Client Code Modification in F&O Transactions Allegations Need Transaction-Level Proof: ITAT Remands ₹1.33 Cr Income Addition Matter [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that an argument for income escaping the net of taxation due to Client Code Modification (CCM) in futures and options transactions cannot just be made based on investigative data alone, without a comprehensive evaluation of the CCM data and a clear transactional reconciliation to align the data to the taxpayer’s actual trading records. Therefore, ITAT remanded this matter back to the Assessing Officer (AO) for a new, factual review.

The Appellant, Shri Vipul Bansal, is an individual taxpayer who reported a total income of ₹1.19 crore in his Income Tax Return filed for the assessment year 2010-11. An original assessment of income was completed under Section 143(3) of the Income Tax Act, 1961. This assessment was, however, subsequently re-opened under Section 147 of the Income Tax Act, 1961 as a result of information received from the Directorate of Investigation which alleged the misuse of the CCM facility in futures and options trading for the purpose of artificially shifting the profitability or loss from one account to another.

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As a result of the investigation conducted by the Directorate of Investigation the AO, so treated the Futures and Options loss of ₹1.33 crore, to be fictitious and therefore disallowed the same as suppression of profit and also added to this sum a further amount of alleged commission expenditure on account of the application of section 69C of the Income Tax Act, 1961.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [CIT(A)], upheld the re-opened assessment as well as the addition and therefore, the Appellant filed an appeal with the Tribunal.

Counsel Saurabh Bhatt for the appellant contended that the reassessment proceedings were without jurisdiction and that the additions were made on an incorrect appreciation of facts. It was submitted that the appellant had actually earned profit from futures and options trading during the relevant year and had only claimed a set-off of brought-forward losses from an earlier assessment year. The appellant submitted that complete details of trading transactions, broker statements, and Securities Transaction Tax (STT) payments were furnished during the original assessment.

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Kavitha Kaushik representing the Revenue argued that the reopening was valid as it was based on tangible information received from the Directorate of Investigation after completion of the original assessment. It was submitted that the investigation material demonstrated that the appellant was a beneficiary of artificial profit or loss shifting through CCM. Further, contended that such manipulation was not evident from routine ledger accounts and therefore constituted a failure on the part of the assessee to disclose material facts.

The Bench of Judicial Member, Sandeep Singh Karhail and Accountant Member, Makarand Vasant Mahadeokar upheld the validity of reopening under Section 147 of the Income Tax Act, 1961, including reopening beyond four years, holding that the information from the Investigation Wing constituted tangible material. However, on merits, the Tribunal noted serious factual inconsistencies in the assessment.

It was observed that the AO failed to establish a direct transaction-wise nexus between the alleged CCM data and the appellant’s trading records, broker statements, and STT filings. The Tribunal also noted the broker’s statement, which did not conclusively attribute any deliberate modification to the appellant’s transactions.

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Holding that the additions were made without proper reconciliation and verification of primary facts, the Tribunal set aside the addition of ₹1.33 crore and restored the matter to the AO for de-novo examination after granting due opportunity to the assessee. The appeal was thus, partly allowed for statistical purposes.

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