2020 (11) TMI 468 - AT - Income Tax

Nature of loss - capital loss or trading loss - Material (silver) loan taken by assessee - At time of return of Material, price has gone high and resulted in loss - HELD THAT - In the present case the loan was not obtained by the assessee under the normal prevailing market practices. Generally, the loans are obtained in cash which are subject to interest and repayable over a certain period of time as agreed between the parties. In the case on hand the assessee has taken a material loan in the form of silver with the understanding that it has to return the silver only to the parties concerned at the end of the agreement. The agreement in question came to an end in the year under consideration. The loan liabilities whether material loan/cash loan was utilized for the purpose of the business activities of the assessee. In the present case the assessee was able to carry on its business activities with the assistance of the material loan without which it was not possible for it to carry on the business. Therefore in our considered view such business loss has been incurred in the course of the business and therefore the assessee is eligible for deduction under the provisions of section 37/28 of the Act as the case may be. Transaction as a colourable device to reduce its tax liability by making the book entry of the impugned loss - Regarding the physical delivery of the material loan to the parties, we note that the assessee before us has filed insurance receipts which is placed on record justifying that the assessee has taken the insurance for the transportation of the silver. Indeed the quantity of the silver was huge and therefore the assessee must have utilized services of some transporters. Items of silver being precious items, the argument of the assessee cannot be neglected in totality. However, there are other clinching evidences supporting the material loan transaction including the agreement, payment of interest which cannot be ignored. Even for the sake of assuming, the material loan has not been returned by the assessee on the termination of the agreement, but the assessee has revalued its current liability at the market rate and any loss thereon as a result of revaluation has to be allowed to the assessee being arising in the course of the business activities. All the transactions having impact on the reduction of tax liability cannot be regarded as colourable device. As such Revenue needs to see the transaction in its entirety as decided in BANYAN AND BERRY 1995 (12) TMI 12 - GUJARAT HIGH COURT . Also relying on MCDOWELL COMPANY LTD. AND OTHERS 1976 (10) TMI 103 - SUPREME COURT we hold that the impugned transaction cannot be regarded as colourable device merely on the reasoning that there is reduction in the tax liability in the hands of the assessee. - Decided against revenue.

Issues Involved:

1. Classification of material loan as trading liability or capital liability.
2. Treatment of the loss incurred on repayment of material loan.
3. Allegation of the transaction being a colorable device to reduce tax liability.
4. Admissibility of additional documents filed by the assessee.

Issue-wise Detailed Analysis:

1. Classification of Material Loan as Trading Liability or Capital Liability:

The primary issue raised by the Revenue was that the CIT (A) erred in deleting the addition made by the AO by treating the material loan as a trading liability rather than a capital liability. The assessee, a private limited company engaged in trading gold, shares, and stock, had borrowed silver as a material loan from related parties. The loan was recorded as stock in trade and repaid in quantity, leading to a claimed trading loss. The AO contended that the loan should be classified as a capital liability, and any loss incurred should be treated as a capital loss, not deductible under business income.

The CIT (A) observed that the assessee consistently treated the material loan as stock in trade, and the Revenue had accepted this treatment in previous assessment years (2009-10 to 2011-12). The CIT (A) concluded that the material loan was indeed a trading liability, as evidenced by the consistent accounting treatment and the nature of the business.

2. Treatment of the Loss Incurred on Repayment of Material Loan:

The assessee claimed a loss of ?6,14,20,769/- on the repayment of the material loan, arguing that the increase in the price of silver at the time of repayment resulted in a trading loss. The AO disallowed this loss, treating it as a capital loss. The CIT (A) disagreed, noting that the material loan was utilized for business purposes, and the resultant loss was incurred in the ordinary course of business, making it eligible for deduction under section 37 of the Act.

The Tribunal supported the CIT (A)'s view, emphasizing that the loan was used for business activities, and the loss incurred on repayment was a legitimate business expense. The Tribunal also noted that the Revenue had accepted similar gains from revaluation of material loans in other years, and thus could not selectively disallow losses.

3. Allegation of the Transaction Being a Colorable Device to Reduce Tax Liability:

The AO alleged that the transaction was a colorable device to create a fictitious loss, citing the Supreme Court's decision in McDowell & Co. Ltd. vs. Commercial Tax Officer. The CIT (A) and the Tribunal rejected this allegation, finding no evidence of concealment or illegitimacy in the transaction. The Tribunal noted that the material loan was a common business practice and had been consistently treated as a trading liability in previous years. The Tribunal also referenced the Supreme Court's clarification in Union of India vs. Azadi Bachao Andolan, which distinguished legitimate tax planning from colorable devices.

4. Admissibility of Additional Documents Filed by the Assessee:

The Revenue argued that the additional documents filed by the assessee should lead to a fresh adjudication by the AO. The Tribunal held that these documents were filed at the instance of the Bench and could not be treated as additional documents. The Tribunal found sufficient evidence on record to decide the issue without remanding it to the AO.

Conclusion:

The Tribunal upheld the CIT (A)'s decision, confirming that the material loan was a trading liability, and the loss incurred on its repayment was a deductible business expense. The Tribunal dismissed the Revenue's appeal, emphasizing the consistency in the assessee's accounting treatment and the legitimacy of the transactions. The Tribunal also clarified that the transaction was not a colorable device, and the additional documents did not warrant a fresh adjudication. The appeal of the Revenue was dismissed.

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