2021 (10) TMI 1019 - AT - Income Tax

Speculative business / transaction - Disallowance of loss suffered by the assessee on account of Sauda Settlement - disallowance being in respect of a specific loss or expenditure, made on the basis of non-acceptance of the assessee s explanation qua the same - HELD THAT - The assessee shall not be, because of the transaction being open-ended and, in any case, unsupported by any materials, saved by section 43(5)(a). The same, being carried in the regular course of the assessee s business, shall qualify for being set off only against the profits of a speculative business which, in terms of Explanation 2 to section 28, is to be regarded as a separate and distinct business. There is, thus, no question of it being set off against the assessee s other, regular business of trading in food grains and oilseeds or, as stated before me, of commission agent/broker. This, further, would also result in non-explanation of the recovery of railway freight by the assessee therefrom. This also explains of this being stated as in the alternative, even as, as afore-stated, it is also without any details or material in support. Again, much less several, as claimed, no similar bargain stands shown as executed during the year, or even in the past, even as the same does not detract from the fact that the bargain under reference is wholly unproved, so that the factum of other bargains would not impact positively on the allowance of this transaction. Such transactions would, similarly, result in either a gain or a loss to the assessee, also demonstrating the manner in which the same is accounted for. There is complete opaqueness about the nature and truth of the transaction/s between the assessee and SAOL, including the impugned credit of ₹ 10,43,274 thereto on 31/03/2013. The same thus cannot be regarded as a business loss and, in any case, is not available for set off against the business profit from its wholesale business. The same stands rightly disallowed by the Revenue. - Decided against assessee.

Summary

Issues involved:
Appeal against order dismissing assessment under section 143(3) of the Income Tax Act for AY 2013-14 due to disallowance of loss on account of 'Sauda Settlement'.

Analysis:
1. The appellant contested the disallowance of loss of ?10,43,274 on account of 'Sauda Settlement'. The appellant, a wholesale trader, argued that the loss was valid and substantiated by relevant material, including a debit note from the buyer. The appellant maintained that the transaction was genuine and accounted for in its books, refuting the Revenue's claim of lack of documentation.

2. The respondent argued that the appellant failed to explain the nature of the transaction resulting in the loss and lacked substantiation. The Tribunal inquired about specific details of the transaction, such as goods sold, rates, and delivery terms, which the appellant could not provide. The respondent highlighted discrepancies in the appellant's accounts regarding freight charges and commission income, casting doubt on the transaction's authenticity.

3. The Tribunal observed that the disallowance of the loss should be judged on its merits, regardless of the audited accounts. It noted the absence of detailed explanation or supporting evidence for the transaction, emphasizing the importance of documenting oral contracts in business practices. The Tribunal questioned the feasibility of leaving a trade open without hedging against market risks, raising doubts about the transaction's validity.

4. The Tribunal further scrutinized the appellant's explanations, pointing out inconsistencies and lack of clarity in the transaction details. It highlighted the absence of business considerations in the substantial sums exchanged between the parties, leading to doubts about the transaction's commercial nature. The Tribunal concluded that the transaction did not qualify as a business loss and could not be set off against regular business profits.

5. Ultimately, the Tribunal found the transaction between the appellant and the buyer to be opaque and lacking in credibility. It determined that the loss claimed was not a valid business loss and upheld the Revenue's decision to disallow it. Consequently, the appellant's appeal was dismissed.

In summary, the judgment focused on the lack of substantiation and clarity regarding the 'Sauda Settlement' transaction, emphasizing the need for proper documentation and consistency in business dealings to support claims of losses. The Tribunal's decision was based on the absence of credible evidence and inconsistencies in the appellant's explanations, leading to the dismissal of the appeal.