Mere Client Code Modification Not Enough To Invoke S.68 On Entire Transaction Value: ITAT Ahmedabad

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Department cannot treat the entire value of commodity transactions routed through alleged client code modifications as unexplained cash credits under Section 68 of the Income Tax Act, 1961, in the absence of material showing that the taxpayer benefited from accommodation entries.

Vice President Dr. B.R.R. Kumar and Judicial Member Siddhartha Nautiyal upheld relief granted to Dharmdeep Commodities Pvt. Ltd. and ruled that the authorities can tax only the profit element embedded in such transactions, not the entire transaction value. The Bench held:

“The Revenue has not brought any distinguishing feature on record to demonstrate that the transactions involved in the present reassessment proceedings are different from those already adjudicated by the Tribunal in the earlier round.”

The Income Tax Department reopened the assessment of Dharmdeep Commodities Pvt. Ltd. after examining commodity trades executed through Anand Rathi Commodities Ltd. on the National Spot Exchange Limited (NSEL) platform. The Department alleged that certain transactions involved client code modifications, and therefore treated the purchases and sales as non-genuine. On this basis, the Assessing Officer added Rs. 4.66 crore under Section 68 by treating the entire purchase value as unexplained cash credit.

Dharmdeep Commodities contended that it carried out genuine business transactions in the ordinary course of trade and had no role in any client code modifications made by the broker. It produced contract notes, broker ledger accounts, and bank statements showing that funds moved through banking channels. It also stated that it had already disclosed the trading profits from these transactions in its return of income.

The Tribunal noted that it had already adjudicated an identical issue involving the same assessee, the same assessment year, the same broker, and the same allegation of client code modification in an earlier round of litigation. It found no new distinguishing facts in the reassessment proceedings.

It also held that authorities cannot invoke Section 68 to add the entire transaction value and can bring only the embedded profit element to tax. It recorded that the disputed trades involved a purchase value of Rs. 4.66 crore, while the profit element worked out to Rs. 8.33 lakh.

Further, the Bench noted that the taxpayer had already included this profit of Rs. 8,33,212 in its total trading income of Rs. 17,59,312 declared in the original return of income, and therefore no income escaped assessment.

Accordingly, the ITAT upheld the order of the Commissioner (Appeals), which restricted the addition from Rs. 4.66 crore to Rs. 8.33 lakh and deleted the remaining addition. Since the quantum addition did not survive, the Tribunal also dismissed the Revenue's appeal against deletion of the Rs. 2 crore penalty imposed under Section 271(1)(c).

For Appellant: Shri Tushar Hemani, Sr. Advocate

For Respondent: Shri Sher Singh, CIT-DR and Shri Rameshwar P Meena, Sr. DR