TMI Blog2019 (2) TMI 1791X X X X Extracts X X X X X X X X Extracts X X X X ..... pose and, rather, in the interest of his business, enters into these contracts covering the entire sale of Narma for the season 2008-09. It is this basis, based on objective material, that shall provide the economic justification for entering into the agreement/s. It is this, and this alone, that would justify the genuineness thereof. We say so as the absence of any such basis implies self-infliction of loss, which cannot be regarded as incurred in the normal course of business No credit period is specified, so that the supplies, made latest by 15.12.2008, continue, as it appears, to outstand for payment even up to 31.03.2009, with in fact the assessee even financing one of the buyers, so that the payment received, which is from one of them, again, does not form part of the assessee s working capital (system) and, rather, gets deployed for the benefit of the said buyer! Now, could it be that while the assessee is under the contract obliged to, even if at a loss, supply the goods, the same does not carry any corresponding obligation as to payment, making the buyer liable for penal consequences for non-payment within the stipulated credit period? The non-payment, then, is itself a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 lacs and, besides, there are pressing charges (₹ 67,808/-) as well. Though the matter, strictly speaking, should be set aside for verification of these claims, we do not think, given the time that has lapsed since, that any proper purpose would be served by doing so. We also cannot be oblivious to the burden, both on the assessee and the administrative machinery, that accompanies such a restoration, particularly as the same includes third party confirmation/evidences. The assessee s case seems prima facie acceptable, in view of which, as well as to give a quietus to the matter, we direct the allowance of the impugned claims - I.T.A. No. 274/Asr/2014 - - - Dated:- 22-2-2019 - SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER For the Appellant : Sh. Ashwani Kalia (C.A.) For the Respondent : Sh. Charan Dass (D.R.) ORDER Per Sanjay Arora, AM: This is an Appeal by the Assessee agitating the Order by the Commissioner of Income Tax (Appeals), Bathinda (CITA) for short) dated 03.02.2014, partly allowing the assessee s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 ( the Act hereinafter) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of those directions, being not on record, it be said that the same are prejudicial to the assessee, Sh. Kalia would state that the very fact with the addition/disallowance/s, and which are on more than one account, have been effected in assessment, is proof enough of the stated directions, in compliance of which the assessment has been admittedly made (i.e., as per the foot note), are prejudicial to the assessee. His attention was then drawn to the decision in Guduthur Bros. v. ITO [1960] 40 ITR 298 (SC), wherein it stands clarified that where the jurisdiction to the proceedings, as to frame assessment in the instant case, has been validly assumed, an absence or lack of proper opportunity of being heard would amount to an irregularity, a curable defect, rather than a nullity, warranting a set aside back to the stage where the irregularity had occurred or set in. He would, in response, submit that while that may well be true or valid under ordinary circumstances, it cannot be said to be so where the statute specifically mandates for provision of opportunity of being heard prior to the issue of the direction/s by the competent authority. The said decision, he would argue, wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The ld. counsel, Sh. Kalia, would object. The very fact that the tribunal had, on an earlier occasion, required the parties to gather the facts in relation to the impugned direction/s, implies an admission of the additional ground in-as-much as it indicates a prima facie satisfaction of a case being made out and a need to have a closer look at the facts. 3. We have heard the parties, and perused the material on record. In our considered view, the assessee s plea fails on both counts, i.e., the admission of the additional ground, raising a legal issue, as well as on its merits. A legal issue, it is well settled, can be raised at any stage of assessment the appellate proceedings being only a continuation of the assessment proceedings, provided the facts necessary for the purpose of its adjudication are admitted or otherwise not disputed, as where they are borne out by the record (NTPC Ltd. v. CIT [1998] 229 ITR 383 (SC)). In the instant case, it is undisputed that the directions u/s. 144A stood issued by the Jt. CIT, the competent authority, to the AO from time to time during the course of assessment, which was completed following them. The said directions, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the adjustments made to the returned income in assessment, on account of these directions, is both presumptuous and misconceived. Finally, the tribunal had at no stage, i.e., prior to the date of hearing, indicated that the additional ground was or even would be admitted. It only, upon preliminarily hearing the parties in the matter, required them to bring all the relevant facts on record, conscious that the same also impinge on the admissibility of the legal plea being raised. Without prejudice, even granting admissibility, i.e., for the sake of argument, the assessee has not brought on record any material rebutting what stands stated in letter No. 1409 dated 20.12.2011 referred to in the office note. The minimum that the assessee ought to have done is to bring those directions on record, making out of a prima facie case of the same being not, as stated, covered by the ambit of Explanation to section 144A. That is, it is only on the basis of the directions issued u/s. 144A, claimed as prejudicial to the assessee, that he could possibly make out a case both with regard to the admissibility of his legal plea as well as, resultantly, on the merits thereof. In fact, on the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount to a revenue authority having no jurisdiction to assess, but that the assessment was defective for that reason. It did not cease to be proceedings under the Act, though was liable to be corrected on challenge. The said decision, among others, delving on this aspect in different fact-situations, stands followed in CIT v. Jai Prakash Singh [1996] 219 ITR 737 (SC). The matter therefore, where the assessee s claim is admitted, shall accordingly have go back to the stage of providing it opportunity before the competent authority. Reference in this context may be made to the decision in Bhagwat Prasad v. CIT [1988] 232 ITR 480 (All). 4. We, next, proceed to decide the other grounds, i.e., the regular grounds raised in appeal. The facts in relation to Ground 1 are that the assessee, a trader in cotton, cotton seed, cotton seed oil, etc. was observed in the assessment proceedings to have incurred a gross loss of ₹ 7,08,823/- on trading in Narma (raw cotton). It was observed that while the purchases were at different, constantly increasing rates, from ₹ 2850 to ₹ 3404 per quintal, the sale, which was to three parties, as under, was at a fixed rate of ₹ 2700/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y denying the same. The question is of the genuineness of the contract-agreement or otherwise, so that the matching of the accounts, being regarded as paper transactions by the Revenue, is of little consequence. Why should anyone continue to supply goods at a lower rate/s despite constantly increasing price in the market, i.e., at a loss, which needs to be satisfactorily explained, and has not been. None of the parties have confirmed the contract/s, further causing a serious doubt on its genuineness. 5.2 Our first observation in the matter is that the question as to whether the loss claimed by the assessee is genuine or not is principally and essentially a question of fact, which would include inference/s drawn from the fact/s proved/found. As regards the law in the matter, loss in only negative income. Just as trading operations could result in profit, as is usually the case, it could as well in loss, as in situations of adverse movement in the market price/s, etc. As such, where incurred in the ordinary course of business, i.e., shown to be so, the same has to be allowed. Our purview as an appellate authority, therefore, is to examine if the assessee, on whom the primary burd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it to be, leaving it to the whims and fancy of the assessee-supplier, in which case, on the contrary, there could be no production management. This is further fraught with another hazard. The assessee, considering the constant increase in prices, may, in a bid to control or minimize his loss, make a higher (disproportionate) supply in the initial month/s. The buyer, whose capacity may not be elastic, being unable to pay, for which in fact, and again surprisingly, time is not provided, would result in blocking of the assessee s working capital, impairing his capacity to make further supplies under the contract. On the other hand, if the assessee perceives the market rate to decline in time, i.e., with the progress of the season, he may, to curtail his loss or maximize his profit, defer the supply to as late as possible, throwing topsy turvy the buyers production schedule. In short, the non-specification of the supply schedule (over the contract period) is not consistent with the business reality and, in fact, carries ominous consequences for both the sides. Thirdly, as afore-noted, no payment schedule (credit period) is specified. How could the payment be open ended? Fourthly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s at which it is made that would prove the assessee s case. That he has been unable to establish the delivery of the goods makes his case that was weaker; in fact, a non-starter. 5.3 As regards the rate of supply, i.e., assuming it (supply) despite being not established as a fact, the principal issue, as afore-stated, is the purpose or the economic logic or reason guiding or motivating the contract, which has nowhere been stated or explained. Where the same is to optimize the profit or, in any case, safeguard against loss that may arise, it can safely be said to have been incurred in the regular course of business and, thus, allowable in computing business income. No such business purpose or economic reason has been shown to have guided the business decision in assuming such disproportionate risk by bearing market volatility over the next few months comprising the season. Why? One could also understand where such similar long position in the past had resulted in gain. It has not even been shown that the buyers insisted on the seller assuring the seasons supply at a fixed rate/s, in which case this would be a regular feature of the trade, i.e., of the other suppliers in the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract is for ₹ 13.50 lacs. Even assuming the entire of it, as stated, a trade debt, there has been no or little recovery. Clearly, there is more to the transactions than meets the eye. 5.4 Though there is no clear finding by the AO/ld. CIT(A) on this, it appears that there is no mismatch in the accounts of the assessee with the trade debtors inas- much as their orders are silent on this. The entries in the books of account are, however, not conclusive where the genuineness of the arrangement, purportedly entered into between them, is in doubt, as in the present case. If the agreement is a make-believe or collusive, what value the entries in the books of account recording the transaction/s entered in pursuance thereof? That none of the parties confirmed the agreement is in fact surprising; and we agree with the ld. CIT(A) that the onus to cross-examine them, being only his witnesses, was on the assessee. Even otherwise, lack of opportunity to cross examine, i.e., assuming so, would only warrant a set aside back for the purpose of the said cross examination (ITO v. M. Pirai Choodi [2011] 334 ITR 262 (SC)). 5.5 In sum The genuineness of the transactions, on the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is from one of them, again, does not form part of the assessee s working capital (system) and, rather, gets deployed for the benefit of the said buyer! Now, could it be that while the assessee is under the contract obliged to, even if at a loss, supply the goods, the same does not carry any corresponding obligation as to payment, making the buyer liable for penal consequences for non-payment within the stipulated credit period? The non-payment, then, is itself a ground enough for the assessee to rescind the agreement, which is clearly a make-believe, being without any sense of (business) purpose or proportionality. In fact, even the delivery is not proved, which though important in-as-much as it only will prove (narma) sale, is in the final analysis not determinative of the matter. We, for the reasons afore-stated, find no infirmity in the disallowance of the assessee s claim of business loss on the sale of narma (₹ 7.08 lacs) by the Revenue. We decide accordingly. 6. The second ground relates to the disallowance of interest on borrowed capital to the extent of ₹ 54,750/- u/s. 36(1)(iii). The disallowance was effected in the absence of the assessee furnishing any b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of 80.12% by borrowed capital. The interest disallowed is on proportionate basis, i.e., in proportion to the period each amount comprising ₹ 16.50 lacs outstands during the year. The assessee shall get further relief, i.e., to the extent of 19.88% thereof on account of being financed by trade liabilities and own capital, both being non-interest bearing. This in fact takes a liberal view of the matter inasmuch as credit for the entire profit for the year arising during the year; in fact, during the season which falls in the latter part of the year, stands allowed. We decide accordingly. 7. Grounds 3 and 4 relate to the disallowance of ginning charges and depreciation, claimed at ₹ 2,40,072/- and ₹ 2,37,262 respectively. The same being inter-related are taken-up together. The assessee having traded in narma and cotton, i.e., as such, the AO found no basis for the claim of ginning charges. In other words, the assessee being a trader, what had the ginning charges been paid for remained unanswered. The assessee, in appeal, explained to have got 3000 quintals of the 20,972 quintals of cotton waste ginned and pressed from outside, as he did not have any pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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