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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of ₹3,63,92,847/- made by the AO on account of alleged misuse of Client Code Modification (CCM) for creating a bogus loss. The AO had reopened the assessment under Section 147 of the Act, alleging that the assessee used the CCM facility to claim a non-genuine loss.
Held
The Tribunal held that the AO had not brought any concrete material evidence on record to prove that the CCM facility was misused by the assessee through his broker to buy bogus loss. The Tribunal noted that the broker did not respond to the Section 133(6) notice and no evidence was produced regarding collusion or exchange of money.
Key Issues
Whether the AO was justified in disallowing the loss claimed on account of alleged misuse of Client Code Modification without substantiating the same with cogent evidence.
Sections Cited
143(3), 147, 148, 133(6), 27
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “F”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI VIMAL KUMAR
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2009-10, arises out of the order of the Commissioner of Income Tax (Appeals)-10, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 371/2016- 17 dated 14.09.2018 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 23.12.2016 by the Assessing Officer, ACIT, Circle-28(1), New Delhi (hereinafter referred to as ‘ld. AO’).
At the outset, the AR stated that the application filed u/s 27 of ITAT Rules by the assessee on 18.07.2025 was stated to be not pressed by him. Accordingly, the same is hereby dismissed as not pressed.
The only effective issue to be decided in this appeal is as to whether the ld CIT(A) was justified in deleting the addition of ₹3,63,92,847/- made by the ld AO on account of Client Code Modification (CCM) in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the material available on record. The return of income for Assessment Year 2009–10 was filed by the assessee on 30.09.2009 declaring loss of ₹5,43,69,625/- . The scrutiny assessment was completed u/s 143(3) of the Act on 15.12.2011 determining the assessed loss of ₹5,40,57,450/-. The assessment was sought to be reopened u/s 147 of the Act vide notice u/s 148 of the Act dated 31.03.2016 for the reasons recorded for reopening of the assessment suggesting that assessee has claimed loss of ₹3,63,92,847/- on account of Client Code Modification and thereby had bought the said loss which is to be treated as non-genuine. Allegation of the revenue is that the assessee had used the facility of Client Code modification. The assessee had transacted the share activity with the registered share Broker M/s Pace Stock Broking Services Private Ltd in the recognized stock exchange. The ld AO issued notice u/s 133(6) of the Act to Pace Stock Broking Services Pvt Ltd (assessee’s broker) based on the information received from ADIT(Investigation), Unit-1(3), Ahmedabad that assessee had reduced his net taxable income amounting to ₹3,63,92,847/- by misusing the facility of Client Code Modification. The said notice was not responded by the assessee’s broker. The ld AO observed that totally in respect of 8 transactions where there was Client Code Modification, the assessee had incurred a loss. Accordingly, the said loss of ₹3,63,92,847/- was treated as non- genuine and the same was disallowed in the assessment on the ground that assessee had not been able to prove the same and that the assessee had abused the facility of CCM to avoid taxes. The assessee submitted before the ld CIT(A) that he had not been involved in the act of any connivance with the broker to carry out any CCM for his transactions. Either way, the returned loss was of ₹5.44 crores and even after the disallowance of CCM loss of ₹3.64 crores, the assessed loss of Rs. 1.80 crores still remain. Hence, there is no need for the assessee to abuse the facility of CCM in connivance with the broker. It was also submitted that merely because the broker had not responded to the notice issued u/s 133(6) of the Act, the assessee could not be penalized. The assessee placed reliance on the various decisions in support of his contentions as under: –
A. ITO vs. Amrabathi Investera Pvt. Ltd in dated 03.05.2017 B. Manoj Kumar Damani Vs. ACIT 517/Kol/2017 dated 23.05.2018
The ld CIT(A) appreciated the contentions of the assessee by observing as under:-
“6.3 I have considered the assessment order and the written submission of the appellant. On perusal of facts it is noticed that the AO had specific information in his possession that an amount of Rs.3,63,92,847/- was taken as loss entry in F&O transactions through M/s Pace Broking Services Pvt. Ltd. It is contended that the AO has treated the loss arising due to Client Code Modification as bogus without any evidence and without giving any opportunity to the appellant to examine the material evidence based on which the AO has formed the opinion. It is claimed that there is no evidence on record before the AO to prove that such transactions were incurred to claim the bogus loss. The appellant has contended that the AO has taken a view that the Client Code Modification has been done to buy bogus loss in order to reduce the taxable income, without any reason and basis. On perusal of facts on record, it is noted that the AO has not brought on record any evidence to prove that modification in Client Code was made by the broker intentionally on the instructions of the appellant in order to reduce the taxable income. No adverse evidence has been brought on record by the AO in respect of any inquiry made by him. In view of these facts, I am of the considered opinion that there is no evidence which shows that the appellant has instructed the broker for Client Code Modification and has abused the facility of CCM to reduce his taxable income. The AO has not provided the appellant with any material or statement based on which the AO has arrived at the conclusion that the appellant has misused the CCM facility in order to suppress its taxable income. It is also noted that the appellant was already having a loss and the finding of the AO that the client code modifications was malafide with the intention to transfer in the losses from other person by modifying the client code so as to create a more losses is not supported by any specific finding/material on record. It is also observed that the AO has made enquiry u/s 133(6) of the Act from the concerned broker who is alleged to have done CCM for the appellant. However, no adverse evidence has been brought on record by the दिAO. In this regard the decisions relied upon by the appellant in respect of Client Code Modification have also been referred to. The decision of the Hon'ble ITAT Kolkata in the case of Ratnawali Commodities Ltd. v ITO, Ward-12(3), Kolkata in in the case of ITO, Kolkata v Amrabathi Investra Pvt. Ltd. in and in the case of Manoj Kumar Damani in ITA No. 517/Kol/2017 are particularly relevant in the facts of the instant case. On perusal of all these facts and case laws, I have come to the conclusion that the AO has not brought any concrete and material evidence on record to show that the facility of CCM was misused by the appellant through his broker to buy bogus loss. Keeping in view the above mentioned facts and the circumstances of the case and the judicial pronouncements, I am of the considered opinion that the AO has not been able to state any valid reason for making the disallowance and therefore, the disallowance made by the AO is deleted and the ground No. 6, 7 of appeal are allowed.
The ld DR before us vehemently submitted that the assessee’s broker did not respond to notice u/s 133(6) of the Act, which prove the connivance. Per Contra, the ld AR submitted that assessee cannot be penalised for default, if any, committed by the broker. We find that in Ground No. 1 raised by the revenue, it has been mentioned that the broker had admitted misuse of CCM facilities for contrived loss and shifting of profits. This, in our considered opinion, is factually incorrect and devoid of merit in view of the fact that the ld AO himself had stated in the assessment order that assessee’s broker had not responded to the notice issued u/s 133(6) of the Act. While this is so, how the broker could have admitted the misuse of CCM is not answered by the revenue before us. Revenue had also not bothered to bring on record the name of the person from whom the loss is allegedly bought by the assessee by misusing the CCM facility in connivance with the Broker. No SEBI action has been taken either on the assessee or on his broker. Even the scrip name where this facility of CCM has been misused is brought on record by the revenue, either in the reasons recorded or in the course of assessment proceedings or in the course of appellate proceedings (both before ld CIT(A) and Tribunal). No evidence whatsoever has been brought on record to prove the coalition between assessee and his broker. No evidence brought on record for exchange of money between the parties as a consideration for transfer of profit. The ld AR placed on record the coordinate bench decision of this tribunal in case of DCIT Vs. M/s. Gen X Commodities Pvt Ltd in for assessment year 2010-11 dated 25.07.2025, wherein similar issue was addressed and decided in favour of the assessee.
Respectfully following the same, in view of the aforesaid observations, we do not find any infirmity in the order of the ld CIT(A) in deleting the addition made on account of disallowance of loss on alleged misuse of CCM facility. Accordingly, the grounds raised by the revenue are dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the open Code on 29/08/2025.