2016 (7) TMI 759 - AT - Income Tax

Disallowance of loss on account of trading in cotton knitted fabrics - Held that - The trading loss claimed by the assessee is not a genuine trading loss and the entire transactions have been carried out in a circuitous route among the group concerns by doing paper work in the form of purchase and sales invoices only to give the colour of genuinity. We hold that the assessee had adopted merely a colourable device with an intent to evade payment of taxes. We find that the decision rendered by the co-ordinate bench of this tribunal in the case of Smt Indra Jalan vs ITO supra is squarely applicable to the facts of the instant case before us and respectfully following the same, we dismiss the grounds raised by the assessee - Decided in favour of revenue

Summary

Issues Involved:
1. Justification of disallowance of loss on account of trading in cotton knitted fabrics amounting to ?12,46,51,755/-.

Issue-wise Detailed Analysis:

1. Justification of Disallowance of Trading Loss:

The primary issue in this appeal is whether the CIT(A) was justified in upholding the disallowance of the trading loss of ?12,46,51,755/- incurred by the assessee in trading cotton knitted fabrics. The assessee, a non-banking finance company (NBFC) registered with the Reserve Bank of India (RBI), claimed this loss, which was disallowed by the Assessing Officer (AO) on the grounds of being self-created through transactions with controlled entities having common directorship or other interests.

Facts and Circumstances:
The assessee, in existence for three decades and listed on the stock exchange, deals in shares, securities, cotton knitted fabrics, and tyres and tubes. During the assessment year 2009-10, the assessee purchased and sold cotton knitted fabrics from/to M/s Visage Equipments Pvt. Ltd and M/s Coral Environment Pvt. Ltd, resulting in a trading loss. The AO observed that these transactions were not normal business transactions but were camouflaged to create a bogus loss to set off real income from interest.

AO's Observations:
- The AO noted that the prices at which the fabrics were bought and sold varied significantly, indicating non-genuine transactions.
- The movement of goods was traced through a circuitous route involving entities with common directorship and shareholding, suggesting a lack of actual movement of goods.
- The transportation charges incurred were minimal and supported only by self-made vouchers, further indicating that the transactions were merely on paper.

CIT(A)'s Findings:
The CIT(A) upheld the AO's order, agreeing that the transactions were designed to create a fictitious loss to offset interest income. The assessee's trading losses were almost equal to its interest income over the years, indicating a pattern of managing transactions to avoid tax liability.

Tribunal's Analysis:
The Tribunal found that the assessee consistently incurred losses in trading cotton knitted fabrics over three years, which were used to set off against interest income. The minimal transportation charges and the circuitous movement of goods among related entities indicated a lack of genuine business transactions. The Tribunal also noted the interconnection between the directors and shareholders of the involved entities, reinforcing the AO's conclusion that the transactions were not genuine.

Comparison with Previous Tribunal Decision:
The Tribunal distinguished the current case from its previous decision in the assessee's own case for the assessment year 2007-08, where the revisionary jurisdiction under section 263 was quashed on technical grounds. In the current case, the Tribunal focused on the merits of the transactions and found them to be non-genuine.

Reliance on Judicial Precedents:
The Tribunal considered various judicial precedents cited by the assessee but found them factually distinguishable. The Tribunal relied on its decision in the case of Smt. Indra Jalan vs ITO, where similar transactions were found to be non-genuine.

Conclusion:
The Tribunal concluded that the trading loss claimed by the assessee was not genuine and that the transactions were carried out in a circuitous route among group concerns to evade taxes. The appeal was dismissed, and the orders of the lower authorities were upheld.

Pronouncement:
The order was pronounced in the open court on 13.07.2016.