ITO-41(1)(2), MUMBAI, BANDRA EAST, MUMBAI vs. JAYSHREE SANJIV HARIA, MUMBAI

स िवाई की िारीख / Date of Hearing 17.06.2025 घोर्णा की िारीख/Date of Pronouncement 24.06.2025 आदेश / O R D E R PER SANDEEP GOSAIN [J.M.]:- This appeal is filed by the revenue against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai-/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2009-10.

A.Y. 2009-10 Jayshree Sanjiv Haria “1. Whether the Ld. CIT(A) erred in facts and in law and ignored the findings of the Investigation Wing and the Assessing Officer, which clearly established that Cllent Code Modification (CCMs) were systematically used to shift profits/losses and were mot mere correction of punching errors? 2. Whether the Ld. CIT(A) was justified in holding that misuse of Client Code Modification was not possible without connivance of unrelated parties, despite documentary evidence indicating common control or design? 3. Whether the Ld. CIT(A) erred in law by disregarding the AO's finding that the assessee and other related clients were managed by the same broker, thereby facilitating pre-planned shifting of profits/losses through Client Code Modifications? 4. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.1,69,730/- made under section 69A of the Income Tax Act, 1961, ignoring the conclusive findings of the Assessing Officer and the Investigation Wing that the Client Code Modifications (CCMs) were systematically executed to facilitate shifting of profits and losses and were not genuine corrections of punching errors? 5. Whether the Ld. CIT(A) failed to appreciate that the CCMs involved modification of entirely dissimilar client codes of unrelated parties, thereby making the claim of inadvertent or genuine error as not possible, and the same is in a clear violation of SEBI's guidelines and evidence of a pre-planned design to evade tax? 6. Whether the Ld. CIT(A) overlooked the judicially recognized principle that entries in books or explanations by the assessee cannot override concrete evidence of tax evasion, as demonstrated by the Investigation Wing's scrip wise and transaction-wise analysis of CCMs? 7. Whether the Ld. CIT(A) erred in substituting his own presumptions in place c factual findings by the Assessing Officer and the Investigation Wing, without rebutting the direct evidence that the CCMs were neither accidental ne isolated but part of a larger scheme of tax avoidance?”

by the revenue are interconnected and interrelated and relate to challenging the order of Ld. CIT(A) in deleting the additions made by the AO on account of Client Code Modification (CCD). Therefore, I have decided to adjudicate these grounds through the present consolidated order.

4. I have heard the counsels for both the parties, perused the material placed on record and the orders passed by the revenue authorities.

5. As per the facts of the present case, the additions in the present case were made by the AO on the basis of findings of the Investigation Wing, which points A.Y. 2009-10 Jayshree Sanjiv Haria out that the CCD was systematically used to shift profits/losses and were not mere corrections of punching errors. However, Ld. CIT(A) has dealt with the matter meticulously and deleted the additions. Therefore, it is necessary to first of all evaluate the order passed by Ld. CIT(A). The operative portion of the order of Ld. CIT(A) is contained at pages 28 to 33, and the same is reproduced herein below: “5.3.1 The Appellant has contended that the Assessing Officer has grossly erred in making an addition of Rs 1,69,730/- on account of CCM based on surmises, conjectures and assumptions without providing any corroborating evidence to substantiate its claim. She has further alleged that the Assessing Officer has grossly erred in not providing the opportunity to cross examine the brokers and has also failed to provide any details obtained from the brokers based on which the addition was made in the hands of Appellant. 5.3.2 The contentions of the Appellant are carefully perused. The AO has held that the Appellant has shifted profit by way of CCM. Client Code is a unique code which is assigned by the broker to its clients. One code is issued to each client; therefore, no client of a broker can have more than one code. The SEBI vide circular No. 39 of 2001 dated 18/07/2001 made it mandatory for all brokers to use unique client code for all clients. In case of any genuine mistakes, a client code is permitted to be changed after execution of trades, however, this permission is given only in exceptional cases of genuine mistakes to be rectified. Thus, the purpose of Client Code Modification permission given to the broker is to rectify human error when a client inadvertently provides a wrong code or a wrong code is punched by the broker while executing trade. The broker is allowed to change the client code after trade is executed between 3.30 P.M. to 4.000 P.M. and this permission and facility to rectify a genuine error which might have occurred while entering the code. 5.3.3 During the search conducted by Investigation Wing Ahmedabad, it was found that the certain brokers are misusing this facility for the purpose of rectifying other than genuine errors. The Client Code Modification facility was being misused and brokers were found indulging in transferring gain or loss from one person to another by changing the code in the garb of correcting the error. 5.3.4 CCM per se is not illegal. In fact, in the case of ITO vs. Pat Commodity Services P. Ltd. and 3499/Mum/2012 dt. 7th Aug, 2015 (Mum) (Trib). which pertains to a broker, it was held that CCM is not illegal. Further, it was held that due to huge volume of transaction CCM become inevitable. Further if CCM is done at the end of the day, then there is no question of shifting profits and losses. The MCX, the stock exchange, is very much aware about client code modifications and hence in order to discourage frequency of modifications, it has brought in penalty mechanism.

A.Y. 2009-10 Jayshree Sanjiv Haria Even under the penalty mechanism also, no penalty shall be leviable if the modification was less than 1% of the total transactions, meaning thereby, the MCX is also accepting the fact that such kind of client code modification is inevitable. Under these set of facts, the next question that arises is Whether the client code modification has resulted into shifting of profits, otherwise earned by the Appellant. The Appellant cannot be considered to be an established player in CCM. Further, the movement of prices of commodities cannot be predicted by anyone with accuracy and hence it is inconceivable or unlikely that the Appellant could have made profits consistently, even if it is assumed for a moment that the Appellant had actually carried out the transactions for its own benefit. It is pertinent to note that the Appellant has not disowned the transactions and has duly disclosed the profits arising from the transactions as their respective income. In fact, there is no tax benefit to the Appellant on the alleged transaction of CCM of Rs. 1,69,730/- as the Appellant has a net loss in the F&O segment of Rs 5,67,544/-. The Appellant did not carry forward this loss due to a delay in filing the return of income. 5.3.5 The AO has not brought on record any material to show that the client code modification made by the Appellant was not genuine. The assessment order also does not bring out the following facts, namely, percentage of modified trade value being significantly higher than the total credit value of the Appellant; number of modified trade being significant to total number of trades of the Appellant; profit/loss arising on account of such modifications by the Appellant being significant in comparison to the profit/loss in the trades were no modification were carried out by the Appellant; profit/loss arising due to CCM being in significant ratio; buying and selling leg off different trades to have been modified; total number of trade modifications being increased before closing of the Financial Year so as to reduce the genuine taxable income of the Appellant etc. and unless the same is brought on record in the assessment order and the correlation of transfer/receipt of profit/loss is established to be illegal or having quid pro quo transaction where one party receives profit/loss by making certain payment to the other party out of their undisclosed income and in the process the taxable income has escaped or artificial or illegal loss have been purchased through Off the floor transactions being in contravention of SEBI Act, 1992 or the Securities Contracts (Regulation) Act, 1956, the disallowance/additions made by the AO cannot be sustained. The AO except for the fact of receiving information from the DIT (I & CI), has not considered the other aspects of the transaction ie receipt and /or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has given in details of the Modus Operandi of creation of fictitious profit and / or losses with a malafide intention of escaping taxes. However, the AO has neither proved nor established any evidence in case of any single transaction undertaken by the Appellant whose Modus Operandi is similar to the nature which he alleges to be income of the Appellant by way of profit shifting. No co-relation between the Appellant on the one hand and the other parties on the other hand has been brought on record to establish any sort of collusion between the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the Appellant. Nothing has been brought on record to suggest that the said losses were purchased and the parties were given cheque or cash payment in view of such favours. Such co-relation is necessary to fasten any liability upon the Appellant.

5.3.6 In view of the above factual analysis of the case as well as applying the ratio of judgments of Hon'ble Courts, the decision of Hon'ble Jurisdictional ITAT, Mumbai in the case of ITO vs. Pat Commodity Services P. Ltd. and 3499/Mum/2012 dt. 7th Aug, 2015 (Mum) (Trib), the disallowance of Rs. 1,69,730/as fictitious loss by the Assessing Officer and addition of the same as unexplained income cannot be sustained and is therefore, directed to be deleted. 5.3.7 It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any Appellant should compulsorily have the following ingredients :- i) A valid transaction must have been executed on the Stock Exchange. ii) The customer of the registered share broker should confirm & agree that the transaction entered into by the broker belongs to him. iii) The payment for purchases and/or receipt of sale proceeds should have happened between the Bank Accounts of the broker & his customer. iv) The above transaction must have been accounted for in the hooks of account of the registered broker as well as his customer. v) The eventual profit/loss on the transactions executed on the Stock Exchange & exchange of monies having happened as well as getting accounted in the respective books of account. 5.3.8 The AO in the present case has mechanically added amounts as income of Appellant without verifying & fumishing evidences on record that all the above steps have actually happened in the case of all the transactions which he has added as undisclosed income. In the case of M/s. Sambhavanath Investment v. ACIT AY 2006-2007 dated 19/12/2013 (Mum.) (Trib.), ACIT v Kunvarji Finance (P) Ltd (2015) 61 www.taxguru.in 52(Ahd.) (Trib.) it was held that CCM within 1% is absolutely normal 5.3.9 In the case of ACIT Vs. Kunvarji Finance Pvt. Ltd. 119 DTR 1 (Ahd.) (Trib.) where it was held that as per Circular No. MCX/T&S/032/2007 dt. 22.01.2007 issued by the Commodity Exchange, client code modification is permitted intra-day i.e. on the same day. There is no penalty if the client code modification is upto 1 per cent of the total orders and if it is greater than 1% but less than 5%, the penalty is Rs.500/-. If it is greater than 5% but less than 10%, penalty is Rs. 1000/- and if it is greater than 10%, then penalty is Rs. 10,000/-. From the above, the only inference that can be drawn is that as per MCX, the client code modification upto 1% is absolutely normal and therefore, the broker is permitted to modify the client code upto 1% without paying any penalty. Even client code modification upto 5% is not considered unusually high because that is also permitted with the token penalty of Rs.500/-. 5.3.10 Thus, in simple words, the Client Code Modification facility allows the broker to correct the mistakes which are committed during the course of doing the trade on behalf of the various clients. There may be some instances of misusing this facility by the brokers but it cannot be done by the broker on regular basis as the broker is bound to carry out trading transactions as per the instructions of the client and therefore, until and unless all three parties are hand in gloves or in-connivance, such misuse of Client Code Modification facility cannot be done. Therefore, all three parties are required to have common intention and design which in normal course is not possible A.Y. 2009-10 Jayshree Sanjiv Haria when they are not related parties as the time limit to modify the client code is very limited after execution of trade/transaction at the stock exchange. The meeting of three minds is essential for misusing this facility and doing this mischievous transfer of profits from one hand to another hand. Until and unless two clients and broker are on the same page and involved in doing this mischievous act by misusing the facility of Client Code Modification such transactions are not possible when the parties are not related to each other party and are independent clients of a particular broker. It is possible only when two clients to a broker are closely related parties and controlled by a single person or set of persons then with the connivance with the broker this kind of bogus transactions can be done in the garb of Client Code Modification. Once the parties are independent and have no relation then doing such transaction within such limited window period of 1/2 hour after trading hours is not possible. Thus, the misuse of such facility is possible only when all three parties i.e. two clients and one broker have the common interest and are closely related party. These transactions are even otherwise cannot be predesigned or planned as it can be done only after transaction is executed on the stock exchange and subsequently once the result and outcome of the transaction is known to the parties, the same can be shifted from one client to another client to serve the interest of parties. Prior to the execution of the transaction, it is not possible to conceive or preconceive the transfer of the transaction from one account to another account 5.3.11 In view of the facts mentioned above the addition made by the AO is hereby deleted and the grounds of appeal are allowed.”

6. No new facts or circumstances have been placed before me in order to controvert or rebut the lawful findings so recorded by the Ld. CIT(A). Therefore, I find no reason to interfere with or to deviate from the lawful findings so recorded by Ld. CIT(A). Thus, the grounds raised by the revenue stand dismissed, and the order passed by the Ld. CIT(A) stand upheld.

7. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 24.06.2025.