and the franchisees and consider the question whether the agreement or contract is for "carrying out any work" by the franchisee, so as to attract the provisions of section 1940 relating to tax deduction at source and consequently the disallowance under Section 40(a)(ia) of the Act. On a careful consideration of the issue, it seems to us that it would not be possible to view the agreement as a contract for carrying out any work by the franchisee The terms of contract which we have referred to show that the arrangement consists of mutual obligations and rights. It is not a simple case of an agreement under which a person is engaged to carry out any work for the other The essence of the contract appears to us to be one under which the trade name or reputation or know-how belonging to the assessee in the business of running learning centres, where students are coached for writing competitive examinations, is permitted to be made use of by the franchisees in different places for a monetary consideration. In the case of a contract for the carrying out of any work as is envisaged by Section 194C, there cannot be any use of a person's trade name or goodwill or know-how by the other The contract envisaged by the Section would be one under which one person merely renders certain services to the other person

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for consideration. It is no doubt true that the word "work" has been defined in a broad and inclusive manner in the Section.
Nevertheless its essential feature remains the same namely that it should be a work carned out by one person for another
The terms of the contract between the assessee and its franchisees in the case before us do not satisfy this condition.
The income tax authorities have erroneously interpreted the contract as one for carrying out a work by the franchisee for the assessee It is not a simple case of the assessee engaging certain other person to conduct the learning centres for which they were to be paid "
10. The Hon'ble Delhi High Court also observed that a case of an arrangement under which both sides have joint together by mutual arrangement and to share the profits of the joint enterprise carried on by them is not covered by the definition.
They mutually undertake the profit-making activity with a stipulation to divide the gains of their collective efforts. The work is undertaken jointly by them for third parties who pay consideration which is shared. Parties do not work for each other.
11. The assessee also relied upon the decision of the Mumbai
Bench of the Hon'ble Tribunal in the case of H.J. Securities P.
Ltd. (PBP 40). In a case involving almost identical facts, the Hon'ble Tribunal has decided the issue in favour of the assessee. It is worthwhile to note that in the said case also the assessee, who was member of Bombay Stock Exchange, had entered into similar agreement with jobber wherein a jobber would trade on the strength of membership card of the assessee and the profit/loss would be divided between jobber and assessee. It was held that S. 194C of the Act would not be applicable.

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12. He further submitted that even 194J is also not applicable because a trader is not rendering any professional services to the assessee and, hence, the provisions of Section 194J of the Act has no application. He drew our attention towards definition of professional services contained in Explanation to S. 194J of the Act. As per the said definition, the professional services include certain specified services only like legal, medical, engineering etc. The present case does not fall under any such category. This is apart from the fact that parties to the agreement do not render services to each other. Therefore, Section 194J of the Act has no application.
13. On the other hand ld. DR strongly relied upon the order of the ld.AO and submitted that the agreement between the assessee and traders is of rendering of professional services which is an alternative ground taken by the ld.AO.
14. We have carefully considered the rival contentions, examined the orders of the authorities below, perused the agreements placed on record, and weighed the judicial precedents cited before us. The short question is whether the assessee, under the impugned arrangements, was obliged to deduct tax at source under Section 194C or Section 194J of the Act, and if so, whether the disallowance made under Section 40(a)(ia) by the Assessing
Officer is legally sustainable.
Applicability of Section 194C

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15. The foundation of the Assessing Officer’s case rests on the premise that the assessee had entered into contracts with traders for carrying out work on its behalf, thereby attracting
Section 194C. This presumption requires scrutiny. Section 194C obliges deduction of tax at source only where a contract is entered into “for carrying out any work.” The phrase
“carrying out any work” has been judicially understood to connote doing something which culminates in a work of completion or in the production of a tangible result for another party. Thus, the essential ingredient of a contract for work is that one party undertakes to perform work for the other, and the consideration flows in return for such performance.
16. Examining the present arrangement, it is clear that no such relationship exists between the assessee and the traders. What the agreements envisage is that the traders would execute trades using the assessee’s proprietary trading terminal and infrastructure. The outcome of those trades profit or loss would then be shared between the parties in a fixed ratio. The assessee was not engaging the traders to perform work on its behalf; rather, both parties pooled their respective strengths the assessee providing access to its platform and the traders applying their skill and jointly undertook a commercial venture. The outcome of that venture was uncertain, being dependent upon market fluctuations, and was to be shared in proportion.
17. This arrangement, in its true character, is a joint venture, not a contract for work. The traders were not ITA No.3890/Mum/2025 and others
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carrying out any task at the behest of the assessee. There was no promise to deliver a product, no obligation to complete a work, and no independent consideration payable for services rendered. Instead, the consideration was in the form of a share of profits arising from the joint activity. As the Hon’ble
Supreme Court has explained in the context of Section 194C, the expression “carrying out any work” cannot be expanded to cover every kind of arrangement, but is confined to contracts where specific work is undertaken for another. The Hon’ble
Bombay High Court too has clarified that not all forms of mutual collaboration fall within the sweep of Section 194C, but only those categories of work specifically included in the statutory Explanation.
18. The Hon’ble Delhi High Court has gone further to hold that where parties embark upon a joint enterprise and mutually agree to share the gains, such an arrangement cannot be regarded as a contract for work, since in those circumstances, the parties do not work for each other they work together for a common commercial object. That principle squarely applies here. The assessee and the traders acted together for a common venture in securities trading; neither was the contractor of the other.
19. The view also finds reinforcement from the coordinate
Bench of this Tribunal in the case of brokers and jobbers, where it was held that execution of trades through the broker’s card and sharing of resultant profit did not amount to a contract for work. The Tribunal recognized that such an ITA No.3890/Mum/2025 and others
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arrangement was in substance a joint participation in commercial activity, outside the purview of Section 194C.
20. Seen in this light, the Assessing Officer’s conclusion that the assessee had entered into “contracts for work” is unsustainable. The sine qua non of Section 194C a party carrying out work for another is absent. What is present is merely joint trading activity and profit-sharing, which cannot be forced into the statutory mould of Section 194C.
Applicability of Section 194J
21. The Assessing Officer, in the alternative, invoked Section 194J, contending that the payments represented fees for professional services. This contention too does not stand scrutiny.
The Explanation to Section 194J defines
“professional services” to mean services rendered in specified fields such as law, medicine, engineering, accountancy, technical consultancy, interior decoration, advertising, etc.
The present case bears no resemblance to any of these categories.
22. The traders were not retained by the assessee to provide technical expertise, professional advice, or consultancy. Their role was to trade in securities, in partnership with the assessee, and to share the resultant profits or losses. Their remuneration was not in the nature of a fee paid for services rendered, but was simply their share in the outcome of a joint venture. In other words, the payment was not compensation for services; it was division of profits. The statutory definition

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of professional services cannot, by any interpretative stretch, encompass such an arrangement.
23. In fact, judicial pronouncements have consistently emphasized that for Section 194J to apply, there must be a direct nexus between the payment and the rendering of professional services by one party to the other. That nexus is conspicuously absent in the present case. The assessee derived no professional service from the traders; it merely shared the results of trading activity undertaken in common.
To invoke Section 194J in these circumstances would be to extend the provision beyond its clear terms, which is impermissible.
24. Having regard to the statutory framework, the terms of the agreements, and the judicial precedents, we are of the considered opinion that neither Section 194C nor Section 194J is attracted. The assessee was under no statutory obligation to deduct tax at source on the impugned payments.
25. The disallowance made under Section 40(a)(ia) is therefore devoid of merit. To sustain it would be to treat a joint venture as a contract for work or professional service, contrary to both fact and law. Such an interpretation would not only distort the statutory scheme but also penalize legitimate commercial arrangements.
26. We therefore find no infirmity in the order of the learned
CIT(A) deleting the disallowance. His reasoning is well founded in law and deserves to be upheld.

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27. Accordingly, the appeal filed by the Revenue stands dismissed.
28. Now coming to the issue of disallowance of loss of unaccounted trade reversal, the ld. AO observed that assessee entered into certain transaction in option trading which have been reversed according to the ld. AO., since the counter party at the time of entering into transaction and at the time of reversal of the transaction is same, the transactions are arranged one and hence, not genuine. These transactions, according to the details provided by the ld. AO have resulted into profit of Rs.5,87,087/- and loss of Rs.5,02,882/-. Since according to him the transactions are not genuine, the loss of Rs.5,02,882/- has been disallowed, the ld. CIT(A) had deleted the addition made by the ld. AO after observing and holding as under:-
25.3.1 The facts of the case of the appellant are that during the search in the case of the appellant company and other entities, it was found that Achintya Commodities Pvt. Ltd.,
Achintya Securities Pvt. Ltd., L7 Hightech Pvt. Ltd., Prarambh
Securities Pvt. Ltd and VISA Capital Partners had traded amongst themselves in Future and Option. During the year, the appellant company made trade of Rs.1,10,86,619/-,
Rs.9,08,250/- and Rs.8,69,563/- with Achintya Securities Pvt.
Ltd., L7 Hightech Pvt. Ltd. and VISA Capital Partners. The total value of trade was of Rs.1,28,64,431/-. The AO noted that the trading in F&O done by the appellant company was with the related entities. Further, the trade was carried out by the appellant company with opposite entity for a single trade at the same time, same price and same quantity. It was not possible to match the trade done by the appellant company with that carried out by another entity without proper planning and arrangement between the parties. The AO considered the trading in F&O with the other entities as reversal trading. The ITA No.3890/Mum/2025 and others
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AO considered the loss of Rs.5,02,822/ as arising from reversal trading and therefore the loss was disallowed.

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trade reversal were closed by NSE. The copies of the letter was given to the AO during the assessment proceedings, which the AO has ignored. Thus, the AO, without examining the correctness of facts and without considering the closure of proceedings by NSE has considered the loss of Rs.5,02,822/- as non-genuine. Therefore, the disallowance of loss of Rs.5,02,822/- in respect of trade reversal is deleted.

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out that all these trades were executed at prevailing market rates through the exchange algorithm and that the matched quantity was only a very small portion of the total volume on those dates. The assessee also placed on record copies of correspondence with NSE which had issued show-cause notices on the subject of reversal trades but had thereafter closed those proceedings after considering the assessee’s explanation. Copies of the NSE closure letters were also filed before the Assessing Officer.
32. The learned CIT(A) found that the Assessing Officer had only made general observations based on a few coincidental matches and had not brought on record any corroborative material to show that the trades were pre-arranged or artificial. There was no evidence of abnormal pricing, deviation from the last traded price, repeated patterns in illiquid contracts, circularity, or any off-market flow of funds.
The CIT(A) also noticed that the Assessing Officer had accepted the profit of ₹5,87,087 from the same trades while rejecting only the loss. Taking into account the closure of surveillance proceedings by NSE, the learned CIT(A) held that the loss was genuine and deleted the disallowance.
33. On an independent evaluation, we find no infirmity in the conclusion of the learned CIT(A). Allegations of artificial or reversal trades must be supported by material evidence. In the present case, the executions were screen-based, in liquid scrips, at prevailing market rates. Out of nearly 50,000 trades in the year, only nine trades were found to have matched.
Such negligible matching is consistent with coincidence

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rather than design, especially when the exchange algorithm matches orders strictly on price and time priority. Given that a handful of top brokers contribute to most of the market volume, the probability of such occasional matching is naturally high.
34. The Assessing Officer has essentially relied on two factors: that the counterparties were related, and that there was equality of time, price and quantity in a few instances.
These two circumstances, by themselves, are not conclusive.
Mere relatedness cannot by itself establish collusion in an anonymous exchange system. Likewise, identical time, price and quantity in high-liquidity contracts is a normal feature of screen-based trading.
35. If the trades were indeed pre-arranged reversal trades, certain features would have been expected, such as use of illiquid contracts to control fills, transactions away from market rates, frequent repeated matches in a pattern, or evidence of off-market settlements. No such evidence has been brought on record. On the contrary, the material shows trades in liquid contracts, at market rates, with only a few coincidences relative to the large volume of total trades. The fact that NSE itself closed its surveillance proceedings after examining the assessee’s submissions further supports the assessee’s claim. While NSE’s closure may not bind the income-tax authorities, it is still a relevant third-party evidence which could not be ignored without cogent reason.

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36. It is also important to note that the Assessing Officer has accepted the profit from the same trades but treated only the loss as non-genuine. Such selective acceptance is not sustainable. Once the profit is treated as genuine, the corresponding loss from the same set of trades cannot be disallowed without concrete material. The approach of the Assessing
Officer amounts to applying inconsistent standards.
37. The reliance on broad remarks about the practice of reversal trading does not suffice. The evidence in this case shows only nine matched trades in a year of nearly 50,000
trades, all screen-based at market prices, and closure of the matter by NSE. On these facts, the probability clearly supports the assessee’s version that the trades were genuine and not pre-arranged.
38. We therefore agree with the findings of the learned
CIT(A) that the Assessing Officer has failed to prove that the loss was artificial or arose from reversal trading. The disallowance of ₹5,02,822 is not supported by facts or evidence and cannot be upheld.
33. In view of the above discussion, we hold that the impugned F&O loss is genuine. The order of the learned
CIT(A) deleting the disallowance is affirmed. The ground raised by the Revenue is dismissed.

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34. In the result, appeals of the Revenue are dismissed.

Order pronounced on 11th September, 2025. (ARUN KHODPIA) (AMIT SHUKLA)
ACCOUNTANT MEMBER
JUDICIAL MEMBER
Mumbai; Dated 11/09/2025
KARUNA, sr.ps

Copy of the Order forwarded to :

BY ORDER,

(Asstt.