The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted additions exceeding ₹83.60 lakh made against an assessee on allegations of misuse of Client Code Modification (CCM) in derivatives trading, holding that the Income Tax Department cannot sustain such additions solely on the basis of information received from the Investigation Wing without corroborative evidence establishing the assessee’s involvement. 

The Tribunal comprising Anikesh Banerjee (Judicial Member) and Bijayananda Pruseth (Accountant Member) allowed the appeal filed by the assessee for Assessment Year 2010-11, setting aside the order of the National Faceless Appeal Centre (NFAC) and directing deletion of additions made under Sections 68 and 69C of the Income Tax Act. 

The assessee had originally filed its return declaring a total income of ₹3.98 lakh. Subsequently, the Income Tax Department received information from the Directorate of Income Tax (Investigation) alleging widespread misuse of the Client Code Modification facility by certain stock brokers in the derivatives (F&O) segment for creating artificial profits and losses to facilitate tax evasion.

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Based on this information, the Assessing Officer reopened the assessment under Sections 147 and 148 of the Income Tax Act. The officer concluded that the assessee had allegedly received accommodation entries through CCM transactions and consequently made an addition of ₹81.96 lakh under Section 68. In addition, an amount of ₹1.63 lakh, representing 2% of the alleged accommodation entries, was added under Section 69C as presumed commission paid for obtaining such entries. These additions were later affirmed by the Commissioner (Appeals), prompting the appeal before the ITAT. 

Before the Tribunal, the assessee argued that a revised return had already been filed declaring substantially higher income and that the reassessment proceedings had been initiated without considering that revised return.

On merits, it was contended that the assessee had never participated in any Client Code Modification arrangement and that the Department had relied exclusively upon investigation reports without producing any evidence directly connecting the assessee with any fraudulent activity. The assessee also relied upon the earlier decision of the Mumbai ITAT in DCIT v. Comet Investments Pvt. Ltd., where similar CCM-based additions had been deleted. 

The department maintained that investigation reports, broker statements and analysis of exchange data demonstrated systematic misuse of Client Code Modification. According to the Department, these materials established that accommodation profits and losses had been created through manipulated client code changes and that the additions were therefore justified.

The Commissioner (Appeals) had also held that documentary evidence such as contract notes and ledger entries alone could not outweigh adverse material comprising broker admissions, exchange analysis and investigation reports pointing towards artificial trading patterns. 

After examining the material on record, the Tribunal found that the issue was already covered by the coordinate bench decision in Comet Investments Pvt. Ltd.

The Bench observed that the Revenue had failed to produce any independent or corroborative evidence demonstrating that the assessee had actually participated in any fraudulent Client Code Modification arrangement.

The Tribunal noted that apart from information supplied by the Investigation Wing, no evidence had been placed on record to establish any collusion between the assessee and the broker; any connection with other alleged beneficiaries; that the transactions were fictitious or sham; or that the assessee had received accommodation entries through manipulated client code changes.

The Tribunal further observed that even during the hearing, the Departmental Representative was unable to distinguish the earlier coordinate bench ruling or cite any contrary judicial precedent warranting a different conclusion. 

The Tribunal reiterated the principle laid down in Comet Investments Pvt. Ltd., namely that additions based on Client Code Modification cannot survive merely because information has been received from the Investigation Wing.

The earlier decision had clarified that unless the Department establishes, through cogent evidence, that the assessee participated in the alleged manipulation and that the impugned transactions were sham or collusive, additions under Sections 68 and 69C cannot be sustained. The precedent also emphasized that mere client code modifications, without proof linking them to tax evasion by the assessee, are insufficient to justify additions. 

Following the earlier precedent, the ITAT held that the addition of ₹81.96 lakh under Section 68 and the consequential addition of ₹1.63 lakh under Section 69C were unsustainable in law.

Accordingly, both additions were deleted and the order of the Commissioner (Appeals) was set aside. Since the appeal succeeded on merits, the Tribunal held that the legal challenge to the validity of the reassessment proceedings had become academic and therefore left those issues open without adjudication. 

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