SFIO-SEBI Findings on NSEL-CCM Scam Not Enough for additions when Trades are Fully Disclosed: ITAT

The Income Tax Appellate Tribunal ( ITAT ), Ahmedabad Bench, has held that general findings of the Serious Fraud Investigation Office (SFIO) and SEBI regarding irregularities in NSEL trades and Client Code Modification (CCM) cannot justify additions when the trades and related profits are fully recorded in the books of account.

The Revenue filed an appeal against the order of the CIT(A) in the case of Dynamatic Developers Private Limited for Assessment Year 2013-14.

The assessment reopened under Section 147 based on information that the assessee had allegedly manipulated commodity trades on the National Spot Exchange Limited (NSEL) platform through Client Code Modification ( CCM ) using a broker, Anand Rathi Commodities Ltd.

The AO, based on SFIO and SEBI reports and statements of broker officials, treated certain purchases and sales as fictitious and made additions under Sections 69A and 69C.

The officer added alleged fictitious purchases of about ₹11.34 crore and fictitious sales of about ₹10.88 crore, and further added profit of about ₹1.00 crore from such transactions as short-term capital gains, resulting in a substantial enhancement of taxable income.

The matter was challenged before the CIT(A) by the assessee.

The assessee submitted that all NSEL trades, including those involving CCM, were recorded in its regular books of account and reflected in the audited trading account and profit and loss account.

It added that detailed documentation was produced, including broker confirmations, contract notes, ledger copies, bank statements, and date-wise transaction details.

The assessee also showed that the CCM entries were made out by the broker for operational reasons and not at the specific instance of the assessee. The total purchases, sales, closing stock, and gross profit from NSEL trades were fully disclosed, and the so-called CCM purchases and sales formed part of the overall turnover already offered to tax.

The first appellate authority found that the Assessing Officer had not conducted any independent inquiry to show that the assessee received any unaccounted benefit or that the recorded transactions were outside the books. There was also no material to show cash dealings or fund reversals to the assessee.

Therefore, the additions were deleted on the ground that the same transactions had already been accounted for and taxing them again would amount to duplication, decided the CIT(A).

Against this order, the revenue filed an appeal before the tribunal. However, the bench of T R Senthilkumar (Judicial member) and Narendra Prasad Sinha (Accountant member) agreed with the CIT(A).

The bench noted that the Revenue could not dispute the factual finding that the purchases and sales arising from CCM trades were already included in the trading account.

The Tribunal observed “The fact that the transactions of sales and purchases related to CCM arising from trading on NSEL platform was accounted for in the trading account of the assessee has not been disputed. Under the circumstances, no separate addition for sales and purchases related to CCM transactions could have been made.”

It further held that the related profit from such trades was also already included in the gross profit shown in the profit and loss account. Therefore, making an additional separate addition of the same profit as short-term capital gain leads to double or even triple taxation of the same income.

Accordingly, the tribunal upheld the deletion made by the CIT(A). The appeal was dismissed.

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