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Facts
The Revenue appealed against the Ld. CIT(A)'s order deleting additions and penalties related to fictitious profits from client code modification in share trading. The Assessing Officer (AO) added profits from Future & Options transactions as unexplained cash credit, alleging client code modification (CCM) to set off losses. The assessee claimed the profits were genuine and from ordinary business.
Held
The Tribunal held that the AO failed to provide sufficient evidence of CCM and manipulation by the assessee or broker. The CIT(A)'s deletion of additions and penalties was upheld, concluding that the F&O transactions were conducted in the ordinary course of business and the profits were genuine.
Key Issues
Whether the profits from F&O transactions were genuine or arose from client code modification, and whether the consequent penalties were leviable.
Sections Cited
68, 148, 271(1)(c)
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Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI
Before: SHRI OM PRAKASH KANT & MS. KAVITHA RAJAGOPAL
These two appeals by the Revenue are directed against two separate orders dated 27.11.2024 and 28.11.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, i.e. the first appeal being in relation to the quantum
Arvind Shantilal Shah 2 & 542/MUM/2025 & 542/MUM/2025 assessment proceedings assessment proceedings, whereas the second appeal relates to whereas the second appeal relates to penalty levied by the Assessing Officer for concealment of penalty levied by the Assessing Officer for concealment of penalty levied by the Assessing Officer for concealment of income/furnishing of inaccurate particulars of income. income/furnishing of inaccurate particulars of income income/furnishing of inaccurate particulars of income
First, we take up t we take up the appeal of the assessee in appeal of the assessee in . The relevant grounds raised are reproduced as 541/Mum/2025. The relevant grounds raised are reproduced as 541/Mum/2025. The relevant grounds raised are reproduced as under:
1. "Whether on the fact and in the circumstances of the case 1. "Whether on the fact and in the circumstances of the case 1. "Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. and in law, the Ld. CIT(A) erred in deleting the addition of Rs. and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 99,26,115/ - made u/s 68 of the Income tax Act by the AO on of the Income tax Act by the AO on account of profit through client code modification?" account of profit through client code modification?" 2. "Whether on the fact and in the circumstances of the case 2. "Whether on the fact and in the circumstances of the case 2. "Whether on the fact and in the circumstances of the case and in law. the Ld. CIT(A) erred in allowing the carry forward of and in law. the Ld. CIT(A) erred in allowing the carry forward of and in law. the Ld. CIT(A) erred in allowing the carry forward of losses to the assessee holding the earnin losses to the assessee holding the earning of profits to be g of profits to be genuine?" 3. "Whether on the fact and in the circumstances of the case 3. "Whether on the fact and in the circumstances of the case 3. "Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made of and in law, the Ld. CIT(A) erred in deleting the addition made of and in law, the Ld. CIT(A) erred in deleting the addition made of Rs. 1.98:522/ Rs. 1.98:522/ - on account of unexplained expenses being on account of unexplained expenses being alleged brokerage payment @ 2 % of Rs. 99,2 alleged brokerage payment @ 2 % of Rs. 99,26.115/ 6.115/- being profit earned through client code modification?" profit earned through client code modification?" 4. "Whether on the fact and in the circumstances of the case 4. "Whether on the fact and in the circumstances of the case 4. "Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in gnoring the fact that as per and in law, the Ld. CIT(A) erred in gnoring the fact that as per and in law, the Ld. CIT(A) erred in gnoring the fact that as per the information received from DCIT (Intell& CR. Inv). the the information received from DCIT (Intell& CR. Inv). the the information received from DCIT (Intell& CR. Inv). the assessee is involved in client code modification and used the is involved in client code modification and used the is involved in client code modification and used the fictitious fictitious fictitious profit profit profit for for for the the the purpose purpose purpose of of of setting setting setting off off off of of of brought forward forward loss? 3. Briefly stated, facts of the case are that the assessee was Briefly stated, facts of the case are that the assessee was Briefly stated, facts of the case are that the assessee was engaged in the business of trading in yarn, the business of trading in yarn, brokerage and commission and share trading business (Future & Options), short, on and share trading business (Future & Options), short, on and share trading business (Future & Options), short, long and intraday. The assessee filed return of income on . The assessee filed return of income on . The assessee filed return of income on 12.10.2010 declaring total income 12.10.2010 declaring total income at Rs.57,860/-. Subsequently, in . Subsequently, in view of information received from the internal sources of the view of information received from the internal sources of the view of information received from the internal sources of the Arvind Shantilal Shah 3 & 542/MUM/2025 & 542/MUM/2025 Income-tax Department that assessee got benefited by way of client epartment that assessee got benefited by way of client epartment that assessee got benefited by way of client code modification(CCM) (CCM) in the business of share trading and had in the business of share trading and had used the fictitious profit of Rs.99,25,116/ used the fictitious profit of Rs.99,25,116/- to set off the losses to set off the losses and reduce his taxable income, reduce his taxable income, the Assessing Officer recorded the the Assessing Officer recorded the reasons to believe that income escaped assessment and issued ons to believe that income escaped assessment and issued ons to believe that income escaped assessment and issued notice u/s 148 of the Income notice u/s 148 of the Income-tax Act, 1961 (in short ‘the Act’) on tax Act, 1961 (in short ‘the Act’) on 16.03.2015. After following the due procedure of the law, the 16.03.2015. After following the due procedure of the law, the 16.03.2015. After following the due procedure of the law, the assessment was completed treating the amount of Rs.99,26,115/- assessment was completed treating the amount of Rs.99,26,115/ assessment was completed treating the amount of Rs.99,26,115/ as unexplained cash credit along with addition for the commission plained cash credit along with addition for the commission plained cash credit along with addition for the commission paid to brokers @ 2% for arranging the CCM transaction amounting paid to brokers @ 2% for arranging the CCM transaction amounting paid to brokers @ 2% for arranging the CCM transaction amounting to Rs.1,98,522/- in the assessment order passed in the assessment order passed. On further in the assessment order passed appeal, the Ld. CIT(A) deleted the addition observing as under : appeal, the Ld. CIT(A) deleted the addition observing as under : appeal, the Ld. CIT(A) deleted the addition observing as under :
“7. Ground No.1 to 4: All these grounds are raised against 7. Ground No.1 to 4: All these grounds are raised against 7. Ground No.1 to 4: All these grounds are raised against the action of the A.O in making an addition of Rs. 99,26,115 the action of the A.O in making an addition of Rs. 99,26,115 the action of the A.O in making an addition of Rs. 99,26,115 by treating the profit earned from F&O transactions as by treating the profit earned from F&O transactions as by treating the profit earned from F&O transactions as fictious profit on account of Client Code Modification(CCM) fictious profit on account of Client Code Modification(CCM) fictious profit on account of Client Code Modification(CCM) and treating the same and treating the same as unexplained cash credits. 7.1 From the assessment order it is seen the assessment 7.1 From the assessment order it is seen the assessment 7.1 From the assessment order it is seen the assessment was reopened on the basis of the information received from was reopened on the basis of the information received from was reopened on the basis of the information received from the DGIT(I&CI) regarding client code modification in the the DGIT(I&CI) regarding client code modification in the the DGIT(I&CI) regarding client code modification in the share trading account of the appellant. While this share trading account of the appellant. While this share trading account of the appellant. While this information may have been sufficient to reopen the ormation may have been sufficient to reopen the ormation may have been sufficient to reopen the assessment and issue notice u/s 148 of the Act, in order to assessment and issue notice u/s 148 of the Act, in order to assessment and issue notice u/s 148 of the Act, in order to make an addition on this account the A.O was required to make an addition on this account the A.O was required to make an addition on this account the A.O was required to carry out independent enquiries and ascertain the true facts carry out independent enquiries and ascertain the true facts carry out independent enquiries and ascertain the true facts and show that the assessee had and show that the assessee had earned the profits on earned the profits on account of the CCM in connivance with the broker. The A.O account of the CCM in connivance with the broker. The A.O account of the CCM in connivance with the broker. The A.O in the assessment order has discussed the general modus in the assessment order has discussed the general modus in the assessment order has discussed the general modus operendi of client code modification but has failed to bring operendi of client code modification but has failed to bring operendi of client code modification but has failed to bring on record any evidence that the trading account of the on record any evidence that the trading account of the on record any evidence that the trading account of the assessee was infact used to carry out the CCM. The A.O essee was infact used to carry out the CCM. The A.O essee was infact used to carry out the CCM. The A.O has failed to even provide the details of the transactions has failed to even provide the details of the transactions has failed to even provide the details of the transactions
Arvind Shantilal Shah 4 & 542/MUM/2025 & 542/MUM/2025 carried out by the appellant by way of an account carried out by the appellant by way of an account carried out by the appellant by way of an account statement and has failed to show in what way the CCM statement and has failed to show in what way the CCM statement and has failed to show in what way the CCM was carried out in the case of the assesse was carried out in the case of the assessee in this case. The e in this case. The A.O has failed to mention the details of the broker and A.O has failed to mention the details of the broker and A.O has failed to mention the details of the broker and results of any enquiries carried out with the broker to show results of any enquiries carried out with the broker to show results of any enquiries carried out with the broker to show how the share transactions in the F&O segment were how the share transactions in the F&O segment were how the share transactions in the F&O segment were manipulated by the assessee in connivance with the broker manipulated by the assessee in connivance with the broker manipulated by the assessee in connivance with the broker to earn the fictitious profits as alleged. The name and e fictitious profits as alleged. The name and e fictitious profits as alleged. The name and details of the broker in this case have also not been details of the broker in this case have also not been details of the broker in this case have also not been mentioned by the A.O nor is there any reference to the mentioned by the A.O nor is there any reference to the mentioned by the A.O nor is there any reference to the manipulated trades or transactions. The A.O only mentions manipulated trades or transactions. The A.O only mentions manipulated trades or transactions. The A.O only mentions that information was called for from NSE an that information was called for from NSE and BSE but has d BSE but has failed to bring on record what the evidence was which failed to bring on record what the evidence was which failed to bring on record what the evidence was which established that the share transactions carried out by the established that the share transactions carried out by the established that the share transactions carried out by the assessee were in fact manipulated by using the modality of assessee were in fact manipulated by using the modality of assessee were in fact manipulated by using the modality of CCM. There are no material facts which have been brought CCM. There are no material facts which have been brought CCM. There are no material facts which have been brought on record by on record by the A.O to prove that the broker had changed the A.O to prove that the broker had changed the client code at the directions of the appellant in any of the client code at the directions of the appellant in any of the client code at the directions of the appellant in any of the transactions on the F&O segment. I am in agreement the transactions on the F&O segment. I am in agreement the transactions on the F&O segment. I am in agreement with the appellant that in the case of CCM, there has to be with the appellant that in the case of CCM, there has to be with the appellant that in the case of CCM, there has to be active involvement and connivance o active involvement and connivance of multiple clients f multiple clients spearheaded by the broker since the fictitious profit is spearheaded by the broker since the fictitious profit is spearheaded by the broker since the fictitious profit is required to be shifted from one client to another. And that in required to be shifted from one client to another. And that in required to be shifted from one client to another. And that in this case there is nothing on record to show that the this case there is nothing on record to show that the this case there is nothing on record to show that the appellant along with other clients, masterminded by the appellant along with other clients, masterminded by the appellant along with other clients, masterminded by the broker were actively involved in the practice of shifting the were actively involved in the practice of shifting the were actively involved in the practice of shifting the profit or loss from one to the other for the purposes of tax profit or loss from one to the other for the purposes of tax profit or loss from one to the other for the purposes of tax evasion. There is also no indication that after the sales were evasion. There is also no indication that after the sales were evasion. There is also no indication that after the sales were credited into the account there was cash withdrawals credited into the account there was cash withdrawals credited into the account there was cash withdrawals against the profits/sale against the profits/sale consideration. Hence it can only be consideration. Hence it can only be concluded that the profit earned on the said F&O concluded that the profit earned on the said F&O concluded that the profit earned on the said F&O transactions which were duly disclosed as such, were transactions which were duly disclosed as such, were transactions which were duly disclosed as such, were undertaken in the ordinary course of business and hence undertaken in the ordinary course of business and hence undertaken in the ordinary course of business and hence was eligible to be set off against the brought forward was eligible to be set off against the brought forward was eligible to be set off against the brought forward losses. 7.2 In the assessment order the A.O has placed reliance on 7.2 In the assessment order the A.O has placed reliance on 7.2 In the assessment order the A.O has placed reliance on the fact that the assessee had accepted that the profit had the fact that the assessee had accepted that the profit had the fact that the assessee had accepted that the profit had been earned by using client code modification. The A.O has been earned by using client code modification. The A.O has been earned by using client code modification. The A.O has also reproduced the reply of the assessee to the show cause also reproduced the reply of the assessee to the show cause also reproduced the reply of the assessee to the show cause notice dated 07 notice dated 07.03.2016 in the order which has also been .03.2016 in the order which has also been Arvind Shantilal Shah 5 & 542/MUM/2025 ITA Nos. 541 & 542/MUM/2025 submitted by the appellant in these proceedings. On perusal submitted by the appellant in these proceedings. On perusal submitted by the appellant in these proceedings. On perusal of this letter it is seen that there is nothing to indicate the of this letter it is seen that there is nothing to indicate the of this letter it is seen that there is nothing to indicate the acceptance of CCM by the assessee. In fact the extract as acceptance of CCM by the assessee. In fact the extract as acceptance of CCM by the assessee. In fact the extract as reproduced in the order clearly reproduced in the order clearly states that the F&O states that the F&O transactions were carried out through the broker in the transactions were carried out through the broker in the transactions were carried out through the broker in the normal course of business and the profit was earned in the normal course of business and the profit was earned in the normal course of business and the profit was earned in the same F&O business. The assessee thorough the A.R has same F&O business. The assessee thorough the A.R has same F&O business. The assessee thorough the A.R has also asserted that the Bonafide intentions in carrying out also asserted that the Bonafide intentions in carrying out also asserted that the Bonafide intentions in carrying out this business are also brought out by the fact that in the AY ness are also brought out by the fact that in the AY ness are also brought out by the fact that in the AY 2015-16 where he earned huge profits in F&O segments 16 where he earned huge profits in F&O segments 16 where he earned huge profits in F&O segments and there was no brought forward loss, he had paid a large and there was no brought forward loss, he had paid a large and there was no brought forward loss, he had paid a large amount of income tax in accordance with the law. amount of income tax in accordance with the law. amount of income tax in accordance with the law. Accordingly, the contentions of the appell Accordingly, the contentions of the appellant that he did not ant that he did not at any point agree to the use of CCM to earn these profits in at any point agree to the use of CCM to earn these profits in at any point agree to the use of CCM to earn these profits in contradiction to the conclusions in the assessment order is contradiction to the conclusions in the assessment order is contradiction to the conclusions in the assessment order is accepted. 7.3 For the aforementioned reasons, it is held that that the 7.3 For the aforementioned reasons, it is held that that the 7.3 For the aforementioned reasons, it is held that that the transactions in the F&O segment of Rs 99,2 transactions in the F&O segment of Rs 99,26,115/- - were carried out by the assessee in the regular course and hence carried out by the assessee in the regular course and hence carried out by the assessee in the regular course and hence the addition of this amount by the A.O is deleted. The the addition of this amount by the A.O is deleted. The the addition of this amount by the A.O is deleted. The carried forward of losses is also required to be allowed to carried forward of losses is also required to be allowed to carried forward of losses is also required to be allowed to the appellant in accordance with law holding the earning of the appellant in accordance with law holding the earning of the appellant in accordance with law holding the earning of profits to be genuine. The Grounds of Appeal are Allowed. to be genuine. The Grounds of Appeal are Allowed. to be genuine. The Grounds of Appeal are Allowed.”
4. We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record the relevant materials on record. The Assessing Officer made . The Assessing Officer made addition of Rs.99,26,115/ addition of Rs.99,26,115/- treating the profit earned from the treating the profit earned from the Future & Options transaction as fictitious profit on account of client ransaction as fictitious profit on account of client ransaction as fictitious profit on account of client code modification and assessed the same as unexplained cash code modification and assessed the same as unexplained cash code modification and assessed the same as unexplained cash credit in terms of section 68 of the Act. However, the Assessing credit in terms of section 68 of the Act. However, the Assessing credit in terms of section 68 of the Act. However, the Assessing Officer failed to provide provide details of such client code modification and of such client code modification and evidence in support as to the client code mo e in support as to the client code modification was done in dification was done in any malafide manner for earning fictitious profit. The Assessing fide manner for earning fictitious profit. The Assessing fide manner for earning fictitious profit. The Assessing Officer neither provided any detail of the broker who had carried Officer neither provided any detail of the broker who had carried Officer neither provided any detail of the broker who had carried
Arvind Shantilal Shah 6 & 542/MUM/2025 & 542/MUM/2025 out client code modification on behalf of the assessee. The out client code modification on behalf of the assessee. The out client code modification on behalf of the assessee. The Assessing Officer merely on the basis of the information from the sing Officer merely on the basis of the information from the sing Officer merely on the basis of the information from the internal sources held the profit from the Future & Options segment sources held the profit from the Future & Options segment sources held the profit from the Future & Options segment as fictitious profit earned by way of client code modification. In as fictitious profit earned by way of client code modification. In as fictitious profit earned by way of client code modification. In absence of any supporting evidence, we do not find any infirmity in absence of any supporting evidence, we do not find any infirm absence of any supporting evidence, we do not find any infirm the order of the Ld. CIT(A) on the issue in dispute and accordingly the order of the Ld. CIT(A) on the issue in dispute and accordingly the order of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The sole ground of appeal of the Revenue is we uphold the same. The sole ground of appeal of the Revenue is we uphold the same. The sole ground of appeal of the Revenue is accordingly dismissed. accordingly dismissed.
5. In In In ITA ITA ITA No. No. No. 542/Mum/2025, 542/Mum/2025, 542/Mum/2025, the the the grounds grounds grounds raised raised raised are are are reproduced as under: reproduced as under:
1. Whether on the fact a Whether on the fact and in the circumstances of the nd in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the case and in law, the Ld. CIT(A) erred in deleting the case and in law, the Ld. CIT(A) erred in deleting the penalty levied u/s 271(1)(c) of the Income Tax Act, of penalty levied u/s 271(1)(c) of the Income Tax Act, of penalty levied u/s 271(1)(c) of the Income Tax Act, of Rs. 31,28,512/ Rs. 31,28,512/-?" 2. "Whether on the fact and in the circumstances of the "Whether on the fact and in the circumstances of the "Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in dele case and in law, the Ld. CIT(A) erred in deleting the ting the penalty levied u/s 271(1)(c) of the Income Tax penalty levied u/s 271(1)(c) of the Income Tax penalty levied u/s 271(1)(c) of the Income Tax ignoring the fact that the assessee has made ignoring the fact that the assessee has made ignoring the fact that the assessee has made concealment of particulars of his income and as per concealment of particulars of his income and as per concealment of particulars of his income and as per the information received from DCIT (Intell& CR. Inu), the information received from DCIT (Intell& CR. Inu), the information received from DCIT (Intell& CR. Inu), the assessee is involved in client code modification the assessee is involved in client code modificat the assessee is involved in client code modificat and used the fictitious profit for the purpose of and used the fictitious profit for the purpose of and used the fictitious profit for the purpose of setting off of brought setting off of brought forward loss?" 5.1 We find that the Ld. CIT(A) has deleted the penalty in respect We find that the Ld. CIT(A) has deleted the penalty in respect We find that the Ld. CIT(A) has deleted the penalty in respect of quantum addition relating to fictitious profit from Future & of quantum addition relating to fictitious profit from Future & of quantum addition relating to fictitious profit from Future & Options transactions amounting to Options transactions amounting to Rs.99,26,116/-. Since we have . Since we have already upheld the order of the Ld. CIT(A) deleting the said addition already upheld the order of the Ld. CIT(A) deleting the said addition already upheld the order of the Ld. CIT(A) deleting the said addition and therefore, we do not find any infirmity in the order of the Ld. and therefore, we do not find any infirmity in the order of the Ld. and therefore, we do not find any infirmity in the order of the Ld.
Arvind Shantilal Shah 7 & 542/MUM/2025 & 542/MUM/2025 CIT(A) on the issue in dispute in deleting the penalty. Accordingly, CIT(A) on the issue in dispute in deleting the penalty. Accordingly, CIT(A) on the issue in dispute in deleting the penalty. Accordingly, we uphold the same we uphold the same. The grounds of appeal of the Revenue are . The grounds of appeal of the Revenue are accordingly dismissed. accordingly dismissed.
In the result, both the appeals of the Revenue are dismissed. In the result, both the appeals of the Revenue are dismissed. In the result, both the appeals of the Revenue are dismissed.
Order pronounced in the open Court on Order pronounced in the open Court on 12/03/2025. /03/2025.