ITAT Ahmedabad Rules Out Duplicate Additions for CCM-Based NSEL Trades

Background and Context

The Ahmedabad Bench of the Income Tax Appellate Tribunal in the case of ACIT Vs Dynamatic Developers Private Limited dealt with a significant controversy arising from alleged fictitious commodity trades executed through Client Code Modification (CCM) on the National Spot Exchange Limited (NSEL) platform for Assessment Year 2013–14.

The central issue was whether adverse findings and investigations by agencies such as the Serious Fraud Investigation Office (SFIO) and SEBI, relating to misuse of CCM at a systemic and broker level, were sufficient by themselves to justify additions in the hands of an assessee when:

  • All CCM-related purchase and sale transactions were fully recorded in the regular books of account, and
  • The resultant profits were already disclosed in the profit and loss account and offered to tax.

The Revenue’s appeal challenged the relief granted by the Commissioner of Income Tax (Appeals) [CIT(A)], who had deleted multiple additions made by the Assessing Officer (AO) under Section 69A, Section 69C and on account of alleged bogus profits treated as short-term capital gains.

Reopening of Assessment and Basis of Allegations

Original Return and Reassessment

  • The assessee filed its return of income for A.Y. 2013-14 on 22.09.2014, declaring income of Rs. 1,23,66,680/-.
  • Subsequently, assessment was reopened through a notice under Section 148 dated 31.03.2021.
  • The trigger for reopening was specific information that the assessee had indulged in manipulation of commodity trades on NSEL through CCM, facilitated by its broker.

Information from SFIO and SEBI

The AO relied on:

  • Investigation material and reports from Serious Fraud Investigation Office (SFIO), and
  • Findings of SEBI regarding misuse of the NSEL platform and CCM facility.

According to these reports, certain brokers, including M/s Anand Rathi Commodities Limited (ARCL), allegedly misused CCM to:

  • Artificially shift profits or losses between clients, and
  • Execute paired contracts without actual physical delivery of commodities, using them as fixed return schemes.

On this foundation, the AO concluded that the assessee’s trades routed through ARCL on NSEL were sham and fictitious.

Additions Made by the Assessing Officer

Alleged Fictitious Purchases and Sales

The AO analysed trade data and identified alleged fictitious CCM transactions as follows:

  • Fictitious purchases: Rs. 11,34,20,350/-
  • Fictitious sales: Rs. 10,88,87,175/-

These figures were treated as unexplained items and:

  • The amount of Rs. 10,88,87,175/- was added under Section 69A as unexplained money, and
  • The amount of Rs. 11,34,20,350/- was added under Section 69C as unexplained expenditure.

Separate Addition of Profit as Short-Term Capital Gain

In addition to the above, the AO identified a profit of Rs. 1,00,79,414/- from these CCM-linked trades.

  • This profit was characterized as arising from bogus and sham transactions,
  • Treated separately as Short Term Capital Gain (STCG), and
  • Added once again to the assessee’s total income.

As a result, the AO completed reassessment under Section 147 r.w.s. Section 144B on 31.03.2022 at a substantially enhanced total income of Rs. 24,47,53,619/-, compared to the returned income of Rs. 1,23,66,680/-.

Assessee’s Stand Before the CIT(A)

The assessee contended before the first appellate authority that: