2014 (10) TMI 33 - AT - Income Tax

Genuineness of trading activity Set off of speculation loss against the other profits u/s 73 - Held that - The AO has held that the parties from whom the assessee purchased rice and parties to whom the assessee sold the rice did not exists, both purchases and sales are bogus - the authorities below have not been confronted, the material relied by them for rejecting the claim of the assessee which is not justified - It amounts in violation of principles of natural justice the AO has power u/s.131 of the Act for enforcing the attendance of the person who could not be produced before the AO on behalf of assessee - the stand of the assessee has been that in spite of written requests during the assessment proceedings, the AO did not furnish the assessee any material of non-service of 6 parties - no adverse inference could be drawn that parties do not exists because the AO has option for calling the attendance of parties under the provisions of section 131 of the Act - The observation of authorities below was premature with regard to their finding of non-existence of the above parties because the transaction of assessee was through banking channel - The details of all parties including telephone, PAN, TIN number were available on record thus, the order of the CIT(A) is set aside and the matter is to be remitted back to the AO for fresh adjudication Decided in favour of assessee. Donation made to Political Party Held that - The word contribute or its grammatical variation used in the section denotes the amount which a company can legally contribute to a political party or trade union - the Explanation to sec.80GGB was intended to restrict the quantum of such contribution eligible for deduction only to the extent that is admissible u/s 293A of the Companies Act - the contention of the assessee that the explanation provided to the said section which refers to Section 293A of the Companies Act, 1956 was limited to the grammatical meaning of the word used in the body of the section Contribute and in no way defines the admissibility of deduction with reference to quantum of the contribution has no merit the AO was justified in restricting the admissible deduction u/s.80GGB to the extent of 5% of the average profit of the assessee for the three immediately preceding three years Decided partly in favour of assessee.

Issues Involved:
1. Legitimacy of trading activity in rice and the resultant loss claimed by the appellant.
2. Classification of the claimed loss as speculation loss under Section 73 of the Income Tax Act.
3. Allowability of the donation made to a political party under Section 80GGB of the Income Tax Act.

Detailed Analysis:

Issue 1: Legitimacy of Trading Activity in Rice and Resultant Loss Claimed
The appellant claimed a loss of Rs. 3,80,77,164 from trading in rice, which was disallowed by the Assessing Officer (AO) on the grounds that the entire trading activity was a sham. The AO noted that the appellant purchased rice at higher rates and sold it at lower rates, resulting in significant losses. The transactions were carried out with a small group of traders, all located in the same area, Naya Bazar, New Delhi. The AO found several discrepancies, including the absence of written contracts, lack of transportation details, and non-existence of some parties at the given addresses. The AO inferred that the sales were made at lower rates deliberately to book losses and set off profits from other activities.

The CIT(A) upheld the AO's decision, concluding that the trading activity was a sham, the evidence was fabricated, and the loss claimed was fictitious. The CIT(A) also noted that the transactions lacked documentary proof of delivery and were settled otherwise than by actual delivery, classifying the loss as speculative.

Issue 2: Classification of Loss as Speculation Loss
Even if the transactions were genuine, the CIT(A) held that the loss was speculative as the transactions were settled without actual delivery of goods. Under Section 43(5) of the Income Tax Act, a transaction is speculative if it is settled otherwise than by actual delivery. The CIT(A) concluded that the appellant failed to prove the physical movement or transfer of goods, and thus the loss could not be set off against other profits under Section 73 of the Act.

Issue 3: Allowability of Donation to Political Party
The appellant claimed a deduction of Rs. 20,00,000 for a donation made to a political party, which was disallowed by the AO except for Rs. 5,214. The AO restricted the deduction under Section 80GGB of the Income Tax Act, which limits the deduction to 5% of the average net profits of the three immediately preceding financial years, as per Section 293A of the Companies Act. The CIT(A) upheld this decision, stating that the explanation to Section 80GGB restricts the quantum of contribution eligible for deduction to the amount admissible under Section 293A of the Companies Act.

Tribunal's Decision:
1. Legitimacy of Trading Activity and Loss Claimed: The Tribunal found that the AO's findings were based on suspicion, conjectures, and surmises without considering vital evidence such as bank transactions and PAN details of the parties. The Tribunal noted that the AO did not use the powers under Section 131 to enforce the attendance of the parties and that the material relied upon was not corroborated by clinching evidence. The Tribunal set aside the CIT(A)'s order and restored the matter to the AO for fresh adjudication, ensuring compliance with principles of natural justice.

2. Classification of Loss as Speculation Loss: The Tribunal did not comment on the merits of this issue, as the matter was restored to the AO for fresh consideration.

3. Allowability of Donation to Political Party: The Tribunal upheld the AO's and CIT(A)'s decision to restrict the deduction to Rs. 5,214, as per the provisions of Section 80GGB and Section 293A of the Companies Act.

Conclusion:
The appeal was partly allowed. The matter regarding the legitimacy of the trading activity and the resultant loss was remanded back to the AO for fresh adjudication, while the disallowance of the donation beyond Rs. 5,214 was upheld.

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