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Facts
The assessee is aggrieved by the disallowance of loss from commodity trading and additions for unexplained commission, which arose from alleged manipulation of client codes. The additions were based on information from the investigation wing regarding brokers admitting to commission for misusing client codes for tax evasion.
Held
The Tribunal held that the client code modification (CCM) is a process for rectifying genuine errors and is not meant for routine use. However, if such modifications are within limits and done on the same day, it should not be considered intentional. The additions made by the AO were based on presumption and suspicion without establishing a direct link to the assessee.
Key Issues
Whether additions based on client code modification are justified when the process is for rectifying genuine errors and lacks direct evidence linking the assessee to mala fide intent?
Sections Cited
147, 143(3), 68
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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: SHRI MANISH BORAD, AM & SHRI NARINDER KUMAR, JM
Under the facts and Circumstances of the case the learned CIT(A) has erred in confirming the action of the Learned AO in passing the order u/s 147/143(3) of the Income Tax Act, 1961 which is void ab-initio and deserves to be quashed.
Under the facts and Circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 15,58,282/-on account of disallowance of income suppressed by using Client Code Modification.
3. Under the facts and Circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 31,166/-on account of unexplained commission payment. 4. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing. the assessee has marched the present appeal on the following grounds:-
1. Under the facts and Circumstances of the case the learned CIT(A) has erred in confirming the action of the Learned AO in passing the order u/s 147/143(3) of the Income Tax Act, 1961 which is void ab-initio and deserves to be quashed.
2. Under the facts and Circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 40,72,459/-on account of disallowance of income suppressed by using Client Code Modification.
3. Under the facts and Circumstances of the case the learned 3 CIT(A) has erred in confirming the addition of Rs. 81,453/- on account of unexplained commission payment. 4. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing. present appeal on the following additional grounds:-
1. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in not providing the information in his possession/report of the DIT(Inv) Ahmedabad/survey report in the case of Fairwealth Securities Ltd. while furnishing reasons recorded for issuing notice u/s 148 to the assessee, hence, notice issued u/s 148 is ab initio void.
2. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in applying provisions of clause (b) of Explanation 2 of Sec. 147 for re-opening of assessment.
3. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in re-opening the assessment in contravention to proviso (i) of Section 147 despite there being no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment 4. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in completing the assessment u/s 147/143(3) in flagrant violations of the principles of natural justice in as much as the following was not provided, although the same were used while completing the assessment in the case of the assessee- (i) Survey report conducted in the case of Fairwealth Securities Ltd. (ii) Report of DIT (Inv) Ahmedabad regarding manipulation of client code modification; (iii) Copies of statements of brokers where survey u/s 133A was conducted and there were confessional statements of receiving commission 0.05% to 2% for providing facility of client code modification/manipulation. 5. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in making addition of Rs. 15,58,282/- on account of manipulation of client code modification without bringing on record any material having a live-link of the assessee with such manipulation. the assessee has marched the
1. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in not providing the information in his possession/report of the DIT(Inv) Ahmedabad/survey report in the case of Fairwealth Securities Ltd. while furnishing reasons recorded for issuing notice u/s 148 to the assessee, hence, notice issued u/s 148 is ab initio void.
2. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in completing the assessment u/s 147/143(3) in flagrant violations of the principles of natural justice in as much as the following was not provided, although the same were used while completing the assessment in the case of the assessee (i) Survey report conducted in the case of Fairwealth Securities Ltd. (ii) Report of DIT (Inv) Ahmedabad regarding manipulation of client code modification; (iii) Copies of statements of brokers where survey u/s 133A was conducted and there were confessional statements of receiving commission 0.05% to 2% for providing facility of client code modification /manipulation. Additional Ground No.3 On the facts and in the circumstances of the case and in law, the Learned Assessing Officer erred in making addition of Rs. 40,72,459/- on account of manipulation of client code modification without bringing on record any material having a live-link of the assessee with such manipulation.
At the outset ld. Counsel for the assessee requested for not pressing the legal issues raised in the grounds of appeal/ additional grounds of appeal for A.Ys. 2009-10 and 2010-11 mentioned above.
4. We accordingly dismiss the grounds raising the legal issues for A.Ys 2009-10 & 2010-11 as not pressed. of the assessee is commonly raised against disallowance of income suppressed by using client code modification coupled with addition of unexplained commission payment for arranging the bogus income/loss by using client code modification.
6. At the outset ld. Counsel for the assessee submitted that the common issue raised in this appeal is squarely covered by the decision of this Hon’ble Tribunal in the case of M/s Spectrum dated 08.04.2024. He further submitted that the transactions giving rise to the alleged additions are duly supported by the documentary evidence in the form contract note, ledger accounts of the authorized broker and transactions having been carried out through banking channels.
7. On the other hand, ld. DR vehemently argued supporting the order of ld. CIT(A) and stated that merely carrying out on the transactions through banking channels by itself cannot be sufficient to hold the transactions to be genuine. He also submitted that ld. AO has specifically dealt with the information received from the investigation wing about the alleged bogus loss suffered by the assessee through client code modification. placed on record. The assessee is aggrieved with the disallowance of loss from commodity trading allegedly earned by client code modification holding it to be bogus along with addition for unexplained expenditure towards commission for arranging the loss for A.Ys 2009 to 2010-11.
9. We observe that for A.Y 2009-10 regular return of income filed declaring income of Rs. 18,54,220/- was selected for scrutiny and vide order u/s 143(3) of the Act dated 15.12.2011 income assessed at Rs. 20,33,710/-. Thereafter, specifically based upon the information from investigation wing unit, Ahemedabad about some brokers allegedly admitted to have received commission for misusing of client code modification and the same having been used as a tool for tax evasion. Assessee is also observed to be one of the beneficiaries. Ld. AO issued noticed u/s 148 of the Act and carried out the reassessment proceedings, and made impugned additions of Rs. 15,58,282/- for A.Y 2009-10 and on observing similar facts for A.Y 2010-11, made the additions of Rs. 47,72,459/- and disallowed the claim of loss which has been set off by the assessee against the positive income from other business. Addition for unexplained commission was also made at Rs. 31,166/- and assessee failed to get any relief from the First Appellate Authority.
On going through the paper book, we notice that the assessee is maintaining regular books of accounts and the same are duly audited. The assessee’s source of income includes income from running sole proprietorship concern M/s Kishan Pashu Aahar Udyog as well as income from trading in shares and derivatives. Except the alleged transactions giving rise to loss allegedly earned by the assessee through cline code modification, ld. AO has accepted all the other book results. It is also not in dispute that business of dealing shares and derivatives is carried out by the assessee for the last many years. The alleged transactions giving rise to the loss have also been carried out through banking channels and are supported by documents including bills and ledger. It is also an admitted fact that transactions have been carried out on recognized commodity trading exchange and through registered brokers and no direct connection, between the two parties i.e. assessee and the other party, has been established by the Revenue.
11. We also observe that ld. AO has not made any independent inquiry and rather, he has made the impugned additions purely on for any information from the broker about total number of transactions where client code has been modified and whether they are within permissible intraday limit fixed by the commodity exchange for such client code modification. In the presence set of facts and circumstances, ld. counsel for the assessee has referred and relied on the decisions of this Tribunal in the case of M/s Spectrum Foods Limited (supra). The relevant finding of this tribunal dealing with very same issue of additions made on account of client code modifications reads as under:-
We have heard the rival contentions and perused the material placed on record and also gone through the various judicial precedent cited by both the parties to drive home to their respective contentions. The brief facts of the case is that the assessee company is engaged in the business of wholesale buying and selling of salt and also from buying and selling of shares and securities. For the year under consideration, the assessee filed return declaring total income of Rs. 1,23,940/- on 30/09/2010. In the case of the assessee, proceedings u/s 147 were initiated by the DCIT, Circle-6, Jaipur by issuance of notice u/s 148 dated 29/03/2015 on the ground that allegedly assessee obtained fictitious profits of Rs.56,73,633/- by misusing client code modification with the help of brokers. Assessment has been completed by ITO, Ward 5(2), Jaipur on total income of Rs.59,11,104/-, inter-alia, making addition of the alleged fictitious profits of Rs. 56,33,633/- and also of Rs. 1,13,472/- on account of payment of commission for receiving the aforesaid fictitious profit. The appeal of the assessee has been dismissed by the ld. CIT(A) ex-parte confirming the action of the ld. AO. The ld. DR argued that since the order of the ld. CIT(A) ex-parte the matter be remanded back to the file of the ld. CIT(A). Whereas the ld. AR of the assessee that the re-opening is made merely on the information based and the case of the assessee is covered by the various judgment on merits and therefore, there is no reason to give & 35/JPR/2025 Naresh Kumar Luhadia vs. DCIT second inning in this case. The ld. DR submitted his submission one for re-opening of the case and another the merits of the case where in the he has emphasized that the ld. CIT(A) thought in the exparte order calculated, the tolerance limit @ 32 vide para 4.3.2 as relied by the ld. DR. He further submitted various decision that it is not necessary to given opportunity to cross examination and availability of report of Investigation wing. On the other hand, the ld. AR submitted that this percentage derived has no basis. But if the same is understood from the facts available at page 4 of the assessment order, the same is worked out as under : Profit / volume = 56,73,633 / 39,78,29,838 in terms of percentage comes to 1.42 % of this volume reported in the order itself. Thus, it the absence of the working in the order of the ld. CIT(A) the volume and percentage as computed be considered as the same is calculated based on the set of facts available on the assessment order.
With this brief facts of the case now let us try to understand the issue in this case which starts with client code modification. The Client code modification [ CCM ] refers to the alteration or change of client codes after the execution of trades. It is a process that allows rectification of errors or incorrect data entry made by dealers during order placement. The purpose of giving this leverage is to correct genuine errors in punching or placing orders. It is not meant for routine use but rather as an exception. Stock exchanges provide a facility for modifying client codes post-trade execution. However, this facility is subject to specific guidelines, including time limits and the system on which modifications can occur. To prevent misuse, non-institutional client code modifications may incur penalties or fines as per the guidelines. Here in this case the issue need to be analyzed based on the facts available on record. The impugned disputed is demonstrated by the ld. AO and the same is reproduced here in below :
& 35/JPR/2025 Naresh Kumar Luhadia vs. DCIT Broker Market PAN Broker PAN Original Original Modified Profit/ loss to Modified Profit/ I client client client client 4, original client loss to Name code code name code name because of modifie client code d client modification becaus e of client code modific ation F&40 11604 S109 AAICS I 108A -15,49,630.00 CS174 AADCS3704R Spectrum 15,49,630.00 Maverick Sandeep Foods Share Stocks Limited Brokers Private Limited Limited F&O 13009 Ridhi SI AAICS1108A -41,24,002.50 5103 AADCS3704R Spectrum 41,24,002.50 Sandeep Share Stocks Foods Pvt. Limited Brokers Pvt Ltd. Ltd.
PAN Name Market Number of trade Qty of shares Value of trade Profit/ loss because modified modified modified of client code modification AADCS3704R Spectrum Foods Limited F&O 129 1,04,000 39,78,29,838 56,73,633
Date wise modified volume Market Segment Date Number of trade modified Qty of shares modified Value of trade modified F&O 5/4/2009 89 74,000 26,92,93,840 F&O 7/6/2009 40 30,000 12,85,35,998 The bench noted that the broker instead of “Spectrum Foods Private Limited” the name of “Sandeep Stock Private Limited” is punched. The transaction were executed on 05.04.2009 and 07.08.2009 and value of the transaction involved is 1,04,000 shares and volume total is 39,78,29,838/-. The number of trade modified is 129 as narrated in the assessment order. The assessee submitted that the income that has been received on the transaction is duly offered in the regular books of accounts and the same is accepted and in addition a separate addition is made merely based on the investigation report and merely the income is accounted by the assessee which is arising out of the CCM done by the broker. The assessee has submitted the documentary evidence about the income, payment received by an account payee cheque. Thus, considering the overall facts which are already on record it is beyond doubt that the assessee no where alleged to have given any cash no documents relating to that transactions found and merely the income is arising & 35/JPR/2025 Naresh Kumar Luhadia vs. DCIT on account of CCM the same cannot be considered as income within the meaning of section 68 of the Act, as the assessee has justified the income with the documentary proof. In support of the income the ld. AR of the assessee submitted all the required evidence and even the controlling authority allowed these type of punching error. This issue is discussed in detailed in the case of M/s. Noble Securities Alwar Vs. ITO wherein the Jaipur bench has considered the issue and the relevant finding is reiterated herein below :
"I have heard the rival contentions and perused the materials available on record. It is noted that the assessee is a partnership firm engaged in the business of trading of trading in shares. It is noted that the assessee itself is a client of M/s. Artistic Finance (P) Ltd. which carried out business on behalf of the assessee and the clients of the assessee. It is noted that every client is provided a unique code which is punched while making the transactions. It is noted that sometime the operating staff is not well versed with the system who at the time of making transactions in shares and in order to save time, prefixed the client code of the assessee in the system as default which sometime led to error in punching of client codes. In order to rectify the punching of client code, a facility i.e. Client Code Modification (in short CCM) is provided by the Stock Exchange till 4:15 PM of the trade day by itself which can be done only on written request by the client. It is also mentioned in Circular No. 974 dated 10.09.2009 of the National Securities Clearing Corporation Limited for its Futures & Options Segment (PB 25-26). The stock exchange has also drawn a list of the common violations committed and the applicable penalties (PB 21-24) where it is stated that "if the transfer of trades / errors at the time of order entries are in excess of 2% of the number of orders executed, fine of 0.1% of value of trades transferred is applicable". It is also noted from the records that the during the year the broker had carried out the broker had carried out 2380 modifications by using CCM facility which is only 0.18% of the total trades carried out by the broker during the year. It is noted that the assessee's client code was set as default in the system is for the convenience of the broker. The assessee has no control over the system. The client brings to the notice of the broker any mistake/ error in the client code. It may be noted that ITAT Ahemdabad Bench in the case of ACIT vs. Kunvarji Finance (P) Ltd. 119 ld. DR 1 had observed that the client code modification is permitted intra day i.e. on the same day. The relevant portion of the decision is as under:-
''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. In the present case, client code modifications made by the assessee being only 0.94 per cent i.e. less & 35/JPR/2025 Naresh Kumar Luhadia vs. DCIT that 1 per cent of the total trading transactions, cannot be said to be unusually high or mala fide when the modification was made on the same day. Had the client modification been done after the transaction period when the price of the commodity had changed, then perhaps there could have been some basis to presume that client code modification was intentional. Even if the view of the Revenue is accepted that client code modification was done with mala fide intention, then the profit or loss accruing till the client code modification can be considered in the case of the assessee but the profit/loss arising after such modification can by no stretch of imagination be considered in the hands of the assessee. Moreover, CIT(A) having found that all transactions at the commodities exchange have been duly accounted in the books of account maintained by the concerned parties, there cannot be any justification for considering that profit/loss in the case of the assessee on the basis of mere presumption or suspicion.'' Respectfully following the decision of ITAT Ahemdabad Bench (supra), the Ground No. 2 and 2.1 of the assessee is allowed. The case law referred in the above decision of ITAT Ahmedabad the same has also been confirmed by the Gujarat High Court reported at 118 taxmann.com 374 (Gujarat), in the case of Principal Commissioner of Income-tax v. Kunvarji Commodities Brokers (P.) Ltd. Thus, considering the fact that against the decision cited by the ld. AR of the assessee the ld. DR did not show the decision of the same strength of High Court having the contrary view we respectfully follow the judicial wisdom of Hon’ble Gujarat High Court and considering the aspect of the mater the ground no. 2 raised by the assessee is allowed.
10. Since we have allowed the ground no 2 in the case of the assessee as discussed above the related commission addition raised vide ground no. 3 being consequential in nature the same is based on the finding recorded in para 10 the same is also directed to be deleted.
As the appeal of the assessee is allowed on merits the ground no. 1 challenging the re-opening of the case and ground no. 4 general in nature. Both these grounds becomes educative in nature and the same are not required to be decided. In the result, the appeal of the assessee is allowed.
After carefully examining the facts of the instant case in the light of about decisions as well as the decisions referred in the above decisions of M/s Spectrum Foods Limited (supra) and also decision of Co-ordinate Bench, Ahemedabad in the case of ACIT vs. Kunvarji Finance (P.) Ltd. 119 DR 1 in the order reported at 118 taxmann. 374 which has been referred in the decision of Spectrum Foods Ltd. (supra) and Ld. Department representative having failed to place any other binding precedent in favour of the revenue, we therefore, respectively following about decisions are of the considered view that the same are squarely applicable to the facts of the present case and therefore the impugned disallowance of loss incurred by assessee as well as addition for unexplained commission expenditure is uncalled for. Finding of ld. CIT(A) is set aside. Accordingly, grounds of appeal raised by the assessee on merits in ground nos. 2 & 3 for A.Ys 2009-10 & 2010-11 are hereby allowed.
In the result, both appeals filed by the assessee are partly allowed.
Order pronounced in the open Court on 30/06/2025.