TaxTMI 
TaxTMI 
TaxTMI 
2025 (6) TMI 1456
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..... 3 2. At the outset, both the parties brought to our notice that the issue stands covered by the decision of ITAT in assessee's own case in ITA No. 329/Ahd/2017 for AY 2011-12 vide order dated 16.11.2022 and also in 328/Ahd/2017 for AY 2011-12. For the sake of ready reference, the relevant part of the order is reproduced hereunder:- "5. The action of the Assessing Officer in treating the amount of Rs.14,42,91,136/- as speculative loss was challenged by the assessee in an appeal filed before the learned CIT(A) and the following submissions were made on behalf of the assessee before the learned CIT(A) in writing in support of its case that the amount in question being finance charges/interest was deductible as business expenditure 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....
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....arty-wise summary of the transactions of sale and' purchase is reproduced on page 8 to 10 of the assessment order. The transactions stated by him are summarized as under:- Sale of NKIL Purchase of NKIL Goods traded Quantity Amount Quantity Amount Profits/losses Castor seeds 333154875 12778992143 333154875 13071300187 (-)292308045 Indian castor oil 47070000 4231635650 47070000 4309751760 (-)78116110 Cotton wash oil 90079620 4670418546 90079620 4747764011 (-)77345466 Total:- (-)447769621 Keeping in view the background of para 5.2 of the assessment order, the Assessing Officer proposed to disallow the above loss on the ground that the 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....
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...., NK Corporation makes payment for purchase made by it under T+36 contract from the purchasing party of NK Inds. and it has to pay on the settlement date, after 36 days. The assesses pays to NK Corporation the purchase consideration on the expiry of T+36 contract. VI) Similar contracts are being entered into and the funds are received as per T+3 contract which are repaid as per T+36 contract. VII) For the above purpose, NK Proteins also maintains margin account of certain percentage of value of transaction on NSEL. VIII) The Assessing Officer has not accepted the above contentions vide para 7.16 to 7.20 of the order. The main reasons given by him are summarized as under- i)The transactions are fictitious for purchase & sale on NSEL platform, 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 ....
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....urchased by IBMA are adjusted against goods sold to NK Corpn. and goods purchased by NK Corpn. from IBMA are adjusted against the goods sold to NKIL. v) Thus, in the process, the NKIL gets funds of Rs. 100 for a period of at least 36 days. The difference between the payment made by it at Rs. 112 and the payment received at Rs. 100 is the cost of finance of Rs. 100 for the period of 36 days. Copies of bills representing one such trading cycle are enclosed which is explained as above. Slide / chart explaining above cycle and fund-flow arising there from is enclosed. It was with reference to the above contention explained before the AO that the transactions are of the nature to garner funds for business and that the difference being the trading loss is in fact the 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 here....
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....e appellant as well as the N.K. Group concerns. The Investigation wing of Income-tax Department too had surveyed the N.K. Group u/s.133A of the Act on 22/8/2013. The appellant itself has admitted that the T+3 and T+36 transactions were in the nature of paired contracts and there was no underlying commodities in these contracts. It is also seen from the findings of FMC, as mentioned earlier, that A.O has correctly drawn the conclusion that these were the trade contracts without any actual delivery of the goods. Shri Nilesh Patel, Director of the appellant has also admitted the said fact. The A.O has summarised the finding at para 7.19 page-17 of the assessment order. I completely agree with the findings of the A.O. The appellant has tried to defend itself by taking the argument 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....
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....livery these transactions are treated as speculative in nature and the loss incurred is speculative loss which cannot be set off against the normal business income. Therefore, the addition of Rs.14,42,91,136/- is hereby confirmed and the ground of appeal is hereby dismissed." 6. The learned Counsel for the assessee submitted that the assessee has suffered a loss of Rs. 14,42,91,136/-, but the Assessing Officer disallowed the same stating therein that it is a speculative loss. The Ld.AR submitted that a reference was made for audit u/s.142(2A) only on the basis of some newspaper report and on that basis it was presumed that the assessee's case is required a special audit. The Ld.AR further submitted that the assessee incurred loss in respect of cotton wash oil. The Ld.AR submitted 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 in....
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....s trading loss, there is no question of applicability of section 40(a)(ia) of the Act. The Ld. A.R. relied upon the decision of Hon'ble Apex Court in case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 227 ITR 172 (SC), Mc Dowell & Co. Ltd. (1985) 154 ITR 148 (SC), Virtual 400 ITR 409 and 370 ITR 547 (SC). The Ld. A.R. also relied upon the decision of Great Eastern Shipping related to interest which was decided by the Apex Court. 7. The Ld. DR submitted that as regards ground No.4, there was no transfer of goods and the assessee could not explain as to why the route of exchange, i.e. NSEL has been taken. The DR relied upon the assessment order and the order of the CIT(A). The Ld. D.R. submitted that the borrowers and lenders entered into a pair of contracts for 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. Ind....
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....and the loss incurred thereon cannot be speculative loss. The contention of the Ld. D.R. that the N. K. Proteins and its client has executed T+3 and T+36 trade contracts itself establishes that there was a transaction to that effect from the platform of NSEL for which the NSEL has maintained a settlement account with HDFC Bank in the name of N. K. Protein Ltd. For the purpose of carrying out transaction with NSEL they use to keep 3.5% of the value of the transaction as margin money of this account which is released only after the transaction is over. But since the transaction was not materialized in end the settlement amount was received in consonance with these business transactions from NSEL and thus it cannot be treated as speculative loss and is a part of business loss. As rightly 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 r....
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....ained expenditure, the material facts relevant to this issue are that NKPL had raised debit notes on assessee company for poor quality of FSG oil; and, as noted by the Special Auditor, the rate difference as reflected in the said debit notes was not debited by the assessee-company in the P&L account but the same was adjusted in the purchase and sales ledger. It was also found by the Assessing Officer that credit was given by the assessee-company to NKPL on account of such debit notes firstly on 28.02.2011 for Rs. 18,18,62,275/- and then on 31.03.2011 for Rs. 14,61,06,496/-. In this connection, the following explanation was offered by the assessee-company before the Assessing Officer to support and substantiate the debit notes raised by the NKPL. "5. It is stated that NKPL has raised a debit note in favour of NKIL for Rs, 32,79,68,772 for poor Quality of FSG oil and that the NKPL has made exports on behalf of NKIL. 5.1 In this connection, it may please be noted that the debit note is not for the poor quality of FSG oil sold to NKPL and that the NKPL has not made any exports on behalf of NKIL. 5.2 The Debit Note [Page No. 81 to 93] is raised by NKPL in favour of NKIL as per M....
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....not profitable in case of NKPL in as much as if it is ignored than there would be net loss as per P & L Account Further, it may please be noted that there was no intension whatsoever to make NKIL BIFR company in as much as NKIL is already sick company from 2002 as per BIFR Order dated 31-03-2014 [Please refer Para No. 15 & 16]. 5.8 Further, it may please be noted that NKIL and NKPL are companies and are liable to tax @ 30% with surcharge. NKIL has returned the loss. Whereas NKPL has returned the profit and paid the taxies thereon meaning by there is no question of any favour or disfavor by NKPL to NKIL. The transactions are entirely strictly commercial transactions and that the same was entered in the beginning of the year, No party was aware about the outcome of transaction at the end of the year. One may lose or one may gain which all depends upon the MOU entered into between the parties. 5.9 NKPL has charged 1% trade margin on average purchase price as per MOU dated 20-04-2010. 5.10. From the above, it may please be seen that the entire transaction is entered into by NKIL with NKPL on account of commercial expediency in as much as NKIL was not able to export since it ha....
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....ticed that the assessee has credited Rs.18,18,62,275/- on 28.02.2011 and Rs, 14,61,06,496/- on 31.03.2011 on account of debited note received from NKPL towards poor quality of FSG Oil received during the year as per debit note dated raised by NKPL on 28.02.2011. ....... ....... Thus the contention of the assessee that the debit notes were not issued in respect of poor quality of FSG Oil sold to NKPL, is conflicting statements of the assessee which establishes the modus operandi of the assessee to reduce its profit. iv) The notes on accounts are silent on this aspect. The 'MOU' has neither been mentioned in the auditor's report nor in the Director's Report. Thus this is an afterthought of the assessee to reduce the tax liability of the company. v) Further the auditor has during the course of special audit has observed that the assessee has introduced such debit notes to reduce income of the assessee. ....... ....... v) On perusal of the debit notes issued by the NKPL and submitted by the assessee vide its submissions dated 03.11.2014, it is noticed that the debit notes are issued monthly. However, the assessee has credited the sums only on 28.02.2011 and 30.0....
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.... by them for export would be belonging to the appellant. Thus, any difference between the price charged by the appellant and the price realised by the NKPL is transferred to the appellant. A perusal of the chart would show that for the month of April, May and June there was credit given by them for such rate difference. This itself shows that there was no intention of transfer of profit from the appellant, and the debit notes were raised as per the understanding between the parties. It does not represent transfer of any profit. The entry in the books of account narrating the same as debit on account of poor quality of FSG oil does not differentiate the fact that the debit note is raised on account of trade margin and price difference and that too as per the MOU. Further, it is stated that merely because MOU is not referred to in the auditors' report or directors' report, it does not establish that there was no such arrangement There is no requirement in audit standards to report the supporting documents for debit to P&L Account in audit report unless the auditors find it to be not reliable. In fact, one has to appreciate that the debit note was in terms of MOU and the commerc....
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..... Proteins Ltd. At para-8 of the order of assessment the A.O has mentioned that as per the special audit report that NKPL has raised debit note for poor quality of FSG Oil on the appellant. The rate difference on this account was not directly debited to the P & L A/c. On scrutiny by the special auditor it was observed by the special auditor that the credit is given to M/s. NKPL through debit notes firstly on 28/2/2011 for Rs. 18,18,62,275/- and on 31/3/2011 for Rs. 14,61,06,496/-. According to appellant it is a manufacturer of caster oil but it has no facilities for exporting the same. Therefore, it had asked its sister concern NKPL to export on its behalf. As per the memorandum of understanding entered between the two whatever losses or profits are incurred would be borne by appellant and the NKPL would charge 1% trade margin as well as would be the beneficiary of export incentive to be received by the appellant. As per the said understanding the total export benefit received by NKPL on the export of caster oil was of Rs. 60.38 crores. During the assessment proceedings the appellant has submitted that NKPL had raised a debit note in favour of appellant for Rs. 32,79,68,072/- and N....
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.... special auditor has also doubted and considered the debit note as a colourable device to maximize loss of the appellant company. Further the special auditor has also pointed out that the appellant had sold caster oil to Tirupati Proteins Pvt. Ltd, which in turn had sold caster oil to another concern namely Hathibhai Bhulakhidas Pvt. Ltd. for exports as well as to M/s. NKPL (exporter for the appellant). However, Tirupati Proteins has not charged any trade margin or rate difference for the said transactions with the appellant. The different stands taken by the appellant with regard to the debit note for exports as well as for poor quality of FSG oil that too at the end of the financial year lead the A.O to doubt the genuineness of the MOU itself. The A.O has considered it as an afterthought to hide the modus operandi of the appellant to increase its loss. Accordingly, the A.O has made a disallowance of Rs. 32,79,68,772/- to the income of the appellant. During the appellate proceedings the appellant has relied upon the arguments made before the A.O during the assessment proceedings. No new argument was put forth by the appellant. Considering the facts and the circumstances referred t....
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....ttention to the details of credit/debit notes issued by NKPL and submitted that the disallowance made by the authorities below, which has resulted in double taxation of the said amount, is not sustainable. 22. Learned DR, on the other hand, submitted that although it has now been claimed by the assessee that the debit notes were raised on account of price difference actually charged and realized, the same was debited in the books of account on account of poor quality of goods exported. He contended that the genuineness of the debit notes thus was doubted by the Special Auditor and the same was considered as a colourable device to maximize the loss of the assessee-company. He contended that the stand taken by the assessee on this issue thus is different from the treatment given in the books of account and the same, therefore, cannot be accepted as rightly held by the authorities below. 23. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that there is exchange correspondence between assessee and N. K. Proteins Ltd. and Memorandum of Understanding (MOU) between both the parties. The entire transaction was commercial....
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....pany. Keeping in view all these facts and circumstances of the case, we are inclined to accept the claim of the assessee that the amount of debit notes in question was its business expenditure being the difference in sale price charged and actually realized which is allowable as deduction. In that view of the matter, we delete the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and allow Ground No.5 of the assessee's appeal." 5. In the absence of any change in the factual matrix of the case and in the legal proposition, we decline to interfere in the order of the Ld. CIT(A) on this issue. The appeal of the Revenue on this ground is hereby dismissed. Issue : Loan Waiver / Income ITA No. 442/Ahd/2023 : AY 2010-11 - By Revenue 6. The brief facts of the issue are that the assessee has been waived of Principal amount of ICD of Rs. 5,36,36,815/- and credited it to Reserves and Surplus. The waiver of the principal amount arose as a result of negotiation with Gufic Limited, Zircon Finance and Leasing Private Limited. As a result of reconstruction of loan payable, Gufic Ltd. and Zircon Finance waived an amount of Rs. 5.36 crores. The assess....
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....ereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. Explanation 2. - For the purposes of this sub-section, "successor in business" means (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm; (iv) where there has been a demerger, the resulting company." 23. Keeping in mind the statutory provisions, we shall now turn to the decisions made upon by the learned Standing Counsel for the Department. 24. In T.V.Sundaram Iyengar & Sons, the assessee transferred certain amounts to the profit and loss account for two assessment years, claiming that those accounts were credit balances standing in favour of the customers of the assessee and that since the customers did not claim these amounts, they were transferred to t....
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.... in Morley. Thereafter, the Supreme Court pointed out that the amounts in question were not in the nature of security deposits held by the assessee for the performance of contract by its constituents. The Supreme Court also held that the unclaimed surplus retained by the assessee will be its trade receipt and the assessee itself treated the same as trade receipt by bringing it to the profit and loss account. 27. Finally, in T.V.Sundaram Iyengar & Sons, the Supreme Court took note of the opinion expressed by Atkinson,J in Jay's-The Jewellers Limited Vs. I.R.C. [1947 (29) TC 274 (KB)], wherein the Bench distinguished the decision in Morley. On the basis of the said opinion, the Supreme Court held that the assessee became richer, by the amount, which it transferred to its profit and loss account and that those monies had arisen out of ordinary trading transactions. The Supreme Court observed that although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties and that by lapse of time, the claim became time barred and attained a different quality. In the third last paragraph of its judgme....
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..... The Assessing Officer looked at the expanded meaning of the expression 'income' under Section 2(24) and held that the principal amount of loan written off was nothing but gain/income in the hands of the assessee by relying upon Section 28(iv) and 41(1). The assessee's first appeal was allowed by the Commissioner, but his order was reversed by the Income Tax Appellate Tribunal, forcing the assessee to file a tax case appeal before the High Court of Delhi. 30. In Logitronics, two substantial questions of law were taken up for consideration by the Delhi High Court and they are as follows : "(1) Whether the Tribunal was right in law in holding that taxability of waiver of loan would be governed by the purpose for which the loan was taken, in as much as, though waiver of loan taken/ utilized for acquiring capital asset does not constitute income, however, waiver of loan taken for the purpose of business/trading activity gives rise to income taxable under the Act ? and (2) Whether waiver of loan, a subsequent event has the effect of changing the nature and character of loan, a capital receipt into a trading receipt and therefore, the ratio of the judgment of the Honou....
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.... of the assessee on account of any trading transactions, the Delhi High Court reiterated the opinion rendered in Logitronics. 36. Therefore, the law as expounded by the Delhi High Court appears to be that if a loan had been taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax. If the loan is taken for trading purposes and was also treated as such from the beginning in the books of account, the waiver thereof may result in the income, more so when it is transferred to the profit and loss account. 37. But, the Delhi High Court, both in Logitronics as well as in Rollatainers, did not take note of one fallacy in the reasoning given in paragraph 27.1 of the decision of this Court in Iskraemeco Regent Limited. In paragraph 27.1 of the decision in Iskraemeco Regent Limited, this Court held that Section 28(iv) speaks only about a benefit or perquisite received in kind and that therefore, it would have no application to any transaction involving money. This observation was actually based upon the decision of the Bombay High Court in Mahindra & Mahindra, which, in turn, had relied upon the decision of the Delhi High Court in Ravinder Singh Vs....
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....ness"makes a world of difference. 40. We shall now turn our attention to the distinction sought to be made between the waiver of a portion of the loan taken for the purpose of acquiring capital assets on the one hand and the the waiver of a portion of the loan taken for the purpose of trading activities on the other hand. 41. It appears that in so far as accounting practices are concerned, no such distinction exists. Irrespective of the purpose for which, a loan is availed by an assessee, the amount of loan is always treated as a liability and it gets reflected in the balance sheet as such. When a repayment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head "profits and gains of business or profession", as per the provisions of the Act. 42. But, Section 36(1)(iii) makes a distinction. The amount of interest paid in respect....
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....he case of CIT Vs. Ramaniyam Homes (P.) Ltd., which held as under: "37. But, the Delhi High Court, both in Logitronics as well as in Rollatainers, did not take note of one fallacy in the reasoning given in paragraph 27.1 of the decision of this Court in Iskraemeco Regent Limited. In paragraph 27.1 of the decision in Iskraemeco Regent Limited, this Court held that Section 28(iv) speaks only about a benefit or perquisite received in kind and that therefore, it would have no application to any transaction involving money. This observation was actually based upon the decision of the Bombay High Court in Mahindra & Mahindra, which, in turn, had relied upon the decision of the Delhi High Court in Ravinder Singh Vs. C.I.T.[205 I.T.R. 353]. 38. With great respect, the above reasoning does not appear to be correct in the light of the express language of Section 28(iv). What is treated as income chargeable to income tax under the head 'profits and gains of business or profession' under Section 28(iv), is "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." 39. Therefore, it is not the actual rece....
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....an assessee, the amount of loan is always treated as a liability and it gets reflected in the balance sheet as such. When a repayment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head "profits and gains of business or profession", as per the provisions of the Act." 10. We have also examined the judgment of the Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd. in CA No. 6949 of 2004 dated 21.04.2018, wherein the Court considered the applicability of Section 28(iv) and Section 41(1) of the Income Tax Act, 1961, in relation to the taxability of amounts waived, whether pertaining to capital or interest. The relevant para of the said order is as under:- "13) On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed sha....
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....y not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it. 16) Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading acc....
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....ved in NKPL-NSEL client A/c. Thus, the Castor Seeds of Rs. 62.21 lac are received to the assessee company as NSEL Payments in Barter System, which is undoubtedly income /receipt of the company. 8.2. Vide SCN dated the assessee company was requested to show cause as to why Rs. 62.21 lacs be not regarded as income of the company? 8.3 Vide submission filed on 01.11.2016, assessee has replied as under: "Vide given point, your good selves have observed that assessee has received castor seeds of Rs. 62.21 lakhs from NSEL and in this regard have show caused as to why this may not amount to barter and thus may not be regarded as income of the company. In this regard, the assessee company submits that it has purchased Castor Seeds on NSEL. Platform on actual delivery basis under Farmers Contract whereby the Farmers sell the goods to the assessee company. Against such purchases, the payments have been made from the funds generated through paper transactions on NSEL platform. Further, the said payments have been made through Settlement Account and thus it is clear that such transaction does not amount to Barter. The assessee has purchased the same through NSEL on delivery basis and t....