ITAT Ahmedabad Limits Section 68 Addition to Profit Element in Commodity CCM Trades and Confirms Penalty Deletion

Background of the Dispute

The decision of the ITAT Ahmedabad in DCIT Vs Dharmdeep Commodities Pvt. Ltd. for A.Y. 2014-15 deals with two key issues:

  1. The scope of addition under Section 68 in respect of commodity trades executed through a broker using client code modification (CCM); and
  2. The sustainability of penalty under Section 271(1)(c) when the underlying quantum addition is substantially pruned down to only the profit component.

The Department filed two separate appeals challenging the relief granted by the CIT(A), National Faceless Appeal Centre, Delhi to Dharmdeep Commodities Pvt. Ltd., a company engaged in trading in cotton bales and also working as a commission agent.

The assessee had originally filed its return of income declaring Rs.98,32,060. The first scrutiny assessment under Section 143(3) accepted this returned income without any modification. The controversy arose only after subsequent reassessment proceedings were initiated on the basis of commodity transactions routed through M/s Anand Rathi Commodities Ltd. on the NSEL platform.

Multiple Rounds of Reassessment and Section 68 Additions

First Reassessment

In the first reassessment completed under Section 147 read with Section 143(3) on 31.12.2019, the Assessing Officer:

  • Disallowed Rs.43,48,272 under Section 37, and
  • Made an addition of Rs.5,45,43,550 under Section 68 in respect of commodity trades routed through M/s Anand Rathi Commodities Ltd. on NSEL.

The basis of the Section 68 addition was that the trades allegedly involved client code modification, leading the Assessing Officer to conclude that the purchases and sales shown by the assessee were not genuine and hence the full transaction value was liable to be taxed as unexplained cash credits.

Second Reassessment

Subsequently, another set of commodity transactions through the same broker and platform came under scrutiny. This triggered a second reassessment when notice under Section 148 was issued on 30.03.2021.

  • The assessee again filed a return declaring income of Rs.98,32,060 on 06.12.2021.
  • The second reassessment was completed under Section 147 read with Section 144B on 29.03.2022.
  • The total income was enhanced to Rs.11,53,81,550 by making a fresh addition of Rs.4,66,57,670 under Section 68.

The Assessing Officer alleged that the assessee had not actually undertaken the trades in its own client code. Instead, the trades were stated to have been shifted to the assessee’s code from original clients such as Navratan Mal Gupta, Ashrit Holdings Ltd., Borosil Glass Works Ltd. and Shirish Rege through client code modification. Consequently, the full purchase value of Rs.4,66,57,670 was treated as unexplained cash credit.

Assessee’s Stand Before the Assessing Officer

During the second reassessment, the assessee consistently maintained that:

  • The commodity deals were genuine business transactions undertaken in the normal course of trade.
  • All trades were carried out through registered broker M/s Anand Rathi Commodities Ltd. on the NSEL platform.
  • The assessee had no knowledge and played no role in any alleged client code modification undertaken at the broker’s end. No instructions were ever issued by the assessee for such CCM.

To substantiate its position, the assessee produced:

  • Contract notes issued in the assessee’s own name;
  • Detailed commodity transaction statements;
  • Broker’s ledger accounts;
  • Bank statements showing payments for purchases and receipts from sales routed through proper banking channels.

The assessee further clarified:

  • The funds used for these trades originated from its business operations in cotton bales, and not from any unexplained source.
  • An overall profit of Rs.17,59,312 from commodity trades executed through Anand Rathi on the NSEL platform had already been disclosed and offered to tax in the original return for A.Y. 2014-15.