N K PROTEINS PVT. LIMITED,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE- 3(1)(1), AHMEDABAD

The assessee has taken the following grounds of appeal:-

Page No. 2 N.K. Proteins vs. DCIT “1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the legality of the Assessing Officer's order passed u/s. 271(1)(c) of the Act imposing penalty for furnishing inaccurate particulars of income. 1.1 While passing the penalty order, the learned CIT(A) has disregarded the fact that the issues on which penalty have been imposed are sub-judice before Honorable ITAT and in view of judicial precedents of Madras High Court in case of Rayala Corporation [161 Taxman 127(Madras)J and Ahmedabad ITAT in case of GE India Industries Pvt. Ltd (33 Taxman.com 15), passing an order in present case is illegal and void-ab-initio.

On the facts and in the circumstance of the case, the learned CIT(A) erred in confirming penalty levied by the Assessing Officer u/s. 271(1)(c) of the Act with regards to disallowance of transaction charges amounting to Rs. 1,30,29,338/-.

The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”

On the facts and circumstances of the case, the Ld.CIT(A) has erred in confirming the disallowance of depreciation of Rs.6,04,648/- without appreciating the tax audit report and the production sheet. 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. Industries Ltd. sold 100 kg. of castor seeds to another prospective investor/client of another broker of NSEL for Rs. 100/-. The another prospective investor client of NSEL in turn executes T+36 trade contract on the electronic platform of NSEL whereby it sells the castor seeds to another client of M/s. N. K. Proteins Ltd. such as M/s. N. K. Corporation which is an associate concern for Rs. 110/-. Thereafter, the associate concern i.e. M/s. N. K. Corporation carry out intra group sale back to M/s. N. K. Proteins Ltd. to square off the sale/purchase transactions and to maintain the stock position. All these three transactions were executed simultaneously and after the above set off of circular transactions, M/s. N. K. Proteins Ltd. has to receive the amount on the 3rd day from prospective investor and the subsidiary concern of M/s. N. K. Proteins Ltd. has to pay to the prospective investor after 36 days. In this way the T+36 contracts are rolled over from one settlement cycle to next cycle. The Ld. D.R. further submitted that the assessee itself has not reflected these transactions as financial transaction in its books of accounts. Therefore, the addition of Rs. 14,42,91,136/- is justifiable.

We have heard both the parties and perused all the relevant material available on record. It is pertinent to note here that the Ld. AR submitted before us that the transactions were entered into with a view to avail finance for the business requirements of the assessee and the loss represented the cost to get the funds to run the business. The trading facility available on NSEL attracted the assessee to enter into such transaction. But the Assessing Officer has observed that if the assessee’s contention that it is a finance transaction, then it attracts the interest element which is not reflected in assessee’s account. Though the contention of the assessee is that it should not be taken as speculative loss, the test of speculative loss can only be determined when the transaction itself is speculative, but in the present case the transaction was that of payment made by banking channel through account payee cheque for purchase and sale with the seller and buyers who are assessed to tax as per the contentions of the assessee. When the parties that of purchaser and seller are present and not artificial then the said transaction cannot be treated as speculative transaction 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 Page No. 5 N.K. Proteins vs. DCIT 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 andis 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 represented cost of such funds which was a business loss. The adverse inference drawn by the learned CIT(A) against the assessee on the basis of withdrawal of such loss partly was also not correct as the reasons for such withdrawal proposed by the assessee were duly explained and the fact that the assessee-company by entering into these transactions had availed finance for the purpose of business was duly established. As regards the applicability of TDS provision, the learned Counsel for the assessee has pointed out from the relevant details of transactions that the sale proceeds were received by the assessee-company from different entities while payment towards the purchase was made towards different entities. The cost of finance thus was not paid to the party from whom the finance was actually availed and the applicability of TDS, therefore, was not warranted. Moreover, the cost incurred by the assessee for availing finance was not strictly in the nature of interest and the party selling the goods having offered the same for taxation, there is no obligation of deduction of tax at source by the assessee. Having regard to all these facts of the case, we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of alleged speculation loss is not sustainable and deleting the same, we allow Ground No.4 of the assessee’s appeal.

As regards the next issue raised in Ground No.6 relating to disallowance of Rs.1,30,29,338/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of transaction charges, the relevant facts are as follows. During the course of Special Audit, it was noticed that transaction charges were paid by the assessee-company for transactions on NSEL platform in connection to caster seeds, soya bean seeds, castor oil and cotton wash oil. Although it was submitted on behalf of the assessee that such transaction charges were not debited to the profit and loss account, the Assessing Officer found that the same were debited and included in the purchases. In this regard, it was explained by the assessee that it was not obligatory on its part as a broker to recover the transaction charges from the clients. It was also pointed out that as per the consistent practice followed by the assessee-company, the transaction charges were never recovered from the clients and the same, therefore, were debited to the purchase account as forming part of the purchase price. The Assessing Officer did not find this contention of the assessee-company to be acceptable. According to him, the transaction charges were recoverable by the assessee-company from clients and since it could not produce any documentary evidence to substantiate its claim that it was not obligatory to recover the transaction charges, he disallowed the entire transaction charges of Rs.1,30,29,338/-.

The disallowance made by the Assessing Officer on account of transaction charges was challenged by the assessee in an appeal filed before the learned CIT(A) and the following submissions in writing were made on behalf of the assessee in support of its case on this issue:- “The Assessing Officer has stated that the company had paid transaction charges for the transactions carried out on NSEL platform for various commodities. This transaction charges was transferred to purchase account of the respective commodities, instead of charging it to the NSEL client. It is stated by the AO that the transaction charges are debited to the purchase of commodities and are charged to P&L A/c. and no recovery thereof has been made from the client. The appellant had explained that it is a practice followed by the appellant-company broker. It is not obligatory on the part of broker to recover the amount of transaction charges. The Assessing Officer has not accepted this contention of the appellant on the ground that before the Special Auditor, the appellant had explained that such transaction charges are not accepted, and hence, not recorded in the books. According to the AO, therefore, the appellant was of the view that the said charges are liable for recovery from the clients. Thereafter, he has stated that the transaction charges are debited in the P&L A/c. as accepted by the assessee and assessee could not produce documentary evidence to show that it was not its obligation to recover its transaction charges. Thus, he has made the addition.

The learned Counsel for the assessee invited our attention to page No.34 of the paper book to point out that the transaction charges of Rs.1,30,29,398/- were actually paid/incurred by the assessee-company. He submitted that the said charges incurred by the assessee represented additional cost of funds raised and utilized; and, since there was no requirement of TDS, it should have been allowed as deduction as rightly claimed by the assessee. He submitted that the factum and quantum of the expenditure incurred by the assessee towards transaction charges was not disputed by the authorities below and disallowance was made merely because the assessee did not recover the same from the clients. He contended that there was no obligation to recover the said charges from the clients and the assessee choose to bear the same as a matter of business expediency. In Page No. 8 N.K. Proteins vs. DCIT support of assessee’s case on this issue, he relied on the submission made on behalf of the assessee before the learned CIT(A) as reproduced in paragraph No.9.1 of the impugned order. He also relied on the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Khambhatta Family Trust, reported in [2013] 215 Taxman 602 (Guj.), to contend that for the allowability of any expenditure the requirement is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily.

The learned DR, on the other hand, relied on the impugned order of the learned CIT(A) in support of the Revenue’s case on this issue and read out paragraph No.9.2 of the same. He contended that the transaction charges should have been recovered by the assessee-company from its clients; but since the assessee choose not to recover the same without there being any business expediency, the claim of the assessee for deduction on account of transaction charges was rightly disallowed by the authorities below.

We have heard both the sides and perused all the relevant material available on record. It is observed that the transaction charges in question were actually paid/incurred by the assessee-company and this position was not disputed or doubted even by the authorities below. They, however, still disallowed the deduction claimed by the assessee on account of transaction charges on the ground that the same ought to have been recovered by the assessee from the clients. As submitted on behalf of the assessee- company before the authorities below as well as before the Tribunal, there was no such obligation on the part of the assessee to recover the transaction charges from the customers and the decision not to recover the same from the clients was taken as a matter of business expediency. The transaction charges actually represented additional cost of funds raised by the assessee company for the purpose of its business and the expenditure incurred on account of the same was wholly and exclusively for the purpose of business of the assessee as rightly contended by the learned Counsel for the assessee. In the case of Khambhatta Family Trust (supra) cited by the learned Counsel for the assessee, the Hon’ble Gujarat High Court has held that the requirement for allowability of any expenditure as business expenditure is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily. Keeping in view the said decision of Hon’ble jurisdictional High Court and having regard to the facts of the case as discussed above, we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of transaction charges is not justifiable and deleting the same, we allow Ground No.6 of the assessee’s appeal.”

In view of the above decision rendered by ITAT in assessee’s own case, wherein both the additions on the basis of penalty under section 271(1)(c) of the Act was imposed have been deleted, then there is no basis for sustaining the levy of penalty u/s 271(1)(c) of the Act.

In the result, penalty u/s 271(1)(c) of the Act is directed to be deleted and the appeal of the assessee is allowed.