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TMI Blog2020 (11) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... o carry on the business. Therefore in our considered view such business loss has been incurred in the course of the business and therefore the assessee is eligible for deduction under the provisions of section 37/28 of the Act as the case may be. Transaction as a colourable device to reduce its tax liability by making the book entry of the impugned loss - Regarding the physical delivery of the material loan to the parties, we note that the assessee before us has filed insurance receipts which is placed on record justifying that the assessee has taken the insurance for the transportation of the silver. Indeed the quantity of the silver was huge and therefore the assessee must have utilized services of some transporters. Items of silver being precious items, the argument of the assessee cannot be neglected in totality. However, there are other clinching evidences supporting the material loan transaction including the agreement, payment of interest which cannot be ignored. Even for the sake of assuming, the material loan has not been returned by the assessee on the termination of the agreement, but the assessee has revalued its current liability at the market rate and any loss thereon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l n. Dholakiya PAN-ABQPD2710D 743.467 22300 16579314 3 M/s, Choksi Vachraj Makanji & Co. PAN-AABFC3586E 3399.172 22300 75801356 3.3 The material loan taken by the assessee was recorded in the accounts as stock in trade by crediting the current liabilities/sundry creditors. The assessee in the year under consideration claimed to have repaid the material loan in the form of quantity by crediting the sales account at the value of the loan obtained initially i.e. 11,01,26,856/-and debiting the sundry creditors account at the original value i.e. 11,01,26,856/- only. 3.4 The assessee in the year under consideration has also taken fresh material loan from the same parties at a value of ₹ 58,100 per KG. The details of the fresh loan including the name of parties, quantity and its value stand as under: Sr. No. Name of Lender Quantity (Kg) Date Rate Amount(Rs.) 1 Jugalkishore N. Dholakia 743.467 08/04/2011 58100 43195433 2 Deepak N. Dholakia 795.785 08/04/2011 58100 46235108 3 CVM & Co. 1394.178 12/04/2011 58900 82117084 Total 2933.430 171547625 3.5 The fresh material loan taken by the assessee was recorded in the accounts as stock in trade in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan from the parties which was shown as stock in trade. The sale of such stock in trade/material loan was shown as sale proceeds in the profit and loss account at the market rate and the difference was offered as income to tax. However at the time of repayment of the material loan in the form of quantity only, the price of the silver has gone high which resulted loss. As such the entire material loan was utilized for the purpose of the business and therefore the same is in the nature of trading liability. Thus, any loss qua to material loan was allowable as deduction. 5.1 As per the assessee the value of the material loan (silver) as on 27th May 2008 was taken at ₹ 22,300/- per kg. whereas the value of the material has gone high at the time of repayment of such loan at ₹ 58,100/- per Kg. Thus the loss was incurred in the course of the business which is eligible for deduction under section 37 of the Act. 5.2 The fact of obtaining the material loan by the assessee was accepted by the Revenue in the assessment year 2009-10, 2010-11 and 2011-12. 5.3 The assessee also claimed that the fresh material loan obtained in the year under consideration was revalued at the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the accounting treatment for Fine Silver Loan is consistent and there is absolutely no change even during the year under appeal. Even otherwise, the impact of such procurement reflects on both the sides of Trading account in a way as the Closing Stock (if silver loan remains unsold) increases to that extent or if it is sold, the sales increase to the extent of loan procured. In Balance Sheet, on the Liability side, the Silver loan is reflected by way of credits of the market value of silver on the date of taking the material loan in the accounts of the respective parties. On the other Side, i.e. Asset side, the same amount becomes part of the Closing Stock. This material loan fell due for repayment in 2011 and as such the same was repaid which is evidenced by duly signed issue and receipt vouchers of the respective parties. On repayment of old loan, as contended by the appellant, all the parties renegotiated for a fresh Fine Silver Loan and entered in to fresh agreements on a stamp paper dated 09.09.2011 with identical terms of the agreement dated 27.05.2008 and again the same has not been disputed by the AO. Similar entries as made earlier were passed in the books of accounts d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man 324 / 225 ITR 525, it is held that the AO has erred in recording the findings on the basis of which disallowance of ₹ 6,14,20,769/- is made. The same is therefore, directed to be deleted. The ground of appeal is allowed. Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us. 6. The learned DR before us submitted that the assessee has filed the fresh documents on the direction of the ITAT, therefore the matter should be set aside to the AO for fresh adjudication. 6.1 The learned DR also contended that the documents filed by the assessee showing the return of material loan are self-serving documents and without mentioning any party name, vehicle number, quantity therein. Similarly, there was only the toll tax receipts shown by the assessee without having any vehicle number. As such there was no evidence for showing the physical delivery of the silver to the loan parties. 6.2 The learned DR also submitted that there is mismatch in the date when the material loan was obtained by the assessee viz a viz the agreement for the material loan was entered. Furthermore, these agreements were not notarized. The Learned DR also found certain defects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was subject to interest at the rate of 2% of such loan amount. Accordingly the assessee has paid the interest on the material loan which was also accepted by the Revenue. Thus, there is no dispute about the genuineness of the material loan shown by the assessee. 9.4 Indeed, in the present case the loan was not obtained by the assessee under the normal prevailing market practices. Generally, the loans are obtained in cash which are subject to interest and repayable over a certain period of time as agreed between the parties. However, in the case on hand the assessee has taken a material loan in the form of silver with the understanding that it has to return the silver only to the parties concerned at the end of the agreement. The agreement in question came to an end in the year under consideration. 9.5 It is a fact on records that the material loan obtained by the assessee was utilized for its business purposes. As such the assessee after receiving the material from the parties has started making sales at the market rate which was recorded as sales in the trading account. Accordingly, there has to be corresponding purchases against the sales. As such the sales cannot be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an without which it was not possible for it to carry on the business. Therefore in our considered view such business loss has been incurred in the course of the business and therefore the assessee is eligible for deduction under the provisions of section 37/28 of the Act as the case may be. In this regard we draw support and guidance from the judgment of Hon'ble Gujarat High Court in the case of Weilding Rods Mfg. Co. vs. CIT reported in 93 Taxman 324 wherein it was held as under: In examining any transaction on entry in the mercantile system of account the Court must give more regard to the reality and specifically to the situation rather than to a purely technical aspect. It must lay greater emphasis on the business aspect of the matter by viewing the transaction as a whole without disregarding statutory language. In the instant case, the assessee was liable to return the wire rods borrowed from its sister concern on demand. Consequently, the assessee must make provision in its account of the price of the said loan in view of the material taken on loan so as to enable it to purchase the same in the open market. The rate of the goods shown by the entry in the assessee's accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the material loan but on the other hand the Revenue has accepted the gain shown by the assessee on account of decrease in the value of the material loan. In our considered view, if the revenue is not inclined to allow the loss to the assessee then it has no authority to tax the gain shown by the assessee as discussed above. As such the revenue cannot pick and choose by providing different treatment of identical transaction according to its convenience and in a manner benefiting to it. As such it has to maintain/provide the same treatment for the identical transactions. 11.4 The assessee has taken the material loan in the year 2008 which was recorded at particular value and it was not possible for the assessee or any person of prudent mind to foresee the value of material loan at the time of repayment. At the time of repayment the value of the material loan has increased many folds which were not challenged by the authorities below. As such it was not possible for the assessee to quantify such amount at the time of repayment of loan. The rates for the silver are governed by the market forces. Therefore, the assessee cannot be faulted if the rate has gone high at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been returned by the assessee on the termination of the agreement, but the assessee has revalued its current liability at the market rate and any loss thereon as a result of revaluation has to be allowed to the assessee being arising in the course of the business activities. 12.5 We also note that the AO in his finding has held that assessee has used this transaction as a colourable device to reduce its tax liability by making the book entry of the impugned loss. Regarding this we note that Hon'ble Supreme court in case of McDowell & Co. Ltd vs. Commercial tax officer (154 ITR 148) dated 17-4-1985 wherein apex court observed that tax planning within the law is permitted, but colourable devices cannot be part of tax planning. 12.6 In the case of McDowell & Co, the assessee was not collecting the sales tax liability on the excise duty even after the amendment in the distillery rules 76 & 79 w.e.f. 4-8-1981. As such before the amendment in the rules, i.e., Distillery rules 76 & 79 w.e.f. 4-8-1981, the buyers were liable to deposit the excise duty directly to the state government. Therefore the assessee did not collect the sales tax on such excise duty. It is pertinent to note t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely - duty so far paid separately directly to the tax authorities and the balance so paid to the seller; the arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in reality of receiving less price than the one on which it was marketing. The Court no where said, that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the frame work of law, unless the same fall in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability infuture. While the planning adopted as a device to avoid tax had been deprecated, principle cannot be read as laying down the law that a person is to arrange his affairs so as to attract maximum tax liability, and every act which results in tax reduction, exemption of tax or not attracting tax authorised by law is to be treated as device of taxavoidance." 12.9 From the above it is transpired that all the transactions having impact on the reduction of tax liability cannot be regarded as colourable device. As such Revenue needs to see the transaction in its entirety, as held by the Hon'ble Gujarat high court in the abovementioned case. 13. However, we further note that before applying the aforesaid principles laid down by the Hon'ble Apex court in case of McDowell (supra) to the case on hand certain facts needs to be considered for arriving at a finding whether a particular series of the transactions is a colourable device or not the onus is on the AO to find out: (i) Whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in different time or at different place; Ans: Regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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