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2023 (1) TMI 610 - AT - Income TaxDisallowance of fictitious losses - loss claimed by assessee which was treated as bogus in nature - allegation that the appellant created artificial transactions in the form of purchase and sale of silver to create fictitious losses - HELD THAT - Sales shown by the M/s Paragati Traders to the appellant assessee has been duly accepted by the Revenue as genuine transaction. Before us no material brought on record by the DR to suggest that the said assessment order has been revised under any provision of the Act where genuineness of such sale has not been accepted. Likewise, the income declared by M/s Gayatri Trading Co who was alleged to be the part of circular transaction was also accepted by the Revenue with minor adjustment in amount of depreciation in the assessment order dated 29-11-2010. Considering the fact that the sale shown by the supplier (M/s Pargati Traaders) of impugned silver to the assessee and purchases shown by the customer (M/s Harshad Jeweller) has been accepted genuine in their respective assessment orders, we hold that the transaction of purchase of sale of silver the by the assessee are genuine transaction and in the process loss incurred by the assessee cannot be disallowed. Hence we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Thus, the ground of appeal of the assessee is allowed. Disallowances of interest expenses on account of diversion of interest bearing fund - HELD THAT - Admittedly the own fund of the assessee exceeds the amount of loans and advances given to various parties. This fact can be verified from the submission made by the assessee before the authorities below. Accordingly, we are of the view that a presumption can be drawn to hold that the interest free advances has been given by the assessee out of his own interest free fund. Accordingly, the question of making the disallowance of interest expense does not arise. Hence, the ground of appeal of the assessee is hereby allowed.
Issues Involved:
1. Disallowance of Alleged Fictitious Loss - Rs. 6,98,85,971/- 2. Disallowance of Interest - Rs. 13,20,000/- Issue-wise Detailed Analysis: 1. Disallowance of Alleged Fictitious Loss - Rs. 6,98,85,971/- The assessee, a private limited company engaged in trading Gold, Silver, and Diamond jewelry, reported a loss of Rs. 6,98,85,971/- due to transactions involving the purchase of silver from M/s Pargati Traders and its sale to M/s Harshad Jewellers. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated this loss as fictitious, alleging that the transactions were circular and intended to evade tax. The AO's findings were based on: - A document (page 4 of Annexure-B) showing purchases and sales of silver on the same dates at different prices. - A statement from Shri Harshadbhai Jashwntlal Soni, proprietor of M/s Harshad Jewellers, admitting that transactions were managed by the director of the assessee company. - Circular transactions among the bank accounts of the involved parties. The assessee argued that: - The transactions were genuine and recorded in the books of accounts, supported by documentary evidence, and audited. - The statement of Shri Harshadbhai Jashwntlal Soni was unreliable as it was made to shift liability and was not retracted or cross-examined. - The transactions were accepted as genuine in the assessments of M/s Pargati Traders and M/s Harshad Jewellers. The Tribunal found: - The impugned transactions were part of regular business and duly recorded in the books of accounts. - The statement of Shri Harshadbhai Jashwntlal Soni lacked evidentiary value as it was recorded under section 133A of the Act. - The transactions were accepted as genuine in the assessments of the respective parties. - The AO did not conduct an independent inquiry into the nature of the transactions. The Tribunal concluded that the transactions were genuine and the loss incurred by the assessee should be allowed, directing the AO to delete the addition. Thus, the ground of appeal of the assessee was allowed. 2. Disallowance of Interest - Rs. 13,20,000/- The AO disallowed Rs. 13,20,000/- of interest expenses, claiming that the assessee diverted interest-bearing funds to interest-free loans to Madhukant Business Group and Shah Trading Co. The assessee argued that: - The advances were given in earlier years. - The parties were facing financial difficulties, making the recovery of the principal amount doubtful. - The assessee had sufficient interest-free funds to cover the advances. The CIT(A) confirmed the disallowance, stating that the assessee failed to establish the business purpose of the advances and that the interest-free funds were not available for providing the advances. The Tribunal found: - The assessee's own interest-free funds exceeded the amount of loans and advances given. - A presumption could be drawn that the interest-free advances were given out of the assessee's own interest-free funds. The Tribunal concluded that the disallowance of interest expenses was not justified and directed the AO to delete the disallowance. Thus, the ground of appeal of the assessee was allowed. Conclusion: The appeal filed by the assessee was allowed, with the Tribunal directing the deletion of both the disallowance of the alleged fictitious loss and the disallowance of interest expenses. The order was pronounced on 11/01/2023 at Ahmedabad.
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