TMI Blog2020 (11) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as a result of revaluation has to be allowed to the assessee being arising in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y x Value) 1 Deepak N.Dholakiya PAN-ABJPC0536B 795.785 22300 17746006 2 Jugal 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd delivery of the material loan to the parties is without any substance, more particularly when there is no such voucher for the repayment of silver, transportation of the silver etc. 4.2 In view of the above the AO held that the entire flow of transaction is nothing but a colorable device to create such fictitious loss which is not allowable as held by the Hon ble Supreme Court of in the case of Mc Dowell Co. Ltd. Vs. Commercial Tax Officer reported in 22 Taxman 11. Accordingly the AO disallowed the loss of ₹ 6,14,20,769/- claimed by the assessee by way of making book entries in the manner as described above and determined the income of the assessee at ₹ 1,11,92,998/- only. Aggrieved assessee preferred an appeal to the learned CIT (A). 5. The assessee before the learned CIT (A) submitted that it has taken a material loan 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the resultant income is also shown by the respective parties in their personal return of income. In the scrutiny assessments made in the case of the appellant for AY 2009-10 to 2011-12, the claim of payment of usance charges is also allowed by the AO and therefore, there cannot be any dispute about the receipt of material loan. At Clause 2 of the said agreement, it is provided that the Fine Silver Loan shall be repaid in terms of material only. Further, at Clause 4, it is stated that the Fine Silver Loan is granted for a fixed term of 3 years from the date of lending and early repayment would attract certain amount of penalty as specified therein. When the loan is procured, it is debited to Trading account and credited to Party Silver Loan account at the prevailing market price as on the date of procurement of such loan. 3.7. It is also seen that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide order dated 15.12.2016 has accepted the same as Trading Liability. Thus, it has been consistently accepted as Trading Liability by the AO in all scrutiny assessments since A. Y.2009-10, except for the year under appeal. Considering the issue in appeal on principle of consistency, it is crystal clear that except for the year under appeal, in all the preceding years the same has been treated as Trading Liability and accepted by the AO. On totality of the facts and circumstances of the case and on due appreciation of the materials and evidences on record and following the ratios laid down in the cases of Radhasoami Satsang v/s CIT [1992] 193 ITR 321/60 Taxman 248 (SC) and Deputy Commissioner of Income-tax, Bharuch Circle v/s Gujarat Narmada Valley Fertilizers Co. Ltd. [2014] 42 taxmann.com 438 (Gujarat) and Wielding Rods Mfg. Co. v/s Commissioner of income Tax 93 Taxman 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re we are not inclined to repeat the same for the sake of brevity and convenience. 9.1 At the threshold, we note that the documents filed by the assessee as per the direction of the bench cannot be treated as additional documents. It is because the assessee at its own has not filed these documents in the form of additional documents. Therefore, we hold that these documents filed at the instance of the bench cannot be categorized as additional documents. 9.2 Besides the above, we also find that there are other documents, other than the so called additional documents as alleged aforesaid, available on record which are sufficient to decide the issue on hand. Hence, we do not find any reason to set aside the order to the file of the AO for fresh adjudication. 9.3 Admittedly, the assessee has taken the material loan from the related parties as specified under section 40A(2)(b) of the Act, which 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 pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in nature. 10.4 If the assessee takes the material loan which was utilized for the business activities of the assessee. 10.5 The assessee shall make the following entries on the receipt of material loan and purchase of the material: (i) Purchase Dr. To Loan Cr. 10.6 In the above entries the loan shall be shown in the liability side of the balance sheet under the head current liabilities or loan liabilities depending upon the nature of loan. But if it is the cash credit from the bank, then it has to be classified under the head current liability. However, in either case the undisputed fact is that the impugned loan has been utilized for the purpose of business activity of the assessee. 10.7 The purchase account shall be shown on the debit side of the trading account being an item of revenue in nature. 10.8 In any of the situation described above, the undisputed fact is that the loan liabilities whether material loan/cash loan was utilized for the purpose of the business activities of the assessee. In the present case the assessee was able to carry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the present facts and circumstances. 11.1 It is also pertinent to note that the assessee was supposed to revalue material loan at the end of each accounting year but he has not done so. But that does not mean that the assessee is not entitled for such loss claimed in the year of repayment. However, we find that the assessee in the year under consideration has revalued the fresh loan obtained by it at the end of the year as on 31 March 2012 and booked a gain as business income amounting to ₹ 49,28,802/- which was accepted by the Revenue. 11.2 The assessee also claimed to have filed provisional accounts as on 28.03.2015 wherein an income of ₹ 3,04,25624.00, on account of revaluation of material loan has been credited and advance tax has been accordingly on such income. On perusal of the financial statement as 31-3-2015, available on record, we find that the assessee has declared an income of ₹ 4,35,90,952.00 in the income tax return after incorporating the above income. Thus in our view the loss incurred by the assessee on the same item in the year under consideration is eligible for deduction. 11.3 Thus what is transpired that the Revenue on one ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration, it is seen that there was an opening stock of fine silver weighing 3343.27 kg. 12.2 Thus it is inferred that the above quantity of the silver was available with the assessee which was utilized for making the repayment of silver loan by showing the sales in its books of accounts. Thus the entire fresh material loan taken by the assessee during the year cannot be said to have adjusted against the initial loan taken by the assessee. 12.3 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. However, the assessee contention is that it has handed over the material loan to the parties by hand. In the given facts and circumstances, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd. , and did not have the benefit of the House of Lords's pronouncement in Craven , the view taken by the Madras High Court appears to be correct and we are inclined to agree with it. 12.8 Further, we also note that Hon ble Jurisdictional High Court in case of Banyan And Berry Vs. Commissioner Of Income Tax (222 ITR 831) held that tax planning within the law is permissible and only if any transaction which is reducing the tax liability cannot be regarded as a colourable device. The court also discussed the meaning of colourable device and case of McDowell Co. Ltd vs. Commercial tax officer (supra) in detail. The relevant extract of the order is read asunder: From the aforesaid, it is apparent that on the factual aspect the Court was considering the case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, something device, arrangement, plan, contrivance, a plot or a trick. Black's Dictionary refers to device as contrivance, a scheme, trick. Subterfuge - according to ordinary meaning as per the Shorter Oxford English Dictionary - means that to which one refers for escape or concealment. Subterfuge on historical principles means, an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals aclue. So also the expression dubious refers to a doubtful or of questionable character. That is to say what has been deprecated as tax planning for avoidance of tax are those acts which have doubtful, or questionable character as to their bona fide and righteousness. Not all legitimate acts of a taxpayer which in ordinary course of conducting his affairs a person does and are under law he is entitled to do, can be branded of questionable character on the anvil of McDowell(supra). We are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to colorable device, a dubious method or subterfuge to avoid tax and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mal circumstances; Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried illegally. As the transaction in the instant case were within the ambit of the law as nothing being illegal/illegitimate was brought to our notice. (iv) These individual transactions create an effect which is contrary to human probabilities; Ans. The transactions carried out by the parties were very much normal transaction. (v) Whether actions of the parties finally are at variance with the terms of the agreement; Ans. There was no variance in the impugned transaction with regard to the terms of the agreement. 13.1 In view of the above we hold that the impugned transaction cannot be regarded as colourable device merely on the reasoning that there is reduction in the tax liability in the hands of the assessee. Accordingly, after considering the facts in totality, we do not find any infirmity in the order of the learned CIT (A) and thus we confirm the same. Hence the ground of appeal of the Revenue is dismissed. 14. In the result, the appeal of the Revenue is dismissed. Order pronounced in Open Court on 31- 08- 2020 - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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