1993 (8) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Loss claimed by the appellant company in respect of trading of foodgrains.
2. Determination of whether the loss was speculative within the meaning of section 43(5) of the Income-tax Act, 1961.
3. Claim of commission expenditure.

Detailed Analysis:

1. Loss Claimed by the Appellant Company in Respect of Trading of Foodgrains:
The appellant, a private limited company engaged in trading paper, also claimed to have dealt in foodgrains during the year under appeal. For the assessment year 1989-90, the appellant reported a net loss of Rs. 40,87,235 from trading in foodgrains. The foodgrains, specifically Gawar, were purchased for Rs. 65,40,578 and sold for Rs. 24,53,343. The purchases were made from five commission agents: V.C. Jain & Sons, Motilal & Co., Mahavir Traders, Arihant Dev Trading Co., and Parasnath Trading Co.

2. Determination of Whether the Loss was Speculative Within the Meaning of Section 43(5) of the Income-tax Act, 1961:
The Assessing Officer (AO) rejected the loss claim on several grounds:
- The parties involved did not provide evidence of physical purchase and sale of goods.
- Two parties, Arihant Dev Trading Co. and Mahavir Traders, failed to produce their books of account.
- Transactions were recorded only as book entries without physical delivery.
- Payments for purchases and sales were not made, only differences were settled.
- There were contradictions in the statements of the involved parties.

The AO also concluded that the loss was speculative under section 43(5) of the Income-tax Act, 1961, as the transactions were settled without actual delivery of goods.

The CIT(A) partially allowed the appeal, confirming that the transactions were not bogus but upheld the AO's view that they were speculative in nature due to the lack of actual delivery.

The Tribunal examined whether the loss was speculative or a business loss. The appellant's counsel argued that the commission agents took and delivered goods on behalf of the appellant, and thus it should be considered actual delivery. They relied on the Tribunal's decision in Pannalal Hukam Chand v. ITO and the Allahabad High Court's decision in Prahlad Rai Murali Lal v. CIT.

The Departmental Representative argued that there was no evidence of physical delivery and cited Supreme Court decisions in Davenport & Co. (P.) Ltd. v. CIT and Jute Investment Co. Ltd. v. CIT, emphasizing the need for actual delivery to exclude transactions from being speculative.

The Tribunal found that:
- The appellant did not take or give physical delivery of goods.
- No payment was made for purchases, nor was any sale consideration received.
- The transactions were settled by paying the difference between purchase and sale prices.

The Tribunal concluded that the transactions were speculative within the meaning of section 43(5) and upheld the revenue authorities' finding that the loss was speculative and not a business loss.

3. Claim of Commission Expenditure:
The appellant claimed a commission expenditure of Rs. 76,70,769 out of a total expenditure of Rs. 1,18,10,337. The Tribunal restored this issue to the file of the Assessing Officer for fresh consideration in accordance with the law.

Conclusion:
The Tribunal upheld the finding that the loss claimed by the appellant in respect of trading in foodgrains was speculative within the meaning of section 43(5) of the Income-tax Act, 1961, and not a business loss. The claim for commission expenditure was remanded to the Assessing Officer for fresh consideration.