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Issues: (i) Whether the disallowance of loss by rejecting the books of account and treating the sales loss as bogus was sustainable; (ii) whether the disallowance of interest expenditure on the ground of diversion of borrowed funds to interest-free advances was sustainable.
Issue (i): Whether the disallowance of loss by rejecting the books of account and treating the sales loss as bogus was sustainable.
Analysis: The assessee maintained audited books, supported transactions by bills, vouchers and banking channels, and the Revenue did not establish any specific defect, suppression of consideration, or sham transaction. The issue was covered by the assessee's own case for an earlier year, where similar losses were held to be genuine. The prior view that market volatility and business pattern could not by themselves justify treating the loss as artificial was followed.
Conclusion: The disallowance of loss was not sustainable and the addition was deleted in favour of the assessee.
Issue (ii): Whether the disallowance of interest expenditure on the ground of diversion of borrowed funds to interest-free advances was sustainable.
Analysis: The assessee contended that its own and interest-free funds were sufficient to cover the advances. The governing principle applied was that where interest-free funds are sufficient, a presumption arises that the advances were made from such funds and not from borrowed money. The matter, however, required factual verification of the fund position by the Assessing Officer.
Conclusion: The issue was restored to the Assessing Officer for fresh verification and adjudication, resulting in partial relief to the assessee.
Final Conclusion: The loss addition was deleted, while the interest disallowance was remanded for verification of availability of own funds, leaving the assessee partly successful.
Ratio Decidendi: A trading loss supported by regular books, documentary evidence and banking entries cannot be disallowed merely on suspicion or assumed market pricing without proving sham or understatement; and interest-free advances are presumed to come from own funds where such funds are sufficient, subject to factual verification.
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