Addition Based on Suspicion of Fictitious Profit via Client Code Modification Facility in F&O Segment Without Investigation Not Sustainable: ITAT [Read Order]
The Tribunal held that without independent evidence or inquiry proving the assessee’s role, the additions treating the profits as undisclosed income were liable to be deleted
![Addition Based on Suspicion of Fictitious Profit via Client Code Modification Facility in F&O Segment Without Investigation Not Sustainable: ITAT [Read Order] Addition Based on Suspicion of Fictitious Profit via Client Code Modification Facility in F&O Segment Without Investigation Not Sustainable: ITAT [Read Order]](https://images.taxscan.in/h-upload/2025/07/12/2063200-itat-itat-roundup-weeklyrounup-taxscan-7.webp)
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in its recent ruling held that the addition made by the Assessing Officer(AO) on suspicion basis without any independent investigation regarding the alleged fictitious profit earned by misusing Client Code Modification Facility in Futures and Options (F&O) segment was not sustainable in law.
The assessee Munish Bajaj and Sons Hindu Undivided Family (HUF), is engaged in the business of share trading, F&O transactions, commodity trading through recognized stock and commodity exchange.
Also Read:ITAT Deletes Additions on Client Code Modifications in Commodity Trading Citing Genuine Transaction Verification [Read Order]
The instant appeal was filed by the Revenue against the order passed by the National Faceless Appeal Centre arising out of the order passed by the Income Tax Officer (ITO) under Section 143(3) read with Section 147 of the Income Tax Act, 1961, for assessment year 2010-11
The ITO entitled the proceeding upon receiving information from the Investigation Wing that the assessee was involved in earning fictitious profit by misusing Client Code Modification Facility in F&O segment.
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The notice under Section 148 of the Act was issued followed by several notices issued under Section 142(1) of the Act. The assessee complied with the notice issued under Section 148 of the Act and filed the return declaring income of Rs.14,44,830
According to the AO, the assessee earned a profit of ₹ 4,03,83,930 and showed the same as speculation business profit and adjusted speculation business loss of ₹ 3,47,97,111 against this profit. A show cause notice was issued to explain why the set off may not be disallowed as the income was treated as income from undisclosed sources.
The assessee submitted that there was no concealment or omission of any particulars and that all disclosures were duly made in the return and books of accounts. It was contended that the assessee was not a share broker and had no control over the Client Code Modification Facility in F&O segment.
The assessee further argued that the adjustment of speculation loss against speculation profit was valid under Section 73(1). During enquiry under Section 131, the surrender of 2% tax was only to settle the matter and avoid litigation. No admission of wrongdoing was intended by such payment.
The AO relied on Investigation Wing information and a statement where the assessee agreed to pay 2% tax on the alleged profit. He disallowed set-off, expenses and commission, assessing income at ₹4,26,36,440 against ₹14,44,830 returned, adding ₹3,47,97,111 loss, ₹55,86,819 expenses and ₹8,07,680 commission.
The assessee filed an appeal to the Commissioner of Income Tax (appeals) ( CIT(A) ) disputing the additions as arbitrary and unsupported by any independent evidence.
The CIT(A) observed that the AO had not carried out any independent investigation nor brought anything on record as evidence that the assessee was engaged in client code modification activity. The CIT(A) emphasized that the onus was on the AO to demonstrate that the assessee was engaged in client code modification and earning fictitious profit/loss.
In the absence of independent investigation and adverse findings on the assessee’s submissions, the additions made by the AO were not sustainable. The CIT(A) deleted the additions of Rs. 4,11,91,610 on account of set-off loss, commission, and other expenses.
The bench comprising Madhumita Roy (Judicial Member) and Manish Agarwal (Accountant Member) upheld CIT(A) decision and observed that the addition to the returned income was made on suspicion basis that the speculation profit was earned by misusing Client Code Modification Facility in F&O segment without any independent investigation by the AO.
Accordingly, the appeal was dismissed.
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