High sea sales of edible oil not speculative under section 43(5) with proper delivery and title transfer

The ITAT Chandigarh held that high sea sales transactions involving edible oil were not speculative under section 43(5) as goods were ultimately delivered to the final buyer through proper transfer of title documents and physical delivery at the port. The tribunal followed precedents establishing that actual delivery by the ultimate purchaser, rather than the intermediate seller, satisfies the delivery requirement. Additionally, the tribunal deleted the disallowance of interest on interest-free advances under section 36(1)(iii), finding sufficient interest-free funds available in the balance sheet to cover the advances given.

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Issues Involved:
1. Whether the transactions undertaken by the assessee are speculative in nature under section 43(5) of the Act.
2. Whether the addition of Rs. 66,04,490/- as interest income under section 36(1)(iii) of the Act was justified.

Issue 1: Speculative Transactions under Section 43(5) of the Act

The department contended that the transactions involving the purchase and sale of edible oil (canola oil) by the assessee were speculative in nature since no actual delivery of goods was taken by the assessee. The AO treated the business loss claimed by the assessee as speculative loss under section 43(5) and denied set-off against other heads of income under section 73(1).

The first appellate authority allowed the loss of Rs. 57.39 lakhs as a business loss, permitting its set-off against interest income earned by the assessee. The Tribunal examined the provisions of section 43(5), which defines a speculative transaction as one settled otherwise than by actual delivery or transfer of the commodity.

The assessee explained the business modus operandi, providing evidence that the goods were physically delivered to the end user at the port of arrival, supported by documents like invoices, bills of lading, and delivery reports. The Tribunal noted that the AO did not dispute the documentary evidence or the sequence of events.

The Tribunal considered various judgments, including those of the Calcutta High Court in Hoosen Kasam Dada (India) Ltd vs. CIT, Andhra Pradesh High Court in Lakshmi Narayan Trading Company, and Rajasthan High Court in Sripal Satyapal vs. ITO, which supported the view that transactions involving actual delivery cannot be considered speculative.

The Tribunal concluded that the transactions in question involved actual delivery of goods to the ultimate buyer, thus not falling within the provisions of section 43(5). Therefore, the transactions were not speculative, and the revenue's appeal on this issue was dismissed.

Issue 2: Addition of Rs. 66,04,490/- as Interest Income under Section 36(1)(iii) of the Act

The AO made a proportionate disallowance of interest amounting to Rs. 66,04,490/- on the grounds that the assessee had advanced interest-free loans to M/s Diamond Traxmein Pvt Ltd while paying interest on borrowed funds.

The first appellate authority sustained the addition, noting that the assessee could not demonstrate the availability of sufficient interest-free funds to cover the advances.

Before the Tribunal, the assessee argued that it had sufficient interest-free funds, amounting to Rs. 26.76 crores as on 31/03/2016 and Rs. 28.18 crores as on 31/03/2017, as reflected in the audited balance sheet. The assessee relied on the Supreme Court's decision in CIT v. Reliance Industries Ltd., which held that if interest-free funds are available, it is presumed that investments were made from such funds.

The Tribunal examined the audited balance sheet and found that the assessee had sufficient interest-free funds to cover the advance. The Tribunal noted that the AO did not dispute the availability of these funds.

Following the Supreme Court's decision in Reliance Industries Ltd., the Tribunal held that the addition of Rs. 66,04,490/- under section 36(1)(iii) was not justified and deleted the addition.

Conclusion:

The Tribunal dismissed the revenue's appeal regarding the speculative nature of transactions and allowed the assessee's appeal, deleting the addition of Rs. 66,04,490/- under section 36(1)(iii).

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