2022 (11) TMI 885 - AT - Income Tax

Speculative loss - trading transactions on NSEL platform and loss incurred - finance charges/interest - claim of the assessee that the same being interest expenditure deductible as business expenditure and allowable as deduction - HELD THAT - For the purpose of carrying out transaction with NSEL they use to keep 3.5% of the value of the transaction as margin money of this account which is released only after the transaction is over. But since the transaction was not materialized in end the settlement amount was received in consonance with these business transactions from NSEL and thus it cannot be treated as speculative loss and is a part of business loss The relevant purchase and sales transactions were entered into by the assessee-company in order to avail the funds and, therefore, the loss incurred in the said transactions actually represented cost of such funds which was a business loss. The adverse inference drawn by the learned CIT(A) against the assessee on the basis of withdrawal of such loss partly was also not correct as the reasons for such withdrawal proposed by the assessee were duly explained and the fact that the assessee-company by entering into these transactions had availed finance for the purpose of business was duly established. Applicability of TDS provision - assessee has pointed out from the relevant details of transactions that the sale proceeds were received by the assessee-company from different entities while payment towards the purchase was made towards different entities. The cost of finance thus was not paid to the party from whom the finance was actually availed and the applicability of TDS, therefore, was not warranted. Moreover, the cost incurred by the assessee for availing finance was not strictly in the nature of interest and the party selling the goods having offered the same for taxation, there is no obligation of deduction of tax at source by the assessee. Having regard to all these facts of the case, we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged speculation loss is not sustainable and deleting the same, we allow Ground No.4 of the assessee s appeal. Addition of transaction charges under Section 40(a)(ia) - HELD THAT - As the assessee failed to furnish any details or make any submission to show that tax at source was deducted from the payment made on account of transaction charges paid to IBMA. He, therefore, confirmed the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Even at the time of hearing before us, nothing has been brought on record on behalf of the assessee to prove that the tax at source was deducted from the amount in question paid towards transaction charges. We, therefore, find no justifiable reason to interfere with the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on this issue. Ground No.5 of the assessee s appeal is accordingly dismissed. Disallowance of transaction charges - transaction charges were recoverable by the assessee-company from clients and since it could not produce any documentary evidence to substantiate its claim that it was not obligatory to recover the transaction charges, he disallowed the entire transaction charges - HELD THAT - The transaction charges actually represented additional cost of funds raised by the assessee-company for the purpose of its business and the expenditure incurred on account of the same was wholly and exclusively for the purpose of business of the assessee as rightly contended by the assessee. In the case of Khambhatta Family Trust 2013 (7) TMI 657 - GUJARAT HIGH COURT cited by assessee, the Hon ble Gujarat High Court has held that the requirement for allowability of any expenditure as business expenditure is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily - we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of transaction charges is not justifiable and deleting the same, we allow Ground No.6 of the assessee s appeal. Partial depreciation claim - asset put to use - depreciation on concerned plant was restricted by AO as well as CIT(A) to the extent of 50% on the ground that even though the said plant was ready to commence the operation, the actual production had started only after 30.09.2010 - HELD THAT - As rightly submitted by the learned Counsel for the assessee by relying on the relevant judicial pronouncements including the decision of Ashima Syntex Ltd, 2000 (8) TMI 22 - GUJARAT HIGH COURT the assessee is entitled for depreciation at full rate as the concerned plant was ready to use on 27.09.2010 itself as agreed by the authorities below also and the business of the assessee was already in existence. We accordingly direct the Assessing Officer to allow depreciation on the said plant at full rate as claimed by the assessee and allow Ground No.7 of the assessee s appeal. Unexplained expenditure - AO disallowed the assessee s claim on account of debit notes raised by NKPL and the amount of such debit notes was added by him to the total income of the assessee by treating the same as unexplained expenditure - HELD THAT - Amount of debit note in question was duly recognized by NKPL as its profit which was offered to tax and keeping in view that the assessee-company was a BIFR company since 2002 incurring consistent losses, it cannot be said by any stretch of imagination that the debit notes were raised to reduce the taxable income of the assessee-company as alleged by the authorities below. There was a Memorandum of Understanding entered into between the assessee-company NKPL and the same was acted upon by both the sides by raising debit/credit notes for the difference in price charged by the assessee to NKPL and the price actually realized by NKPL from corresponding exports as the same was to be transferred to the assessee-company. We are inclined to accept the claim of the assessee that the amount of debit notes in question was its business expenditure being the difference in sale price charged and actually realized which is allowable as deduction. In that view of the matter, we delete the disallowance made by the AO and confirmed by the learned CIT(A) on this issue and allow Ground No.5 of the assessee s appeal. Disallowance of interest under Section 36(1)(iii) - HELD THAT - The assessee has not produced any cogent evidence to substantiate its claim that the advances in question were given for the purposes of business. He has also not furnished any details or given any reasons as to why the recovery of these advances had become doubtful as claimed. Since the business purpose of giving these advances was not established by the assessee on evidence, we are of the view that it was a clear case of diversion of interest bearing loans for non-business purpose and disallowance on account of interest attributable to the said advances was rightly made by the Assessing Officer and confirmed by the learned CIT(A). Ground No.6 of the assessee s appeal is accordingly dismissed. Disallowance on account of employees contribution to PF and ESI - HELD THAT - This issue is squarely covered against the assessee by the decision of CIT Vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT which has been subsequently upheld by the Hon ble Supreme Court. Respectfully following the said judgment of the Hon ble jurisdictional High Court which has been upheld by the Hon ble Apex Court, we uphold the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on this issue. Ground No.7 is accordingly dismissed. Addition u/s 68 - payment against purchase - HELD THAT - The entire amount was utilized by the assessee-company for making payment against purchase as a part of the trade cycle and consequently even the balance amounT cannot be treated as unexplained cash credit under Section 68 of the Act merely on the ground that the same had remained unpaid. Moreover, the entire corresponding sales made by the assessee-company to the parties through NSEL was duly recognized as its income in the books of account and the proceeds against the same cannot be treated as income of the assessee again as the same would amount to double addition. We, therefore, delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and allow Ground No.8 of the assessee s appeal. Claim for business loss - action of AO in treating the loss in question as speculative loss instead of trading loss - HELD THAT - Keeping in view the submission made by both the sides, we consider it fair and proper and in the interest of justice to restore this issue to the file of the Assessing Officer with the direction to decide the same afresh after giving the assessee an opportunity to establish that all the transactions resulting in the business loss in question were made at the prevailing market price and it was not a case where the goods purchased at higher rate were sold by the assessee-company at lower rate in order to claim trading loss. Non-genuine purchases - HELD THAT - A confirmation of Shree Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. was also filed by the assessee confirming delivery of CWO made to the concerned parties on various dates. Moreover, the quantitative details furnished by the assessee also revealed that the quantity of both purchases and sales was tallying with each other. It is thus clear that the purchase of 10180 MT of CWO for Rs.59.70 crores on delivery basis was actually established by the assessee on the basis of supporting evidence and since the corresponding sale of the same was not only proved but the same was also recorded and recognized as income in the books of account of the assessee-company, we are of the view that the purchase of 10,180 MT of CWO for Rs.59.70 crores cannot be said to be excessive as alleged by the authorities below. We, therefore, delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged excessive purchases and allow Ground No.4 of the assessee s appeal. Unexplained sales - DR has submitted that this claim of the assessee specifically made for the first time before the Tribunal requires verification by the AO - HELD THAT - We find merit in this contention of the learned DR and since the learned Counsel for the assessee has also no objection for such verification being done by the Assessing Officer, we restore this issue to the file of the Assessing Officer with the direction to decide the same afresh after verifying the claim of the assessee that the sales in question treated as unexplained was already accounted for by the assessee-company in its books of account. Ground No.5 is accordingly treated as allowed for statistical purposes. Disallowance of interest expenses - HELD THAT - At the time of hearing before us, assessee has invited our attention to the balance-sheet of the assessee-company placed to point out that own funds in the form of capital and reserves to the extent of Rs.420 crores were available with the assessee-company at the relevant time and the same were sufficient to give interest free advances in question. We, therefore, find merit in this contention of the learned Counsel for the assessee that the disallowance made by the Assessing Officer on account of interest and confirmed by CIT(A) is not sustainable. The same is accordingly deleted and Ground No.7 of the assessee s appeal is allowed.

Summary

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Assessment order barred by limitation.
3. Justification for special audit.
4. Treatment of speculative loss.
5. Disallowance of transaction charges.
6. Disallowance of depreciation.
7. Disallowance of debit notes.
8. Disallowance of interest under Section 36(1)(iii).
9. Disallowance of employees' contribution to PF and ESI.
10. Addition under Section 68 of the Act.

Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee contended that the CIT(A)'s order was bad in law and void ab initio. However, this ground was not pressed by the assessee during the hearing and was thus dismissed.

2. Assessment Order Barred by Limitation:
The assessee argued that the assessment order was barred by limitation. This ground was also not pressed by the assessee during the hearing and was dismissed accordingly.

3. Justification for Special Audit:
The assessee challenged the necessity of a special audit. This ground was not pressed by the assessee during the hearing and was dismissed.

4. Treatment of Speculative Loss:
The assessee claimed a loss of Rs.14,42,91,136/- as business expenditure, arguing it was incurred for financing transactions. The CIT(A) and Assessing Officer treated this as speculative loss due to lack of physical delivery of goods. The Tribunal found that the transactions were indeed for obtaining finance, and the loss represented the cost of funds, which should be allowed as business expenditure. The disallowance was deleted.

5. Disallowance of Transaction Charges:
The Assessing Officer disallowed Rs.2,65,865/- under Section 40(a)(ia) due to non-deduction of TDS. The CIT(A) confirmed this disallowance. The Tribunal upheld this decision as the assessee failed to provide evidence of TDS deduction.

For the disallowance of Rs.1,30,29,338/-, the assessee argued that it was not obligatory to recover transaction charges from clients. The Tribunal found that the transaction charges were indeed incurred for business purposes and allowed the deduction, reversing the CIT(A)'s decision.

6. Disallowance of Depreciation:
The Assessing Officer restricted depreciation to 50%, arguing the plant was not operational until after 30.09.2010. The Tribunal, citing judicial precedents, directed the Assessing Officer to allow full depreciation as the plant was ready for use before the specified date.

7. Disallowance of Debit Notes:
The Assessing Officer disallowed Rs.32,79,68,772/- related to debit notes from N.K. Proteins Ltd., treating it as unexplained expenditure. The CIT(A) upheld this disallowance. The Tribunal found that the transactions were commercial and supported by a Memorandum of Understanding (MOU). The debit notes were genuine business expenses, and the disallowance was deleted.

8. Disallowance of Interest Under Section 36(1)(iii):
The Assessing Officer disallowed Rs.1,45,18,708/- of interest, arguing that advances to certain parties were not for business purposes. The CIT(A) confirmed this disallowance. The Tribunal found that the advances were old and given for business purposes. Since no new facts justified disallowance, the Tribunal deleted the disallowance.

9. Disallowance of Employees' Contribution to PF and ESI:
The CIT(A) confirmed the disallowance of Rs.1,66,584/- for delayed deposit of employees' contributions to PF and ESI. The Tribunal upheld this decision, citing the jurisdictional High Court's ruling.

10. Addition Under Section 68 of the Act:
The Assessing Officer added Rs.244.98 crores as unexplained cash credit. The CIT(A) reduced this to Rs.52.01 crores. The Tribunal found that the entire amount was used for business purposes and was duly accounted for. The addition was deleted.

Separate Judgments:
The Tribunal delivered separate judgments for different appeals but followed consistent reasoning across similar issues. The decisions were based on the merits of each case, with detailed analysis and consideration of all relevant facts and judicial precedents.