Revenue appeal dismissed; deletion of addition for alleged loss from misuse of client code modification upheld for lack of evidence

ITAT upheld the tribunal below and dismissed the revenue's appeal, confirming deletion of an addition for alleged loss arising from misuse of the Client Code Modification facility. The tribunal found no evidence of broker admission, no identification of the counterparty, no SEBI action, and no proof of collusion or monetary exchange between parties. Absent documentary or testimonial support and on precedent, the disallowance was held unsustainable and the assessing officer's addition was vacated.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the Assessing Officer was justified in disallowing a loss of Rs.3,63,92,847/- on account of alleged misuse of Client Code Modification (CCM) facility where the broker did not respond to notice under section 133(6) and no direct evidence was produced linking the assessee to the alleged CCM misuse.

2. Whether absence of broker's response to notice under section 133(6) and absence of SEBI action or other corroborative material can, by itself, establish connivance between the assessee and the broker to create contrived losses by CCM.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of AO's disallowance of loss claimed on account of Client Code Modification (CCM)

Legal framework: Assessment under the Income-tax Act requires disallowance only upon formation of a reasoned belief supported by material indicating that claimed losses are non-genuine or contrived. Reopening under section 147/notice under section 148 must be based on recorded reasons; inquiry under section 133(6) is an evidentiary step to collect information from brokers.

Precedent treatment: The Tribunal and coordinate benches have examined CCM-related disputes and have set aside additions where the revenue failed to place concrete material demonstrating misuse or connivance; such decisions are treated as relevant and followed in the instant adjudication.

Interpretation and reasoning: The AO's disallowance rested on information allegedly indicating that the assessee had used CCM to book losses, but the AO did not produce any concrete material connecting the assessee to an instruction to the broker or to a specific person from whom losses were purportedly bought. The broker did not respond to the section 133(6) notice; no adverse statement, exchange-of-money evidence, SEBI action, or identification of specific scrips was produced. The CIT(A) found, on perusal of the record, that the AO failed to bring relevant evidence on record showing misuse of CCM by the assessee; the AO did not provide the assessee an opportunity to confront the material basis of his opinion. The Tribunal concurred, noting the AO's failure to establish factual foundations for concluding contrivance.

Ratio vs. Obiter: Ratio - where an assessing authority disallows trading losses as contrived on CCM grounds, such disallowance must be supported by concrete evidence linking the assessee to the CCM misuse; absence of corroborative material and failure to produce broker's statements does not justify addition. Obiter - observations on broader investigatory practices (e.g., expectations from SEBI) are ancillary.

Conclusions: The disallowance of Rs.3,63,92,847/- for alleged CCM misuse was unsustainable for want of material proof; the CIT(A)'s deletion of the addition is affirmed. The Tribunal found no infirmity in the appellate conclusion and dismissed the revenue's grounds.

Issue 2: Evidentiary value of non-response to section 133(6) notice and whether it establishes connivance

Legal framework: Non-response by a third party to a summons or notice is an evidentiary fact but, standing alone, does not constitute conclusive proof of guilt or connivance by the assessee. Burden remains on the revenue to produce admissible evidence establishing that transactions were effectuated to create bogus losses.

Precedent treatment: Coordinate bench authorities addressing CCM have held that mere non-cooperation of broker cannot substitute for positive evidence against the assessee; such precedents were relied upon and followed.

Interpretation and reasoning: The revenue's allegation that the broker's non-response equated to an admission of CCM misuse was found to be factually incorrect where the AO's own order stated that the broker did not respond. The revenue also asserted the broker "admitted" misuse in its grounds, but no such admission was on record. The Tribunal emphasized that absence of broker's reply cannot be treated as proof of connivance without corroborative material (e.g., broker statements, traceable fund flows, identified counterparties, SEBI findings). The Tribunal further noted the lack of any showing that the assessee received consideration or that losses were transferred from identifiable persons.

Ratio vs. Obiter: Ratio - non-response to a statutory notice is insufficient, by itself, to infer connivance or to sustain an addition for contrived losses; affirmative evidence linking the assessee to the misuse is necessary. Obiter - procedural expectations for departmental proof or reliance on regulatory action are commentary supporting the ratio.

Conclusions: The Tribunal held that the broker's non-response did not validate the AO's conclusion of connivance; therefore, the addition could not be sustained on that basis alone.

Cross-reference

The Tribunal expressly relied on and followed coordinate-bench decisions dealing with CCM issues where the revenue failed to produce concrete evidence; those precedents supported the proposition that additions must be anchored in material proof rather than inference from non-cooperation.

Final Conclusion

The Assessing Officer's disallowance of the claimed loss for alleged misuse of the CCM facility was deleted by the appellate authority for lack of supporting evidence; the Tribunal affirmed that deletion, dismissing the revenue's appeal.

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