Client Code Modification Misuse: ITAT Upholds CIT(A)’s Restriction of Additions to 1% as Assessee Acted Only as Broker [Read Order]
The tribunal observed that the additions by the Assessing Officer were based on an incorrect assumption that the assessee converted profits into losses, whereas the client codes belonged to actual clients and modifications occurred due to client errors.
broker - Taxscan
broker - Taxscan
The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax(Appeals)[CIT(A)]’s restriction of additions to 1% in a client code modification case, noting that the assessee acted only as a broker and did not benefit from any alleged misuse.
The Revenue-appellant appealed against the CIT(A) order dated 02.01.2025 for AY 2012-13. The appeal challenged the restriction of additions to 1% of total transactions, as the Lalkar Commodities Pvt Ltd, respondent-assessee, was treated only as a broker and not as a beneficiary of client code modification.
The tribunal noted that the assessment was reopened based on information about misuse of client code modification for tax evasion by converting income into losses. The Assessing Officer (AO) found that the assessee changed its UCC in NSEL trading and made additions of Rs. 29,49,330/-. The assessee appealed, and the CIT(A) partly allowed it by restricting the additions to 1% of total transactions.
The appellate tribunal observed that the AO had made additions on the incorrect assumption that the assessee had modified its client codes to convert profits into losses. In reality, the client codes S0760 and K0142 belonged to the clients, Ms. Shalini and Kishori Suresh Chandra Jhaveri, and not to the assessee.
The bench noted that the assessee acted only as a broker and had not traded in its proprietary capacity. The client code modifications occurred due to client errors, and the assessee had neither earned profits requiring offsetting losses nor benefitted from such modifications. The income shown by the assessee was only brokerage fees, with no transactions carried out under its own code.
The tribunal also observed that the AO had not conducted any independent enquiry and relied solely on SFIO reports and investigation wing information. No evidence was produced to show commissions received or enquiries made with the clients.
A single member bench of Sandeep Gosain (Judicial Member) agreed with the CIT(A) that the additions were properly restricted to 1% and found no reason to interfere. The revenue’s grounds were therefore dismissed, with no order as to costs.
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