N.K. Proteins Pvt. Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that the transaction charges are actually additional cost of funds raised for the purpose of business. Hence, expenditure incurred on account of the same was wholly and exclusively for the purpose of business.
Facts- The assessee challenges the disallowance of Rs.1,30,29,338/- made by AO and confirmed by the learned CIT(A) on account of transaction charges. Notably, during the course of Special Audit, it was noticed that transaction charges were paid by the assessee-company for transactions on NSEL platform in connection to caster seeds, soya bean seeds, castor oil and cotton wash oil. Although it was submitted on behalf of the assessee that such transaction charges were not debited to the profit and loss account, the Assessing Officer found that the same were debited and included in the purchases. According to AO, the transaction charges were recoverable by the assessee-company from clients and since it could not produce any documentary evidence to substantiate its claim that it was not obligatory to recover the transaction charges, he disallowed the entire transaction charges of Rs.1,30,29,338/-.
Secondly, assessee also challenged addition on the basis of unexplained cash credit stating that that the entire amount of Rs.244.98 crores was utilized by the assessee-company for making payment against purchase as a part of the trade cycle and consequently even the balance amount of Rs.52.01 cores cannot be treated as unexplained cash credit under Section 68 of the Act merely on the ground that the same had remained unpaid.
Conclusion- The transaction charges actually represented additional cost of funds raised by the assessee-company for the purpose of its business and the expenditure incurred on account of the same was wholly and exclusively for the purpose of business of the assessee as rightly contended by the learned Counsel for the assessee. In the case of Khambhatta Family Trust (supra) cited by the learned Counsel for the assessee, the Hon’ble Gujarat High Court has held that the requirement for allowability of any expenditure as business expenditure is that the same should be wholly and exclusively incurred for the purpose of business and not necessarily. Keeping in view the said decision of Hon’ble jurisdictional High Court and having regard to the facts of the case as discussed above, we are of the view that the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of transaction charges is not justifiable and deleting the same.
Further it was also held that the entire corresponding sales made by the assessee-company to the parties through NSEL was duly recognized as its income in the books of account and the proceeds against the same cannot be treated as income of the assessee again as the same would amount to double addition. We, therefore, delete the addition made by the Assessing Officer and confirmed by the learned CIT(A) on this issue and allow
FULL TEXT OF THE ORDER OF ITAT DELHI
Out of these four appeals, two appeals being ITA Nos.329/Ahd/2017 & 1211/Ahd/2018 filed by the assessee N.K. Industries Ltd. are filed against the order of the learned Commissioner of Income-tax (Appeals)-9 & 7, Ahmedabad [“CIT(A)” in short] dated 22/11/2016 & 12/03/2018 for Assessment Years (AYs) 2011-12 & 2012-13 respectively, one appeal being ITA No.328/Ahd/2017 filed by the assessee namely N.K. Proteins Pvt. Ltd. is directed against the order of the CIT(A)-9, Ahmedabad dated 23/11/2016 for AY 2011-12 while the remaining one appeal being ITA No.1213/Ahd/2018 filed by the assessee namely Tirupati Proteins Pvt. Ltd. is against the order of the CIT(A)-7, Ahmedabad dated 12/03/2018 for AY 2011-12. Since these appeals filed in the case of assessees belonging to the same group involve some common issues, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience.
2. First we take up ITA No.328/Ahd/2017 for AY 2011-12 in the case of N.K. Proteins Pvt. Ltd. and the grounds of appeal raised therein are as under:
1. On the facts and in the circumstances of the case, the CIT(A) has erred in not accepting Appellant’s plea that the order passed by the Ld.CIT(A) is bad in law and void ab initio.
2. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have accepted that assessment order was barred by limitation.
3. On the facts and in the circumstances of the case, the learned CIT(A) is not correct in observing that the Assessing Officer had right reasons to believe that special audit was required in the given case.
4. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred by confirming the Assessing Officer’s decision that the loss of Rs.14,42,91,136/- is speculative in nature.
5. On the facts and circumstances of the case, the Ld.CIT(A) has erred in confirming the disallowance of transaction charges of Rs.2,65,865/-u/s.40(a)(ia) in as much as Section 194H is not applicable, since the transaction charges is not the commission or brokerage within the meaning of Section 194H.
6. On the facts and circumstances of the case, the Ld.CIT(A) has erred in confirming the disallowance of transaction charges of Rs.1,30,29,338/- in as much as there is no obligation on the part of assessee to recover such amount from the client and the assessee is following consistent practice not to recover such charges from client.
7. On the facts and circumstances of the case, the Ld.CIT(A) has erred in confirming the disallowance of depreciation of Rs.6,04,648/- without appreciating the tax audit report and the production sheet.
3. At the time of hearing before us, the learned Counsel for the assessee has not pressed Ground Nos. 1 to 3 raised by the assessee in this appeal; the same are accordingly dismissed as not pressed.
4. Apropos the issue raised in Ground No.4 relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of the alleged speculative loss, the relevant facts of the case are that the assessee is a company which is engaged in the business of manufacturing edible and non-edible oil products and by-products thereof. The return of income for the year under consideration was filed by it on 25.10.2011 declaring a total income of Rs.25,68,73,038/-. Although the said return was originally processed by the Assessing Officer under Section 143(1) of the Income-tax Act, 1961 (“the Act” in short), the case was subsequently selected for scrutiny and a notice under Section 143(2) of the Act was issued by him to the assessee on 14.09.2012. During the course of assessment proceedings, complexities and doubts about the accounts of the assessee-company were noticed as it was a group concern of N.K. Proteins Group which was involved in transactions with National Spot Exchange Ltd. (“NSEL” in short) and the assessee-company had also carried out certain transactions on NSEL platform. In order to ascertain whether the transactions with its sister-concerns were completed by the assessee-company by actual delivery of stocks or merely multiple transactions of the same stocks were done with a view to artificially inflate turnover, Special Audit of the books of accounts of the assessee-company for the year under consideration was ordered under Section 142(2A) of the Act by the competent authority. Due to financial irregularities and default in payments to investors, the NSEL was investigated by various Government agencies. In this connection, the assessee-company being member of NSEL and its group concerns were also surveyed under Section 133A of the Act by the Investigation Wing of the Income-tax Department on 22.08.2013. After taking into consideration the survey report as well as Special Audit Report and the submission made on behalf of the assessee on the relevant issues, the following observations/findings, as summarized in paragraph No. 7.19 of the assessment order, were recorded by the Assessing Officer:-
“a. The assessee group is closely linked with NSEL.
b. Though NKPL claimed to a broker for NSEL in effect all transactions done by it were done for the entities of the NKP group only. Thus the charade of being a broker was created only to mask the true nature of the transactions entered into by the group entities on the NSEL platform.
c. These was systemic misuse of the NSEL platform and what was apparent was admittedly as per the assesses group itself not the true form of the transactions.
d. Though NSEL was a physical exchange that is all the trades were to be backed with goods and the transactions on paper were to be settled against delivery of goods, delivery never took place and transactions of buy and sell remained on paper only.
e. In effect the whole of the stock on paper was nonexistent. The assessee group being one of the main warehouses of NSEL for castor o(l and -other related items was aware of the true nature of NSEL and was in effect an active collaborator In the misuse of the NSEL platform.
f. Though in his submissions before the it authorities the assessee group claimed that the true nature of the transactions on NSEL were finance transactions it has never withdrawn the claim of losses of Rs. 14,42,91,136 debited in its books.
g. Even if the form in which the transactions are booked is taken to be true the loss of Rs. 14,42,91,136 admittedly incurred on transactions that were settled without effecting delivery being speculative in nature cannot be allowed to be set off against business income.
h. Even if the form of the transactions is takers to be financing transactions then as discussed above the difference between the sale -purchase partakes the character of interest and as no TDS was done on these the same is disallowable. Further as till date the assessee group has not been able to discharge the onus of explaining the use of the funds to the extent of Rs.43.80 Crores, that it got from the so called financing transactions, for the purpose of its business the interest expenses claimed to have been incurred on the said finance is disallowed.”
4.1 On the basis of the above findings/observations recorded by him, the Assessing Officer treated the amount of Rs.14,42,91,136/- as speculative loss and the claim of the assessee that the same being interest expenditure allowable as deduction was disallowed by him.
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:-
