2016 (3) TMI 586 - AT - Income Tax

Disallowance of speculation loss - purchase and sale of silver and other metals by holding such loss as bogus and inadmissible - Held that - The assessee has incurred losses from the off market commodity transactions and the AO held such loss as bogus and inadmissible in the eyes of the law. The same loss was also confirmed by the ld. CIT(A). However we find that all the transactions through the broker were duly recorded in the books of the assessee. The broker has also declared in its books of accounts and offered for taxation. In our view to hold a transaction as bogus, there has to be some concrete evidence where the transactions cannot be proved with the supportive evidence. Here in the case the transactions of the commodity exchanged have not only been explained but also substantiated from the confirmation of the party. Both the parties are confirming the transactions which have been duly supported with the books of accounts and bank transactions. The ld. AR has also submitted the board resolution for the trading of commodity transaction. The broker was expelled from the commodity exchange cannot be the criteria to hold the transaction as bogus - Decided in favour of assessee Speculation loss while computing the income u/s 115JB - Held that - Having considered the decision of Hon ble Supreme Court in the case of Apollo Tyres Ltd. (2002 (5) TMI 5 - SUPREME Court), we are of the view that the AO cannot reopen the accounts of a company, which have been audited and certified by the statutory auditor, passed by the members of the company in general body meeting, filed before the ROC, and to which he has not taken any objection under that Act. The impugned amount was not entered in the books as liability and the auditor had made certain remarks only in regard to the impugned amount. No objection has been taken by the registrar to the accounts field before him. Therefore, the book profit has to be taken as per the aforesaid P&L a/c. No adjustment is permissible in the book profit in respect of aforesaid amount under any of the cls. (i) to (vii) of the Explanation to s. 115JB. IN view thereof, it is held that the learned CIT(A) erred in directing the AO to reduce this amount from the book profit. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of speculation loss from purchase and sale of silver and other metals.
2. Treatment of speculation loss under Section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Speculation Loss:
The primary issue involves the disallowance of a speculation loss amounting to Rs. 2,26,96,157/- claimed by the assessee from the purchase and sale of silver and other metals. The assessee, a Private Limited Company engaged in the business of granting loans and dealing in commodities, conducted trading through a broker, Vatika Merchant Pvt. Ltd., on the National Multi Commodity Exchange (NMCE). The Assessing Officer (AO) disallowed the loss, deeming the transactions as bogus, primarily because the broker was expelled from the NMCE for issuing forged and fraudulent contract notes. The AO's decision was based on the lack of direct transaction records from the commodity exchange and reliance on off-market transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the transactions appeared fabricated, as the assessee incurred losses in all transactions without any gains, and failed to provide adequate supporting data, including price fluctuations of silver.

2. Treatment Under Section 115JB:
The second issue pertains to the treatment of the disallowed speculation loss under Section 115JB of the Income Tax Act, 1961, which deals with the computation of book profits for Minimum Alternate Tax (MAT). The AO added back the disallowed loss while computing the income under Section 115JB, which was confirmed by the CIT(A). The CIT(A) reasoned that since the transactions were deemed bogus, they could not be included in the Profit & Loss account for computing book profits under Section 115JB. The CIT(A) also upheld the addition of Rs. 36,538/- paid as Securities Transaction Tax (STT), stating it is not deductible as an expenditure in the Profit & Loss account.

Tribunal's Decision:
Upon appeal, the Tribunal examined the evidence provided by the assessee, including purchase and sale contract notes, bank statements, and a board resolution authorizing the commodity transactions. The Tribunal found that the transactions were duly recorded in the books of both the assessee and the broker, substantiated by account payee cheques and confirmations from the broker. The Tribunal emphasized that the broker's expulsion from the commodity exchange could not solely determine the genuineness of the transactions. Consequently, the Tribunal reversed the lower authorities' decisions, allowing the assessee's claim for the speculation loss.

Regarding the treatment under Section 115JB, the Tribunal referred to several judicial precedents, including the Supreme Court's decision in "Apollo Tyres Ltd. v. CIT" and "Malayala Manorama Co. Ltd. v. CIT," which restrict the AO's power to alter the book profits certified under the Companies Act, except as provided in the explanation to Section 115JB. The Tribunal concluded that the AO could not disregard the net profit shown in the Profit & Loss account, thus reversing the lower authorities' decisions and allowing the assessee's appeal on this ground as well.

Conclusion:
The Tribunal allowed the assessee's appeal, recognizing the speculation loss as genuine and directing that it be considered in the computation of income under both the regular provisions and Section 115JB of the Income Tax Act. The Tribunal's decision underscores the importance of substantive evidence and adherence to statutory provisions in tax assessments.