Share trading losses in F&O transactions allowed despite client code modification allegations following Kundan Investment precedent

The ITAT Kolkata allowed the assessee's appeal regarding share trading losses in F&O transactions involving alleged client code modifications. Following the precedent in Kundan Investment Ltd., the Tribunal found that shares were of reputed companies, quoted on stock exchanges, and traded at prevailing market rates as verified by exchange statements. The CIT(A) had disallowed the loss based on suspicion of ingenuine transactions, but the Tribunal held that genuineness should be determined by material evidence of actual transactions, not business expedience or correctness of decisions. The Tribunal directed the AO to delete the addition, ruling in favor of the assessee.

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Issues Involved:
1. Validity of reopening proceedings under Section 147.
2. Correctness of treating the assessee’s loss as not genuine due to client code modification in the F&O account.

Detailed Analysis:

1. Validity of Reopening Proceedings under Section 147:
The learned counsel for the assessee did not press the issue challenging the validity of the reopening proceedings. Therefore, this issue was not addressed in the judgment.

2. Correctness of Treating the Assessee’s Loss as Not Genuine:
The primary issue in this case was the correctness of the lower authorities' action in treating the assessee's loss of Rs. 25,43,874/- as not genuine due to client code modification in the F&O account. The tribunal noted the absence of any indication in the lower authorities' orders regarding whether the assessee’s demat account was involved in such client code modification.

The tribunal referred to a similar case, Shagun Business Services Pvt. Ltd. vs. Income Tax Officer, where the issue of client code modification was adjudicated. In that case, the CIT(A) had upheld the assessing authority's action, treating the disallowance of losses as bogus due to alleged client code modification by the broker. The CIT(A) observed that the assessee had not substantiated its bona fides with proper evidence, such as books of accounts or objections raised with the broker. The CIT(A) concluded that the modifications were not genuine and upheld the addition.

The tribunal also referred to another case, M/s. Khaitan Trade Holdings Pvt. Limited vs. ITO, where the Assessing Officer disallowed the claim on account of derivative transactions, holding that the losses were incurred by someone else and transferred to the assessee through client code modification. The First Appellate Authority upheld this order, applying the theory of human probabilities.

However, upon appeal, the tribunal found that the assessee had provided sufficient documentary evidence, including contract notes, bank statements, and confirmations from the National Stock Exchange (NSE). The tribunal held that client code modifications are permitted by NSE within a prescribed time limit and that the modifications in the assessee's case were genuine. The tribunal emphasized that additions based on surmise and conjecture are not permissible in law.

In the present case, the tribunal adopted the detailed reasoning from the aforementioned cases and directed the Assessing Officer to delete the addition of Rs. 25,43,874/-, concluding that the unexplained cash credit addition was not sustainable.

Conclusion:
The tribunal allowed the assessee's appeal partly, directing the deletion of the addition in question. The order was pronounced in open court on 14/02/2020.

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