2022 (3) TMI 768 - AT - Income Tax

Addition considering the purchase cost paid over the spot rate in respect of deliveries of Palmolein Oil taken after the expiry of the delivery period of the contract - addition holding the transaction as non-genuine - whether payment on the basis of the purchase rate specified under the contract which is higher than rate prevailing on the date of delivery is genuine or not? - HELD THAT - We find that in the subsequent year that is A.Y. 2011-12 no addition has been made on this count. Furthermore, in the A.Y. 2012-13 the assessment was finalized under Section 143(3) holding the business transaction of Palmolein Oil are genuine one and no addition has been made on account of trading transaction of Palmolein Oil. It is relevant to mention that in the A.Y. 2013-14 though in assessee's case the addition was made on the same issue of an amount of ₹ 39,89,762/- taking the base of A.Y. 2010-11 which under consideration before us the Ld. CIT(A) in that A.Y. 2013-14 by and under the order dated 25.01.2017 has accepted the said Palmolein Oil business as a genuine one and only confirmed an addition of ₹ 2,00,000/- on ad-hoc basis. We do not justify the observation made by the Ld. AO in holding the transaction ingenuine and further holding that the loss incurred by the appellant is not a genuine loss and thereby making addition considering the purchase cost paid over spot rate in respect of deliveries of Palmolein Oil. Therefore, the addition in our considered opinion is not in terms of the prescribe method of accounting as discussed hereinabove and hence, the same is hereby deleted. - Decided in favour of assessee.

Summary

Issues:
1. Addition of ?1,01,49,926/- for purchase cost paid over the spot rate in deliveries of Palmolein Oil.
2. Whether payment based on the contract rate higher than the prevailing rate on the delivery date is genuine.

Analysis:
Issue 1: The appeal challenged the addition of ?1,01,49,926/- for paying above the spot rate for Palmolein Oil deliveries. The assessee's income included business profits, and the AO disallowed the excess payment over the spot rate. The AO observed a drop in Gross Profit Ratio due to losses in Palmolein Oil trading. The appellant had contracts with a broker for Palmolein Oil purchases, and deviations led to higher payments than spot rates after contract expiry. The AO's disallowance was upheld by the First Appellate Authority, prompting the appeal.

Issue 2: The central question was whether paying the contract rate higher than the prevailing rate on the delivery date was genuine. The AO based calculations on spot rates, ignoring the forward market contracts integral to the appellant's business model. The Revenue alleged inflated purchases, but the appellant's commitment to specified quantities at contract rates within set timeframes was highlighted. The Tribunal found the AO's addition unjustified, noting no similar additions in subsequent years and accepting the genuineness of the Palmolein Oil business in later assessments.

The Tribunal held that the AO's characterization of the transaction as non-genuine was unfounded. The Tribunal emphasized accounting principles dictating recognition of liabilities at the actual transaction date, supporting the appellant's use of contract rates over spot rates. Citing consistency in subsequent assessments and the appellant's adherence to contract terms, the Tribunal overturned the addition, deeming it inconsistent with prescribed accounting methods. Consequently, the appeal was allowed, and the addition of ?1,01,49,926/- was deleted.

In conclusion, the Tribunal's decision favored the appellant, emphasizing the genuine nature of the transactions and the adherence to contract terms despite deviations from spot rates. The judgment underscored the importance of accounting principles and consistency in assessments, leading to the deletion of the contested addition.