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2023 (8) TMI 1641 - HC - Income TaxLosses arising from the transactions carried out by National Spot Exchange Limited ( NSEL ) - Assessee has carried out such transactions without affecting any physical delivery either of purchase of the goods or sale thereof which is a prerequisite for carrying out the transaction on NSEL - ITAT concluded that the finance was availed for the business purpose and the loss claimed is not the speculative loss - HELD THAT - Having heard learned advocates for both the sides and without entering into the merits of the matter and considering the facts of the matter question-(a) is admitted as the same is based upon the concurrent funding of fact which was reversed by the Tribunal and the same requires consideration. Appeal is ADMITTED for consideration of Question- a . Disallowance of the transaction charges which are embedded in the cost price of the goods purchased by the assessee on NSEL and accordingly debited to profit and loss account only on the ground that the assessee was required to recover the same - ITAT held that the transaction charges were 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 - HELD THAT - On finding of fact arrived at by the Tribunal question No.(b) is dismissed. Disallowance with regard to the depreciation - ITAT holding that the assessee is entitled to depreciation at full rate as the concerned plant was ready to use on 27.09.2010 - HELD THAT - Tribunal has arrived at finding of fact as rightly submitted by 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 AO to allow depreciation on the said plant at full rate as claimed by the assessee.
1. ISSUES PRESENTED and CONSIDERED
The Court considered the following core legal questions arising from the impugned order of the Income Tax Appellate Tribunal (ITAT) for assessment year 2011-12: (a) Whether the ITAT erred in holding that the finance was availed for business purposes and the loss claimed was not speculative, despite evidence that the transactions on the National Spot Exchange Limited (NSEL) platform were paper trades without physical delivery, and were in fact meant to avail short-term finance; (b) Whether the ITAT erred in allowing the deduction of transaction charges as business expenses, even though these charges were embedded in the purchase cost of commodities and thus indirectly debited in the profit and loss account, and the Assessing Officer had disallowed the same on the ground that such charges should have been recovered from clients; (c) Whether the ITAT erred in allowing depreciation at the full rate on a plant claimed to be ready for use on 27.09.2010, despite production having commenced only on 02.10.2010, thereby justifying only 50% depreciation as held by the Assessing Officer and CIT(A). 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Nature of Transactions on NSEL and Claim of Loss Relevant Legal Framework and Precedents: The issue revolves around the characterization of transactions on NSEL as genuine business transactions versus paper trades intended solely for availing finance. The legal principle involves distinguishing between speculative losses and business losses, with the requirement that for a loss to be allowable, the transaction must be bona fide and not a mere device for financing. Court's Interpretation and Reasoning: The Revenue argued that the transactions were not genuine purchase and sale but were executed only to avail short-term finance, without physical delivery of commodities, as admitted by the assessee and evidenced by statements including that of Shri Nilesh Patel. The Revenue contended that such transactions should be treated as speculative and losses disallowed. The assessee contended that the transactions were duly recorded in books, payments were made through banking channels, and the loss claimed was legitimate business loss. The Court admitted this question for consideration, noting that the ITAT had reversed concurrent findings of fact made by the Assessing Officer and CIT(A), who had disallowed the loss. The Court emphasized that this issue involves concurrent findings of fact and requires detailed examination beyond the scope of the present appeal. Key Evidence and Findings: The statement of Shri Nilesh Patel admitting the nature of transactions as paper trades for finance, absence of physical delivery, and the accounting treatment in the assessee's books were crucial facts. Application of Law to Facts: The Court recognized that the question involves determining whether losses claimed arise from genuine business transactions or speculative trades designed to obtain finance. The reversal of concurrent findings by the ITAT necessitates scrutiny. Treatment of Competing Arguments: The Court balanced the Revenue's assertion of non-genuine transactions against the assessee's contention of bona fide business dealings recorded in books and payments made through banking channels. The Court did not decide on merits but admitted the question for detailed consideration. Conclusion: The Court admitted Question (a) for consideration, indicating that the correctness of the ITAT's reversal of concurrent findings on the nature of transactions and loss claim requires further examination. Issue (b): Allowability of Transaction Charges as Business Expenditure Relevant Legal Framework and Precedents: The principle for allowability of business expenditure is that the expense must be wholly and exclusively incurred for business purposes. The Gujarat High Court's decision in Khambhatta Family Trust was cited, which held that business expenditure need not be recovered from clients to be allowable. Court's Interpretation and Reasoning: The Assessing Officer disallowed transaction charges on the ground that the assessee did not recover these charges from clients, thus questioning their allowability as business expenses. The ITAT found that the transaction charges were actually paid by the assessee and were not disputed. The decision not to recover these charges was a business expediency, and the charges represented additional cost of funds raised for business purposes. The ITAT relied on the principle that expenditure wholly and exclusively incurred for business is allowable, regardless of recovery from clients. Key Evidence and Findings: The undisputed fact that transaction charges were paid/incurred by the assessee, and the absence of any obligation to recover the same from clients, were central to the finding. Application of Law to Facts: The ITAT applied the legal principle that business expenditure need not be recovered to be allowable, concluding that the transaction charges were legitimate business expenses. Treatment of Competing Arguments: The Revenue's argument based on non-recovery was rejected as the decision not to recover was a matter of business expediency and did not affect the allowability of the expenditure. Conclusion: The Court dismissed Question (b), affirming the ITAT's finding that the transaction charges were allowable business expenses. Issue (c): Depreciation Claim on Plant Ready for Use Relevant Legal Framework and Precedents: Depreciation is allowable at full rates once an asset is ready to be put to use. The Gujarat High Court's decision in ACIT vs. Ashima Syntex Ltd. was cited, which held that the date of readiness for use, not the date of actual production, governs depreciation claims. Court's Interpretation and Reasoning: The Assessing Officer and CIT(A) restricted depreciation to 50% on the ground that production started after 30.09.2010, though the plant was ready for use on 27.09.2010. The ITAT held that since the plant was ready to use on 27.09.2010, the assessee was entitled to depreciation at full rate. Key Evidence and Findings: The production report showing actual production start date, the plant's readiness date, and judicial precedents on depreciation were key to the decision. Application of Law to Facts: The ITAT applied the principle that readiness for use triggers full depreciation entitlement, regardless of the date production commenced. Treatment of Competing Arguments: The Revenue's argument based on delayed production start was rejected in light of the plant's readiness and relevant case law. Conclusion: The Court dismissed Question (c), upholding the ITAT's direction to allow depreciation at full rate. 3. SIGNIFICANT HOLDINGS The Court's crucial legal reasoning and final determinations include the following: On Issue (a), the Court stated: "Without entering into the merits of the matter, and considering the facts of the matter, question-(a) is admitted as the same is based upon the concurrent finding of fact which was reversed by the Tribunal and the same requires consideration." This preserves the principle that concurrent findings of fact warrant careful scrutiny before being overturned. On Issue (b), the ITAT's reasoning was preserved verbatim: "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 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." This establishes that business expenditure need not be recovered from clients to be allowable. On Issue (c), the ITAT's finding was also preserved: "The assessee is entitled for depreciation at full rate as the concerned plant was ready to use on 27.09.2010 itself... 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." This confirms that readiness for use, not actual production commencement, determines depreciation entitlement. Final determinations: - Question (a) concerning the nature of NSEL transactions and loss claim is admitted for consideration, requiring further examination of the reversal of concurrent findings. - Questions (b) and (c) concerning allowability of transaction charges and depreciation claim are dismissed, affirming the ITAT's findings in favor of the assessee.
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