Stock Trader Wins Appeal: ITAT Rules 63 Client Code Changes Alone Can’t Prove Income Escape [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has quashed a Rs. 12.56 lakh tax addition against a share trader, holding that frequent client code modifications (CCMs) alone cannot establish tax evasion without concrete evidence of collusion or undisclosed income. The ruling emphasizes that reopening assessments after four years requires proof of the assessee's failure to disclose material facts, not just suspicion.

Ahmedabad-based stock trader Chandresh Luniya, whose 2009-10 assessment was reopened in 2016 based on an investigation wing report flagging 63 CCMs totaling ₹12.56 lakh through broker Mehta Finstock Pvt Ltd. The Income Tax Department alleged these modifications helped manipulate profits/losses, but Luniya maintained they were routine broker corrections with no tax impact, as his books already reflected massive derivative losses of ₹3.27 crore.

The tribunal bench comprising Judicial Member T.R. Senthil Kumar and Accountant Member Ramit Kochar overturned lower authorities' orders, stressing three critical flaws in the tax department's case. First, the reopening after four years was invalid since the original assessment under Section 143(3) had accepted Luniya's loss claims after scrutiny, and the department failed to prove any material non-disclosure, a mandatory condition for late reassessment.

Second, the ITAT noted the department relied entirely on "borrowed satisfaction" from the investigation report without independent verification. Quoting the Bombay HC's Ashish Niranjan Shah ruling (2024), the bench observed CCMs could either be genuine broker corrections or manipulation attempts, but the tax office produced no evidence - like cash trail or beneficiary details - to prove Luniya benefited. The Delhi HC's Well Trans Logistics verdict (2024) was also cited, where courts rejected reassessments based solely on investigation reports without tangible material.

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Third, the tribunal highlighted logical inconsistencies in the tax department's stance. With Luniya's books already showing ₹1.8 crore net losses, the alleged ₹12.56 lakh CCM adjustment couldn't possibly reduce his tax liability. The ITAT referenced its own Kaizen Stock Trade decision (2021), where similar CCM additions were deleted because the department hadn't corroborated suspicions with transaction-level proof.

The ruling makes clear that while CCMs may raise eyebrows, they're a common market practice to rectify input errors. Without demonstrating how specific modifications altered tax outcomes or establishing direct assessee involvement, tax authorities can't treat them as prima facie evidence of escapement. The burden lies on the department to prove both income suppression and the assessee's role in it through transaction trails, not just statistical anomalies.

For Luniya, the verdict brings closure to a nine-year dispute that began when his originally accepted return was suddenly questioned years later based on third-party data. The ITAT's decision reinforces that reassessment after the four-year limitation period requires tangible proof of concealment, not just algorithmic red flags from exchange feeds.

Judicial Members Senthil Kumar and Kochar's order could influence pending CCM-related cases across tribunals, particularly where additions are made without establishing direct beneficiary links or quantifying actual tax impact. However, the ruling doesn't blanketly immunize CCMs - it merely insists on higher evidentiary standards before treating them as tax evasion tools.

The verdict serves as a reminder for tax authorities to build stronger documentary cases when challenging breaking transactions, while reassuring traders that bona fide market operations won't be penalized based on theoretical assumptions alone. For now, Luniya's derivative losses stand as originally declared, with the ITAT refusing to let suspicion substitute for substance in tax enforcement.

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