2024 (11) TMI 1068 - HC - Income Tax

Disallowance of loss - Bogus/sham transaction of sale and purchase of dies - HELD THAT - It is settled law that the AO cannot supplant its view as to the commercial expediency of transactions in place of that of the Assessee. In the present case, the AO s decision to disallow the loss is based on surmises and assumptions. The fact that the Assessee had purchased some of the dies from HTIPL, which may be an affiliate of HCIL, did not in any manner indicate that the loss suffered by it was not genuine. It is material to note that neither HTIPL nor TITC are affiliate entities of the Assessee. There is also no allegation that the Assessee is affiliated to HCIL. It is, thus, apparent that the transaction for sale and purchase of dies was a pure commercial transaction entered into by the Assessee in its commercial wisdom. The fact that the Assessee had incurred a loss in the said transaction is also not disputed. There is no allegation that the Assessee was paid any undisclosed consideration from the parties in a clandestine secret transaction to reverse the loss. We find that the AO had made the additions solely on the basis of what the AO thought was commercially expedient an area which the AO was not required to tread. In the present case, the Assessee has also justified its commercial decision by reflecting the enhanced turnover and the profits earned by it from its business from HCIL. However, it would be apposite to add that even if the Assessee had not been able to earn profits in later years, the same would make no difference. It is not necessary that every business decision made by an assessee yields profit. The area of examination is only confined to whether the transactions entered into by the assessee are genuine and not whether they are commercially expedient. In the present case, there is no material other than just a sense of suspicion that has persuaded the AO and the CIT(A) to make the addition in question. Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the transaction of sale and purchase of dies was a sham transaction or a genuine business transaction.
2. Whether the loss claimed by the Assessee due to the transaction should be disallowed by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Sham Transaction Allegation:

The primary issue was whether the transaction involving the sale and purchase of dies was a sham transaction. The AO had concluded that the transaction was artificial, asserting that the Assessee's loss was not genuine. The AO's reasoning was based on the relationship between the parties involved, specifically noting that the tools and dies were purchased from a "sister concern" of HCIL, and questioning the necessity of the transaction structure. The AO viewed the transaction as a "colorable device," suggesting that there was no need for the Assessee to sell the dies to HCIL and then receive them back for manufacturing purposes.

The Assessee countered this allegation by explaining that the transaction was commercially expedient. HCIL required the Assessee to procure and sell the dies at a negotiated price, which was based on quotations obtained by HCIL from other parties. The Assessee argued that the transaction was a business decision aimed at securing a profitable contract with HCIL, which resulted in a significant increase in turnover.

The Income Tax Appellate Tribunal (ITAT) accepted the Assessee's explanation, stating that the transaction was genuine and that the loss incurred was a result of commercial prudence. The ITAT emphasized that the Assessee's decision was driven by the need to maintain a sustainable business relationship with HCIL, which led to profits in subsequent years.

2. Disallowance of Loss:

The AO disallowed the loss claimed by the Assessee, reducing the assessed loss significantly. The AO's disallowance was based on the suspicion that the transaction was not genuine and was structured to create an artificial loss. The CIT(A) upheld this decision, maintaining the disallowance of the loss on the grounds that the transaction was tainted due to the relationship between the parties.

The ITAT, however, found that the AO's decision was based on assumptions and lacked concrete evidence. The ITAT noted that the AO had failed to appreciate the Assessee's business strategy and the commercial context of the transaction. The Tribunal highlighted that the Assessee had reported profits in subsequent years, demonstrating the long-term viability of the business decision.

The High Court supported the ITAT's findings, stating that the AO cannot replace the Assessee's commercial judgment with its own. The Court emphasized that the transaction was a legitimate commercial arrangement, and the loss was genuine. It further noted that there was no evidence of any clandestine or undisclosed consideration, reinforcing the genuineness of the transaction.

In conclusion, the High Court dismissed the Revenue's appeal, affirming that no substantial questions of law arose and that the appeal was unmerited. The Court upheld the ITAT's decision, recognizing the transaction as a genuine business transaction and allowing the loss claimed by the Assessee.