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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
आदेश / O R D E R
PER RAMIT KOCHAR, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee company directed against the Order by the learned Commissioner of Income Tax (Appeals)- 22, Mumbai (‘CIT(A)’ for short) dated 01.03.2011 , the assessee company’s appeal contesting its assessment order dated 15.12.2008 u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter for short) for the assessment year 2006- 07.
The assessee company has raised following grounds of appeal in the memo of 2. appeal filed with the Tribunal:-
“(1). On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the Assessing Officer
2 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. in treating the sale and purchase transactions with M/s. Ravi Dal Industries as fictitious and added Rs.17,31,200/-. (2). On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the Assessing Officer in treating the sale and purchase transactions with M/s. Sam International as fictitious and added Rs.1,50,000/-. (3). On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the Assessing Officer in treating the sale and purchase transactions with M/s. M.P.G. Impex Pvt. Ltd. as fictitious and added Rs.21,25,605/-. (4). On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the Assessing Officer in treating the sale and purchase transactions with M/s. R.L. Enterprises as fictitious and added Rs.18,40,000/-. (5) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the Assessing Officer in initiating the proceedings under Section 271(1)(c) of the Income Tax Act. (6) The appellant craves leave to add , alter, amend and/or vary any of the above grounds of appeal/relief claimed at any time before the decision of the appeal.”
The assessee company has raised following additional grounds of Appeal which is admitted, after hearing both the parties :-
(1) On the facts and in law, the Hon. CIT(Appeals) erred in upholding addition of Rs.75,78,805/- , on account of disallowance of losses from trading transactions with 4 parties , not appreciating that the total of disallowance of transaction with the said 4 parties was Rs.58,46,805/- only and this fact was accepted by the ld. AO in 3 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. remand proceedings and therefore the addition is excessive by Rs.17,32,000/- ( Rs.75,78,805/- - Rs.58,46,805/-).
(2) On the facts and in law, the Hon. CIT(Appeals) erred in upholding the alternate ground relied upon by the ld. AO to disallow deduction of Rs.75,78,805/- in respect of losses from settlement of contracts without delivery, by considering the same to be speculative transactions covered by sec. 43(5) of the I.T.Act 1961 and accordingly holding that the said loss could not be set off against other business income.. ”
The brief facts of the case are that the assessee company is trading in pulses & is also trading at the commodity exchange. The assessee company has total sales turnover of Rs. 23.74 crores and income of Rs.3.85 crores from NCDEX operations. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the learned Assessing Officer (hereinafter called “the AO”) observed that the assessee company has entered into various transactions, which had been settled by making price differences otherwise than by actual delivery. The AO undertook exercise of verifying these transactions and the details are described hereunder. i. Transaction with Ravi Dal Industries - in the course of assessment proceedings to verify genuineness of the transaction, a notice u/s.133(6) of the Act was issued on 16.07.2007 which was returned back by the Postal Authorities with the remark “Not known”. The assessee company was informed by the AO about the non existence of said M/s Ravi Dal Industries at given address and was requested to produce the partner or proprietor of the said concern. The assessee company failed to do so even after many reminders. The assessee company was requested to explain why the losses claimed from the transactions with the alleged party should not be treated
4 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. fictitious and disallowed. The assessee company submitted that it brought Mr. R.L. Bhanushali, proprietor of Ravi Dal Industries on 08.11.2008 in the office of the AO but as the AO was not available in the office , the meeting could not take place. The assessee company submitted that the assessee company has furnished confirmation of the account of M/s Ravi Dal Industries and the assessee company could not be held responsible for non appearance of the person to whom summons have been issued relying on the decision of Hon’ble Supreme Court in its favour .
The detail of transactions claiming to be purchases and sales of the assessee with M/s. Ravi Dal Industries is summarized as under: - Date of Quantity Purchase Date of Quantity Sale price Loss purchase in bags Price sale in bags 02.01.2006 4000 25,02,000 20.01.2006 4000 19,22,000 5,80,000 03.01.2006 2000 12,51,000 03.01.2006 2000 10,51,000 2,00,000 02.01.2006 7520 48,78,880 31.01.2006 7520 41,67,680 7,11,200 08.03.2006 2880 23,04,720 08.03.2006 2880 21,60,720 1,40,000 27.03.2006 1920 15,89,280 27.03.2006 1920 14,93,280 96,000 Total Loss 17,31,200 ii. The assessee company claimed that it had entered into following transactions with Sam International, New Delhi, which were settled by paying price differences.
Date of Quantity Purchase Date of Quantity Sale price Loss purchase in bags Price sale in bags 17.03.2006 2000 29,85,000 17.03.2006 2000 28,85,000 1,00,000 19.03.2006 1000 15,05,500 19.03.2006 1000 14,55,500 50,000 Total Loss 1,50,000
5 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. iii. Similarly, assessee company has entered into transaction with M/s. MPG Impex Pvt. Ltd., New Delhi, which were settled by paying price differences. The said M/s SAM International and M/s M.P.G.Impex Private Limited are related concerns operating from the same premises.The assessee company claimed that it had entered into following transactions with MPG Impex Private Limited which was settled by paying price difference:-
Date of Quantity Purchase Date of Quantity Sale price Loss purchase in bags Price sale in bags 06.03.2006 2000 + 65,90,200 06.03.2006 4400 63,70,200 2,20,000 2400 (two) 08.03.2006 2000 + 62,80,100 08.03.2006 4200 60,70,100 2,10,000 2200 (two) 09.03.2006 2400 + 70,05,850 09.03.2006 4700 67,70,850 2,35,000 2300 (two) 11.03.2006 2000 + 64,73,650 11.03.2006 4300 62,48,650 2,25,000 2300 (two) 13.03.2006 2000 29,91,000 13.03.2006 2000 28,91,000 1,00,000 14.03.2006 2300 33,93,650 14.03.2006 2300 32,78,650 1,15,000 14.03.2006 2200 33,01,705 17.03.2006 2200 31,91,100 1,10,605 18.03.2006 2200 31,61,000 18.03.2006 2200 29,61,000 2,00,000 20.03.2006 2000 32,91,000 20.03.2006 2000 30,91,000 2,00,000 21.03.2006 2000 33,11,000 21.03.2006 2000 31,11,000 2,00,000 24.03.2006 2000 33,71,000 24.03.2006 2000 31,71,000 2,00,000 27.03.2006 2000 33,51,000 27.03.2006 2000 32,41,000 1,10,000 24.03.2006 2000 33,71,000 24.03.2006 2000 31,71,000 2,00,000 Total Loss 21,25,605 iv. The transactions with M/s. R.L. Enterprises – The assessee company has debited an amount of Rs.18,40,000/- on account of “penalty for non lifting of goods”. In the course of assessment proceedings assessee produced a debit note of R.L. Enterprises describing the transactions as – “Black Matpe 1000 MT” purchased from you for February shipment settled as below –
6 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. Purchase Details Date Settled Date Difference 200 MT @ 29410/- 02.01.2006 200 MT @ 29410/- 02.03.2006 2,00,000 200 MT @ 29610/- 04.01.2006 200 MT @ 31610/- 03.03.2006 4,00,000 200 MT @ 30010/- 06.01.2006 200 MT @ 32510/- 06.03.2006 5,00,000 200 MT @ 29910/- 08.01.2006 200 MT @ 32110/- 06.03.2006 4,40,000 200 MT @ 29810/- 12.01.2006 200 MT @ 31310/- 12.03.2006 3,00,000 18,40,000 To verify the transactions with M/s R L Enterprises, AO issued a Commission u/s.131 to DDIT (Inv.), Surat, who vide letter dated 13.12.2008 intimated to the AO that the proprietor of M/s. R.L. Enterprises, Mr. Jagdish Prasad M. Goel did not know any business activities and business is handled by his son and also reported that no business is done from Surat but it is done from Mumbai. The DDIT(Inv) also reported that R.L. Enterprises credited in its account the rate difference of Rs.18,40,000/- which was set off against the loss of Rs.1,23,65,000/- claiming to be from commodity trading and consequently no tax was borne on the amount of Rs.18,40,000/- paid by the assessee company.
Notices were issued u/s.133(6) of the Act to M/s. M.P. G. Impex Pvt. Ltd. and M/s. Sam International and both have confirmed the transactions as claimed by the assessee company but it was observed by the AO that both the concern did not pay tax on these transactions because of losses.
It was claimed by the assessee company that all these transactions were made through brokers. It was observed by the AO that transactions with M/s. M.P.G. Impex Pvt. Ltd. were recorded through broker M/s. Dalal Atulkumar Mulji. The assessee company was directed to produce Mr. Mulji Katira, proprietor of M/s. Dalal Atulkumar Mulji to which assessee company stated that Dalal Atulkumar Mulji is suffering from heart ailment and is not in position to appear. However, the assessee company produced Mr. Atulkumar
7 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. Mulji, son of Mulji Katira on 02.12.2008 and his statement on oath was recorded whereby Atulkumar Mulji admitted that he is working with his father and is involved in the transaction of the assessee company with M/s. M.P.G. Impex Pvt. Ltd. . Mr Atulkumar Mulji stated that no bill of brokerage has been raised as there was losses in the transactions and he did not received any brokerage from the assessee company . The AO show caused the assessee company that why the transactions should not be treated as fictitious as these are purely accommodation entries enabling the assessee company to reduce the income, and evade the taxes.
The assessee company vide letter dated 12.12.2008, contended that these transactions were genuine transactions and were made in regular course of business. The AO rejected contentions of the assessee company and held that manner in which transactions were made, timing of transactions and payments clearly shows that these transactions are merely paper transactions made with ulterior motive to evade the tax.
The AO observed that transactions were shown to have been made mostly in the fag end of March, 2006, except some transactions with M/s. Ravi Dal Industries and M/s. R.L. Enterprises. All the transactions resulted in losses only and the accounts were settled in March, 2006. The assessee company failed to produce any third party independent evidence’s to prove that these transactions were taken place on the dates and time which the assessee company claimed to have made and merely exchanging debit and credit notes between the parties and the assessee company is not reliable and the same cannot be treated as evidence unless corroborated with some independent evidences . The bank statement shows that the payments were made at the fag end of the year or next year . The brokers have not raised any invoice for brokerage nor any brokerage was paid in respect of these transactions . The statement of the brokers recorded is not reliable as the brokers will not go
8 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. against the traders. The loss of Rs.18,40,000/- incurred in transaction with R L Enterprises has been debited in Profit and Loss Account by disclosing it as ‘Penalty for non lifting of goods’. All the recipients of the profits made out of above mentioned transactions have not made any payment of tax on such amount’s of income in their hand as they have more than sufficient losses to set off the same. The assessee company has incurred losses in all such transactions which is against the law of probability and in-fact the assessee company was in search of losses to set off profits to reduce taxes was observed that the AO made addition on account of the disallowed losses claimed of Rs.75,78,805/- as under by treating the same as fictitious and bogus transactions and accommodation entries to evade the taxes:-
(i) Ravidal Industries Rs.17,31,200 (ii) Sam International Rs. 1,50,000 (iii) M.P.G. Impex Rs.21,25,605 (iv) R.L. Enterprises Rs.18,40,000 Total Rs.75,78,805(error in figure claimed by the assessee vide additional ground raised in this appeal)
Without prejudice, it was observed by the AO that these transactions are speculative in nature as provided u/s 43(5) of the Act and the losses arising there-from are speculative losses . The assessee company submitted that it is a wholesale dealer in pulses and transactions made by it which were settled otherwise than by delivery were also in respect of pulses and these transactions are out of purview of section 43(5) of the Act and cannot be treated as speculative transaction’s. The AO observed that to be out of purview of Section 43(5) of the Act for the reasons that these transactions are entered into by a merchant to protect him against the loss through future price fluctuations are known as hedging transactions and the essential features of hedging contract are :-
9 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. (i) There is a contract for actual delivery of goods or merchandise sold by him.
(ii) The party intend to ward against loss through future price fluctuations in respect of those contracts.
(iii) In order to guard himself the assessee must have entered into a contract in respect of raw-materials or merchandise in the course of merchandising business.
Thus, it can be seen that proviso (a) contemplates two simultaneous contracts –
(i) a contract for actually delivery of goods manufactured by assessee or merchandise sold by him.
(ii) a contract in respect of raw-material or merchandise entered into in the course of manufacturing or merchandising business to safe guard loss to future price fluctuation.
[Relied upon the decision in the cases of (Sakseria Riswan Sugar Factory, 121 ITR 196 Bombay), (ii) Juvi Subbaramaiyah & Co. 51 ITR 742, Ragunath Prahaladas, 104 ITR 95].
The AO rejected contentions of the assessee company by holding that these transactions were not entered into to guard against from any future losses on account of fluctuation in the commodity prices and are not hedging transactions within proviso (a) of Section 43(5) of the Act . The transactions have been entered into almost on the same day or within an interval of day or two and all these transactions resulted into losses. The AO held these transactions to be speculative transactions and are not allowed to set off against the normal business income , vide assessment orders dated 15.12.2008 passed u/s 143(3) of the Act.
4.Aggrieved by the assessment order dated 15.12.2008 passed by the AO u/s 143(3) of the Act, the assessee company filed first appeal with the CIT(A).
10 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd.
The assessee company submitted that with respect to disallowance of Rs. 17,31,200/- of loss of Ravi Dal Industries , all the details of the transaction were given to the AO and also informed the AO that the said party has shifted to Surat . The assessee company submitted that ledger account and PAN of the said party was submitted but the AO disallowed the loss only for the reasons that the said party was not available for examination. With respect to SAM International disallowance of Rs.1,50,000/- and Rs.21,25,605/- disallowance with respect to M/s M.P.G. Impex Private Limited, the assessee company submitted that both the parties have confirmed the transactions as claimed by it but the AO has disputed the transactions mainly on the basis that these parties have incurred losses and no taxes have been paid to Revenue on the profits made from the assessee company in view of other losses available in their hands .In respect of R L Enterprises , the assessee company submitted that the Revenue has found the existence of the said party and also confirmed the transaction with the said party of loss of Rs.18,40,000/- which has been credited as income by said party but still disallowance is made which is not justified. With respect to application of Section 43(5) of the Act, the assessee company submitted that the assessee company is trader in commodities and the loss has arisen from hedging contracts in the same commodity and it is improper to attribute any other motives to the transaction. In order to verify the genuineness of the transaction, the CIT(A) remanded the matter to AO and the AO sent his report to the CIT(A) through Addl. CIT.
The CIT(A) after perusal of material on record including remand report of the AO, rejected the contentions of the assessee company in view of the detailed enquiries made by the AO and discrepancies pointed out . No address of Ravi Dal Industries was produced by the assessee company, 13 transactions in case of MPG Impex Private Limited, 5 transactions in case of R L Enterprises,
11 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. 5 transactions in case of Ravi Dal Industries and 2 transactions in case of SAM international , in all totaling 25 transactions have resulted into losses. No broker has been paid brokerage through which transactions are claimed to have been made. All the transactions are in the fag end of March 2006. None of the parties have paid taxes since they are having available other losses which clearly point towards the non-genuineness of these transactions. The circumstantial evidences brought on record by the AO on touchstone of preponderance of probabilities is sufficient to establish that these transactions are non-genuine. Further, the CIT(A) held that these transactions are speculative in nature and are not covered by proviso (a) to Section 43(5) of the Act and hence the additions made by the AO was upheld by the CIT(A) vide orders dated 01.03.2011.
Aggrieved by the orders dated 01.03.2011 passed by the CIT(A), the assessee company is in appeal before the Tribunal. The Learned counsel for the assessee company submitted that the sale and purchase transaction are treated as non genuine/fictitious transactions by the AO and CIT(A) has confirmed the same . The AO has also treated these transaction as speculative transactions and disallowed u/s 43(5) of the Act . Ld. Counsel for the assessee company submitted that the assessee company is dealing in pulses and sale turn over amounting to Rs.23.7 cr. and returned income is 3.35 cr. . There are transaction with four parties and there has been losses and AO has disallowed the losses. The parties have confirmed the transactions . The payment for these losses have been made by cheque through banking transactions. The Ld. Counsel submitted that enquiries were made by the Revenue and the main reason for disallowance is losses and the recipient had losses and thus have not paid taxes on these income. The ld. Counsel reiterated its submissions as made before the authorities below which are not repeated for the sake of brevity. The ld. Counsel submitted that these transactions were settled otherwise than by delivery as otherwise also 12 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. there was losses even if the assessee company might have taken delivery and these are regular business transactions The AO never asked to produce sauda book to evidence the transactions that are entered into by the assessee company with these four entities.
While on the other hand, Ld. DR relied upon the orders of the authorities below and submitted that the transaction are entered into mainly in March 2006 and most of the transactions are settled on the same day. With respect to sale and purchase of commodities these are not genuine transactions and are entered into to reduce profits earned by the assessee company . The assessee company failed to produce Ravi Dal Industries even before the CIT(A) . The Ld. DR submitted that these are not hedging transactions and are in-fact fictitious and bogus transactions to reduce profits. Without prejudice, these are speculative transactions as held by the AO and as confirmed by the CIT(A).
We have considered the rival contentions and perused the material on record. We have observed that the assessee company entered into the transaction of purchase and sale of agricultural commodities without taking the delivery . We have observed that most of these transactions were entered into at fag end of the year and all the transactions have resulted into losses and most of the transactions are squared off within a day to day. We have observed that these transactions are in agricultural products and settled without delivery and claimed by the assessee company to be hedging transactions to guard against losses that might arise in the contracts based on actual deliveries of these commodities . The Revenue has doubted the genuineness of the transactions entered into by the assessee company and alleged that these are fictitious/bogus transactions being accommodation entries. The primary-onus is on the assessee company to bring on record cogent material to substantiate that these transactions are genuine
13 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. transactions and were actually entered into by the assessee company and are not merely accommodation entries by bringing on record cogent evidences / documents such as sauda books, records maintained by various government and other statutory /authorities authorities which are regulating transactions in agricultural produce under various legislations and rules regulating the trade in agricultural commodities such as APMC, Forward Contract(Regulation) Act,1952, State Agricultural Board’s , Agricultural Mandi’s etc. and proof of payment of any fee,taxes etc to these bodies/authorities as mandated under law to substantiate that these transactions were genuinely entered into by the assessee company at that point of time and the losses , if incurred were genuine losses . Further , the primary onus is on the assessee company to bring on record cogent material to substantiate that these transactions are hedging transactions to safeguard against future losses in contracts based on actual delivery entered into by the assessee company on these commodities by bringing on record cogent material by way of contracts in the agricultural commodities which the assessee company has to execute on actual delivery basis against which these hedging transactions were entered into to guard against losses to be covered by proviso (a) to Section 43(5) of the Act to be taken out of purview of being classified as speculative transaction. In our considered view , the interest of justice will be best served if the matter is restored to the file of the AO to decide afresh the above issue’s de-novo and the assessee company is directed to produce cogent material/evidences to substantiate its stand that these transactions were genuine transactions and as well that these were not speculative transaction and falls within proviso (a) to Section 43(5) of the Act. Needless to say proper and adequate opportunity of being heard as per law shall be granted by the AO to the assessee company in accordance with principles of natural justice and the AO shall admit the evidences filed by the assessee company in its defense. While adjudicating the issue afresh, the AO shall also consider plea of the assesssee company with respect to the 14 ITA 3607/Mum/2011 Assessment Year 2006-07 M/s. Sanika Agri Impex Pvt. Ltd. arithmetical error that has crept in the orders as raised by way of additional grounds before the Tribunal which shall also be adjudicated on merits by the AO. We order accordingly.
In the result, the appeal of the assessee company is allowed for statistical purpose.
Order pronounced in the open court on 24th February 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 24- 02-2016 को क� गई ।