2010 (3) TMI 1073 - AT - Income Tax

Tribunal disallows business loss claim due to lack of evidence & procedural lapse.

M/s. Monika India Versus The Income Tax Officer, Ward-12 (2) (1), Mumbai

The Tribunal upheld the disallowance of the business loss of Rs. 43,45,978/- claimed by the assessee, emphasizing that the evidence and circumstances ... - Issues Involved:1. Disallowance of business loss of Rs. 43,45,978/- claimed by the assessee.2. Violation of natural justice due to the absence of cross-examination of witnesses.3. Examination of the genuineness of transactions and surrounding circumstances.Detailed Analysis:1. Disallowance of Business Loss:The assessee, a partnership firm engaged in trading raw wool, synthetic waste, and acrylic fiber, declared a loss of Rs. 58,81,580/- in its return for the assessment year 1996-97. The Assessing Officer (AO) scrutinized the return and disallowed a business loss of Rs. 43,45,978/-. The AO observed that the assessee purchased raw wool at Rs. 210/- per kg but sold it at significantly lower prices (Rs. 127/- to Rs. 165/- per kg), which was unusual and not justified by market conditions. The AO issued a show-cause notice and found discrepancies in the assessee's explanations and documents, including the absence of a written agreement and inconsistencies in the fax message from Suvidha Woollen Mills. The AO concluded that the loss claimed was not genuine and disallowed it.2. Violation of Natural Justice:The assessee appealed to the CIT(A), arguing that the AO relied on statements from third parties without allowing cross-examination, violating natural justice. The CIT(A) directed the AO to provide an opportunity for cross-examination, but due to various reasons, including the unavailability of witnesses, the cross-examination did not occur. The CIT(A) upheld the AO's decision, noting that the assessee failed to substantiate the loss and that the statements of the witnesses, even if not cross-examined, indicated no depression in the raw wool market.3. Examination of Genuineness and Surrounding Circumstances:The Tribunal examined whether the disallowance of the loss was justified despite the procedural lapse. It noted that the assessee consistently purchased raw wool at higher prices and sold it at lower prices, which was not indicative of normal business conduct. The Tribunal found that the assessee could not provide a convincing explanation for these transactions, nor did it incur expenses typically associated with retail sales, such as salaries or labor charges. The Tribunal also considered the conduct of the assessee and the surrounding circumstances, including the pattern of booking losses to offset substantial interest income in subsequent years. The Tribunal concluded that the claim of loss failed the test of human probabilities and the normal course of human conduct.Conclusion:The Tribunal upheld the disallowance of the business loss of Rs. 43,45,978/-, dismissing the appeal filed by the assessee. It emphasized that while the procedural lapse regarding cross-examination was acknowledged, the overall evidence and circumstances justified the disallowance. The Tribunal applied the principles of human probabilities and the surrounding circumstances to determine the genuineness of the transactions, ultimately finding the assessee's claim to be unsubstantiated and contrary to normal business practices.