2025 (6) TMI 1762 - AT - Income Tax

Revision u/s 263 - Disallowance of loss claimed at NSEL - CIT(A) held that the assessee has entered into circular transactions which are clearly represent nongenuine trade and such losses cannot be allowed to be set off against business income - HELD THAT - As in its own case 2022 (11) TMI 885 - ITAT AHMEDABAD wherein similar loss was allowed as business loss/finance loss. As rightly contended on behalf of the assessee-company 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 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. Decided in favour of assessee. Addition on account of paper/fictious purchase of castor seeds - CIT(A) deleted addition - HELD THAT - The assessee has submitted purchase details along with stock register for goods received at Chandisar and Kadi location which in fact prove that assessee has received such goods at such premises. The castor seeds purchased during the year are either used for crushing for production of oil and oil cake or subsequent sales and such details are apparent from stock register as well as relevant schedules of Audited Annual accounts already on record of Assessing Officer as well as Special Auditor. The castor seeds purchases in its books of account with other purchases made from various parties in books of account and aggregate purchase value shown in purchase register tallies with amount shown in Profit Loss account. The sales register along with stock register which clearly proves that part of above referred purchases were sold. When Assessing Officer has not doubted purchase quantity sale quantity books results manufacturing process there is no reason for treating entire purchase value as income of assessee. The assessee has in fact made payment against such purchases and the proofs have been submitted viz. copies of obligation report of NSEL for such purchase value and payments have in fact been made through HDFC Settlement Account. The assessee had submitted relevant bank details along with bank vouchers in support of its claim. Hence we decline to interfere with the order of the Ld. CIT(A). Revenue on this ground is dismissed.

2022 (11) TMI 885 - AT

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeals before the Tribunal were:

(a) Whether the loss amounting to Rs. 72,67,098/- claimed by the assessee on transactions carried out on the National Spot Exchange Limited (NSEL) platform is a genuine business loss or a fictitious loss arising from paper transactions without actual delivery of goods, and whether such loss can be allowed as a deduction against business income under the Income-tax Act, 1961.

(b) Whether the addition of Rs. 23,02,44,592/- made by the Assessing Officer on account of alleged paper/fictitious purchases of castor seeds through the NSEL platform is justified, or whether the purchases were genuine delivery-based transactions and the addition should be deleted.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance of loss claimed at NSEL amounting to Rs. 72,67,098/-

Relevant legal framework and precedents: The provisions of the Income-tax Act, 1961, specifically Section 43(5) (which deals with deeming provisions for speculative transactions) and Section 73 (which relates to speculative business losses), were applied by the Assessing Officer to disallow the loss claimed. The Tribunal's earlier decision in the assessee's own case for AY 2011-12 (ITA No. 328/Ahd/2017) was cited as precedent, where similar losses on NSEL transactions were held to be business losses representing cost of finance and not speculative losses.

Court's interpretation and reasoning: The Assessing Officer and the Commissioner of Income-tax (Appeals) (CIT(A)) held that the transactions on NSEL were paper transactions without actual delivery of goods, entered into to create artificial losses. The transactions involved paired contracts (T+3 and T+36) on the same platform with different settlement dates and prices, resulting in losses claimed by the assessee. The Assessing Officer found that such circular transactions were used to generate fictitious losses, which cannot be allowed as business losses or set off against other income.

The CIT(A) emphasized that the platform was misused and that the losses were not genuine since both buyers and sellers benefitted and there was no evidence that the income of the counterparty was offered to tax. The assessee's contention that the losses represented financial cost of short-term financing was rejected due to lack of supporting evidence and the nature of transactions.

However, the Tribunal referred to its earlier decision in the assessee's own case for AY 2011-12, where it was held that:

The transactions were entered into to avail finance for business requirements.
The losses represented the cost of funds and were business losses, not speculative losses.
The transactions were executed through banking channels with payment made by account payee cheques.
The circular nature of transactions was established but the Tribunal accepted the assessee's explanation that the transactions were genuine for financing purposes.
The absence of interest element in the accounts was noted, but the Tribunal accepted that the loss represented finance cost and not speculation.
The Tribunal also rejected the applicability of TDS provisions on the cost of finance in these transactions.

Key evidence and findings: The evidence included transaction details on NSEL, purchase and sale quantities and amounts, the nature of contracts (T+3 and T+36), and the absence of actual delivery of goods. The assessee's explanation that the transactions represented short-term financing was supported by the manner of payments and the financial accounting treatment. The Tribunal relied heavily on the earlier order in the same assessee's case, which had comprehensively examined similar facts.

Application of law to facts: The Tribunal applied the principles established in the earlier decision, holding that the loss was a business loss representing finance cost and not a speculative loss under the Act. The disallowance under Sections 43(5) and 73 was therefore not sustainable.

Treatment of competing arguments: The Assessing Officer and CIT(A) viewed the transactions as artificial and paper-based, denying genuineness of losses. The assessee argued the losses were genuine finance costs incurred to raise short-term funds using NSEL platform. The Tribunal accepted the assessee's view based on the earlier precedent and the absence of contrary evidence.

Conclusions: The appeal on this issue was allowed, and the loss of Rs. 72,67,098/- was held to be allowable as business loss, not speculative loss.

Issue (b): Addition of Rs. 23,02,44,592/- on account of alleged paper/fictitious purchase of castor seeds

Relevant legal framework and precedents: The Assessing Officer relied on the Special Audit Report and provisions under the Income-tax Act to treat the alleged paper purchases as income under the barter system, since payment for goods was not made from the assessee's own bank accounts but through NSEL settlement accounts. The burden was on the assessee to prove the genuineness of purchases and payments.

Court's interpretation and reasoning: The Assessing Officer held that the castor seeds worth Rs. 23.02 crore were received without corresponding payments from the assessee's own bank accounts, and the transactions were settled through NSEL accounts, amounting to barter transactions and thus income to the assessee. The assessee contended that purchases were made under Farmers contract on actual delivery basis, supported by purchase invoices, stock registers, obligation reports, and payment details through NSEL settlement accounts.

The CIT(A) examined the evidence and found that:

Purchases of castor seeds were genuine and physically received at the assessee's locations.
The quantity and value of castor seeds purchased tallied with the books of accounts and stock registers.
The castor seeds were either used for crushing or sold subsequently, as reflected in stock and sales registers.
Payments were made through the NSEL settlement account and supported by bank vouchers and obligation reports.
The Assessing Officer did not dispute the physical receipt or usage of the goods.

Accordingly, the CIT(A) deleted the addition made by the Assessing Officer.

Key evidence and findings: The key evidence included purchase invoices, stock registers, sales registers, audited annual accounts, obligation reports from NSEL, bank vouchers evidencing payments, and special audit reports. The physical receipt of goods at specified locations was also confirmed.

Application of law to facts: The Tribunal noted that since the Assessing Officer did not challenge the genuineness of purchase quantities, sales quantities, or manufacturing process, there was no basis to treat the entire purchase value as income. The payments made through NSEL settlement accounts were accepted as valid payments for purchases, not barter transactions.

Treatment of competing arguments: The Revenue argued that the transactions were paper transactions and payments were not made from the assessee's own accounts, thus constituting barter income. The assessee demonstrated that the purchases were genuine, physically received, and payments were duly made through NSEL accounts. The Tribunal accepted the assessee's evidence and rejected the Revenue's contention.

Conclusions: The appeal of the Revenue was dismissed, and the addition of Rs. 23.02 crore was deleted.

3. SIGNIFICANT HOLDINGS

On the issue of loss claimed on NSEL transactions, the Tribunal held:

"...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."

Further, the Tribunal observed:

"...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."

On the issue of addition on account of alleged paper purchases of castor seeds, the Tribunal concluded:

"It is undisputed fact that assessee has made purchase of castor seeds worth Rs 23.02 crore (8323.475 MT) under farmers contract during the year... The castor seeds purchased during the year are either used for crushing for production of oil and oil cake or subsequent sales and such details are apparent from stock register as well as relevant schedules of Audited Annual accounts... When Assessing Officer has not doubted purchase quantity, sale quantity, books results, manufacturing process, there is no reason for treating entire purchase value as income of assessee."

The Tribunal thereby established the principle that transactions carried out on the NSEL platform may be considered genuine business transactions if supported by cogent documentary evidence of delivery, payment, and usage, and that losses arising from paired transactions intended as finance cost may be allowed as business losses rather than speculative losses.

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