Tribunal upholds decision on fictitious losses set off

The Tribunal upheld the CIT(A)'s decision to delete the addition made towards set off of fictitious losses through Client Code Modification. The Tribunal found that the AO's general propositions lacked substantiation, and the addition was not sustainable as there was no specific evidence linking the assessee to malafide intentions behind the client code modifications. The appeal filed by the Revenue was dismissed on 25.10.2019.

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Issues:
- Addition made towards set off of fictitious losses through Client Code Modification

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the deletion of an addition made towards set off of fictitious losses through Client Code Modification for the assessment year 2010-11.

2. The assessee-company filed its return of income declaring a total income of Rs. 42,43,345 for the A.Y. 2010-11. The Assessing Officer (AO) issued a notice u/s.148 after receiving information about loss adjustment entries made through Client Code Modification (CCM). The AO disallowed the fictitious loss of Rs. 1,55,31,999 based on the belief that the entries were used to cover up profits and gains from the segment.

3. The Commissioner of Income Tax (Appeals) observed that the AO's addition was solely based on enquiries by the DIT and that there was no specific evidence showing malafide intention behind the client code modifications. The CIT(A) also highlighted that CCM is permissible by SEBI and is under the broker's control, not the client's.

4. The CIT(A) deleted the addition based on the ITAT, Ahmedabad's decision in a similar case, emphasizing that the modification of client code is the broker's responsibility, and the assessee cannot be penalized for others' actions.

5. During the appeal hearing, the Departmental Representative argued that the entries were used to cover up profits, while the assessee's counsel contended that the reopening of assessment was invalid and that the assessee was not involved in CCM.

6. The Tribunal dismissed the grounds against the reopening but found that the assessee, not being a registered broker, could not have modified client codes. No incriminating statements from the assessee's brokers were provided, and no evidence of SEBI action was presented. The AO's addition lacked specific evidence for any single transaction, leading to the confirmation of the CIT(A)'s order.

7. The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the AO's general propositions lacked substantiation, and the addition of Rs. 1,55,31,999 was not sustainable. Consequently, the appeal filed by the revenue was dismissed on 25.10.2019.

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