2025 (7) TMI 1804 - AT - Income Tax

ITAT Upholds Deletion of Additions and Rejects Section 14A and 2(22)(e) Disallowances in Tax Appeal

DCIT Central Circle-29 New Delhi Versus M/s. Gen X Commodities (P) Ltd.

The ITAT DELHI upheld the CIT(A)'s order deleting additions related to client code modifications and commission earned, following precedent from a sister ... Additions made on account of client code modifications(CCM) - AO observed that client codes have been modified in the back office - HELD THAT:- Respectfully following the decision of the Tribunal in the case of the sister concern [2021 (9) TMI 1172 - ITAT DELHI] we hold that there is no infirmity in the order of the CIT(A) in deleting the addition made on account of Client Code Modification and commission earned for such accommodation entry. Disallowance u/s 14A - Expenditure incurred earning exempt income - HELD THAT:- Issue decided in favour of the assessee on the premise that in the absence of any exempt income earned during the year, no disallowance under s. 14A is permissible in law. Addition u/s 2(22)(e) towards deemed dividend - HELD THAT:- The impugned credit resulting in additions u/s 2(22)(e) of the Act are offshoot of business transactions and thus outside the bounds of sec 2(22)(e) of the Act. The rationale in the view adopted by the CIT(A) is thus is in tune with the Co-ordinate Bench order in assessee’s own case and group case as pointed out on behalf of the assessee. Additions on account of loss on shares - as submitted that assessee has purchased the share of JCSL at an average price of INR 25 per share and sold at INR 37/- per share - AO had wrongly assumed that the shares were purchased at INR 40/- per share and hence incurred loss - CIT(A) allowed claim - HELD THAT:- CIT(A) has dealt with the issue objectively and returned the findings on facts that the assessee has derived profits on the impugned transactions rather than loss incurred as wrongly rendered by the AO. The profits arising have been offered for taxation and thus no cause of action, against the assessee, plausibly exists. The Revenue could not bring anything on record to rebut the findings of the AO. We thus see no reason to disturb the findings of the CIT(A) and upheld the same. ISSUES: Whether additions made on account of Client Code Modification (CCM) are justified when the assessee is not a member of the exchange and CCM is carried out by group concerns within permissible limits prescribed by SEBI and stock exchanges.Whether disallowance under section 14A of the Income Tax Act is sustainable in absence of any exempt income earned during the relevant assessment year.Whether additions under section 2(22)(e) of the Income Tax Act on account of deemed dividend are justified where transactions with related companies are in the ordinary course of business and represent running current account transactions rather than loans or advances.Whether addition on account of loss on sale of shares is justified where the assessee has not claimed any loss and the transactions have resulted in profits duly offered to tax. RULINGS / HOLDINGS: On CCM additions: The Tribunal held that the assessee 'is not a member to the exchange and cannot execute client code modifications,' and that the CCM transactions done by group concerns are 'genuine' and 'within the permissible limit allowed by SEBI.' The addition of Rs. 7,65,00,355/- on account of CCM was deleted as the AO was not justified in making the addition.On disallowance under section 14A: The CIT(A) held that 'no disallowance can be made u/s 14A, if there is no exempt income earned during the year,' and accordingly deleted the disallowance of Rs. 1,76,48,396/- made by the AO.On deemed dividend under section 2(22)(e): The Tribunal upheld the CIT(A)'s order deleting the addition of Rs. 60,40,87,544/-, holding that the transactions with related companies were 'transactions entered in the ordinary course of business' and represented 'running current account transactions,' not loans or advances attracting section 2(22)(e).On loss on sale of shares: The CIT(A) found the AO's addition of Rs. 2,88,90,000/- to be erroneous, as the assessee did not claim any loss but had in fact earned a profit of Rs. 18,48,96,000/- on the transactions, which was duly offered to tax; thus, the addition was deleted. RATIONALE: The Tribunal relied on the statutory framework and guidelines issued by SEBI and stock exchanges permitting client code modifications up to 1% of total transactions without penalty, recognizing CCM as a facility to rectify genuine errors rather than a tool for tax avoidance. Precedents from coordinate benches and various Tribunal decisions were followed, emphasizing that the assessee not being a member of the exchange cannot be held responsible for CCM done by brokers.Regarding section 14A, the legal principle applied is that disallowance under this section is not permissible in the absence of exempt income during the relevant year, consistent with the jurisdictional High Court ruling.For section 2(22)(e), the Tribunal applied the interpretation that deemed dividend arises only when advances or loans are made to shareholders, and business transactions conducted through running accounts do not qualify as loans or advances. The decision referred to judicial precedents distinguishing business transactions from loans and advances and emphasized the need for all conditions under section 2(22)(e) to be fulfilled for its applicability.On the loss on sale of shares, the Tribunal accepted the factual findings that the assessee held shares at a lower average cost and sold them at a higher price, resulting in profit, not loss. The AO's mechanical addition without proper verification was rejected, consistent with principles of fair assessment and evidence-based findings.