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TMI Blog2022 (11) TMI 885X X X X Extracts X X X X X X X X Extracts X X X X ..... ti Proteins Pvt. Ltd. is against the order of the CIT(A)-7, Ahmedabad dated 12/03/2018 for AY 2011-12. Since these appeals filed in the case of assessees belonging to the same group involve some common issues, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First we take up ITA No.328/Ahd/2017 for AY 2011-12 in the case of N.K. Proteins Pvt. Ltd. and the grounds of appeal raised therein are as under: 1. On the facts and in the circumstances of the case, the CIT(A) has erred in not accepting Appellant's plea that the order passed by the Ld.CIT(A) is bad in law and void ab initio. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have accepted that assessment order was barred by limitation. 3. On the facts and in the circumstances of the case, the learned CIT(A) is not correct in observing that the Assessing Officer had right reasons to believe that special audit was required in the given case. 4. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred by confirming the Assessing Officer's decision that the loss of Rs.14,42,91,136/- is speculative in natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly inflate turnover, Special Audit of the books of accounts of the assessee-company for the year under consideration was ordered under Section 142(2A) of the Act by the competent authority. Due to financial irregularities and default in payments to investors, the NSEL was investigated by various Government agencies. In this connection, the assessee-company being member of NSEL and its group concerns were also surveyed under Section 133A of the Act by the Investigation Wing of the Income-tax Department on 22.08.2013. After taking into consideration the survey report as well as Special Audit Report and the submission made on behalf of the assessee on the relevant issues, the following observations/findings, as summarized in paragraph No. 7.19 of the assessment order, were recorded by the Assessing Officer:- "a. The assessee group is closely linked with NSEL. b. Though NKPL claimed to a broker for NSEL in effect all transactions done by it were done for the entities of the NKP group only. Thus the charade of being a broker was created only to mask the true nature of the transactions entered into by the group entities on the NSEL platform. c. These was systemic misuse of the NSEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and the Assessing Officer was not justified in treating the same as speculative loss:- "5. Regarding addition on account of trading transactions on NSEL platform and loss incurred at Rs. 14,42,91,136/-. 5.1 The Assessing Officer in para 4 of the assessment order has referred trading practice of the commodities on NSEL i.e. National Spot Exchange Ltd. It is stated that as per the mechanism the sellers of a particular commodity brings their goods to the godown operated by National Spot Exchange and get receipt online for such goods and thereafter they can sell the receipt to the buyer online, the buyer will pay the amount and on producing the receipt they can get the material. It is stated that the buyer can also sell the receipt to other buyer. According to him there is supposed to be a settlement cycle for the commodities to be traded on NSEL. It is stated by the AO that the buyer was supposed to pay the money to the seller for the entire lot to be purchased by him on the date of settlement of the cycle. However, in reality, it did not happen and quantity of goods was never delivered. The cycle was settled by repayment of whole amount of money back to the buyer i.e. the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions were not supported by the delivery of goods. The appellant had, therefore, explained before the AO that :- i) the transactions were entered into through NK Proteins, broker of the NSEL and that transactions are basically in the nature of financial transactions. ii) The appellant had entered into sale and purchase of both. The sale and purchase invoices with quantity details, VAT charged were submitted and it was also explained that the VAT was paid by the appellant. iii) it was explained that the transactions were entered into with a view to avail finance for the business requirements of the appellant and that the loss represented the cost to garner funds to run business, which is reflected as trading loss as above. iv) It was explained that the assessee company was in the need of finance and trading facility available on NSEL attracted the appellant to enter into such transactions, so that the appellant was having finance available for its business and thus there was no intention for incurring loss. v) The transactions were entered into with the market rate and were entered into on the NSEL platform. vi) the payment is made by banking channel through acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm, without actual delivery of goods. (para 7.14) ii) There was no real transaction of purchase and sale but the transactions were given to obtain the funds from the investor on short term basis. (para 7.15 & 7.16) iii) If the appellant's contention that it is a finance transaction, is accepted, it represents interest element which is not reflected in the accounts. It is stated by the AO that if it is a finance transaction as stated by the assessee, the tax should have been deducted at source on the interest and as per provisions of section 40(a)(ia) the payment is required to be disallowed in absence of deduction of tax. It is stated that apart from furnishing the details of payment out of funds received from NSEL, the assessee has not given fund flow statement. (para 7.17) iv) The loss so incurred without delivery of goods cannot be set off against the regular business income. As it is an arrangement by the assessee with the help of NSEL to get the funds, according to him the same is not the normal business transaction. v) Therefore, according to the AO, arrangement made is colourable device to reduce tax liability in connivance with NSEL and the said loss cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost. It was explained that the appellant had obtained the funds for the purpose of its business, and hence, the cost is admissible as business expenditure. In the light of the above facts, the AO's observation that there was no actual transfer of goods i.e. purchase or sales is not material for admissibility of the claim. What is important is that it represents cost for the use of the funds as explained herein above which is for the purpose of business, and hence, it is admissible. It may be seen that the AO has also noticed this fact inasmuch as he has accepted that the transactions were made to obtain funds from investors on short term basis which support appellant's contention, (para 7.16 & 7.18) As regards the AO's observation about not debiting any interest to the profit and loss account, it may be noticed that as stated above it represents difference between the purchase and sales price of transaction. Therefore, it is considered as trading loss in the books, hence there is no question of debiting the same as interest in the accounts Moreover, as will be observed from the example given herein above the receipt of proceeds from sale are from a different enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt such as the substance of transaction should be considered and not the form of the transaction. Further, the appellant has tried to blame NSEL that it was that promoted the appellant to enter into such trading transactions. The books of accounts audited by the special auditor also reflect that the appellant itself has considered these transactions as trading transactions and not financial transactions. The A.O has rightly held that the loss arising out of these transactions is a fictitious loss in nature. Therefore, the A.O has concluded that such transactions cannot be considered as part of its normal business and hence the loss incurred is nothing but an arrangement between NSEL and the appellant and it is the colourable device to reduce its tax liability. Finally, at para 7.18the A.O has given the finding that the transactions conducted on the NSEL platform concluded without physical delivery and hence the Joss incurred is speculative loss. Such a speculative loss cannot set off against the normal business income. Accordingly, the A.O has disallowed Rs.14,42,91,136/-. I completely agree with the contention of the A.O. It is apparent that the books of accounts maintained by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the assessee entered into transactions with NSEL as broker which were basically of financial nature. The modus operandi followed by NSEL to enter into sales and purchase transactions and related to same invoices were prepared with quantitative details. The VAT is also charged on purchases and sales and wherever VAT is payable, it is actually paid by the assessee. The assessee-company has entered into the trading transactions with NSEL with a view to avail finance for the business requirements and the loss represents the interest cost reflected as trading loss in the financial statements. The Ld. AR submitted that there was no intention on the part of the assessee to declare the losses. The assessee-company was in need of finance and the NSEL prompted the company to enter into such trading transactions. There was no intention to book the loss since such loss is nothing but the interest. It is only modus operandi followed by NSEL. Thus, in substance, the trading loss represents the interest expenses on the finance availed from NSEL for the business purposes. The transactions of purchase and sales are actually entered at market rate and the settlement of the same has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r every deal and conceptually NSEL was set up as an online trading platform for a number of commodities and each commodity as its delivery locations at NSEL designated warehouse or accredited godowns. But as per information the said platform was misused. Client of M/s. N. K. Proteins Pvt. Ltd. submitted that M/s. N. K. Industries Ltd. executed T+3 contract in the electronic platform of NSEL whereby N. K. Industries Ltd. sold 100 kg. of castor seeds to another prospective investor/client of another broker of NSEL for Rs. 100/-. The another prospective investor client of NSEL in turn executes T+36 trade contract on the electronic platform of NSEL whereby it sells the castor seeds to another client of M/s. N. K. Proteins Ltd. such as M/s. N. K. Corporation which is an associate concern for Rs. 110/-. Thereafter, the associate concern i.e. M/s. N. K. Corporation carry out intragroup sale back to M/s. N. K. Proteins Ltd. to square off the sale/purchase transactions and to maintain the stock position. All these three transactions were executed simultaneously and after the above set off of circular transactions, M/s. N. K. Proteins Ltd. has to receive the amount on the 3rd day from prospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghtly 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. As regards the applicability of TDS provision, the learned Counsel for the 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 finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-company for transactions on NSEL platform in connection to caster seeds, soya bean seeds, castor oil and cotton wash oil. Although it was submitted on behalf of the assessee that such transaction charges were not debited to the profit and loss account, the Assessing Officer found that the same were debited and included in the purchases. In this regard, it was explained by the assessee that it was not obligatory on its part as a broker to recover the transaction charges from the clients. It was also pointed out that as per the consistent practice followed by the assessee-company, the transaction charges were never recovered from the clients and the same, therefore, were debited to the purchase account as forming part of the purchase price. The Assessing Officer did not find this contention of the assessee-company to be acceptable. According to him, the 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 of Rs.1,30,29,338/-. 11. The disallowance made by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that this contention of the Assessing Officer is not correct. It is the discretion of the businessman as to how the transactions are to be carried out. Whether the transaction charge paid by it to the Exchange are to be recovered or not, is the discretion of the assessee and the AO cannot ask the assessee to carry out the business as per his opinion. It is held by courts the revenue cannot justifiably claim to put itself in the arm-chair of businessmen and no businessmen can be compelled to maximize his profit. See CIT vs. Dalmia Cement 254 ITR 377 (Delhi). Further, it may be noticed that he has no-where established with any practice prevailing in this business that such transaction charges are liable to be recovered." 11.1 The submission made by the assessee in support of its case on this issue did not find favour with the learned CIT(A) who proceeded to confirm the disallowance made by the Assessing Officer on account of transaction charges for the following reasons given in paragraph No.9.2 of his impugned order:- "9.2 I have carefully considered the facts of the case, contention of the appellant as well as the case law relied upon by the appellant. It is observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, since there was no requirement of TDS, it should have been allowed as deduction as rightly claimed by the assessee. He submitted that the factum and quantum of the expenditure incurred by the assessee towards transaction charges was not disputed by the authorities below and disallowance was made merely because the assessee did not recover the same from the clients. He contended that there was no obligation to recover the said charges from the clients and the assessee choose to bear the same as a matter of business expediency. In support of assessee's case on this issue, he relied on the submission made on behalf of the assessee before the learned CIT(A) as reproduced in paragraph No.9.1 of the impugned order. He also relied on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Khambhatta Family Trust, reported in [2013] 215 Taxman 602 (Guj.), to contend that for the allowability of any expenditure the requirement is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily. 13. The learned DR, on the other hand, relied on the impugned order of the learned CIT(A) in support of the Revenue's case on this issue an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the concerned plant was restricted by the Assessing Officer as well as by the learned 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. As rightly submitted by the learned Counsel for the assessee by relying on the relevant judicial pronouncements including the decision of Hon'ble Gujarat High Court in the case of ACIT Vs. Ashima Syntex Ltd, reported in [2001] 251 ITR 133 (Guj.), 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. 16. Thus, ITA No. 328/Ahd/2020 is partly allowed. 17. Now, we take up ITA No.329/Ahd/2017 for AY 2011-12 in the case of N.K. Industries Ltd. and the grounds of appeal raised therein are as under: 1. On the facts and in the circumstances of the case, the CIT(A) has erred in not accepting Appellant's plea t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. 18. At the time of hearing before us, the learned Counsel for the assessee has not pressed Ground Nos. 1 to 3 raised by the assessee in this appeal; the same are accordingly dismissed as not pressed. 19. As regards Ground No.4 raised by the assessee in this appeal, it is observed that the issue involved therein relating to disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged speculative loss is similar to the issue raised in Ground No.4 of the appeal filed in the case of N.K. Proteins Pvt. Ltd. (supra) being ITA No.328/Ahd/2017. Since all the material facts relevant thereto as well as the arguments of both the sides are similar to the case of N.K. Proteins Pvt. Ltd. (supra), we follow our conclusion drawn in the case of N.K. Proteins Pvt. Ltd. (supra) and decide the issue involved in Ground No.4 in favour of the assessee. 20. As regards the issue involved in Ground No.5 of this appeal relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of debit notes received by the assessee from N.K. Proteins Ltd by treating the same as unexplained expenditure, the material facts relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a result of the exports made by us and we shall bear all the export expenses as stated by you. (5) Any export incentives that may realize as a result of the exports in overseas market shall belong to NKPL (6) NKPL shall bear all the export expenses such as transportation from factory at Kadi to Kandla Port, storage charges for storing the castor oil and derivatives at Kandla port, if any. (7) Taxes and duties, ocean freight, if the contract is CIF etc. 5.5 There is exchange of correspondence between NKIL and NKPL and there is MOU dated 20-04-2010 entered into by NKIL and NKPL [copy enclosed] 5.6 From the MOU, it may please be seen that the entire transaction is commercial transaction and that NKPL is entitled to export Incentives of Rs. 60.38 Crore since NKPL is a star trading export house and therefore the buyers would feel comfortable to buy from NKPL At the same time NKPL has borne the entire export expenses of Rs. 32.78 Crore. The break-up of such expenses is enclosed [Page No._____]. 5.7 It may please further be noted that if export incentives do not belong to the NKPL than the entire transaction is not profitable in case of NKPL in as much as if it is ignored th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot tenable. Because the statement of the assessee is in contravention as it has credited the sums in its books of account on account of poor quality of FSG Oil. Further, according to para 6 of the MOU it is clearly evident that the Export expenses are to be borne by the NKPL only. ii) The assessee contended that the debit notes were issued as per the MOU dated 20.04.2010 as per correspondence exchanged between NKIL and NKPL. On perusal of the copy of the MOU furnished by the assessee, it is noticed that the MOU has been signed by Shri Kamlesh L. Patel, Whole time Director in NKPL and Shri Ashvin P. Patel, Whole Time Director in NKIL. Since both of them are not the Managing Directors of the respective companies, the MOU signed by them has no significance in deciding the business policies. Further, the MOU has been executed on plain paper which is not notarized or registered document. Thus the MOU is of no worth to substantiate the contention of the assessee. iii) Further, on perusal of the related party details and copies of ledger accounts submitted by the assessee vide submission dated 03.11.2014, it was noticed that the assessee has credited Rs.18,18,62,275/- on 28.02.2011 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) in support of its case. "i) As explained before the AO, the debit notes are issued in terms of the MOD i.e. agreement between the parties. Merely because MOD is on plain paper it does not justify the rejection of the claim made by NKPL by issue of debit notes. The appellant submits a copy of the chart furnished by the special auditor with their report and copies of debit notes for ready reference. The details/break up of chart so amount by debit notes is as under: Sr. Particulars Amount (Rs) 1. Trade margin at 1% of value. 7,96,84,259 2. Rate difference 23,26,66,952 3. VAT at 4%. 1,24,94,048 4. Additional VAT at 1%. 31,23,512 Total of Debit Notes:- 32,79,68,772 It may be noted that the debit note is on account of trade margin i.e. commission @ 1% and such trade margin is being charged in the course of normal business practice. Further amount represents rate difference charged by NKPL in terms of the MOU. As stated before the AO, as per understanding between the parties, the profit/loss on the goods so sold to NKPL which may arise to them on further sale by them for export would be belonging to the appellant. Thus, any difference betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax liability when there is an increase in loss in an already loss making entity, vis-a-vis an increase in profit in a profit making entity. Accordingly, the very argument of the Assessing Officer goes against his logic. iv) Having regard to the above explanation, the entire disallowance made by the AO is based on presumption of the special auditors and it has been made on account of irrelevant presumption. The debit notes are as stated above, on genuine MOD and genuine commercial understanding between parties. The addition may please be deleted." 20.4 The learned CIT(A) did not find merit in the submissions made on behalf of the assessee on this issue and proceeded to confirm the addition made by the Assessing Officer by disallowing assessee's claim on account of debit notes raised by NKPL vide paragraph no. 8.2 of his impugned order as under :- "8.2 I have carefully considered rival contentions and observations made by the A.O. in the assessment order. It is observed that the A.O has made an addition of Rs.32,79,68,772/- as unexplained expenses on account of debit note received from N.K. Proteins Ltd. At para-8 of the order of assessment the A.O has mentioned that as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f poor quality of FSG oil to NKPL in respect of export expenses is not tenable. Further, according to the A.O the appellant has debit note received from NKPL towards the poor quality of FSG oil on 2872/2011 and 31/3/2011. The A.O at page-24 has reproduced the scanned copies of the books of accounts for its support. The special auditor has also given the observations on this issue. The special auditor too has observed that the amount of Rs. 18,18,62,275/- on 28/2/2011 an amount of Rs. 14,61,06,496/- on 31/3/2011 were reflected as debit note for poor quality of FSG oil in the books of the appellant. The calculation done by the special auditor reflects that the debit note has been raised for trade margin of 1%, Further on the trade margin and rate difference amount in the debit note, 5% of VAT is also charged which has resulted into total debit note of Rs. 32,79,68,772/-. According to special auditor this transaction of debit note has helped the appellant to file the BIFR status of sick company. The whole transaction of debit note has resulted into loss of Rs. 32.80 crores to the appellant. The special auditor has also doubted and considered the debit note as a colourable device to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual realization from exports will be finally adjusted. He submitted that debit/credit notes were accordingly issued by NKPL for the difference between the amount of invoices raised by the assessee and the amount actually realized through exports and the same were duly accounted for by the assessee-company in its books of account. He contended that the net amount of such credit/debit notes amounting to Rs.32.80 crores accordingly was debited by the assessee-company in its books of accounts and the said amount was already offered to tax by NKPL as its income. He invited our attention to the Memorandum of Understanding entered into by the assessee-company with NKPL and submitted that the same was duly acted upon by both the parties. He submitted that even VAT was also charged by NKPL on the said debit notes. He contended that all these vital aspects were brought to the notice of the learned CIT(A) by the assessee in the written submission filed before him, but he proceeded to upheld the findings of the Assessing Officer without appreciating the case of the assessee. He also invited our attention to the details of credit/debit notes issued by NKPL and submitted that the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer the price difference. The said difference, going by the nature thereof, was adjusted by the assessee-company in the books of account against sales and the authorities below, in our opinion, were not justified to doubt the genuineness of the debit/credit notes on the basis of this accounting treatment given by the assessee-company which actually was correct. Moreover, the 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. Keeping in view all these facts and circumstances of the case, we are inclined to accept th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the learned CIT(A) and the following submission was made on behalf of the assessee in support of its case that the disallowance made by the Assessing Officer on account of interest was not sustainable. "8.1 The Assessing Officer has stated that the appellant had given advances to 13 parties of the aggregate amount of Rs.12,09,89,234 and that, therefore, the appellant was asked to show cause as to why the interest should not be disallowed. The appellant's reply has been reproduced by the Assessing Officer in which it was stated that the out of 13 parties, 9 parties are such that recovery from those parties were doubtful and that, therefore, appellant had made provisions for doubtful debts with reference to balances of such parties. The appellant had submitted copies of accounts of those parties, which represented old balances and classified as doubtful debts in the balance sheet. It was, therefore, stated that there was no question of considering the interest income or receiving any interest income on such sticky advances. The Assessing Officer was, therefore, requested not to take any adverse view u/s.36(1)(iii) of the Act. The appellant had also explained the nature of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t advances made to the 13 parties are for other than business purpose and on such assumption made impugned addition of interest without appreciating the circumstantial evidences. Here it would not be out of place to go into the various judicial decisions establishing the ratios for the purpose of allowing deduction for the interest paid by the appellant. The Supreme Court in the case of Madhav Prasad Jatia v. CIT (1979) 118ITR 200 has laid down at page 208 asunder: "....... we may point out that under s. 10(2)(iii), three conditions are required to be satisfied in order to enable the assesses to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assesses, (b) that it must have been borrowed for the purpose of business, and (c) that the assesses must have paid interest on the said amount and claimed it as a deduction. ......" The principle of law after going through following decisions is that that once it is found that the capital is borrowed for the purposes of business, the appellant is entitled to claim the interest paid thereon as deduction u/s. 36(i)(iii) of the Income-tax Act regardless of the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the following reasons given in paragraph No. 9.2 of his impugned order:- "9.2 I have carefully considered the rival contentions, observation of the A.O as well as the case law relied upon by the appellant. It is observed that the A.O has made an addition of Rs, 1,45,18,708/- u/s.36(1)(iii) of the Act. The appellant has given interest free advances to 13 different persons for a total amount of Rs, 12,09,89,234/-. According to appellant out of these 13 persons the advances given to 9 persons as mentioned by the A.O at para-9.2 of the order of assessment are sticky advances and are doubtful as far as their recovery is concerned. On failure of the appellant to establish that the sums advanced were for the business purposes only, the A.O has disallowed the interest at the rate of 12% per annum on these interest free advances amounting to Rs.1,45,18,708/- u/s.36(1)(iii) of the Act. During the appellate proceedings the appellant has submitted that the advances given to 9 persons as mentioned by the A.O are difficult to be recovered, therefore, these advances are doubtful. During the appellate proceedings the appellant could not produce any argument or cogent evidence to substantiat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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. 30. As regards the issue raised in Ground No.7, the learned representatives of both the sides have agreed that the issue raised therein relating to the disallowance made by the Assessing Officer and confirmed by the leaned CIT(A) on account of employees' contribution to PF and ESI is squarely covered against the assessee by the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation, reported in 366 ITR 170 (Guj.), 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. 31. As regards the issue raised in Ground No.8 relating to the addition made by the Assessing Officer under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions on NSEL are concerned; and, therefore, its claim of having received a huge amount in question against the paper transactions without making any sales to anyone was not acceptable. He accordingly treated the amount of Rs.244.98 crores in question as unexplained cash credit and made addition to that extent to the total income of the assessee under Section 68 of the Act. 31.1 The addition made by the Assessing Officer under Section 68 of the Act was challenged by the assessee in an appeal filed before the learned CIT(A) and the following submission was made on behalf of the assessee-company in support of its case on this issue. "7. Regarding addition of Rs.244,98,04,635/- on account of payment received from NKPL - NSEL Client A/c. 7.1 This issue has been raised by the Assessing Officer as per para 12 of the assessment order. It is observed by the AO that the appellant company had undertaken transactions of castor seeds, castor oil and cotton wash oil on NSEL with the Member of NSEL viz NKPL. It is stated by him that NKPL has received the payment from NSEL in HDFC, NSEL Client A/c being A/c. No. 00076340013639 and from this account, the appellant NKIL has received Rs.244,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of incurring expenditure. It is stated by the AO that the appellant had given the statement of use of funds from the books of NKIL, Tirupati Proteins. The AO has again referred to liability of the group company to NSEL at Rs.384 crores as against the claim by NSEL of Rs.969 crores. The appellant had explained before the AO that the payment was received from NSEL client settlement account to NKPL by actual transfer of funds through bank or Obligation Report. The AO states that the contention of the appellant are contradictory, inasmuch as, it has explained that the actual money received was paid and in the second time it was added to the funds received through bank or Obligation Report." 31.2 The above submission made by the assessee was forwarded by the learned CIT(A) to the Assessing Officer for his comments. In the remand report dated 08.07.2016 submitted to the learned CIT(A), the Assessing Officer offered his comments as under:- "2. The assessee's request under Rule 46A is with reference to their submissions against the addition of Rs.244,98,04,635 made in the assessment order u/s.68 of the Act, holding that the said amount represents unexplained credits received in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under T+36 contract from the purchasing party of NKIL and it has to pay on the settlement date, after 36 days. The assessee pays to NK Corporation the purchase consideration on the expiry of T+36 contract. V) Similar contracts are being entered into and the funds are received as per T+3 contract which are repaid as per T+36 contract. VI) For the above purpose, NK Proteins also maintains margin account of certain percentage of value of transaction on NSEL 3.1 The transactions so entered into were to raise temporary funds. However, there was no co-relation of sales and amount transferred from NKPL client A/c. to the assessee's bank account. The assessee has explained that in the above trade cycle, the assessee has to make payment to NKC from whom they have made the purchases in the trade cycle. The amount has been paid against the sales made through NKPL as broker in NSEL and against that amount NSEL had made payment in the Settlement Account of NKPL and from that account NKPL has transferred the funds to NSEL Client A/c and from such account the assessee has received funds. The assessee has further stated that as observed by the Auditor against the amount of Rs.244.98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is a credit balance of NKC in the books of the assessee which assessee has made payment in the subsequent year. However, the fact remains that during the year under consideration, the assessee has made payment to NKC of Rs. 192.97 crores only and balance amount has not been utilized for payment against purchases during the year. 5. The above facts are found from the details furnished by the assessee along with the bank statement. 6. During the course of hearing, I have also perused the trade cycle explained by the assessee by which they have entered into alleged transaction of sales & purchases on sample basis. In those cases, the assessee has made sales on NSEL through NKPL in T+3 contract. On test check, it is also seen that the same quantity of goods are purchased by NKC from NSEL platform in T+36 transaction. NKC has thereafter made sales of the same quantity of goods which is purchased by them to the assessee company. Thus, the quantity of sales made by the assessee and purchases made in the cycle is the same." 31.3 When the remand report submitted by the Assessing Officer was confronted by the learned CIT(A) to the assessee, the latter submitted its rejoinder th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has further stated that A as observed by the Auditor against the amount of Rs.244.98 crores received from NKPL Client A/c they have paid Rs.205.86 crores to NKC from whom they have made purchases as reported in the Special Audit Report. Thus, it is stated that the funds are received on account of sales and it is utilized for the purpose of bus/ness. The funds are raised through trade cycle for the purpose of business and that assessee has also repaid the funds in the trade cycle by making payment to NKC who has made the sales. This has been explained by giving details as under:- i) Reference is made to the Special Auditor Report page 22 to 26 wherein it is reported that the funds of Rs.244.98 crores are received by the assessee from NKPL Client A/c and against the same, the payment is made to NKC. Here, the assessee has in the course of remand proceedings explained that the correct amount of the funds paid to NKC during the year against the purchases is Rs. 193.86 crores, and there is mistake in the figure taken in the Audit Report to the extent of Rs. 12 crores. This is verified from the bank statement and also from account of NKC. ii) The assessee has further given a chart an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er considering the entire material available on record including the submission made by the assessee, the remand report submitted by the Assessing Officer and the rejoinder made by the assessee, the learned CIT(A) decided the issue vide paragraph no. 12. 3 of his impugned order as under:- "12.3 The A.O has observed at para-4 of the remand report that it has made a payment of Rs. 192.97 crores out of receipt of Rs. 244.98 crores to N.K. Corporation. Thus, it is seen that the appellant has received Rs. 52.01 crores from the NSEL client account during the year under consideration for which it had no repayment obligation. It is seen earlier that the transactions entered into by the appellant on NSEL platform were in the nature of paired contracts. There was no physical delivery of goods involved in these paired contracts. The A.O has mentioned in the remand report that the appellant has made a payment of the remaining amount to N.K. Corporation in the subsequent years. However, in the remand proceedings the obligation on the appellant to repay back Rs. 52.01 crores has not been established at all. In absence of such obligation the quantum of Rs. 52.01 crore is the receipt of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard both the sides and perused all the relevant material available on record. It is observed that the amount of Rs.244.98 crores received by the assessee-company from NSEL client against sale was substantially paid towards the purchases made. Since such payment to the extent of Rs.192.97 crores was made by the assessee during the year under consideration as found by the Assessing Officer on verification, the learned CIT(A) deleted the addition of Rs.244.98 crores made by the Assessing Officer to the extent of Rs.192.97 crores. He, however, sustained the balance addition of Rs.52.01 crores on the ground that the same was not paid by the assessee-company. It appears that the learned CIT(A), however, completely ignored the fact that this balance amount of Rs.52.01 crores was carried over to the next year and the same was paid by assessee-company to NKPL in the subsequent year as found by the Assessing Officer himself on verification. It is thus clear that 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 cores cannot be treated as unexpla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deserves to be deleted. 37. At the time of hearing before us, the learned Counsel for the assessee has not pressed Ground Nos. 1 & 2 raised by the assessee in this appeal; the same are accordingly dismissed as not pressed. 38. As regards the issue raised in Ground No.3, it is observed that the issue involved therein relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged speculation loss is similar to the issue raised in Ground No.4 of the appeal filed in the case of N.K. Proteins Pvt. Ltd. (supra) being ITA No.328/Ahd/2017. Since all the material facts relevant thereto as well as the arguments of both the sides are similar to the case of N.K. Proteins Pvt. Ltd. (supra), we follow our conclusion drawn in the case of N.K. Proteins Pvt. Ltd. (supra) and decide the issue involved in Ground No.4 in favour of the assessee. 39. As regards the issue raised in Ground No.4 of this appeal relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of assessee's claim for business loss of Rs.20,62,50,456/-, the relevant facts are that the assessee-company had undertaken transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise, in case your good selves are desirous to take adverse view then also, there would be no ultimate benefit to the revenue authorities as in case of the assessee, only loss to a certain extent would be reduced in case of the assessee company and there would still be loss and hence no taxable income would be there in case of the assessee whereas the other group concerns are in profit which would turn into losses and / or reduce the taxable income making them liable to pay lesser amount of tax. Looking at the above explanation, it will be noticed by your good selves that the assessee had no control over the prices that it fetched as a result of the transactions entered into by it with TPPL. NKC and NKPL and therefore, the contention of Special Auditor that it is paper loss is factually erroneous." 39.1 The submission made by the assessee was not found acceptable by the Assessing Officer. According to him, the assessee-company could not provide any supporting evidence relating to the alleged sale or purchase transactions with group/associated concerns in respect of which the trading loss of Rs.20,62,50,456/- was claimed. He held that the said transactions were effected without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transactions are duly with group concerns was incorrect. It was also explained before the Assessing Officer that the transactions were taken at the market rate and the price fluctuation depends on market dynamics. It was the business decision to enter into such transactions and the appellant had no control over the market fluctuations taking place. It was also explained before the AO that there was no intention of diversion of profit by the assessee company since both the concerns, i.e., group concerns and are liable to pay taxes at the maximum marginal rate. Hence, there was no tax planning or tax avoidance. However, the Ld. Assessing Officer has not appreciated the above contention and stated that during the course of special audit, the appellant had not provided any transport evidence relating to purchase/sale of the material with sister concern on which such loss has incurred. He has also held that transaction is speculative in nature and the loss cannot be allowed for set off on the ground that the transaction is without physical delivery and that it is covered by the provision ofSec.43(5) and Sec.73 of the IT. Act. 4.3 With reference to the above addition, it m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KCH for providing the various services plus 5%. The costs towards services provided to the assessee were allocated on the basis suggested by a firm of CAs. The AO disallowed a part of the charges reimbursed on the ground that they were excessive and not for business purposes which was upheld by the CIT (A). However, the Tribunal deleted the disallowance on the ground that there was provision to disallow expenditure on the ground that it was excessive or unreasonable unless the case of the assessee fell within the scope of s. 40A (2). It was held that as it was not the case of the Department that s. 40A (2) was attracted, the disallowance could not be made. The department challenged the deletion, HELD dismissing the SLP: "The Authorities below have recorded a concurrent finding that the said two Companies are not related Companies under s. 40A (2). As far as this SLP is concerned, no interference is called for as the entire exercise is a revenue neutral exercise. Hence, the SLP stands dismissed. For other years, the authorities must examine whether there is any loss of revenue. If the Authorities find that the exercise is a revenue neutral exercise, then the matter may be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is an undisputed fact that transactions of various commodities were concluded by the appellant and its group concerns without actual physical delivery and therefore the issue being covered by Section 43(5) read with Section 73 of the Act as being speculative los and was disallowed by the AO. The appellant on the other hand claimed that it had also entered into transaction with concerns other than its group concerns which were not related parties. 9.2.1 It is seen from the submission made by the appellant and the remand report sent by the AO that the appellant has not provided any proof of the actual delivery of commodities either during the course of special audit, during the assessment proceedings or during remand proceedings. Even during the appellate proceedings, while it has been claimed that trading was carried out with other concerns as well, no evidences in the form of documents, copies of bills/invoices, payment details or proof of delivery have been furnished. In view of these facts, I am inclined to agree with the decision taken by the AO that transactions were completed without physical delivery, and therefore the same were speculative in nature. The addition of Rs.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar to the case of N.K. Industries Ltd. (supra) ,we follow our conclusion drawn in the case of N.K. Industries Ltd. (supra) and delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on this issue. Ground No. 5 of assessee's appeal is accordingly allowed. 44. As regards Ground No.6, it is observed that the issue raised therein relating to the addition made by the Assessing Officer under Section 68 of the Act and confirmed by the learned CIT(A) is similar to the issue raised in Ground No.8 of the appeal filed in the case of N.K. Industries Ltd. (supra) being ITA No.329/Ahd/2017. Since all the material facts relevant thereto as well as the arguments of both the sides are similar to the case of N.K. Industries Ltd. (supra) ,we follow our conclusion drawn in the case of N.K. Industries Ltd. (supra) and decide the issue involved in Ground No.6 in favour of the assessee. 45. As regards the issue raised in Ground No.7, the learned representatives of both the sides have agreed that the issue raised therein relating to the disallowance made by the Assessing Officer and confirmed by the leaned CIT(A) on account of employees' contribution to PF and ESI is squar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erves to be deleted. 48. At the time of hearing before us, the learned Counsel for the assessee has not pressed Ground Nos. 1 & 2 raised by the assessee in this appeal; the same are accordingly dismissed as not pressed. 49. As regard the issue involved in Ground No.3 relating to the addition made by the Assessing Officer and confirmed by the learned CIT(A) on account of unexplained cash credit under Section 68 of the Act, it is observed that the amount of Rs.108.97 crores in question was received by the assessee-company on account of transaction of sales made on NSEL through NKPL. Although the transactions on NSEL were made by the assessee-company for raising finance for the purpose of business as claimed by it, the relevant sales of 108.97 cores were duly accounted for by the assessee-company in its books of account as income. As rightly contended by the learned Counsel for the assessee, the amount in question received against such sales which was duly accounted for in the books of account and recognized as income by the assessee-company; therefore, cannot be treated as unexplained cash credit under Section 68 of the Act. Treating the said amount as income of the assessee under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase by TPPL as per the chart to the extent of RS. 59.70 Crore. In fact, there is no difference as is seen from the quantity tally as per books of TPPL and NKPL reproduced below: Purchases M.Tons Amount Rs. In Crore Sales M.Tons Amount of Rs. in Crore Purchase from NSEL through NKPL 249737.98 1290.73 Sales to NSEL Parties 259917.98 1350.43 Purchase from NKPL 10180.00 59.70 Total: 259917.98 1350.43 Total: 259917.98 1350.43 From the above, it is seen that the difference of Rs. 59.70 Crore represents the purchase from NKPL which is not considered by the special auditor. The quantity and value is reconciled above. Therefore there is no question of any addition." 50.1 The assessee also furnished sales invoices and delivery challans to support and substantiate its explanation. A certificate from Shree Rajkot Lodhika Sahkari Kharid Vechan Sangh Ltd. dated 18.11.2014 was also filed by the assessee confirming that the CWO had actually been delivered by the assessee to the concerned parties. The assessee also submitted soft copy of purchase and sales register in excel format to prove the transactions of purchase and sales and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of 25,99,17,979. Thus, there was no difference. The appellant had also explained that the sales of 10,180 MT was made to different parties, details of which were given and are reproduced on page 21 of the assessment order. 6.3 The appellant had before the AO explained that this 10,180 MT was sold in physical form and that the stock so sold was lying with Rajkot Lodhika Sahkari Kharid Vechan Sangh at Rajkot, wherein they have confirmed chat this physical delivery was received by them on behalf of the respective parties. It was also explained that the amount for sale of Rs.59.82 crores received by way of obligation report and banking channels. Cotton Wash Oil Purchases Sales Qty. (Kg) Amt (Rs) Qty. (Kg) Amt(Rs) NSEL Transactions 59917979 13504310147 259917979 13505517944 Group Concerns 2254615 90184600 28339674 1384341016 STC/PEC 0 0 2253034 87868326 Other parties 39531040 1978430127 11202265 597988134 Total 301703634 15572924874 301712952 15575715420 The Assessing Officer has, however, not accepted the said contention. He has referred to details of total purchase and sale of cotton wash oil by appellant which as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit the account of IBMA for payment received from and on behalf of other parties. Therefore, the submission of the assessee about payment received from various parties is not accepted. vii) The Certificate from Rajkot Lodhika Sahkar Kharid-Vechan Sangh to support delivery of goods filed with AO which is referred to earlier, is also not held to be reliable on the ground that it does not mention the tank number against the stock lying for cotton wash oil und, that the particulars of warehouse of the Sangh for the storage. He has also stated that the certificate does not mention the confirmation of the parties. There is no movement of the stock from warehouse. The certificate was submitted at the fag end of the year and, therefore, verification was not done. viii) With the above discussion, it is ultimately held that the appellant has booked purchases from NKPL in excess of the sales actually made by the NKPL to the appellant and the assessee has not reconciled the actual sale & purchase carried out on NSEL platform. 6.4 In this connection, the appellant submits as under:- i) The Assessing Officer has referred to purchases shown by the assessee from NKPL which were sold on NSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer has incorrectly made the addition for the alleged excess purchase shown by the appellant from NKPL, which is based on assumption that on NSEL the sales made are without delivery. The addition so made deserves to be deleted." 50.3 The learned CIT(A) did not find merit in the submission made by the assessee and proceeded to confirm the addition made by the Assessing Officer on account of the alleged non-genuine purchases for the following reasons given in paragraph No. 10.2 of his impugned order:- "10.2 I have carefully considered the assessment order facts of the case and the submissions made by the appellant. It was noted by the AO during the course of assessment proceedings that the appellant had undertaken transactions of CWO through NKPL on the NSEL platform. He noted that as per the said audit report, the appellant had shown purchases of CWO from NKPL amounting to Rs. 13,50,43,10,147/- (weighing 259917979 kgs) whereas on cross verification, it was seen that NKPL had shown sale of CWO to the appellant amounting to Rs.12,90,73,51,619/- [weighing 249737981 kgs). Thus, the appellant i.e. Tirupati Proteins Pvt. Ltd. (TPPL) had shown excess purchases amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -book respectively and submitted that the corresponding sales made by the assessee-company out of purchases in question were duly supported by documentary evidence in the form of relevant invoices - copies of which are placed at page nos. 199 to 240 of the paper-book. He contended that when the corresponding sales duly accounted for by the assessee-company were accepted by the authorities below, there was no justification on their part to doubt the genuineness of the purchases from which the said sales were made and disallowed the said purchases. 52. The learned DR, on the other hand, relied on the orders of the authorities below in support of the Revenue's case on this issue. 53. We have heard both the parties and perused all the relevant material available on record. It is observed that the transactions of 10,180 MT of CWO for Rs.59.70 crores was through actual delivery of goods and it was not a part of trading cycle effected by the assessee-company through NSEL for raising finance. As submitted on behalf of the assessee-company, NKPL was having one functionary unit at Rajkot Lodhika Sahkari Kharid Vechan Sangh, situated at Rajkot and they had sold 10,180 CWO to the assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel 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. 55. As regard the issue raised in Ground No.6 of this appeal relating to the addition of Rs.10,04,170/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of unexplained cash credit, the learned Counsel for the assessee has submitted that the said amount actually represented realization of sale proceeds as explained on behalf of the assessee before the authorities below. He contended that the same, therefore, cannot be treated as unexplained cash credit and Section 68 of the Act has no application. We find merit in this contention of the learned Counsel for the assessee and since the learned DR has not been able to dispute the position that the amount in question represented sale proceeds realized by the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 16.11.2022 while mentioning the amount of disputed addition in the ground of appeal, i.e. Ground No.6, wherein it has been wrongly typed as Rs.66 crores instead of Rs.85 crores. In support of the same, learned Counsel for the assessee has placed on record copy of Form No. 36 filed by the assessee in ITA No.1211/Ahd/2018 and submitted that the order may be modified rectifying the aforesaid mistake. 3. We find that there was indeed a typographical mistake crept in on page No.53, in paragraph No.36, of the order dated 16.11.2022 passed by the Tribunal in ITA No.1211/Ahd/2018 for AY 2012-13 in the case of M/s. N.K. Industries Ltd. The mistake, which is apparent from the record, is required to be rectified; and, we accordingly rectify it as under:- Ground No. 6 in Para 36 on page No.53 mentioned earlier in the order:- "36 ... ..... ..... 6. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in confirming the addition of Rs.66 crore made by the Ld. Assessing Officer and the same is not warranted." The same should now be read as follows :- "36 ..... ..... ..... 6. In law and in the facts and circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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