2022 (3) TMI 142 - AT - Income Tax

Disallowance of trading/business loss claimed on account of advance forfeited - HELD THAT - The assessee used to purchase low silica high grade limestone from M/s. Ridhi Siddhi in the past. The assessee also entered into a sale and purchase contract on 14.12.2016 and certain terms and conditions were finalized. A copy of agreement is placed - In Clause 6.0 of this agreement a condition is mentioned as per which in the event of the buyer not purchasing the material, an amount of USD9772 (Indian ₹ 6,61,299/-) will be deducted out of the advance amount as commitment/incidental charges. We notice that the assessee gave certain orders for purchase of material but could not reach to a consensus for the discount on the purchases and the seller did not accept the proposal. Due to this reason, the assessee cancelled the contract and for doing this act the advance amount was forfeited. All these series of facts and looking to the gross turnover of the assessee company, we find merit in the contention of the ld. Counsel for the assessee that the alleged amount is purely a business loss which is incurred in the regular course of doing the business of purchase and sale. We are also satisfied that the alleged amount cannot be treated as capital advance as it was paid for purchasing raw material used by the cement industries. Under these given facts and circumstances, we are of the considered view that the ld. CIT(A) erred in denying the claim of advance forfeited as an expenditure. We direct the AO to allow this claim of the assessee.

Summary

Issues:
1. Disallowance of trading/business loss claimed at ?6,61,299 on account of advance forfeited.

Analysis:
The appeal pertains to the Assessment Year 2017-18 against the order of the Commissioner of Income-tax (Appeals) dated 16.04.2021. The assessee raised grounds challenging the addition of ?6,61,299 made by the Assessing Officer under the head "Advance Forfeited" in the Profit and Loss Account. The assessee contended that the interest charged under sections 234B and 234D of the Income Tax Act was excessive and not applicable in this case. The delay of 42 days in filing the appeal was condoned due to pandemic circumstances. The main issue revolved around the disallowance of the trading/business loss claimed by the assessee.

The assessee, a private limited company, had given an advance of ?6,61,299 to a foreign seller for importing raw materials used in cement factories. The contract was subsequently canceled, leading to the forfeiture of the advance amount. The Assessing Officer disallowed this claim, which was upheld by the Commissioner of Income-tax (Appeals). The Tribunal considered the facts, including the turnover and profit before tax of the assessee, and reviewed the agreement and invoices supporting the transaction. It was noted that the amount forfeited was a business loss incurred in the regular course of business. The Tribunal found merit in the contention that the amount was not a capital advance but a business loss related to the purchase and sale operations of the assessee.

After analyzing the documents and arguments presented, the Tribunal concluded that the Commissioner of Income-tax (Appeals) erred in denying the claim of advance forfeited as an expenditure. The Tribunal directed the Assessing Officer to allow the claim of ?6,61,299 as a business loss. The appeal of the assessee was allowed, and the remaining grounds were deemed general and consequential, requiring no further adjudication. The decision was delivered on 25th February 2022 in Kolkata.