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2020 (6) TMI 27 - AT - Income TaxDisallowance of business loss - HELD THAT - For a small amount the authorities below should not have doubted the explanation of the assessee and others. The reasons given by the A.O. are merely a presumption which could not reject the explanation of assessee that he has suffered genuine business loss. The assessee furnished copy of the invoices and ledger account in support of the above explanation - the documentary evidences which have not been rebutted by the A.O. could not have been disbelieved by the A.O. on irrelevant reasons. A.O. did not examine the parties from whom assessee has purchased the items under reference which were later on sold to other parties when the above two parties refused to accept the goods from the assessee. We are of the view that the A.O. has failed to establish that loss suffered by the assessee is not genuine. There is no reason to sustain the addition - we set aside the Orders of the authorities below and delete the entire addition. In the result, appeal of the assessee is allowed.
Issues Involved:
1. Legality and factual correctness of the CIT(A)'s order. 2. Sustaining the disallowance of ?56,53,550/- as business loss. 3. Basis for sustaining the disallowance including surrounding circumstances and human conduct. 4. Evidence provided by the appellant to prove the genuineness of the business loss. 5. Alleged violation of natural justice principles by the CIT(A). 6. Allegation of sham transactions for tax evasion. 7. Assessing Officer's role in determining business conduct. Detailed Analysis: 1. Legality and Factual Correctness of the CIT(A)'s Order: The appellant challenged the order of the CIT(A) dated 26.09.2018, claiming it was bad in law and on facts. The appeal was directed against the disallowance of a business loss of ?56,53,550/- made by the Assessing Officer (AO) and upheld by the CIT(A). 2. Sustaining the Disallowance of ?56,53,550/- as Business Loss: The AO disallowed the business loss claimed by the assessee, holding that it was not genuine and resulted from meticulously planned events to create a business loss for adjusting short-term capital gain from the sale of a plot in Noida. The CIT(A) upheld this disallowance after further inquiry. 3. Basis for Sustaining the Disallowance Including Surrounding Circumstances and Human Conduct: The AO cited several reasons for rejecting the business loss claim, including: - Similarity in purchase orders from M/s Cotton Collection and M/s Sarthak Apparels. - Inconsistent reasons provided by the assessee for the loss. - Lack of prior business dealings and absence of security for the transactions. - No legal action taken against parties for order cancellations. - Continued purchase of fabric despite known issues. - Cessation of the business of trading in designed fabric the following year. - Non-compliance by the parties involved in response to AO's summons. - Inspector's report indicating non-existence of M/s Cotton Collection at the given address. 4. Evidence Provided by the Appellant to Prove the Genuineness of the Business Loss: The assessee presented several arguments and evidence before the CIT(A), including: - Long history of trading in grey fabric and first-time venture into design fabric. - Business decisions based on maintaining market reputation. - Subjective considerations like not accepting security from buyers. - Verbal and telephonic communications with M/s Cotton Collection and M/s Sarthak Apparels. - Production of main persons from the above parties who confirmed the transactions and reasons for order cancellations. - Affidavit stating that M/s Shylgo Textile's accountant appeared before the AO but was not examined. 5. Alleged Violation of Natural Justice Principles by the CIT(A): The appellant argued that the CIT(A) violated principles of natural justice by not confronting third-party evidence and not providing the Inspector's report to the assessee. 6. Allegation of Sham Transactions for Tax Evasion: The CIT(A) and AO concluded that the transactions were sham, entered into for the purpose of evading tax. The CIT(A) emphasized the burden of proof on the assessee to establish the genuineness of the loss, citing the Supreme Court's decision in Sri Charan Singh Vs Chandra Bhan. 7. Assessing Officer's Role in Determining Business Conduct: The assessee argued that the AO should not determine how the business is conducted, referencing the Supreme Court's decision in SA Builders Ltd vs CIT. The Tribunal agreed, stating that business decisions are often based on maintaining relations and avoiding litigation. Conclusion: The Tribunal found that the AO's reasons were based on presumption and not sufficient to reject the assessee's explanation. The Tribunal noted that the assessee provided documentary evidence, including invoices and ledger accounts, which were not rebutted by the AO. The Tribunal concluded that the AO failed to establish that the loss was not genuine and thus allowed the appeal, deleting the addition of ?56,53,550/-. Order: The appeal of the assessee was allowed, and the addition of ?56,53,550/- was deleted. The order was pronounced in the open court on 29th May, 2020.
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