TaxTMI 
TaxTMI 
2021 (4) TMI 767
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....ssessee and the suppliers was only arrangement and speculative in nature. When the statement of the supplier proves beyond doubt that there was no loss to the supplier to make the assessee to pay the compensation. 3. Any other ground that may be urged at the time of hearing." 2. Brief facts of the case are that the assessee company engaged in the business of trading in iron and steel filed its return of income for the AY 2009-10 on 30/09/2009 admitting a total income of Rs. 29,68,550/-. The AO completed the assessment u/s 143(3) of the Act determining the total income of the assessee at Rs. 5,80,19,050/- by making the following additions: 1. Disallowance of compensation claimed of Rs. 3,05,10,500/- 2. Disallowance of commission of Rs. 2,45,40,000/-. 3. When the assessee preferred an appeal before the CIT(A) against the order of AO, the CIT(A) deleted the disallowances made by the AO and allowed the appeal of the assessee. 4. Against the order of CIT(A), the revenue is in appeal before us. 5. As regards the ground no. 1 regarding disallowance of commission of Rs. 2,45,40,000/-, the assessee debited an amount of Rs. 2,45,40,000/- on account of c....
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....ed by the Assessing Officer in his assessment order over the genuineness and purpose of payment of commission were properly answered. The family members of the appellant have admitted to have received the commission, shown this commission in their return of income along with claims of TDS made by the appellant. As regards the purpose, it was submitted by recipients that as they are relatives to the Director of the company, they helped the company in getting credit purchases and not. sales as opined by the Assessing Officer. Since the purpose and the genuineness of payment of commission was proved beyond doubt, I do not find any reason in the action of the Assessing Officer to disallow the entire claim of commission payment by referring to six recipients of commission, who are relatives to the Director of the company. Accordingly, I direct the Assessing Officer to delete the addition of Rs. 2,45,40,OOO/-." 8. Before us, the ld. DR relied on the order of AO and submitted that the CIT(A) ignored the remand report submitted by the AO which is based on statements of beneficiaries recorded and evidences gathered during the course of remand proceedings and allowed relief to the assesse....
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.... account constituted income from some undisclosed sources ? (2) Whether the Tribunal was entitled to reject the evidence on behalf of the assessee on mere scepticism instead of any tangible evidence to support its findings ?" 2. Submitted by the Tribunal under Section 66(2) of the Income-tax Act, 1922, in the negative. The Commissioner of Income-tax has appealed to this court against the order of the High Court on the first question. The High Court recorded their answer on the second question in favour of the Commissioner and no appeal has been filed by the assessee against that order, and nothing more need be said in this appeal in that behalf. 3. Before the Income-tax Officer the assessee had contended that he had in November, 1941, a large cash balance in his Calcutta business and out of that balance he had transferred Rs. 3,00,000 to Nawalgarh. The reasons for the transfer according to the assessee were: (1) that there was a scare of Japanese invasion; and (2) that proceedings for recovery of a large amount of tax due by the firm of Messrs. Ram Sahaymal More--an unregistered firm--which the assessee was a partner were initiated by the income-tax autho....
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....as a resident of India and it was the statutory duty of the assessee to disclose his total world income, and, accordingly, the alleged receipt might have been income at Nawalgarh, or at some other place outside British India. The Appellate Assistant Commissioner and the Appellate Tribunal have confirmed the order of the Income-tax Officer, but they have in their order described the said sum as income from undisclosed sources. The very fact that they have confirmed the order of the Income-tax Officer shows that they have meant that this undisclosed source relates to the assessee's business activity in British India. If their objects are to reverse the finding of the Income-tax Officer on this point their orders could have been sustained inasmuch as the assessee is a resident of India and his income from undisclosed source, whether earned in India or outside, is taxable in India. There is no dispute as to the fact that the said sum of Rs. 2,20,000 has been remitted from Nawalgarh to Calcutta. The explanation offered by the assessee to the effect that the said sum was a part of the cash balance of the Calcutta business in November, 1941, has been rejected, and rightly so, for the ....
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.... to be argued before the Tribunal that the source of the income affected its exigibility to tax. We are, therefore, unable to uphold the answer recorded by the High Court. 8. We allow the appeal, discharge the answer recorded by the High Court on the first question, and record an answer in the affirmative. The assessee will pay the costs of the Commissioner in this court and in the High Court." 10.1 In the case of Sumathi Dayal Vs. CIT, 1995 AIR 2109, the Hon'ble Apex Court's judgement is as under: "1. These appeals filed by the assessee against the order dated February 24, 1977 passed by the Income Tax Settlement Commission hereinafter referred to as 'the Settlement Commission'), relate to assessment years 1971-72 and 1972- 2. The appellant carries on business as a dealer in art pieces, antiques and curios at Bangalore. During the assessment year 1971-72 the appellant received a total amount of Rs. 3,11,831 /- by way of race winnings in Jackpots and Treble events in races at Turf Clubs in Bangalore, Madras and Hyderabad. The said amount was shown by the appellant in the capital account in the books. 'The appellant filed a return on March 2....
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....he Commissioner also submitted that the books of accounts did not indicate the expenditure on travel and other incidental expenses which had been incurred by the appellant for at- tending the races at Bangalore and Hyderabad. The Commissioner also asked for reopening of the assessment year 197071 where the appellant had won a sum of Rs. 74,681/- and which was not brought to tax by the Income Tax Officer. 3. The matter was heard by three member of the Settlement Commission. By order dated February 24, 1977 two members of the Commission (Shri R.S. Chadda and Shri K. Srinivassan) upheld the assessment for the assessment years 1971-72 and 1972-73 made by the Income Tax Officer and confirmed by the Appellate Assistant Commissioner of Income Tax; but did not find it possible under Section 245-E to accede to the request of the Commissioner of Income Tax that the assessment for 1970-71, which was made without bringing to tax the alleged race winnings of Rs. 74, 681/-, may be reopened on the view that the assessment for 1970-71 was not so connected with the case pending before them as to make it necessary to reopen it for the proper disposal of the assessments for 1971-72 and 1972-....
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....he opinion of the Assessing Officer, not satisfactory. In such case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut , the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably. (See : Sreelekha Banerjee (supra) at p. 120) 6. In the instant cases the amount is credited in capital account in the books of the appellant. The appellant has offered her explanation about the said receipts being her winnings from races. The said explanation has been considered in the light of the sworn statement of the appellant dated January 6, 1973 and other material on record. The Income Tax Officer and the Appellate Assistant Commissioner have not accepted the explanation offered by the appellant. The two members constituting the majority in the Settlement Commission have also taken the same view. 7. There is no dispute that the amounts were received by the appellant from various race clubs on the basis of winning tickets presented by her. What is dispute is that th....
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....and once in Madras and he had similar wins also. The appellant had also stated that she had not gone to races in 1972. The appellant admitted that she had been buying Jackpot tickets of the value of Rs. 2,000/-, Rs. 1,400/- and even tickets for Rs. 3,000/- have been bought and that on the first day she won the Jackpot she purchased a Jackpot combination ticket for approximately Rs. 2,500/- and that on November 8, 1970 she had bought two combinations, each for about Rs. 2,000/-. The appellant also admitted that she had not claimed any loss in races and only winnings were shown and stated that she won similar amounts which were not accounted and the losses were met out of the said amounts. The appellant further stated that she had no record of her expenditure at the race course as against/ her claim of winnings. 10. Having regard to the said statement of the appellant, the two,members, constituting the majority on the Settlement Commission, came to the conclusion that the apparent is not,the real and that the appellant's claim about her winning in races is contrived and not genuine for the following reasons: (i) The appellant's knowledge of racing is very me....
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.... to go and call for five numbers in counter and obtain a Jackpot ticket and that books containing information are available which are quite cheap. 13. This, in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of human probabilities. The Chairman of the Settlement Commission has emphasised that the appellant did possess the winning ticket which was surrendered to the Race Club and in return a crossed cheque was obtained. It is, in our view, a neutral circumstance, because if the appellant had purchased the winning ticket after the event she would be having the winning ticket with her which she could surrender to the Race Club. The observation by the Chairman of the Settlement Commission that "fraudulent sale of winning ticket is not an usual practice but is very much of an unusual practice" ignores the prevalent malpractice that was noticed by the District Taxes Enquiry Committee and the recommendations made by the said Committee which led to the amendment of the Act by the Finance Act of 1972 whereby the exemption from tax that was available in respect of winnings from lotteries, crossword puzzles, races, etc. was withdraw....
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....ow much commission they are going to get, but only they come to know the same on 31/03/2009 when the entries were passed in the books of account of the assessee. Considering all the attending facts as above, we are of the considered opinion that the ratios laid down by the Hon'ble Supreme Court in the above judgments (supra) are squarely applicable to the case of the assessee. Accordingly, we set aside the order of the CIT(A) and allow the ground raised by the revenue on this issue. 11. As regards ground No. 2 relating to disallowance of compensation claimed of Rs. 3,05,10,500/-, the assessee company had placed orders for manufacturing of MS Flats of 500 MT @ Rs. 45,500/-, MS Angles of 540 MT @ Rs. 46,400/- and MS Beams of 250Mt @ Rs. 53,000/-, to one supplier M/s Shalini Steels Pvt Ltd and MS Flats of 430 MT @ Rs. 45,400/- and MS Angles of 290 MT @ Rs. 46,450/- to M/s Vijay Iron Foundry. The purchase orders were placed between 10.08.2008 to 09.09.2008. On receipt of the work orders, the supplier companies stipulated some conditions of payment vide their correspondence dated 13.09.2008. The supplier company, vide their letter dated 12.10.2008, had intimated the assessee that ....
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....ing on the statement of the MD of the supplier company wherein it was admitted that the loss is a notional one, the entire 'transaction are make belief affairs and bogus, the impugned loss occasioned due to compensation is not acceptable. Without prejudice to the above, the Assessing Officer also brought out an alternate view that the entire transaction is of speculative nature and the loss arising out of the same cannot be allowed. Accordingly the amount of compensation of Rs. 3,05,10,500/- was disallowed and brought to tax. 12. Before the CIT(A), the assessee claimed that there is every correspondence between them and the suppliers and pointing out to some nominal differences, the Assessing Officer started doubting the transaction and in pursuant of his doubt, he pinpointed out even to the difference in dates mentioned in the correspondence. Explaining the background and the reasons for such cancellation of the work orders, the assessee submitted that it was due to problems in the market and worsen economic scenario, crash in price of steel during the intervening gap of placing work orders and accepting the work orders, the same were cancelled. It was further submitted by ....
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....ance. 6.5 Going by the correspondence between the suppliers and the appellant, sparing a few deficiencies that gave rise to the Assessing Officer, to hold otherwise, I find that this correspondence cannot be totally ignored. Further more, when legal proceedings were initiated by the supplier against the appellant, no outside judgment can prevail over a business deal than the view of the business man involved in such a situation. As rightly pointed out by the appellant, the decision to pay compensation was purely a commercial decision and nobody can step into the shoes of a business man and decide the transaction otherwise. On the period of paying the compensation also, the assessing Officer made some comments that support the final view taken by him. However, showing the amount of compensation as payable to the suppliers in the Balance Sheet for the year under consideration and paying the same in the month of January, 2010 and March, 2010, after receipt of legal notices from the suppliers in the month of December, 2009 goes to prove beyond doubt that the appellant acted as a prudent businessman. Though in principle, he accepted the liability for the year under consideratio....
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....tions for the material required. The material was not manufactured by the supplier before the deal was cancelled. Hence, the bills furnished as additional evidence in the paper books and the purchase order placed by the assessee company with M/s. Shalini Steels (P) Ltd and M/s. Vijay Iron Foundry (P) Ltd cannot be matched up. 3. Further, the second contention of the assessee is that the steel market is highly volatile and, therefore, the transactions have been entered into as a measure of insurance in the form of hedging transactions. This is also not true for the reason that the contract for supply to CPDCL at a particular rate has already been fixed by the orders of the General Manager of CPDCL. Secondly, from the date of purchase order to the companies, i.e., 10.08.2008 onwards, there is a steep fall in the price of steel in the market. When the price in the market is' falling and below the price agreed for purchase from the two customers, there cannot be any benefit derived by the assessee if the contracts of purchase are cancelled. This is because, the purchase price is already fixed at a higher price. In other words, the assessee will not be a looser even going b....
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....n view of the above submissions, the ld. CIT-DR prayed for restoration of the AO's order. 15. The ld. AR of the assessee, on the other hand, relied on the order of the CIT(A) and submitted that the CIT(A) has rightly appreciated the facts of the case and directed the AO to allow the compensation loss claimed by the assessee. He has relied on the written synopsis as well as relied on the case law which are as under: "During the financial year relevant to the assessment year 2009-10, the assessee has entered into number of transactions for supply of MS flats, MS angles, etc., with M/s. Shalini Steels (P) Ltd and Vijay Iron Foundry (P) Ltd. The transaction was for supply of steel products in the month of December, 2008 at the agreed price. The transactions entered into are contended by the assessee to be in the nature of hedging transactions in order to safe-guard the company and as a precautionary measure, in the course of business carried on by it and, therefore, they fall proviso in clause (a) to sub-section (5) to Sec.43 of I.T. Act. As the proof of the same, the assessee has furnished the orders of the General Manager, CPDCL which are in respect of supply of MS Channe....
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.... he stands to gain by this type of hedging transaction which is rescinded prematurely even before the completion of the contract. On the contrary, the assessee can purchase at a lesser price in the open market and stand to gain by selling at the pre-fixed priced to CPDCL. 4. It has to be noted that the contract for purchase in respect of hedging transactions are for different items and they do not match the specifications relating to CPDCL order. Therefore, the transaction cannot be treated as hedging transaction as per the decision in the case of Pankaj Oil Mills (1l5-ITR-824) (Gujarat Full Bench). Thirdly, there is no actual delivery. Fourthly, the amount paid by the assessee does not fall in the category of payment towards arbitration charges in lieu of dispute. The whole process of agreement to pay by way of acquiescence by the assessee shows that the payment is not towards mitigation of any litigation. Therefore, the entire loss has to be treated as speculative not fall within the parameters of proviso to clause (a) to sub-section (5) to Sec.43 of I.T. Act. 5. Another significant aspect to be noted is that in respect of any hedging transaction, the s....