THE DCIT, CIRCLE-4(1)(2), AHMEDABAD vs. VISHAL EXPORTS OVERSEAS PVT. LTD.,, AHMEDABAD

2.4 In reply dated 18.12.2017, the assessee submitted that the purchases, job work, and sales were not entirely with the same parties; different parties were involved at different stages. The assessee also submitted that high seas purchases were from various suppliers, and the goods, after clearance, were processed into finished goods through job work at different locations, and thereafter sold in the domestic market after payment of applicable excise duty and VAT. The Assessee further stated that the transactions were conducted under statutory permissions granted by DGFT, and utilisation of licences was in accordance with law. The assessee contended that it had carried on genuine business activity and incurred a genuine business loss of Rs. 17,45,94,780/- on account of 2.5 After considering the assessee’s submissions, the AO held that:

- Although the Bill of Entry was in the assessee’s name, the goods were never brought to the assessee’s premises. They were handled directly by the purchasing party and sent for job work at the purchase party’s own or designated premises. The assessee had no control or ownership rights over the goods. - The assessee entered into separate purchase, job work, and sale transactions not out of business necessity, but to comply with DGFT requirements to utilise its custom duty licences. All transactions were guided by third parties. - Even where transactions appeared to be with different parties, the AO found that the major counterparties such as M/s Lincon Polymers Pvt. Ltd., M/s Malay Exports Pvt. Ltd., M/s Priyal Plast Pvt. Ltd., and M/s Ralin Polymers Pvt. Ltd. had common directors with the assessee. - The assessee admitted that it had no working capital to conduct operations on its own and had not borrowed funds from related parties. This indicated that it could not have undertaken substantial manufacturing or trading activity. - Employee expenses were only Rs.51,000/- for a turnover of Rs.234 crores. Out of Rs.5.95 crores total expenses, Rs.4.88 crores were towards freight and port charges (incurred to facilitate high seas purchases under licences). Administrative expenses, including indirect taxes, were only Rs. 1.07 crores, indicating absence of any significant operational setup for manufacturing. - The AO applied the principle that in commercial transactions, substance should prevail over form. Based on the nature of the dealings, lack of operational infrastructure, and related party involvement, the AO concluded that no real manufacturing was carried out and the assessee only facilitated the use of its custom duty licences for others.

2.6 The AO disallowed the business loss claimed on manufacturing of plastic woven fabrics, holding that the activity was merely provision of licence services. Total disallowance of Rs. 22,33,94,780/- was comprising Rs.17,45,94,780/- manufacturing loss and Rs. 4,88,00,000/- freight & port

- the assessee is engaged in imports, exports, trading, and generation of electricity. It has been in this line since inception, and the activities were accepted in past assessments. - Licences were received in F.Y. 2006-07 under government policy, accounted for by crediting income and debiting receivable against licences for customs duty benefit. Value as on 01.04.2014 was Rs.213.62 crore. - Initially, business was at its peak, but due to market conditions and financial difficulties, licences were utilised in the year for import of plastic granules at pre-negotiated prices which is a common practice in this business. - At the start of the year, crude prices were around US$ 104/barrel; finished goods prices were high, so no loss was expected. Later in 2014, prices fell steeply due to global factors, affecting plastic granule prices (derived from crude). - Imports were pre-negotiated; the appellant had two options: i. Cancel the contract, risk litigation, damages, and expiry of licences worth Rs. 213.62 crore. ii. Import and process granules into finished goods through job manufacturing, then sell. - Due to lack of capital and to avoid bigger loss, opted for job manufacturing and sale. This avoided damages and allowed chance for profit if prices rose before sale.

The loss actually incurred was Rs. 17,45,94,780/- against possible loss of Rs. 250 crore. - AO’s view that assessee could have manufactured in-house was unrealistic — the company lacked finance and capacity and in-house would have incurred higher losses with interest costs. - AO also disallowed freight & port charges of Rs. 4.88 crore, though mostly paid to port authorities.

5 - The assessee held DFCE licenses obtained as export incentives which could be used only under the “Actual User” condition as per DGFT policy, meaning the imported material had to be used by the importer itself, either for its own manufacturing or through job work by approved supporting manufacturers. - The DGFT circular/public notice No. 112 (RE-2007)/2004-2009 dated 15.02.2008 allowed job work and sale of finished goods to the same party doing the job work. - The assessee was facing financial difficulties, had no working capital for 7–8 years, and thus collaborated with financially capable parties. Same parties purchased raw materials, did job work, and bought finished goods due to their capacity to mobilise funds. - That there was no prohibition under law, including the Income Tax Act, 1961, on conducting business with the same party.

3.1 In rebuttal to the allegation of paper transactions, the assessee contended that all purchases, job work, and sales were genuine, duly supported by documentary evidence and routed entirely through recognised banking channels. It was pointed out that these transactions were further corroborated by contemporaneous records maintained under customs, excise, and VAT laws. The assessee explained that the business losses were attributable to a sharp fall in crude oil prices from USD 104 to USD 45 per barrel during the relevant period, which had a direct bearing on the prices of both raw materials and finished goods. It was emphasised that all transactions had been carried out at prevailing market rates and there was no relationship, direct or indirect, between the suppliers and the buyers that could indicate collusion or manipulation. In support of its explanation, the assessee furnished detailed consignment-wise and month-wise profit and loss statements, which reflected that certain consignments and months yielded profits while others resulted in losses, thereby demonstrating the normal course of commercial operations rather than any accommodation entries.

3.2 Before CIT(A), the assessee further pointed out that none of the transactions relating to purchase, sale, job work, or expenses had been found to be bogus or non-genuine. The AO had not invoked the provisions 6 of section 40A(2)(b) or Explanation 1 to section 37 of the Act, and the audited books of account had not been rejected under section 145(3). It was argued that mere dealings with related parties are not incriminating unless it is established that such transactions were not at fair market value or were prejudicial to the assessee. The Assessee also pointed out that the AO had not made any inquiry by issuing any notices u/s 133(6) or by issuing summons u/s 131 to nail the truth.

3.3 After considering the submissions and examining the material on record, the learned CIT(A) held that there was no evidence brought by the AO to show that any transaction was not genuine or that it was not laid out wholly and exclusively for the purposes of the assessee’s business. The CIT(A) observed that the AO had not disputed the genuineness of purchases, sales, or job work, nor had the books of account been rejected. In such circumstances, the CIT(A) found the disallowance of Rs.22,33,94,780/- to be totally bereft of merit and unsustainable. For the sake of clarity we reproduce the findings and conclusion of CIT(A) as follows:

“5. I have carefully considered the impugned assessment order and the submissions made by the appellant. Appellant is a public limited company engaged in the business of the import, export, trading and generation of electricity. Appellant had received licenses as per the policy of Government of India in F.Y. 2006-07 which was credited in the P&L A/c during the relevant period. Value of these licenses as on 01.04.2014 was at 213.62 crore as per the books of accounts. Appellant received these licenses when the business was at its peak and later on gradually the business fell down and appellant started facing financial difficulties. Prior to the year under assessment, appellant's business activity has not been questioned in any of the years. Since, appellant did not have financial capacity to manufacture the plastic woven fabric after importing the plastic granules it got the job work done by various other parties at market rate. It is not the case of the AO that any of the transaction was not at arm's length or any of the related party has taken any advantage of the appellant affecting the total income of the appellant. Appellant has furnished each and every detail as also noted by the AO in the impugned assessment order and no doubt has been cast on any of the transaction with the related parties. None of the transaction of purchase, sale, job work or the expense is not found to be bogus or non genuine. Provisions of section 40A(2)(b) have not been invoked by the AO. It is important to note that having transactions with related 7 party per se is not incriminating unless it is shown that such transactions are not at the fair market rate and are to the detriment of the appellant. There is not a shred of doubt and iota of evidence on this issue in the entire assessment order. None of the transactions of purchase, sales, job works or any other expenses or income has been found to be not true or bogus or unrelated to the business of the appellant. The audited books of account have not been rejected. It is not the case of the AO that appellant has violated any law so as to invoke the explanation 1 to section 37 of the Act which has not been done. In absence of any of these and in absence of any transaction being questioned the action of AO discarding the entire loss is totally devoid of merit. AO has also mentioned that the expenses incurred by the appellant are nominal, that in itself cannot be the reason to discard the result of audited books of accounts by the kind of generic discussion by AO in the impugned assessment order. Moreso, when appellant had itself submitted that because of financial difficulties it had to outsource the work of job work etc. hence, logically its own administrative expenses would decrease. None of the expense has been found to be not laid out wholly and exclusively for the purpose of appellant's business.

In view of the above facts, I find that the action of AO is totally bereft of merit and is not sustainable. Hence, the disallowance of total loss amounting to Rs. 22,33,94,780/- is deleted. AO is directed to allow the same. Ground No. 1 & 2 of the appeal are allowed.

1. Whether the Ld. CIT(A) was correct in deleting the disallowance of business loss amounting to Rs. 22,33,94,780/-.

2. On the facts and circumstances of the case, ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored."

7.2 The primary objection of the Assessing Officer appears to be that the assessee did not have the operational infrastructure or financial capacity to undertake in-house manufacturing and that substantial dealings were with the same or related parties, which in his view indicated that the assessee merely facilitated the use of its customs duty licences for others. However, as correctly noted by the learned CIT(A), there is no legal bar under the Act on conducting business with related parties, nor can such dealings per se be a ground for disallowance unless it is shown that they are not at arm’s length or have resulted in shifting of profits to the detriment of the revenue. The Assessing Officer has not invoked section 40A(2)(b) of the Act, nor has he adduced any evidence to demonstrate that the transactions were not at market value or were sham.

7.3 The Assessing Officer has also placed emphasis on the nominal employee cost and the composition of expenses to support his conclusion that no real manufacturing activity was carried out. In our considered view, this line of reasoning ignores the fact, adequately explained by the assessee and accepted by the CIT(A), that due to severe financial constraints, the assessee outsourced manufacturing operations to job workers. This business model, in the given commercial circumstances, would naturally entail lower employee and administrative costs for the assessee itself, without affecting the genuineness of the underlying manufacturing or trading activity. The AO has not shown that the job work charges paid were not for actual services rendered or that they were inflated or fictitious.

10 7.4 On the aspect of absence of working capital, the assessee has satisfactorily demonstrated that the imports were pre-negotiated under the Actual User condition of DGFT policy and that cancelling such contracts would have exposed it to litigation, damages, and the risk of forfeiting DFCE licences valued at Rs. 213.62 crore. The assessee, therefore, adopted a commercially prudent course by collaborating with financially capable parties to complete the transactions through job work and subsequent sale, in the hope of mitigating the loss arising from the steep fall in crude oil prices from USD 104 to USD 45 per barrel during the year. The resultant loss of Rs.17.45 crore, in the backdrop of a possible loss of Rs.250 crore, cannot be said to be a colourable device or a non-genuine claim.

7.5 We also find merit in the CIT(A)’s observation that the AO has not rejected the audited books of account under section 145(3), nor invoked Explanation 1 to section 37 of the Act. There is no finding that any expenditure was not laid out wholly and exclusively for the purposes of business. The CIT(A) has also correctly noted that the AO’s disallowance is based on generic discussion, without pinpointing any specific transaction as bogus, non-genuine, or unrelated to the assessee’s business.

7.6 On the allegation that purchases, job work, and sales were circular or pre-arranged, we note that the assessee has furnished consignment-wise and month-wise profit and loss statements showing that certain consignments resulted in profit while others resulted in loss. This pattern is inconsistent with the theory of pre-arranged accommodation entries and is more in line with the normal vagaries of commodity trading influenced by market volatility. The AO has not undertaken any third-party verification under section 133(6) or issued summons under section 131 to disprove the assessee’s version. In the absence of such enquiries, the disallowance rests merely on suspicion and conjecture, which cannot substitute for legal proof.

7.7 Having regard to the entirety of facts and circumstances, we are in agreement with the detailed and well-reasoned findings recorded by the learned CIT(A) in paragraph 5 of his order, which we have reproduced hereinabove. We endorse the conclusion of the CIT(A) that the disallowance of the entire business loss of Rs.22,33,94,780/– was totally devoid of merit and unsustainable in law.

Accordingly, we uphold the order of the learned CIT(A) in deleting the disallowance.

Order pronounced in the Court on 14th August, 2025 at Ahmedabad.