2024 (12) TMI 815 - AT - Income Tax

Speculation transactions of purchases sales on High Seas Sales basis (HSS) - treating the business loss as speculative loss - CIT(A) was of the opinion that the assessee has not shown any evidence of any physical purchase and sales of goods and that the transactions are on paper only - HELD THAT - High Seas Sale is a common trade practice where the original importer sells the goods to the buyer before the goods are entered into customs clearance of the port where the voyage ends i.e. before filing the first bill of entry, either for home consumption or for warehousing, as the case may be. Under the Act, the term speculation focuses on whether the transactions involves actual delivery, transfer, or settlement. Even if the goods or commodities involved are inherently speculative, the crucial factor remains to establish actual delivery. Thus it is clear that, when delivery of the goods are not taken, the transaction is treated as speculative in nature. But in assessee's case the entire transaction is going through a process where delivery of goods take place and documents evidencing delivery of goods related to high sea sale are Bill of Lading which has not been disputed by the revenue authorities. We find that the chain of events as laid down by the assessee, supported by documentary evidences, has not been disputed by the AO. The only point of dispute is there is no evidence of actual delivery and merely because the assessee entered into a forward contract, the transaction was considered to be speculative in nature. 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. The authorities below do not disputed the factual sequence of events stated above, and has also not disputed the veracity of documentary evidence on record, regarding the ultimate delivery of goods being taken by the last buyer. We do not agree with the findings of the authorities below that the transaction of purchase and sale undertaken by the assessee amounts to be speculative in nature. Appeal filed by the assessee stands allowed.

Summary

Issues Involved:

1. Classification of High Seas Sales (HSS) transactions as speculative transactions.
2. Treatment of loss incurred in trading commodities on HSS as speculation loss instead of business loss.
3. Classification of other income, including export incentives and excess provisions written back, as income from other sources instead of business income.

Issue-wise Detailed Analysis:

1. Classification of High Seas Sales (HSS) Transactions as Speculative Transactions:

The primary issue was whether the transactions of purchase and sale on a High Seas Sales basis should be classified as speculative transactions. The Appellate Authority upheld the Assessing Officer's (AO) decision that these transactions were speculative, as they were considered forward contracts without actual delivery of goods. The AO noted that the assessee did not take or give actual delivery of goods, as the transactions were settled through endorsements of the Bill of Lading, which were seen as speculative in nature. However, the Tribunal found that the transactions involved actual delivery, as the original seller transferred possession at the time of loading onto the vessel, and the ultimate buyer took physical delivery after customs clearance. The Tribunal concluded that the transactions did not fall under the definition of speculative transactions as per Section 43(5) of the Act, which requires settlement otherwise than by actual delivery.

2. Treatment of Loss Incurred in Trading Commodities on HSS as Speculation Loss:

The assessee declared a loss of Rs. 10,05,28,283/- from trading commodities on an HSS basis, which the AO and Appellate Authority treated as a speculation loss. The Tribunal examined whether there was actual delivery in these transactions. The assessee provided evidence of physical delivery through the Bill of Lading and other documents, indicating that the goods were physically transferred to the ultimate buyer. The Tribunal referenced precedents from the Hon'ble Rajasthan High Court and Hon'ble Andhra Pradesh High Court, which supported the view that transactions involving actual delivery do not constitute speculative transactions. The Tribunal concluded that the transactions were genuine business transactions, not speculative, and thus the loss should be treated as a business loss.

3. Classification of Other Income as Income from Other Sources:

The assessee argued that the other income, primarily comprising export incentives and excess provisions written back, should be considered part of business income. The AO and Appellate Authority classified this income as income from other sources. The Tribunal noted that these components were integral to the assessee's business activities and should be included as business income. The Tribunal found that the authorities below had erred in treating this income as from other sources, as it was directly related to the business operations of the assessee.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, concluding that the transactions on a High Seas Sales basis involved actual delivery and should not be classified as speculative. Consequently, the loss incurred was a business loss, not a speculation loss. Additionally, the Tribunal held that the other income should be considered as part of the business income. The decision emphasized the importance of actual delivery in determining the nature of transactions under Section 43(5) of the Act.