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Facts
The assessee company engaged in trading of license and derivatives filed its return. The case was re-opened based on information that the client code modification (CCM) facility was misused, leading to fictitious losses. The Assessing Officer disallowed the loss and added a portion as unexplained expenditure.
Held
The Tribunal noted that the assessee is not a registered broker and thus cannot be held responsible for CCM. The Assessing Officer failed to provide evidence of collusion, misused CCM, or establish transactions being of the nature alleged. The Tribunal relied on previous judgments where CCM within 1% was considered normal and additions were deleted.
Key Issues
Whether the re-opening of assessment under section 147 was valid and whether the addition of alleged fictitious loss and unexplained expenditure was justified.
Sections Cited
147, 143(2), 142(1), 148, 69C, 250
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Before: SHRI SANDEEP GOSAIN & SHRI BIJAYANANDA PRUSETH
On the other hand, the Ld. Sr. DR of Revenue supported the order of lower authorities.
We have heard both parties and perused the materials on record. We have also carefully gone through the order of the ITAT in case of Comet Investments Pvt. Ltd (supra). We find that under similar facts the co-ordinate Bench of the ITAT, Mumbai has dismissed the appeal of Revenue by holding as under:
“7. After having heard the counsels for both the parties at length and after having fine through the facts of the present case, we find from the records that the assessee is not a registered broker on the Stock Exchange. Only the registered brokers can modify Client code (CCM) of their own clients. Therefore in such circumstances, the allegations of assessee having done or restored to CCM is apparently not correct. The AO has not brought on record that even the instructions for CCM was ever given by the assessee. Hence, in these circumstances, the assessee can't be held responsible for CCM if any done at the end of the broker. The AO except for the fact of receiving information from the DIT (1 & CI), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect 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 stated the complete 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 lead any evidence in case of any single transaction, which he has added to the income of the assessee, 2010-11 JAP Overseas Private Limited being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee.
8. 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 assessee should compulsorily have the following ingredients ie 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 Ibr 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 would eventually result into taxable profit and/or loss in the hands of such customers of the registered broker.
Whereas, the AO in the present case has mechanically added amounts as income of assessee without verifying & furnishing evidences on record that all the above steps have actually happened in the case of all the transactions which he has added as assessee's income. In our view, by no stretch of imagination can any AO consider a transaction on the Stock Exchange as income of a person other than the one who has either actually received monies in his bank account (in case of profit) and/or paid any monies from his bank account (in case of losses).
10. For the above proposition, we rely upon the decision in the case of MA. Sambhavanath Investment ACIT LT.A. No.3109/Mum/2011 ΑΥ 2006- 2007 dated 19/12/2013 (Mum) (Trib), ACIT Kunvarji Finance (P) Lad (2015) 61 Taxmann.com 52(Ahd.) (Trib) wherein it was held that CCM within 1% is absolutely normal. Accordingly the addition was deleted. In the facts of the present case also, CCM is within 1%, ITO vs. Pat 2010-11 JAP Overseas Private Limited Commodity Services P. Ltd. and 3499/Mum/2012 dt. 7th Aug,2015 (Mum.) (Trib.), DCITv Sunil J Anandpara Assessment Year: 2010-11 Bench I dated 15/9/2017 (Mum.)(Trib.) and ITO vs. M/s. M.N. Shares & Stock Brokers Pvt. Ltd. IT No. 5399/M/2017, AN, 2009-10 Bench-SMC.
Even nothing has been placed on record by the AO to demonstrate that any proceedings were ever initiated against the assessee by the SEBI or any stock exchange. It was also clarified by the Ld. AR that the broker, through whom the assessee carried on share transactions, were also not imposed any penalty. No co-relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours. According to us, such co-relation was necessary to fasten any liability upon the assessee.
No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CTT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised
by the assessee stands dismissed.
13. Since we have dismissed the appeal of revenue by upholding the deletion of addition on merits, therefore the appeal filed by the assessee challenging the order of reopening becomes academic in view of our decision in the appeal filed by the revenue.”
2010-11 JAP Overseas Private Limited
We find that the facts of the present appeal are similar to the facts of the case reproduced above. The revenue has not been able to distinguish facts of the present appeal from the facts of the case relied upon by the appellant. Therefore, following the above decision, the grounds of the appellant are allowed.
9. Since, we have allowed the appeal of the assessee on merit, therefore, the grounds challenging the validity of re-opening u/s 147 by issue of notice u/s 148 of the Act becomes academic in nature and does not require adjudication.
In the result, the appeal by the assessee is allowed.
Order is pronounced on 29.01.2026.