2012 (10) TMI 775 - AT - Income Tax

Speculative loss - CIT(A) deleted the addition - Held that - The genuineness of loss was never questioned by A.O., therefore, without going into the findings whether the loss was genuine or not, the case of the assessee is covered by the case of sister concerns M/s. Orient Overseas Pvt. Ltd. wherein under similar facts and circumstances, the ITAT had remitted the case back to the file of A.O. - in favour of revenue for statistical purposes. Disallowance of interest being not incurred for the purpose of business and profession - CIT(A) deleted the addition - Held that - On analysis of balance sheet, there does not seem to be any loans or advances which can be said to have been given out of borrowed funds. The non charging of interest from sister concerns is also covered by the decision of Hon ble Apex Court in the case of SA Builders vs. CIT reported (2006 (12) TMI 82- SUPREME COURT OF INDIA ) wherein it was held that transfer of borrowed funds to a sister concern is to be seen from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profit, thus no reason to interfere in the order of CIT (A) on this account - against revenue.

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of disallowance of speculative loss.
2. Deletion of addition made by the Assessing Officer by disallowing interest not incurred for the purpose of business and profession.

Issue-Wise Detailed Analysis:

1. Disallowance of Speculative Loss:

The revenue challenged the deletion of an addition of Rs.3,12,90,375/- made by the Assessing Officer (A.O.) on account of speculative loss. The assessee, a company engaged in the import and sale of pulses, had debited this amount as damages paid to foreign suppliers for breach of contracts for importing yellow peas and toor. The A.O. categorized this as a speculative loss under section 43(5) of the Income Tax Act, citing precedents where transactions settled without actual delivery were deemed speculative.

The assessee contended that the damages were a result of non-performance of contracts due to falling prices, and thus, it was a business loss, not speculative. They relied on judgments such as Bhandari Rajmal Kushalraj v. CIT and CIT v. Shanty Lal Pvt. Ltd., which differentiated between speculative transactions and damages paid due to breach of contract.

The CIT(A) sided with the assessee, referencing a similar case involving the assessee's sister concern, M/s Orient Overseas Pvt. Ltd., where such disallowances were deleted. The Tribunal, noting the genuineness of the loss was not questioned by the A.O., remitted the case back to the A.O. for fresh consideration, aligning with the precedent set in the sister concern's case.

2. Disallowance of Interest:

The revenue also contested the deletion of a Rs.30 lakhs addition made by the A.O. for disallowing interest, arguing that the interest-free loans given by the assessee were not for business purposes. The A.O. noted that the company had significant interest expenses but earned minimal interest from advances, suggesting that the interest-free loans did not benefit the business.

The assessee argued that the A.O. had not identified specific discrepancies in the books and that the interest disallowance was estimated without proper basis. They provided details showing net interest payable would have been minimal if interest on all balances were accounted for. They also highlighted that major interest expenses were related to imports and that the interest earned exceeded the interest paid.

The CIT(A) and subsequently the Tribunal found that the assessee's funds, as seen from the balance sheet, were sufficient to cover the advances without relying on borrowed funds. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in SA Builders vs. CIT, which emphasized commercial expediency over profit motives in such transactions.

Conclusion:

The Tribunal allowed the revenue's appeal partly for statistical purposes by remitting the issue of speculative loss back to the A.O. for fresh adjudication while dismissing the appeal regarding the disallowance of interest, thereby upholding the CIT(A)'s order on this account.

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