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2025 (4) TMI 154 - AT - Income TaxCharges paid by the assessee company for gold stock - scope of the Gold Hire Agreements - AO was of the view that considering nature of business of assessee hiring gold interest paid is not related the business of the assessee and hence disallowed hire gold interest paid HELD THAT - We find that in year 2013 the Gold Hire Agreement between appellant and Shri Nathmal wherein we find that 65 kg gold was hired to the assessee. Similarly in year 2016 by the separate Gold Hire Agreements between appellant and Smt. Indra Bai 2100 grams gold was hired to the assessee and between appellant and Smt. Tara Devi 2650 grams gold was hired to the assessee. In all agreements it is clear covenant that the renter shall have obligation to pay Rs. 5/- per gram per month to the owner. It is also clear stipulation in the Gold Hire Agreements that apart from the hire charges the renter shall also deposit security charges with the owner. Schedule 3(B) forming part of balance sheet duly records loan from Nathmal (Director) and and Tara Jain and related party Indra Bai. Schedule 20 forming part of balance sheet duly records hire gold interest paid. We also find that the company hired the stock from the directors and used for the purpose of its business. In fact the company has no stock-in-trade of its own. Pursuant to bench query ld. AR for the assessee submitted that stock-in-trade is exempt from the Wealth Tax. It is undisputed fact that the company has closing stock of Rs. 9, 76, 12, 546/-. We find force in the argument of the AR for the assessee that the company has to pay interest if it has purchased stocks worth Rs. 9, 76, 12, 546/- at least at 12% being bank rate which will be Rs. 1, 08, 00, 000/-. Assessee s decision to take on hire charges which requires payment of Rs. 41, 85, 000/- was better option than taking loan from the bank to purchase the stocks. Hence in the light of our above view we delete the addition made by the AO. Appeal of the assessee is allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issue in this judgment revolves around whether the hire charges paid by the assessee company for gold stock should be allowed as a deductible business expense. The specific questions considered include:
ISSUE-WISE DETAILED ANALYSIS Relevant legal framework and precedents The key legal framework involves the Income Tax Act, focusing on the deductibility of business expenses under Section 37, which allows deductions for expenses incurred wholly and exclusively for business purposes. The judgment also considers the principles of tax avoidance versus legitimate tax planning. Court's interpretation and reasoning The Tribunal analyzed the nature of the gold hire agreements and the business necessity of such arrangements. It considered the argument that hiring gold stock was a strategic decision to avoid higher costs associated with purchasing gold on loan, which would have attracted higher interest rates. Key evidence and findings The Tribunal examined the Gold Hire Agreements, which stipulated a hire charge of Rs. 5/- per gram per month and required a security deposit. It noted that these agreements were in place since 2013 and had not been questioned by tax authorities in previous years. The financial statements and balance sheet entries corroborated the hire charges and the company's lack of its own stock-in-trade. Application of law to facts The Tribunal applied the principles of business expense deductibility, emphasizing that the decision to hire rather than purchase stock was a legitimate business choice aimed at cost efficiency. It highlighted that the cost of hiring was significantly lower than the potential interest expense on a bank loan for purchasing the stock. Treatment of competing arguments The Tribunal considered the Revenue's argument that the hire charges were unnecessary and aimed at tax evasion. However, it found that the company's strategy was a reasonable business decision rather than an attempt to evade taxes. The Tribunal noted that the company's financial strategy was transparent and recorded in its financial statements. Conclusions The Tribunal concluded that the hire charges were a legitimate business expense incurred wholly and exclusively for the purpose of the business. It found the AO's disallowance of these charges to be unjustified and deleted the addition made to the assessee's income. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning The Tribunal stated: "We are of the view that assessee's decision to take on hire charges which requires payment of Rs. 41,85,000/- was better option than taking loan from the bank to purchase the stocks." Core principles established The judgment reinforces the principle that business expenses must be evaluated based on their necessity and purpose for the business, rather than being dismissed as tax avoidance without substantial evidence. It underscores the importance of examining the economic rationale behind business decisions. Final determinations on each issue The Tribunal allowed the appeal of the assessee, thereby permitting the deduction of the hire charges as a business expense. It held that the arrangement to hire gold stock was a legitimate business strategy, and the expenses incurred were wholly and exclusively for the business purpose.
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