2022 (4) TMI 393 - AT - Income Tax

Revision u/s 263 - disallowance of expenses - as per CIT AO had erroneously disallowed only certain expenses, viz. manufacturing expenses, consultancy charges, travelling expenses, professional fees, selling expenses, interest paid to bank and others and bank commission, and had failed to disallow the remaining expenses on Interest on unsecured loans, Brokerage charges on unsecured loans and Processing charges - CIT was of the view that the failure on the part of the A.O to disallow the aforesaid balance expenses had rendered his order erroneous in so far as it was prejudicial to the interest of the revenue - HELD THAT - CIT had proceeded with absolutely on the basis of misconceived facts. The very basis for the Pr. CIT to infer that the assessee company was not carrying out any actual business and was only involved in paper transactions and accommodation entries is absolutely incorrect and fallacious. In fact, we may herein observe, that the reference to paper transactions of the assessee by the Assessing Officer was in the context of the fact that the assessee was carrying out coal trading transactions which were non-delivery based i.e. no physical delivery of the commodity was therein involved. AO on the basis of his aforesaid observations that the assessee was engaged in the business of coal trading transactions which were non-delivery based i.e. trading on spot delivery basis, had thus, for the said reason concluded that the assessee s claim for deduction of expenses were to be restricted only to those which were related to non-delivery transactions or paper transactions. Pr. CIT had construed the paper transactions of the assessee as if no actual business was being carried out by it. In our considered view, not only the basis adopted by the Pr. CIT is found to be fallacious, but also, the same is not consistent with the past history of the assessee. As brought to our notice by the Ld. AR, the AO while framing assessment in the assessee s own case for the immediately preceding year i.e, assessment year 2010-11, had observed, that the assessee s claim for deduction of the expenses was to be restricted to only those expenses which were related to non-delivery based transactions or paper transactions and had allowed those expenses which were genuinely incurred to carry out such transactions. AO had after deliberating at length arrived at a plausible view i.e., allowing of the assessee s claim for deduction of expenses to the extent the same were genuinely incurred in the course of its coal trading transactions on a non-delivery basis. In sum and substance, the Assessing Officer had after due application of mind restricted the assessee s claim for deduction to only those expenses which were related to its non-delivery based transactions or paper transactions. Apart from that, the view so taken by the Assessing Officer is found to be in conformity with that taken in the assessee s own case for the assessment year 2010-11 2019 (3) TMI 1966 - ITAT NAGPUR Pr.CIT had approached the issue in question absolutely on the basis of misconceived and incorrect facts i.e., by construing the term non-delivery based transactions or paper transactions as if no actual business was done by the assessee. Also, as observed by us hereinabove, the view taken by the Assessing Officer i.e, allowing of the assessee s claim for deduction of certain expenses that were genuinely incurred in the course of its non-delivery based coal trading transactions is in conformity with the order passed by the Tribunal in the assessee s own case for the immediately preceding year - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the notice and order under Section 263 of the Income-tax Act, 1961.
2. Disallowance of interest on unsecured loans, brokerage charges, and processing charges.
3. Rejection of the claim of trading loss due to the nature of business transactions.

Issue-wise Detailed Analysis:

1. Legality of the Notice and Order under Section 263:
The assessee challenged the notice and order issued by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, arguing that the original assessment order passed under Section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The Appellate Tribunal observed that the Pr. CIT's basis for invoking Section 263 was misconceived. The Pr. CIT incorrectly inferred that the assessee was not conducting any real business and was only involved in paper transactions. The Tribunal found that the Assessing Officer (AO) had already scrutinized the assessee's business activities and had reasonably allowed deductions for expenses genuinely incurred in non-delivery-based trading transactions. The Tribunal concluded that the Pr. CIT's order was based on incorrect facts and thus set aside the order under Section 263, restoring the original assessment order.

2. Disallowance of Interest on Unsecured Loans, Brokerage Charges, and Processing Charges:
The Pr. CIT directed the AO to disallow additional expenses, including interest on unsecured loans, brokerage charges, and processing charges, totaling ?50,46,835/-. The Tribunal found that the AO had already considered the nature of the assessee's business, which involved non-delivery-based coal trading transactions, and had allowed only those expenses genuinely incurred for such transactions. The Tribunal noted that the AO's approach was consistent with the assessee's past assessment years, where similar expenses were allowed. The Tribunal upheld the AO's decision to allow these expenses, finding no error in the original assessment order.

3. Rejection of the Claim of Trading Loss:
The Pr. CIT held that the assessee's claim of trading loss should have been rejected, as no real business was conducted. The Tribunal, however, found that the AO had conducted a detailed scrutiny and had verified the assessee's records, concluding that the trading transactions, though non-delivery-based, were legitimate business activities. The Tribunal emphasized that the AO's decision was backed by a detailed examination of the assessee's business model and was consistent with the past assessment practices. Thus, the Tribunal rejected the Pr. CIT's view and restored the AO's allowance of the trading loss.

Conclusion:
The Tribunal concluded that the Pr. CIT's order under Section 263 was based on a misunderstanding of the facts and the nature of the assessee's business. The original assessment order passed by the AO was found to be reasonable and consistent with the assessee's past assessments. Consequently, the Tribunal set aside the Pr. CIT's order and restored the original assessment order, allowing the assessee's appeals.

Result:
Both the appeals of the assessee were allowed, and the original assessment orders were restored.

Order Pronounced:
The order was pronounced in open court on 05th April 2022.