2024 (6) TMI 737 - AT - Income Tax

Speculative Transactions u/s 43(5) - transactions of purchase and sale of edible oil (canola oil - involving high sea sales) by the assessee were speculative as no actual delivery of goods was received by the assessee - whether, in the instant transaction, there has been actual delivery of goods or whether the transaction has been ultimately settled, otherwise than by actual delivery? - HELD THAT - Hon ble Andhra Pradesh High court in the case of Lakshmi Narayan Trading Company 1995 (3) TMI 20 - ANDHRA PRADESH HIGH COURT while dealing with identical situation that where there are successive sales of same commodity coupled with delivery or transfer of the commodity and the physical delivery is only taken by the ultimate purchaser, the transaction does not fall within the sweep of speculative transaction. Also in case Sripal Satyapal 2007 (1) TMI 627 - RAJASTHAN HIGH COURT held that there is no requirement in the provisions of section 43(5) for actual delivery or the transfer of commodity by the assessee or is agent but the emphasis is on that whether transactions entered into by the parties were settled by delivery of goods, (and for determining the speculative transaction in terms of 43(5) is that whether the transactions entered into by the assessee has been settled otherwise by way of actual delivery of the goods). It is not a case, where delivery of the goods were not contemplated at all , but it is a case where goods where physically purchased by the importer from the foreign seller, who loaded the goods on the ship , and thereafter , the assessee has purchased the goods from the importer while on the high seas in transit , and thereafter, the assessee sold the goods by handing over and transfer of title documents, in favour of the ultimate buyer, which includes handing over the sale invoice, High Seas sales agreement, copy of original import invoice, and copy of bill of lading to the purchaser , while the goods were still on high seas in transit and finally , the ultimate buyer has taken delivery and physical possession of the goods by filing the bill of entry at the port of delivery in India, and complied with all the custom formalities. Thus we hold that the ultimate settlement of the transactions entered into by the assessee has been settled by the actual delivery of the goods to the ultimate buyer and thus the transactions of sale and purchase in the instant case does not fall within the provisions of section 43(5) of the Act 61 and are not speculative transactions . Decided against revenue. Addition as interest income u/s 36(1)(iii) - AO has made a proportionate disallowance of interest on interest free advances and added back the same to total income - HELD THAT - DR has not disputed or controverted the arguments of the assessee on the aspect of availability of interest free funds, as shown to have been reflected in the audited balance sheet. We are of the opinion that there is neither any reason nor any material to disbelieve the figures contained in the audited balance sheet, more so, the availability of unsecured loans (free of interest) duly reflected in the balance sheet amounting to Rs. 19.80 crores on 31st March 2016 and Rs. 20 crores on 31st March 2017, which is sufficient to meet the advance of Rs. 9.25 crores, given to M/s Diamond Traxmein Pvt Ltd, and respectfully following the decision of Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT we delete the addition sustained by the CIT(A) u/s 36(1)(iii) - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the transactions undertaken by the assessee are speculative in nature under section 43(5) of the Act.
2. Whether the addition of Rs. 66,04,490/- as interest income under section 36(1)(iii) of the Act was justified.

Issue 1: Speculative Transactions under Section 43(5) of the Act

The department contended that the transactions involving the purchase and sale of edible oil (canola oil) by the assessee were speculative in nature since no actual delivery of goods was taken by the assessee. The AO treated the business loss claimed by the assessee as speculative loss under section 43(5) and denied set-off against other heads of income under section 73(1).

The first appellate authority allowed the loss of Rs. 57.39 lakhs as a business loss, permitting its set-off against interest income earned by the assessee. The Tribunal examined the provisions of section 43(5), which defines a speculative transaction as one settled otherwise than by actual delivery or transfer of the commodity.

The assessee explained the business modus operandi, providing evidence that the goods were physically delivered to the end user at the port of arrival, supported by documents like invoices, bills of lading, and delivery reports. The Tribunal noted that the AO did not dispute the documentary evidence or the sequence of events.

The Tribunal considered various judgments, including those of the Calcutta High Court in Hoosen Kasam Dada (India) Ltd vs. CIT, Andhra Pradesh High Court in Lakshmi Narayan Trading Company, and Rajasthan High Court in Sripal Satyapal vs. ITO, which supported the view that transactions involving actual delivery cannot be considered speculative.

The Tribunal concluded that the transactions in question involved actual delivery of goods to the ultimate buyer, thus not falling within the provisions of section 43(5). Therefore, the transactions were not speculative, and the revenue's appeal on this issue was dismissed.

Issue 2: Addition of Rs. 66,04,490/- as Interest Income under Section 36(1)(iii) of the Act

The AO made a proportionate disallowance of interest amounting to Rs. 66,04,490/- on the grounds that the assessee had advanced interest-free loans to M/s Diamond Traxmein Pvt Ltd while paying interest on borrowed funds.

The first appellate authority sustained the addition, noting that the assessee could not demonstrate the availability of sufficient interest-free funds to cover the advances.

Before the Tribunal, the assessee argued that it had sufficient interest-free funds, amounting to Rs. 26.76 crores as on 31/03/2016 and Rs. 28.18 crores as on 31/03/2017, as reflected in the audited balance sheet. The assessee relied on the Supreme Court's decision in CIT v. Reliance Industries Ltd., which held that if interest-free funds are available, it is presumed that investments were made from such funds.

The Tribunal examined the audited balance sheet and found that the assessee had sufficient interest-free funds to cover the advance. The Tribunal noted that the AO did not dispute the availability of these funds.

Following the Supreme Court's decision in Reliance Industries Ltd., the Tribunal held that the addition of Rs. 66,04,490/- under section 36(1)(iii) was not justified and deleted the addition.

Conclusion:

The Tribunal dismissed the revenue's appeal regarding the speculative nature of transactions and allowed the assessee's appeal, deleting the addition of Rs. 66,04,490/- under section 36(1)(iii).