Section 14A – No Disallowance in Absence of Exempt Income.

By | May 24, 2025
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I. Loss from NSEL Transactions for Availing Finance Not Speculative Loss.

Issue:

Whether a loss incurred by an assessee from transactions of cotton wash oil on the NSEL platform, where settlement occurred without actual delivery of goods, should be treated as a speculative loss under Section 43(5) read with Section 73 of the Income-tax Act, 1961, especially when these transactions were entered into primarily to avail finance for business purposes.

Facts:

For Assessment Years 2010-11 and 2013-14, the assessee claimed a loss arising from transactions of cotton wash oil on the National Spot Exchange Limited (NSEL) platform. The assessee asserted that it entered into purchase and sale of cotton wash oil through a broker on NSEL. The Assessing Officer (AO) disallowed this loss, arguing that since the transactions were settled without actual delivery of goods, it constituted a speculative loss under Section 43(5) read with Section 73.

However, it was noted that the relevant purchase and sales transactions were entered into by the assessee in order to avail funds. Therefore, the loss incurred in these transactions actually represented the cost of such funds. It was also noted that the purchaser and seller were present and not artificial. The court considered whether such a transaction, when primarily for finance, could be treated as speculative and the loss as speculative loss.

Decision:

In favor of the assessee: The court held that since the assessee had entered into these transactions to avail finance for the purpose of business, it could not be said that these transactions were fictitious. Consequently, the loss incurred was not a speculative loss. Furthermore, since the transaction was not materialized in the end and the settlement amount was received in consonance with these business transactions from NSEL, it could not be treated as a speculative loss and was, in fact, a part of business loss.

Key Takeaways:

  • Definition of Speculative Transaction (Section 43(5)): A “speculative transaction” under Section 43(5) is one in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
  • Intent and Purpose are Crucial: While the definition might technically apply to non-delivery, courts often look at the intent and purpose behind the transactions. If the primary purpose is not speculative trading for price differences but rather to achieve a business objective (like obtaining finance), the nature of the loss can change.
  • “Accommodation Transactions” for Finance: Transactions on platforms like NSEL, even if settled without delivery, if proven to be undertaken to raise short-term finance (where the ‘loss’ is essentially the cost of finance), are often treated as business losses rather than speculative losses. The funds are availed, and the differential is the effective interest/cost.
  • Genuine Parties, Not Fictitious: The fact that actual purchasers and sellers existed (i.e., the transactions were not sham/fictitious in that regard) strengthens the argument against them being treated as purely speculative.
  • Distinction from Pure Trading: The ruling draws a distinction between genuine financing arrangements that use trading platforms as a vehicle and pure speculative trading.

II. Business Expenditure – Allowability of Debit Notes from Sister Concern.

Issue:

Whether the amount of debit notes raised by a sister concern (NKPL) on account of poor quality of FSG oil should be allowed as a business deduction under Section 37(1) of the Income-tax Act, 1961, when the Assessing Officer views it as an afterthought to reduce profit and alleges it as unexplained expenses.

Facts:

For Assessment Years 2010-11 and 2013-14, the assessee claimed a deduction for the amount of debit notes raised by NKPL (a sister concern) due to the poor quality of FSG oil. The Assessing Officer (AO) disallowed this claim, contending that the debit notes were not genuinely issued for poor quality and were an afterthought by the assessee to reduce its profit. The AO consequently made an addition as “unexplained expenses” on account of the debit note received from NKPL.

However, it was noted that there was a Memorandum of Understanding (MoU) between the assessee and NKPL. This MoU was acted upon by both sides through the raising of debit/credit notes for the difference between the price charged by the assessee to NKPL and the price actually realized by NKPL from corresponding exports, as this difference was to be transferred to the assessee. Moreover, the amount of the debit note in question was duly recognized by NKPL as its profit and offered to tax. Furthermore, considering that the assessee-company was a BIFR company since 2002, consistently incurring losses, it was deemed unlikely that the debit notes were raised solely to reduce the taxable income of the assessee-company as alleged by the authorities.

Decision:

In favor of the assessee: The court held that, on the facts, the impugned debit notes raised by NKPL were genuine, and thus, the assessee’s claim for deduction was to be allowed as business expenditure under Section 37(1).

Key Takeaways:

  • Commercial Expediency and Genuineness of Transactions: For an expenditure to be allowable under Section 37(1), it must be incurred wholly and exclusively for the purpose of business and must be genuine.
  • Inter-Party Agreements (MoU): The existence and adherence to a formal agreement like an MoU between the assessee and its sister concern provides strong evidence of the genuineness and commercial basis of the transactions (debit/credit notes for price adjustments due to quality issues or export realizations).
  • Mirror Accounting/Taxation (No Revenue Loss): The fact that NKPL (the sister concern) recognized the debit note amount as its profit and offered it to tax is a significant factor. This indicates that there was no overall revenue loss to the exchequer due to the transaction, merely a reallocation of income/expense within related entities based on a commercial arrangement.
  • Financial Health of Assessee (BIFR): The assessee’s consistent loss-making status and BIFR registration counter the revenue’s allegation that the debit notes were an “afterthought to reduce profit.” A company already in losses generally has less incentive to artificially reduce further profit.
  • Burden of Proof (AO’s Failure): The AO’s disallowance based on mere suspicion or “afterthought” without concrete evidence of non-genuineness or lack of commercial expediency was not sustained.

III. Section 14A – No Disallowance in Absence of Exempt Income.

Issue:

Whether a disallowance under Section 14A of the Income-tax Act, 1961, is called for in the absence of any exempt income earned or claimed by the assessee.

Facts:

For Assessment Year 2013-14, the assessee was subject to a potential disallowance under Section 14A.

Decision:

In favor of the assessee: The court reiterated the settled legal position that no disallowance under Section 14A is called for in the absence of any exempt income earned/claimed by the assessee.

Key Takeaways:

  • Nexus for Section 14A: Section 14A mandates disallowance of expenditure incurred in relation to income which does not form part of the total income (exempt income).
  • No Exempt Income, No Disallowance: A long line of judicial precedents (including by the Supreme Court and various High Courts) has established that if there is no exempt income earned by the assessee in a particular year, then the question of incurring expenditure to earn such exempt income does not arise, and consequently, no disallowance under Section 14A can be made for that year. The section applies only when exempt income is actually earned, not merely when investments capable of yielding exempt income are held.
IN THE ITAT AHMEDABAD BENCH ‘A’
Deputy Commissioner of Income-tax
v.
N.K. Industries Ltd.
Dr. B.R.R. Kumar, Vice President
and Ms. Suchitra Kamble, Judicial Member
IT Appeal Nos.442, 443, 447 and 448 (Ahd) of 2023
[Assessment Years 2010-11 and 2013-14]
APRIL  25, 2025
S.N. Soparkar, Sr. Adv. and Parin Shah, AR for the Appellant. R.N. Dsouza, CIT-DR and B.P. Srivastava, Sr. DR for the Respondent.
ORDER
Dr. B.R.R. Kumar, Vice President.- These cross appeals have been filed by the Revenue and the Assessee against the orders of the Ld. Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as “CIT(A)” for short) of even dated 30.03.2023 passed u/s 250 of the Income-tax Act, 1961, (hereinafter referred to as “the Act” for short) for the Assessment Years 2010-11 & 2013-14. Issue : Speculative Transactions
ITA No. 442/Ahd/2023 : AY 2010-11 – By Revenue – Ground No. 1
ITA No. 443/Ahd/2023 : AY 2013-14 – By Revenue – Ground No. 1
ITA No. 447/Ahd/2023 : AY 2010-11 – By Assessee – Ground No. 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 the godown operated by National Spot Exchange and get receipt online for such goods and thereafter they can sell the receipt to the buyer online, the buyer will pay the amount and on producing the receipt they can get the material. It is stated that the buyer can also sell the receipt to other buyer. According to him there is supposed to be a settlement cycle for the commodities to be traded on NSEL. It is stated by the AO that the buyer was supposed to pay the money to the seller for the entire lot to be purchased by him on the date of settlement of the cycle. However, in reality, it did not happen and quantity of goods was never delivered. The cycle was settled by repayment of whole amount of money back to the buyer i.e. the purchaser sold the goods back to the seller. Thus, the financial transactions took place through NSEL. In para 5.3 of the order, the AO has stated as under-

“5.3 The borrowers and lenders entered into a pair of contracts for every deal. First, there was a three-day contract that mandated that within two days of signing it, the investor will lend the money and the borrower will hand over a warehouse receipt. Simultaneously, they entered into a 36-day contract, which said 35 days after cutting the deal, the borrower will pay back a pre-agreed amount and get back the receipt. The difference between the money lent and paid back captured the interest return. The money borrowed was rarely paid back after 36 days. On the contract’s expiry, the borrower just paid the interest to the lender and the two parties would roll over the positions by entering into d new but similar contract, this would go on for months. This was similar to the now banned badla finance once the lifeline of stock markets.”

In the background of the above discussion, the Assessing Officer has referred to appellant’s transaction in the NSEL in para 6 and 7 of the assessment order. As stated to by him, NK Proteins is a member of National Spot Exchange Ltd. It is stated by him that there was survey in the group cases of N.K. Proteins u/s. 133A of the Act on 22.8.2013 by the Income Tax Department. The Special Auditors appointed by him have given their report dated 26.9.2014. On the basis of Special Audit Report, it is stated by him that the appellant has incurred loss of Rs. 14,42,91,136/- on the transactions of cotton wash oil on NSEL through NK Proteins. The Party-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 NKILPurchase of NKIL
Goods tradedQuantityAmountQuantityAmountProfits/losses
Castor seeds3331548751277899214333315487513071300187(-292308045
Indian castor oil470700004231635650470700004309751760(-)78116110
Cotton wash oil900796204670418546900796204747764011(-)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 VAT was paid by the appellant.
(iii)it was explained that the transactions were entered into with a view to avail finance for the business requirements of the appellant and that the loss represented the cost to garner funds to run business, which is reflected as trading loss as above.
(iv)It was explained that the assessee company was in the need of finance and trading facility available on NSEL attracted the appellant to enter into such transactions, so that the appellant was having finance available for its business and thus there was no intention for incurring loss.
(v)The transactions were entered into with the market rate and were entered into on the NSEL platform.
(vi)the payment is made by banking channel through account payee cheque for purchase as well as sale; and
(vii)the sellers and buyers are assessed to tax i.e. they are having PAN No.

The Assessing Officer was, therefore, requested to consider the above facts and that the loss represents the cost to garner funds for running the business. The appellant had also submitted the details of fund utilization with the bank statement and it showed that the funds were utilized for the purpose of business.

The Assessing Officer has referred to explanation of Nilesh Patel during the course of survey u/s. 133A of the Act, and that the modus operandi adopted by NK Proteins and its clients was explained by him. The relevant para is para 7.6 of the order. The same is summarized as under:-

I)NK Proteins is Member Broker on NSEL.
II)NK Inds. being client of NK Proteins executes T+3 contract on the electronic platform of NSEL, say for sale of 100 Kg. of castor oil to another client of another broker of NSEL for Rs. 100 per Kg.
III)The other prospective client/ investor referred to above who has purchased the quantity as above executes another transaction on NSEL for sale of said quantity on T+36 contract on the electronic platform whereby it sells entire quantity purchased as above to another client of NK Proteins (say NK Corporation) for Rs.110 per kg.
IV)NK Corporation carry out Intra group sale of same quantity to NK Inds., say for Rs.112 per kg.

Thus, the entire quantity is set off for purchase of sale in the hands of each of the party.

V)NK Inds. on the first sale receives the sale consideration within 3 days i.e. on settlement of T+3 contract.

As against this, 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 as stated by the assessee, the tax should have been deducted at source on the interest and as per provisions of section 40(a)(ia) the payment is required to be disallowed in absence of deduction of tax. It is stated that apart from furnishing the details of payment out of funds received from NSEL, the assessee has not given fund flow statement. (para 7.17)
(iv)The loss so incurred without delivery of goods cannot be set off against the regular business income. As it is an arrangement by the assessee with the help of NSEL to get the funds, according to him the same is not the normal business transaction.
(v)Therefore, according to the AO, arrangement made is colourable device to reduce tax liability in connivance with NSEL and the said loss cannot be considered as normal business loss.
(vi)Alternatively, it is stated by him that the transactions having been settled without delivery, the same is covered by Sec.43(5) r.w.s. 73 and is speculative loss and cannot be set off against the normal business income.

With the above remarks, the Assessing Officer has held that the claim of loss of Rs.44,77,69,621 is rejected.

5.2 In this connection, the appellant submits that as stated above, the transactions were entered into in the NSEL by the appellant through NKPL in order to get the funds for short term period. The modus operandi has been explained before the AO and even in the proceedings u/s.133A, the same is again explained by way of example as under:-

(i)The first step is, NKIL sells the castor oil for Rs.100 for a particular quantity to client of another broker, say to IBMA on a particular date for T+3 settlement contract. In that case, the settlement is to be carried out within 3 working days from the date of transaction. On that day of settlement, the NKIL gets payment from NKPL via NSEL.
(ii)The IBMA on the same day entered into contract under T+36 settlement contract with the concern related to NKIL, say NK Corporation for Rs.110. This settlement is to be made at the period of 36 working days. On the date of settlement NK Corporation pays Rs.110 to IBMA.
(iii)On the other end, NK Corporation sells the said material to NKIL on the same day for Rs.112 and its payment is to be made after the period of settlement of T+36 transaction.
(iv)Thus, the goods sold by NKIL are adjusted against goods purchased from NK Corpn. Similarly, goods purchased 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 herein above which is for the purpose of business, and hence, it is admissible. It may be seen that the AO has also noticed this fact inasmuch as he has accepted that the transactions were made to obtain funds from investors on short term basis which support appellant’s contention, (para 7.16 & 7.18)

As regards the AO’s observation about not debiting any interest to the profit and loss account, it may be noticed that as stated above it represents difference between the purchase and sales price of transaction. Therefore, it is considered as trading loss in the books, hence there is no question of debiting the same as interest in the accounts Moreover, as will be observed from the example given herein above the receipt of proceeds from sale are from a different entity than the payment made towards the purchase which is from a different entity. As it is considered as trading loss, there is no question of applicability of section 40(a)(ia).

The withdrawal of claim by the appellant to the extent of Rs. 10 crores was only in order to buy peace and was not on account of accepting such allegation of AO. It was proposed by the appellant in order to reduce the claim for cost, for probable use of funds by other concern, if any, keeping in view the nature of transactions explained above.

In so far as the AO’s observation about considering it as speculative loss u/s. 43(5) is concerned, it may be submitted that the transactions are with a view to obtain funds, more so when even the Assessing Officer himself states the same and, therefore, the loss represents cost, and hence there is no question of invoking the provisions of section 43(5) of the Act.”

5.1 The learned CIT(A) did not find merit in the submissions made on behalf of the assessee on this issue and proceeded to confirm the action of the Assessing Officer in treating the amount in question as speculative loss for the following reasons given in paragraph No. 7.2 of his impugned order:-

“7.2 I have carefully considered the facts of the case, observation of the A.O as well as the case law relied upon by the appellant. It is observed that the A.O has made an addition of Rs. 14,42,91,136/- on account of loss arising out of fictitious transactions. It is observed at para-6.1 of the order that due to NSEL Scam various regulatory and law enforcement agencies are already investigating the role of the 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 has rightly held that the loss arising out of these transactions is a fictitious loss in nature. Therefore, the A.O has concluded that such transactions cannot be considered as part of its normal business and hence the loss incurred is nothing but an arrangement between NSEL and the appellant and it is the colourable device to reduce its tax liability. Finally, at para 7.18the A.O has given the finding that the transactions conducted on the NSEL platform concluded without physical delivery and hence the Joss incurred is speculative loss. Such a speculative loss cannot set off against the normal business income. Accordingly, the A.O has disallowed Rs.14,42,91,136/-. I completely agree with the contention of the A.O. It is apparent that the books of accounts maintained by the appellant are in difference with the argument it has taken during the assessment proceedings. According to the appellant, these are financial transactions, however, the appellant itself has not reflected these transactions as financial transactions in its books of accounts. It can also be seen from the order of FMC quoted above that the FMC too is considering these transactions as financial transactions. However, for the Income-tax proceedings and the appellate proceedings, what could matter is the way the books of accounts have been maintained by the appellant. The books of accounts tell a different story. Even if the argument of the appellant that the transactions of NSEL platforms are financial transactions taken into account then the A.O at para-7.16 has raised the issue of deduction of tax at source on payment of interest on these financial transactions. As no TDS has been made on such interest payment the whole quantum is liable to be added back to the income of the appellant u/s.40(a)(ia) of the Act. Therefore, the alternate argument of the appellant also fails. It is also seen that appellant has charged VAT on the purchases and sales in its books of accounts. Therefore, reliance is placed more on the nature of transactions as trade contracts and not financial transactions. I am of the considered opinion that irrespective of the conlenlron of the appellant that these are financial transactions, I would like to rely upon what has been reflected in its books of accounts by the appellant. As all the transactions on NSEL platform conducted by the appellant were without any physical delivery 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 into the trading transactions with NSEL with a view to avail finance for the business requirements and the loss represents the interest cost reflected as trading loss in the financial statements. The Ld. AR submitted that there was no intention on the part of the assessee to declare the losses. The assessee-company was in need of finance and the NSEL prompted the company to enter into such trading transactions. There was no intention to book the loss since such loss is nothing but the interest. It is only modus operandi followed by NSEL. Thus, in substance, the trading loss represents the interest expenses on the finance availed from NSEL for the business purposes. The transactions of purchase and sales are actually entered at market rate and the settlement of the same has also been done through NSEL platform. The payment is made and received only by account payee cheques. The sellers and buyers are holding PAN. The Ld.AR further submitted that the treatment given in the accounts is of no relevance. What is to be seen is the substance over form. The substance is interest and not the trading loss. Therefore, the transaction cannot be considered as bogus or not genuine or the loss arising there from is also not bogus. The loss represents the interest expenses represented by trading loss and therefore the loss claimed is genuine having regard to the facts and circumstances of the case. The Ld.AR submitted that the funds received from NKPL are utilized for the purpose of making payment for purchases from suppliers. The funds utilized are for the purpose of business and, therefore, interest represented by loss should be allowed as deduction. For the purpose of financing, the NSEL has maintained a Settlement Account with HDFC bank in the name of N.K. Proteins Ltd. All the pay-in and pay-out transactions with National Spot Exchange Ltd. have taken place through this account only. Thus, the Ld.AR submitted that there was a difference between purchase and sales transactions which is considered as trading loss in the books, hence, there is no question of debiting the same as interest in the accounts. The Ld.AR submitted that moreover as will be observed from the example given by the assessee before the CIT(A), the receipt of proceeds from sale are from the different entity than the payment made towards the purchase which is from a different entity. As it is considered as 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. v. CIT ITR 172 (SC), Mc Dowell & Co. Ltd (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. 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.
8. 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 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 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.”
3. 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. Appeal of the assessee on this ground, being in similar nature is hereby allowed.
Issue : Unexplained expenses / Debit Note
ITA No. 442/Ahd/2023 : AY 2010-11 – By Revenue
ITA No. 443/Ahd/2023 : AY 2013-14 – By Revenue
4. Both the parties fairly agreed that this issue also 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. For the sake of ready reference, the relevant part of the order is reproduced hereunder:-
“20. As regards the issue involved in Ground No.5 of this appeal relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of debit notes received by the assessee from N.K. Proteins Ltd by treating the same as unexplained 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 MOU dated 20-04-2010 [Page No. 101 to 103] and as per the correspondence exchanged between NKIL and NKPL /Page No. 94 to 100] (the copy of MOU and correspondence are enclosed]. The transaction of sale of castor oil to NKPL is strictly a commercial transaction.

5.3 NKIL is the manufacturer of castor oil FSG export quality. The assesses company is not likely to fetch the sale price from the domestic market and therefore requested NKPL who is Star Trading Export House [Certificate Page No. 80] to buy from NKIL for the purpose of exports as per the terms and conditions stated in the correspondence and MOU as referred to above. NKIL does not enjoy any banking facilities since it is BIFR Company as per BIFR Order dated 31-03-2014 [Page No. 112 of Paper BookPara No. 15.1&15.2].

5.4 The main terms as per MOU are as under:

(1)NKPL shall purchase at the prevailing market rate during F, Y. 2010-2011,
(2)If the purchases are exported by NKPL than the price realized will belong to NKIL. In other words, if there is a profit it will belong to NKIL and if there is a loss the same will also belong to NKIL
(3)NKPL shall charge 1 % trade margin on average purchase price.
(4)NKPL shall retain the export incentives that may be received as a result of the exports made by us and we shall bear all the export expenses as stated by you.
(5)Any export incentives that may realize as a result of the exports in overseas market shall belong to NKPL
(6)NKPL shall bear all the export expenses such as transportation from factory at Kadi to Kandla Port, storage charges for storing the castor oil and derivatives at Kandla port, if any.
(7)Taxes and duties, ocean freight, if the contract is CIF etc.

5.5 There is exchange of correspondence between NKIL and NKPL and there is MOU dated 20-04-2010 entered into by NKIL and NKPL [copy enclosed]

5.6 From the MOU, it may please be seen that the entire transaction is commercial transaction and that NKPL is entitled to export Incentives of Rs. 60.38 Crore since NKPL is a star trading export house and therefore the buyers would feel comfortable to buy from NKPL At the same time NKPL has borne the entire export expenses of Rs. 32.78 Crore. The break-up of such expenses is enclosed [Page No.].

5.7 It may please further be noted that if export incentives do not belong to the NKPL than the entire transaction is 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 has no credit facilities since it is BIFR company and that it has no brand name in the overseas market. Whereas in case of NKPL it is not the manufacturer of castor oil FSG and that it is star trading export house and that for the conhnuWuoi of status as star trading export house it is necessary to have minimum exports. NKPL got opportunity to maintain the status and also to make some profit on account of working hard for making exports. It may please be noted that the export expenses of Rs. 32.78 Crore are only direct expenses and that indirect expenses in the form of managerial remuneration and other administrative facilities are not considered. NKPL has competent staff for entering into export agreements and for its execution to maintain its brand name. If indirect cost is considered than NKPL has made only nominal profit and not as is seen from the figures mentioned in the notice.”

20.1 The above explanation offered by the assessee was not found acceptable by the Assessing Officer for the following reasons:-

“i) The contention of the assessee that the debit notes are received not on account of poor quality of FSG Oil sold to NKPL but in respect of Export Expenses incurred according to MOU dated 20.04.2010 entered between NKPL and NKIL, is not tenable. Because the statement of the assessee is in contravention as it has credited the sums in its books of account on account of poor quality of FSG Oil. Further, according to para 6 of the MOU it is clearly evident that the Export expenses are to be borne by the NKPL only.

(ii) The assessee contended that the debit notes were issued as per the MOU dated 20.04.2010 as per correspondence exchanged between NKIL and NKPL. On perusal of the copy of the MOU furnished by the assessee, it is noticed that the MOU has been signed by Shri Kamlesh L. Patel, Whole time Director in NKPL and Shri Ashvin P. Patel, Whole Time Director in NKIL. Since both of them are not the Managing Directors of the respective companies, the MOU signed by them has no significance in deciding the business policies. Further, the MOU has been executed on plain paper which is not notarized or registered document. Thus the MOU is of no worth to substantiate the contention of the assessee.

(iii) Further, on perusal of the related party details and copies of ledger accounts submitted by the assessee vide submission dated 03.11.2014, it was noticed 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 30.03.2011 i.e. at the end of the financial year stating that on account of debit note issued on 28.02.2011 which is factually untrue and proves the assessee’s intention to reduce of reducing profit.

(vi) The MOU entered into by the NKPL and NKIL is nothing but an afterthought of the assessee to hide the modus operandi of reducing profit by issuing debit notes on account of poor quality of the FSG Oil.

(vii) In any circumstances, two different stands cannot be taken in respect of any sum credited or debited in books of accounts to Standard Principals of Accounting. Therefore the dual stand taken by the assessee on account of debit notes of Rs. 32.79 crores cannot be sustained and accordingly liable to be rejected.”

20.2 For the reasons given above, the Assessing Officer disallowed the assessee’s claim on account of debit notes raised by NKPL and the amount of such debit notes was added by him to the total income of the assessee by treating the same as unexplained expenditure.
20.3 The disallowance made by the Assessing Officer by treating the amount of debit notes as unexplained expenditure 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 before the learned CIT(A) in support of its case.

“i) As explained before the AO, the debit notes are issued in terms of the MOD i.e. agreement between the parties. Merely because MOD is on plain paper it does not justify the rejection of the claim made by NKPL by issue of debit notes. The appellant submits a copy of the chart furnished by the special auditor with their report and copies of debit notes for ready reference. The details/break up of chart so amount by debit notes is as under:

Sr.ParticularsAmount (Rs)
1.Trade margin at 1% of value.7,96,84,259
2.Rate difference23,26,66,952
3.VAT at 4%.1,24,94,048
4.Additional VAT at 1%.31,23,512
Total of Debit Notes:-32,79,68,772

 

It may be noted that the debit note is on account of trade margin i.e. commission @ 1% and such trade margin is being charged in the course of normal business practice. Further amount represents rate difference charged by NKPL in terms of the MOU. As stated before the AO, as per understanding between the parties, the profit/loss on the goods so sold to NKPL which may arise to them on further sale 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 commercial practice and that, therefore. no adverse view is required to be taken.

(ii) Observation of Auditors that it is not debited to P&L A/c, but to either purchase/sales or somewhere else does not effect the nature of transaction. As it relates to appellant’s sales it is natural that it can be debited to sales.

(iii) The rate margin of 1% recovered by the NKPL is as per the normal trade practice. The auditors have alleged that the debit note is merely shifting of profit from NKIL to MKPL and to keep assessee company under loss, is totally irrelevant. The auditor has to appreciate that there was no avoidance of tax from the transactions referred to above. The assessee company is having loss whereas NKPL is having taxable income chargeable at 30%. The auditors have stated that the debit note is dubious and colourable device to make the assessee company as sick company. However, he has to failed to appreciate that there is no benefit of having a sick company. Further, the assessee company is sick company under BIFR since 2002 as explained before the AO, and that therefore, the debit note referred to by him would not effect the said status of sick company. Also one fails to understand as to how the assessee group would stand to gain in terms of its overall income tax liability when there is an increase in loss in an already loss making entity, vis-a-vis an increase in profit in a profit making entity. Accordingly, the very argument of the Assessing Officer goes against his logic.

(iv) Having regard to the above explanation, the entire disallowance made by the AO is based on presumption of the special auditors and it has been made on account of irrelevant presumption. The debit notes are as stated above, on genuine MOD and genuine commercial understanding between parties. The addition may please be deleted.”

20.4 The learned CIT(A) did not find merit in the submissions made on behalf of the assessee on this issue and proceeded to confirm the addition made by the Assessing Officer by disallowing assessee’s claim on account of debit notes raised by NKPL vide paragraph no. 8.2 of his impugned order as under :-

“8.2 I have carefully considered rival contentions and observations made by the A.O. in the assessment order. It is observed that the A.O has made an addition of Rs.32,79,68,772/- as unexplained expenses on account of debit note received from N.K. 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 NKPL had made exports on behalf of the appellant. According to the appellant said debit note was not for the poor quality of FSG Oil sold to NKPL and it also stated that NKPL has not made any exports on behalf of the appellant (para 8.4 of the order of assessment). According to the appellant the debit note raised by NKPL in favour of the appellant has been as per the MOU and the transaction of sale of caster oil to NKPL is strictly a commercial transaction. As NKPL was a star trading export house the appellant requested NKPL to buy from it for the purpose of exports as per the terms and conditions of the MOU. As per the MOU NKPL would purchase at market rate from NKIL and if these purchases are exported then the price realised will belong to the appellant i.e. the profit or loss would belong to the appellant. Apart from this, NKPL would be also charging 1% and trade margin on average purchase price and it would be also entitled to export incentives. However, the A.O has not accepted the contention of the appellant. According to the A.O, the perusal of books of accounts reflect that the appellant has credited its sums in its books of accounts on account of poor quality of FSG oil, therefore, the contention of the appellant that the debit notes were not received on account of poor quality of FSG oil to NKPL in respect of export expenses is not tenable. Further, according to the A.O the appellant has debit note received from NKPL towards the poor quality of FSG oil on 2872/2011 and 31/3/2011. The A.O at page-24 has reproduced the scanned copies of the books of accounts for its support. The special auditor has also given the observations on this issue. The special auditor too has observed that the amount of Rs. 18,18,62,275/- on 28/2/2011 an amount of Rs. 14,61,06,496/- on 31/3/2011 were reflected as debit note for poor quality of FSG oil in the books of the appellant. The calculation done by the special auditor reflects that the debit note has been raised for trade margin of 1%, Further on the trade margin and rate difference amount in the debit note, 5% of VAT is also charged which has resulted into total debit note of Rs. 32,79,68,772/-. According to special auditor this transaction of debit note has helped the appellant to file the BIFR status of sick company. The whole transaction of debit note has resulted into loss of Rs. 32.80 crores to the appellant. The 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 to by the A.O at para-8 of its assessment order wherein the A.O has also mentioned the findings of the special auditor, I agree with the contention of the A.O. It is seen that the appellant has taken different stand and has tried to use a colourable device in the form of debit note to increase its own loss. As pointed out by the special auditor the appellant has not entered into such kind of MOU with its other sister concern namely Tirupati Proteins for exports. The appellant has loaded the cost of rate difference, trade margins of 1% of the value of goods and VAT @5% resulting into raising of debit note amounting to Rs.32,79,68,772/- by NKPL. Further, considering that the debit note was issued at the fag end of the year that too on account of poor quality of FSG oil, I agree with the finding of the A.O that the MOU is an afterthought and confirm the addition of Rs.32,79,68,772/- on account of unexplained expenses debited to P & L A/c. Thus, the said addition is confirmed and the ground of appeal is dismissed.”

21. The learned Counsel for the assessee submitted that exports were made by the assessee-company through N.K. Proteins Pvt. Ltd. and as per the agreement with them, invoices were regularly raised by the assessee-company with an understanding that the difference in actual realization from exports will be finally adjusted. He submitted that debit/credit notes were accordingly issued by NKPL for the difference between the amount of invoices raised by the assessee and the amount actually realized through exports and the same were duly accounted for by the assessee-company in its books of account. He contended that the net amount of such credit/debit notes amounting to Rs.32.80 crores accordingly was debited by the assessee-company in its books of accounts and the said amount was already offered to tax by NKPL as its income. He invited our attention to the Memorandum of Understanding entered into by the assessee-company with NKPL and submitted that the same was duly acted upon by both the parties. He submitted that even VAT was also charged by NKPL on the said debit notes. He contended that all these vital aspects were brought to the notice of the learned CIT(A) by the assessee in the written submission filed before him, but he proceeded to upheld the findings of the Assessing Officer without appreciating the case of the assessee. He also invited our attention 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 transaction and N. K. Proteins Ltd. was entitled to export incentives of Rs. 60.38 crores as the same is a Star Trading Export House and therefore, the buyers will be able to buy from assessee’s company. It is an undisputed fact that the assessee company has entered into Memorandum of Understanding for export of its FSG Oil and borne the export expenses as the debit note has been raised by the N. K. Proteins Ltd. for poor quality of FSG Oil on the assessee. The break-up of such expenses were given during the assessment proceedings by the assessee. It is not disputed fact that assessee has returned the loss whereas N. K. Proteins Ltd. has returned the profit and paid the taxes thereon on the said transaction which is a commercial transaction. As per the understanding between the assessee-company and the NKPL, invoices were being raised by the assessee on NKPL at the agreed rate for the goods to be exported through NKPL. At the time of actual export of the said goods, NKPL at many times used to realize a different rate than the rate charged by the assessee in the invoices for various reasons including the quality difference. Since the assessee-company was accountable for these differences as per understanding with NKPL, NKPL raised debt/credit notes on the assessee-company to transfer the price difference. The said difference, going by the nature thereof, was adjusted by the assessee-company in the books of account against sales and the authorities below, in our opinion, were not justified to doubt the genuineness of the debit/credit notes on the basis of this accounting treatment given by the assessee-company which actually was correct. Moreover, the amount of debit note in question was duly recognized by NKPL as its profit which was offered to tax and keeping in view that the assessee-company was a BIFR company since 2002 incurring consistent losses, it cannot be said by any stretch of imagination that the debit notes were raised to reduce the taxable income of the assessee-company as alleged by the authorities below. There was a Memorandum of Understanding entered into between the assessee-company & NKPL and the same was acted upon by both the sides by raising debit/credit notes for the difference in price charged by the assessee to NKPL and the price actually realized by NKPL from corresponding exports as the same was to be transferred to the assessee-company. 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 assessee treated same as capital receipt and contested that such waiver is not in the nature of cessation of trading liability and therefore not taxable. Assessing Officer held that the waiver of principal amount would constitute income for the assessee u/s 28(iv) of the Act. The Assessing Officer relied on the judgment of Hon’ble Madras High Court in the case of CIT v. Ramaniyam Homes Pvt Ltd. ITR 530 (Madras). The relevant part of the said judgment weighed by the Assessing Officer is as under:-
“22. Section 41 which deals with profits chargeable to tax, speaks about the receipt of a benefit in respect of a trading liability, by way of remission or cessation of the liability. Section 41(1) requires to be extracted and hence, it is extracted as follows:

“Section 41:

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year

(a)the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to incometax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b)the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1. – For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” 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 the profit and loss account. The Income Tax Officer took the view that these amounts represented surplus that had arisen as a result of trade transactions and that therefore, the amounts had the character of income. Therefore, the Assessing Officer added these amounts as the income of the assessee for the purpose of assessment. The Commissioner (Appeals) deleted these additions and the same was upheld by the Tribunal. On an application under Section 256(2) to the High Court, the High Court held that the issue was already covered by the decision of the High Court in C.I.T. v. A.V.M. Limited ITR 355 (Madras)]. When the matter was taken to the Supreme Court, the Supreme Court found that there was a conflict of decisions among various High Courts. Some High Courts had taken the view that if deposits taken by the company in the course of its trading operations were not refunded, partly or in full, the amounts retained by the assessee would constitute its income. Some other High Courts had taken the view that if the deposits were originally of a capital nature, their character will not change merely by lapse of time and even when the amount was taken to the profit and loss account of the assessee. The reasoning behind the second view was that the origin of the amount may be the business activity of the assessee, but every receipt need not be an income.
25. The question that was actually taken up for consideration by the Supreme Court in T.V.Sundaram Iyengar & Sons was as to whether the deposits, which were of capital nature, at the point of receipt by the assessee, have their character changed by efflux of time. Before answering the said question, the Supreme Court took note of the test laid down by Lord Greene in Morley [H.M.Inspector of Taxes] v. Tattersall [1939 (7) ITR 316 (CA)] to the effect that the taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income account as his own, it would not alter that character. The Supreme Court noted that this test laid down by Lord Greene formed the basis of several judgments delivered by our courts.
26. After taking note of the principle of law laid down by Lord Greene, the Supreme Court considered a few decisions of different High Courts as well as the Supreme Court, where the Courts distinguished the decision 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 v. 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 judgment, the Supreme Court summarised the principle as follows :

“In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee.”

28. In Solid Containers Limited v. D.C.I.T. (Bombay)], a Bench of the Bombay High Court was concerned with a case, in which, a loan obtained by the assessee during the previous year for business purposes was written back as a result of the consent terms between the parties. The assessee claimed that the loan was the capital receipt and was not claimed as deduction from the taxable income as expenses and hence, it did not come under Section 41(1). The Assessing Officer held that the credit balances written back was the income of the assessee that arose out of the business activity and hence, liable to tax under Section 28. The Tribunal relied upon the decision in T.V.Sundaram Iyengar & Sons and upheld the contention of the Revenue. Before the High Court, the assessee relied upon a judgment of the Bombay High Court in Mahindra & Mahindra Limited v. C.I.T. [261 I.T.R. 501] to the effect that in relation to such transactions, Section 28(iv) was not attracted. But, the Bombay High Court followed the decision in T.V.Sundaram Iyengar & Sons and rejected the claim of the assessee.
29. In Logitronics, the Delhi High Court was concerned with the very same questions that we are called upon to deal with in this case. In the case before the Delhi High Court, the assessee availed a loan from the State Bank of India, but failed to discharge its liability. The loan was categorized as a non performing asset and proceedings for recovery have been initiated. During the pendency of those proceedings, a One Time Settlement was arrived at and a portion of the loan as well as interest were waived. In the return filed by the assessee, they showed the interest waived as income, but not the amount of loan waived. The principal amount written off was directly taken to the balance sheet under the head ‘capital reserve’ and it was not offered for taxation. 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 Honourable Supreme Court in CIT v. T.V. Sundaram Iyengar & Sons Limited wherein unclaimed deposits received in the course of trading transaction were held to be taxable is applicable to waiver of loan?”

31. Before proceeding with the discussion on the substantial questions of law, the Delhi High Court took note of the broad scheme of the Act and posed a question to itself as to what would be the character of waiver of part of the loan at the hands of the assessee, though such waiver definitely brings some benefit to the assessee. If the waiver of the part of the loan brings a capital receipt, then only the capital gains tax would be chargeable under Section 45 and if not, the question was whether remission of loan was no income at all.
32. The Delhi High Court started with the decision of the Supreme Court in T.V.Sundaram Iyengar & Sons and after analysing the same in great detail, the Delhi High Court took note of the decision of this Court in Iskraemeco Regent Limited, on which, heavy reliance is placed in this case by the assessee.
33. On the basis its analysis of the decision of this Court in Iskraemeco Regent Limited, the Delhi High Court came to the conclusion in paragraph 23 of the report that ‘in the context of waiver of loan amount, what follows from the reading of the aforesaid judgment would be that the answer would depend upon the purpose for which the loan was taken.’ If the loan had been taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. But, if the loan was for trading purpose and was treated as such from the beginning in the books of account, the waiver thereof may result in the income more so when it was transferred to the profit and loss account.
34. In Rollatainers, the Delhi High Court was again concerned with a case where in terms of a corporate debt restructuring package worked out between the assessee and the bank, a portion of the principal and interest were waived. The Income Tax Appellate Tribunal held that the waiver of the working capital loan utilised towards the day-to-day business operations resulted in manifest in the revenue field and hence, was taxable in the year of waiver.
35. Finding on facts that the term loans in question were taken for the purchase of capital assets from time to time and these amounts did not come into the possession 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 v. 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 receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for instance, a gift voucher is issued, enabling the holder of the voucher to have dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”. The absence of the prefix “the” to the word “business”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 of capital borrowed for the purpose of business or profession is allowed as deduction under Section 36(1)(iii), in computing the income referred to in Section 28. But, the proviso thereunder states that any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession, whether capitalised in the books of account or not for any period beginning from the date on which the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction.
43. Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. These aspects have not been taken note of in Iskraemeco Regent Ltd.
44. In view of the above, the questions of law are liable to be answered in favour of the Revenue/appellant. Accordingly, they are answered in favour of the appellant/Revenue and the appeal filed by the Revenue is allowed. No costs.”
7. The Ld. CIT(A) deleted the addition relying on the judgments in the case of CIT v. Mahindra and Mahindra Ltd.,6 (Bombay).
8. Before us, the Ld. DR relied on the order of the Assessing Officer and Ld. AR supported the order of the Ld. CIT(A).
9. We have examined the judgment of the Hon’ble High Court of Madras dated 22.04.2016 in the case of CIT v. 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 v. 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 receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for instance, a gift voucher is issued, enabling the holder of the voucher to have dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”. The absence of the prefix “the” to the word “business”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 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.”
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 shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.
14) Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re-produced as under:

“41. Profits chargeable to tax.- (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

x x x”

15) On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by 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 account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between ‘trading liability’ and ‘other liability’. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.
17) To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons:
(a)Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money.
(b)Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.
18) In view of above discussion, we are of the considered view that these appeals are devoid of merits and deserve to be dismissed. Accordingly, the appeals are dismissed. All the other connected appeals are disposed off accordingly, leaving parties to bear their own cost.”
11. Hence respectfully following the ratio laid down by the Hon’ble Apex Court, we decline to interfere with the order of the Ld. CIT(A). Appeal of the Revenue on this ground is dismissed.
Issue : Purchases without consideration
ITA No. 443/Ahd/2023 : AY 2013-14 – By Revenue
12. The entire part of the assessment on this issue is as under:-
“8. Purchase at NSEL without consideration:-
81. Vide para 2 of observations made in special audit report it has been highlighted that M/s. NKIL has during the year purchased Castor seed through NSEL Platform amounting to Rs. 62,21,328/- (weighing 173.530 MT) However, the company has not furnished details to special auditor regarding payments for such goods purchased and has merely replied that the payment is made through Settlement account of NSEL This fact states that the goods are received by company without any payment and the same is settled against other parties account, thus, the Castor Seeds received are in the nature of payment received from NSEL, alike to the payment received 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 these transactions are not paper transactions under traders contract. To substantiate the same, the assessee had furnished the details of purchases and sales register to the special auditor at the time of special audit. The ledger account of purchase parties showing payments made to these parties is attached herewith vide Annexure-1.”
84 As per submission of the assessee is similar to that furnished before special auditor. It has been stated that Payment is made through Settlement account of NSEL. This fact states that the goods are received by company without any payment and the same is settled against other parties account. Thus, the Castor Seeds received are in the nature of payment received from NSEL alike to the payment received in NKPL-NSEL client A/c. The misuse of NSEL platform has been discussed in earlier paras. The same was being misused in order to avail finance. There was no underlying stock. 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 as the same has been utilized by NKIL itself unlike funds which are rotated through NK group concerns. Thus assessee has not been able to bring any concrete evidence on record regarding genuineness of payments made from NKIL’s account. Thus, considering this fact and the findings of special auditor in this regard, it is concluded that 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.”
13. The Ld. CIT(A), on this issue, held as under:-
“6.10 The learned has carried out addition of Rs.62,21,328/- on account of purchases without consideration based on submission made by special auditor.
6.11 In this contest the appellant submitted that it had purchased castor seed on NSEL platform on actual delivery basis under farmers contract and appellant submitted bank statement reflecting payment made along with relevant vouchers and ledger extracts of said purchase.
6.12 On perusal of the supporting evidences submitted by the appellant it is evident that there are no purchases recorded without consideration. Therefore, addition made by learned AO is deleted.”
14. Before us, the Ld. AR reiterated of the arguments taken before the Revenue Authorities and the Ld. DR relied on the order of the Assessing Officer. We have gone through the factum. The reasons for making the addition by the Assessing Officer was that the assessee-company has not furnished the details of purchase of Castor Seeds on NSEL Platform to the Special Auditor. The Assessing Officer held that the goods were received by the assessee without any payment and the same is settled against other party’s account. On the other hand, the assessee submitted that the castor seeds have been purchased on actual delivery bases and against that purchases payments have been made through settlement account. The assessee has also furnished the details of purchases & sales and ledger account of purchase parties reflecting payments made thereof. Keeping in view these undisputed facts, we hold that no addition is called for. The appeal of the Revenue on this ground is dismissed.
Issue : Disallowance u/s 14A of the Act
ITA No. 448/Ahd/2023 : AY 2013-14 – By Assessee
15. It is an undisputable fact that the assessee has not earned any income which has been claimed as exempt. Hence, keeping in view the established jurisprudence, we hold that no disallowance is called for in the absence of any exempt income earned/claimed. Appeal of the assessee on this ground is allowed.
Issue : Brought Forward Losses
ITA No. 447/Ahd/2023 : AY 2010-11 – By Assessee
ITA No. 448/Ahd/2023 : AY 2013-14 – By Assessee
16. The Assessing Officer is directed to consider the amount of brought forward losses available on the record and shall allow the set off of the same while determining the total income. In the result, the appeal of the assessee on this ground is allowed.
17. In the result, the appeals of the Revenue are dismissed and the appeals of the Assessee are allowed.