2022 (11) TMI 885 - AT - Income Tax

Speculative loss - trading transactions on NSEL platform and loss incurred - finance charges/interest - claim of the assessee that the same being interest expenditure deductible as business expenditure and allowable as deduction - HELD THAT - For the purpose of carrying out transaction with NSEL they use to keep 3.5% of the value of the transaction as margin money of this account which is released only after the transaction is over. But since the transaction was not materialized in end the settlement amount was received in consonance with these business transactions from NSEL and thus it cannot be treated as speculative loss and is a part of business loss The relevant purchase and sales transactions were entered into by the assessee-company in order to avail the funds and therefore the loss incurred in the said transactions actually represented cost of such funds which was a business loss. The adverse inference drawn by the learned CIT(A) against the assessee on the basis of withdrawal of such loss partly was also not correct as the reasons for such withdrawal proposed by the assessee were duly explained and the fact that the assessee-company by entering into these transactions had availed finance for the purpose of business was duly established. Applicability of TDS provision - assessee has pointed out from the relevant details of transactions that the sale proceeds were received by the assessee-company from different entities while payment towards the purchase was made towards different entities. The cost of finance thus was not paid to the party from whom the finance was actually availed and the applicability of TDS therefore was not warranted. Moreover the cost incurred by the assessee for availing finance was not strictly in the nature of interest and the party selling the goods having offered the same for taxation there is no obligation of deduction of tax at source by the assessee. Having regard to all these facts of the case we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged speculation loss is not sustainable and deleting the same we allow Ground No.4 of the assessee s appeal. Addition of transaction charges under Section 40(a)(ia) - HELD THAT - As the assessee failed to furnish any details or make any submission to show that tax at source was deducted from the payment made on account of transaction charges paid to IBMA. He therefore confirmed the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Even at the time of hearing before us nothing has been brought on record on behalf of the assessee to prove that the tax at source was deducted from the amount in question paid towards transaction charges. We therefore find no justifiable reason to interfere with the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on this issue. Ground No.5 of the assessee s appeal is accordingly dismissed. Disallowance of transaction charges - transaction charges were recoverable by the assessee-company from clients and since it could not produce any documentary evidence to substantiate its claim that it was not obligatory to recover the transaction charges he disallowed the entire transaction charges - HELD THAT - The transaction charges actually represented additional cost of funds raised by the assessee-company for the purpose of its business and the expenditure incurred on account of the same was wholly and exclusively for the purpose of business of the assessee as rightly contended by the assessee. In the case of Khambhatta Family Trust 2013 (7) TMI 657 - GUJARAT HIGH COURT cited by assessee the Hon ble Gujarat High Court has held that the requirement for allowability of any expenditure as business expenditure is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily - we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of transaction charges is not justifiable and deleting the same we allow Ground No.6 of the assessee s appeal. Partial depreciation claim - asset put to use - depreciation on concerned plant was restricted by AO as well as CIT(A) to the extent of 50% on the ground that even though the said plant was ready to commence the operation the actual production had started only after 30.09.2010 - HELD THAT - As rightly submitted by the learned Counsel for the assessee by relying on the relevant judicial pronouncements including the decision of Ashima Syntex Ltd 2000 (8) TMI 22 - GUJARAT HIGH COURT the assessee is entitled for depreciation at full rate as the concerned plant was ready to use on 27.09.2010 itself as agreed by the authorities below also and the business of the assessee was already in existence. We accordingly direct the Assessing Officer to allow depreciation on the said plant at full rate as claimed by the assessee and allow Ground No.7 of the assessee s appeal. Unexplained expenditure - AO disallowed the assessee s claim on account of debit notes raised by NKPL and the amount of such debit notes was added by him to the total income of the assessee by treating the same as unexplained expenditure - HELD THAT - Amount of debit note in question was duly recognized by NKPL as its profit which was offered to tax and keeping in view that the assessee-company was a BIFR company since 2002 incurring consistent losses it cannot be said by any stretch of imagination that the debit notes were raised to reduce the taxable income of the assessee-company as alleged by the authorities below. There was a Memorandum of Understanding entered into between the assessee-company NKPL and the same was acted upon by both the sides by raising debit/credit notes for the difference in price charged by the assessee to NKPL and the price actually realized by NKPL from corresponding exports as the same was to be transferred to the assessee-company. We are inclined to accept the claim of the assessee that the amount of debit notes in question was its business expenditure being the difference in sale price charged and actually realized which is allowable as deduction. In that view of the matter we delete the disallowance made by the AO and confirmed by the learned CIT(A) on this issue and allow Ground No.5 of the assessee s appeal. Disallowance of interest under Section 36(1)(iii) - HELD THAT - The assessee has not produced any cogent evidence to substantiate its claim that the advances in question were given for the purposes of business. He has also not furnished any details or given any reasons as to why the recovery of these advances had become doubtful as claimed. Since the business purpose of giving these advances was not established by the assessee on evidence we are of the view that it was a clear case of diversion of interest bearing loans for non-business purpose and disallowance on account of interest attributable to the said advances was rightly made by the Assessing Officer and confirmed by the learned CIT(A). Ground No.6 of the assessee s appeal is accordingly dismissed. Disallowance on account of employees contribution to PF and ESI - HELD THAT - This issue is squarely covered against the assessee by the decision of CIT Vs. Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT which has been subsequently upheld by the Hon ble Supreme Court. Respectfully following the said judgment of the Hon ble jurisdictional High Court which has been upheld by the Hon ble Apex Court we uphold the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on this issue. Ground No.7 is accordingly dismissed. Addition u/s 68 - payment against purchase - HELD THAT - The entire amount was utilized by the assessee-company for making payment against purchase as a part of the trade cycle and consequently even the balance amounT cannot be treated as unexplained cash credit under Section 68 of the Act merely on the ground that the same had remained unpaid. Moreover the entire corresponding sales made by the assessee-company to the parties through NSEL was duly recognized as its income in the books of account and the proceeds against the same cannot be treated as income of the assessee again as the same would amount to double addition. We therefore delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and allow Ground No.8 of the assessee s appeal. Claim for business loss - action of AO in treating the loss in question as speculative loss instead of trading loss - HELD THAT - Keeping in view the submission made by both the sides we consider it fair and proper and in the interest of justice to restore this issue to the file of the Assessing Officer with the direction to decide the same afresh after giving the assessee an opportunity to establish that all the transactions resulting in the business loss in question were made at the prevailing market price and it was not a case where the goods purchased at higher rate were sold by the assessee-company at lower rate in order to claim trading loss. Non-genuine purchases - HELD THAT - A confirmation of Shree Rajkot Lodhika Sahakari Kharid Vechan Sangh Ltd. was also filed by the assessee confirming delivery of CWO made to the concerned parties on various dates. Moreover the quantitative details furnished by the assessee also revealed that the quantity of both purchases and sales was tallying with each other. It is thus clear that the purchase of 10180 MT of CWO for Rs.59.70 crores on delivery basis was actually established by the assessee on the basis of supporting evidence and since the corresponding sale of the same was not only proved but the same was also recorded and recognized as income in the books of account of the assessee-company we are of the view that the purchase of 10, 180 MT of CWO for Rs.59.70 crores cannot be said to be excessive as alleged by the authorities below. We therefore delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged excessive purchases and allow Ground No.4 of the assessee s appeal. Unexplained sales - DR has submitted that this claim of the assessee specifically made for the first time before the Tribunal requires verification by the AO - HELD THAT - We find merit in this contention of the learned DR and since the learned Counsel for the assessee has also no objection for such verification being done by the Assessing Officer we restore this issue to the file of the Assessing Officer with the direction to decide the same afresh after verifying the claim of the assessee that the sales in question treated as unexplained was already accounted for by the assessee-company in its books of account. Ground No.5 is accordingly treated as allowed for statistical purposes. Disallowance of interest expenses - HELD THAT - At the time of hearing before us assessee has invited our attention to the balance-sheet of the assessee-company placed to point out that own funds in the form of capital and reserves to the extent of Rs.420 crores were available with the assessee-company at the relevant time and the same were sufficient to give interest free advances in question. We therefore find merit in this contention of the learned Counsel for the assessee that the disallowance made by the Assessing Officer on account of interest and confirmed by CIT(A) is not sustainable. The same is accordingly deleted and Ground No.7 of the assessee s appeal is allowed.

Summary

Issues Presented and Considered

1. Whether the loss of Rs.14,42,91,136/- (and similar amounts in related appeals) incurred in transactions on the National Spot Exchange Ltd. (NSEL) platform can be treated as a speculative loss or as a legitimate business loss/interest expense deductible against income.

2. Whether the assessment orders were barred by limitation or void ab initio due to procedural or legal infirmities, including the validity of ordering special audit under Section 142(2A) of the Income-tax Act.

3. Whether transaction charges paid by the assessee but not recovered from clients are allowable as business expenditure or liable to disallowance under Section 40(a)(ia) of the Act.

4. Whether the depreciation claimed on a plant is allowable at full rate despite delayed commencement of actual production.

5. Whether debit notes received from related parties, reflecting differences such as trade margins and export expenses, are allowable business expenditures or unexplained/unsubstantiated expenses warranting disallowance.

6. Whether interest disallowance under Section 36(1)(iii) is justified on advances given without charging interest, especially when advances are old and recovery doubtful.

7. Whether unexplained cash credits under Section 68 of the Act are justified on amounts received from NSEL client accounts, considering the nature of transactions and subsequent repayments.

8. Whether business losses claimed on transactions with related parties are genuine or fictitious/speculative, particularly when transactions lack evidence of physical delivery.

9. Whether unexplained sales additions and other cash credits are sustainable or require verification and deletion.

10. Whether disallowance of employee contributions to PF and ESI under Section 36(1)(va) is sustainable in light of binding judicial precedents.

Issue-wise Detailed Analysis

1. Treatment of Loss on NSEL Transactions as Speculative or Business Loss

Legal Framework and Precedents: Section 43(5) of the Income-tax Act defines speculative transactions and disallows losses arising therefrom to be set off against business income. The Court also considered principles of substance over form and the requirement for actual delivery of goods in commodity transactions.

Court's Interpretation and Reasoning: The Assessing Officer (AO) and Commissioner of Income-tax (Appeals) [CIT(A)] initially held that the transactions on NSEL platform were fictitious, involving paired contracts (T+3 and T+36), without actual delivery of goods, amounting to speculative transactions. The loss of Rs.14.42 crores (and similar amounts in other appeals) was thus disallowed as speculative loss.

The assessee contended that these transactions were financial in nature, entered into to raise short-term finance for business needs, and the loss represented the cost of funds (interest), reflected as trading loss in books. The assessee submitted evidence of invoices, VAT payments, bank transactions, and argued that the loss was a genuine business expense.

The Tribunal analyzed the modus operandi of the transactions, noting that although delivery did not take place, the parties were genuine, payments were through banking channels, and funds were used for business purposes. It held that the absence of physical delivery does not ipso facto render the transactions speculative if the underlying purpose was business finance. The Tribunal further observed that the AO's reliance on the form of the transactions over substance was misplaced, particularly since the assessee's books treated these as trading losses and not interest expenses, and the applicability of TDS provisions under Section 40(a)(ia) was not warranted due to the nature of transactions and parties involved.

Key Evidence and Findings: The Tribunal noted the special audit report, survey under Section 133A, statements of the assessee's representatives, bank statements, invoices, and the modus operandi of paired contracts on NSEL. It also considered the fact that the assessee-company was a member of NSEL and utilized the platform for business finance.

Application of Law to Facts: The Tribunal applied the principle that substance prevails over form and that speculative loss under Section 43(5) requires the transaction itself to be speculative. Since the transactions were genuine business finance arrangements, the loss was allowable as business loss.

Treatment of Competing Arguments: The Tribunal rejected the AO's and CIT(A)'s view that the transactions were colorable devices to reduce tax liability, and that the loss was speculative. It also found the AO's reliance on non-deduction of TDS misplaced. The Tribunal accepted the assessee's explanation and evidence on the business purpose and use of funds.

Conclusion: The Tribunal deleted the addition disallowing the loss as speculative and allowed the claim as business loss.

2. Limitation and Validity of Special Audit

The grounds relating to limitation and validity of special audit were not pressed by the assessee and were dismissed accordingly.

3. Disallowance of Transaction Charges under Section 40(a)(ia)

Legal Framework: Section 40(a)(ia) mandates disallowance of expenditure on which tax is deductible at source (TDS) but not deducted.

Facts and Reasoning: The AO disallowed transaction charges of Rs.2,65,865/- due to non-deduction of TDS, confirmed by CIT(A). The assessee failed to prove TDS deduction and the disallowance was upheld.

However, for transaction charges of Rs.1,30,29,338/-, the assessee contended that these charges were incurred but not recovered from clients as a matter of business discretion, and thus allowable as business expenditure. The AO and CIT(A) disallowed the amount on the ground that such charges were recoverable and not recovered, which was not accepted by the Tribunal.

Application of Law: The Tribunal referred to judicial precedents holding that business expenditure is allowable if wholly and exclusively incurred for business, regardless of recovery from clients. The Tribunal held that the assessee's choice not to recover charges was a business decision and the expenditure was genuine.

Conclusion: Disallowance of Rs.2,65,865/- under Section 40(a)(ia) was upheld; disallowance of Rs.1,30,29,338/- was deleted.

4. Depreciation on Plant

The AO and CIT(A) restricted depreciation to 50% on the ground of delayed commencement of production. The Tribunal held that depreciation is allowable at full rate if the plant is ready to use, relying on judicial precedents. The claim for full depreciation was allowed.

5. Disallowance of Debit Notes from Related Parties

Facts: Debit notes amounting to Rs.32.79 crores were raised by NK Proteins Ltd. on the assessee for trade margins, rate differences, and export expenses under a Memorandum of Understanding (MOU). The AO and CIT(A) disallowed the amount as unexplained expenditure, doubting the genuineness of the MOU and treating it as a colorable device to reduce profits.

Assessee's Contentions: The assessee submitted the MOU, correspondence, and explained commercial expediency in the arrangement, noting that NK Proteins Ltd. was a star trading export house entitled to export incentives and that the debit notes reflected genuine business expenses. The amount was offered to tax by NK Proteins Ltd., and the assessee was a BIFR company incurring losses, negating any tax avoidance motive.

Tribunal's Analysis: The Tribunal found the MOU and correspondence credible, the debit notes represented legitimate commercial transactions, and the accounting treatment was correct. It observed that double taxation would result if the amount was disallowed and added back. The Tribunal rejected the AO's and CIT(A)'s adverse inference and allowed the claim.

6. Disallowance of Interest under Section 36(1)(iii) on Advances

Facts: Advances amounting to Rs.12.10 crores were given interest-free to various parties, some of which were doubtful. The AO disallowed interest of Rs.1.45 crores attributable to these advances, holding that the assessee failed to prove business purpose and utilization of borrowed funds.

Assessee's Contentions: The advances were old, given for business purposes, and no new advances were made during the year. Recovery was doubtful, and no interest was chargeable. Reliance was placed on judicial precedents establishing that interest is allowable if capital is borrowed for business purposes.

Tribunal's Reasoning: The assessee failed to furnish cogent evidence proving the business purpose and doubtful recovery. The AO's presumption of non-business purpose was upheld, and disallowance was confirmed.

7. Addition under Section 68 on Unexplained Cash Credits

Facts: Amounts aggregating Rs.244.98 crores were received by the assessee from NSEL client accounts. The AO treated the entire amount as unexplained credit, disallowing it under Section 68. The CIT(A) deleted disallowance to the extent of Rs.192.97 crores paid to NK Corporation but confirmed Rs.52.01 crores as unexplained credit.

Assessee's Contentions: The amounts represented proceeds from sales on NSEL platform and were used for business purposes, including payments to suppliers. The balance amount was paid in the subsequent year, establishing obligation to repay.

Tribunal's Analysis: The Tribunal found that the entire amount was utilized for business payments and the balance was paid in the subsequent year. Treating any part as unexplained credit would amount to double addition since sales were accounted for as income. The Tribunal deleted the addition.

8. Disallowance of Business Loss on Transactions with Related Parties

Facts: Losses of Rs.20.62 crores were claimed on transactions of castor seeds and cotton wash oil with group concerns. The AO and CIT(A) disallowed the loss, treating transactions as speculative and fictitious due to lack of proof of physical delivery.

Assessee's Contentions: Some transactions involved unrelated parties. All transactions were at market rates, with no tax avoidance as related parties were taxable at maximum marginal rates. The assessee requested opportunity to produce evidence.

Tribunal's Decision: The Tribunal found no evidence of delivery or invoices during assessment or remand proceedings. It upheld the disallowance but remanded the issue to the AO for fresh adjudication after giving opportunity to the assessee to substantiate the claim.

9. Disallowance of Purchases and Sales as Non-genuine or Unexplained

Facts: Purchases of cotton wash oil amounting to Rs.59.70 crores were disallowed as non-genuine due to mismatch with sales by NK Proteins Ltd. The AO and CIT(A) rejected the assessee's evidence of delivery and invoices, doubting genuineness.

Assessee's Contentions: The difference represented physical purchases outside NSEL trade cycle, supported by delivery challans and certificates from warehouse authorities. The corresponding sales were accepted by authorities.

Tribunal's Findings: The Tribunal accepted the evidence of physical delivery and corresponding sales, holding that disallowance of purchases when sales are accepted is unjustified. It deleted the addition.

Regarding unexplained sales addition, the Tribunal remanded the issue for verification by the AO.

10. Disallowance of Employee Contributions to PF and ESI

Following binding decisions of the Gujarat High Court and Supreme Court, the Tribunal upheld the disallowance made under Section 36(1)(va).

Significant Holdings

"It is pertinent to note that the test of speculative loss can only be determined when the transaction itself is speculative, but in the present case the transaction was that of payment made by banking channel through account payee cheque for purchase and sale with the seller and buyers who are assessed to tax as per the contentions of the assessee. When the parties that of purchaser and seller are present and not artificial then the said transaction cannot be treated as speculative transaction and the loss incurred thereon cannot be speculative loss."

"The exercise of re-characterization of transactions in the light of statement given by Shri Nilesh Patel should be restricted to only determination of correct taxable income. The relevant purchase and sales transactions were entered into by the assessee-company in order to avail the funds and, therefore, the loss incurred in the said transactions actually represented cost of such funds which was a business loss."

"The transaction charges actually represented additional cost of funds raised by the assessee-company for the purpose of its business and the expenditure incurred on account of the same was wholly and exclusively for the purpose of business of the assessee."

"The entire transaction is commercial transaction and N. K. Proteins Ltd. was entitled to export incentives of Rs. 60.38 crores as the same is a Star Trading Export House and therefore, the buyers will be able to buy from assessee's company. It is an undisputed fact that the assessee company has entered into Memorandum of Understanding for export of its FSG Oil and borne the export expenses as the debit note has been raised by the N. K. Proteins Ltd. for poor quality of FSG Oil on the assessee."

"The entire amount of Rs.244.98 crores was utilized by the assessee-company for making payment against purchase as a part of the trade cycle and consequently even the balance amount of Rs.52.01 crores cannot be treated as unexplained cash credit under Section 68 of the Act merely on the ground that the same had remained unpaid."

"The purchase of 10,180 MT of CWO for Rs.59.70 crores on delivery basis was actually established by the assessee on the basis of supporting evidence and since the corresponding sale of the same was not only proved but the same was also recorded and recognized as income in the books of account of the assessee-company, the purchase cannot be said to be excessive."

"The disallowance made by the Assessing Officer on account of interest attributable to old advances was rightly disallowed as the assessee failed to establish the business purpose and doubtful recovery."

"The disallowance of transaction charges of Rs.2,65,865/- under Section 40(a)(ia) was upheld due to non-deduction of TDS, but the disallowance of Rs.1,30,29,338/- was deleted as the assessee was not obliged to recover the charges from clients."

"The depreciation on plant ready for use is allowable at full rate notwithstanding delayed commencement of production."