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2019 (2) TMI 1791 - AT - Income TaxDirections u/s. 144A - non affording any opportunity to the assessee - HELD THAT - The law in the matter is well-settled. In Guduthur Bros. 1960 (7) TMI 5 - SUPREME COURT a decision by it s larger bench, the Apex Court explained that the proceedings shall go back to the stage where the irregularity had set in - The matter therefore, where the assessee s claim is admitted, shall accordingly have go back to the stage of providing it opportunity before the competent authority. Reference in this context may be made to the decision in Bhagwat Prasad v. CIT 1997 (9) TMI 75 - ALLAHABAD HIGH COURT Loss on trading in Narma (raw cotton) - genuineness of loss - HELD THAT - The genuineness of the transactions, on the conspectus of the case, is completely unproved - The business purpose or economic rationale that informs the agreement is conspicuous by its absence. Is the assessee acting on the basis of the some past experience or demonstrated price behavior? What is the information or the data, acting on the basis of which the assessee, as a business man, with a business purpose and, rather, in the interest of his business, enters into these contracts covering the entire sale of Narma for the season 2008-09. It is this basis, based on objective material, that shall provide the economic justification for entering into the agreement/s. It is this, and this alone, that would justify the genuineness thereof. We say so as the absence of any such basis implies self-infliction of loss, which cannot be regarded as incurred in the normal course of business No credit period is specified, so that the supplies, made latest by 15.12.2008, continue, as it appears, to outstand for payment even up to 31.03.2009, with in fact the assessee even financing one of the buyers, so that the payment received, which is from one of them, again, does not form part of the assessee s working capital (system) and, rather, gets deployed for the benefit of the said buyer Now, could it be that while the assessee is under the contract obliged to, even if at a loss, supply the goods, the same does not carry any corresponding obligation as to payment, making the buyer liable for penal consequences for non-payment within the stipulated credit period? The non-payment, then, is itself a ground enough for the assessee to rescind the agreement, which is clearly a make-believe, being without any sense of (business) purpose or proportionality. In fact, even the delivery is not proved, which though important in-as-much as it only will prove (narma) sale, is in the final analysis not determinative of the matter. We, for the reasons afore-stated, find no infirmity in the disallowance of the assessee s claim of business loss on the sale of narma Disallowance of interest on borrowed capital u/s. 36(1)(iii) - disallowance was effected in the absence of the assessee furnishing any business purpose of an advance during the relevant period on interest-free basis - HELD THAT - Impugned advance thus stands advanced to the extent of 80.12% by borrowed capital. The interest disallowed is on proportionate basis, i.e., in proportion to the period each amount comprising ₹ 16.50 lacs outstands during the year. The assessee shall get further relief, i.e., to the extent of 19.88% thereof on account of being financed by trade liabilities and own capital, both being non-interest bearing. This in fact takes a liberal view of the matter inasmuch as credit for the entire profit for the year arising during the year; in fact, during the season which falls in the latter part of the year, stands allowed. We decide accordingly. Disallowance of ginning charges and depreciation - HELD THAT - As it appears to us, it is the lack of proper articulation of his case, substantiating his claims by the assessee, that has led to the impugned disallowance. Why did, for instance, the assessee prepare a trading account of cotton, suggesting it of being sold as it is, when, as claimed before us, ginning was done to convert cotton and cotton waste into standard quality, also incurring expenditure on power and labour. The assessee should have, accordingly, prepared a manufacturing account, debiting the ginning and pressing charges, besides the said two expenses to this account. Even as the same is a matter of presentation, by itself not decisive, it does raise a question which, given his own accounts, duly audited, requires explanation. Further, why, one wonders, the explanation/facts being now stated were not furnished before the Revenue authorities? The electricity charges, debited in accounts, as we observe, are for ₹ 3.74 lacs and not for, as stated, ₹ 4.20 lacs and, besides, there are pressing charges (₹ 67,808/-) as well. Though the matter, strictly speaking, should be set aside for verification of these claims, we do not think, given the time that has lapsed since, that any proper purpose would be served by doing so. We also cannot be oblivious to the burden, both on the assessee and the administrative machinery, that accompanies such a restoration, particularly as the same includes third party confirmation/evidences. The assessee s case seems prima facie acceptable, in view of which, as well as to give a quietus to the matter, we direct the allowance of the impugned claims
Issues Involved:
1. Admission and merits of the additional legal ground raised by the assessee. 2. Disallowance of business loss claimed on trading in Narma (raw cotton). 3. Disallowance of interest on borrowed capital under Section 36(1)(iii). 4. Disallowance of ginning charges and depreciation. Issue-Wise Detailed Analysis: 1. Admission and Merits of the Additional Legal Ground Raised by the Assessee: The assessee contended that the assessment order was void ab initio because the Joint Commissioner of Income Tax issued directions under Section 144A without affording an opportunity to the assessee, violating principles of natural justice. The Tribunal examined whether the directions were prejudicial to the assessee and found that the directions were not on record. The Tribunal noted that the directions were supervisory, guiding the AO on the lines of investigation, and not prejudicial to the assessee as per the Explanation to Section 144A. The Tribunal held that the additional ground was an afterthought and not maintainable. Even if the directions were prejudicial, the lack of opportunity would only render the assessment defective, warranting a remission back for hearing the assessee, not a nullity. 2. Disallowance of Business Loss Claimed on Trading in Narma: The assessee claimed a loss due to forward contracts with three parties. The AO disallowed the loss, finding the contracts non-genuine as the parties did not confirm the agreements, and one denied its existence. The Tribunal upheld the disallowance, noting several inconsistencies: - The contracts lacked a supply schedule and payment terms. - No delivery receipts were produced. - The assessee's explanation was not consistent with business reality. - The contracts appeared to be make-believe, lacking economic rationale. The Tribunal found no infirmity in the AO's disallowance, concluding that the transactions were not genuine. 3. Disallowance of Interest on Borrowed Capital under Section 36(1)(iii): The AO disallowed interest on borrowed capital to the extent of ?54,750, as the assessee advanced ?16.50 lacs on an interest-free basis without a business purpose. The Tribunal examined the balance sheet and found that the assessee's capital was insufficient to cover the advances, which were primarily funded by borrowed capital. The Tribunal upheld the disallowance on a proportionate basis, allowing relief to the extent of 19.88% financed by non-interest-bearing funds. 4. Disallowance of Ginning Charges and Depreciation: The AO disallowed ginning charges and depreciation, questioning the necessity of ginning for a trader and the claim of using own machinery. The Tribunal found that the assessee's explanation of converting loose cotton into standard quality was plausible. The Tribunal noted that the assessee incurred electricity and wage expenses, and the power connection became inoperational, necessitating outsourcing ginning. Despite discrepancies in the presentation of accounts, the Tribunal allowed the claims to avoid further administrative burden and to give a quietus to the matter. Conclusion: The Tribunal partly allowed the assessee's appeal, upholding the disallowance of business loss and interest on borrowed capital, while allowing the ginning charges and depreciation claims. The additional legal ground raised by the assessee was not admitted on its merits.
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