Leo Edibles & Fats Limited, Hyderabad, Hyderabad V. ITO, Ward-16(1), Hyderabad, Hyderabad

ITA 17/Hyd/2017

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9442 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 28-09-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 04-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S T.S. AJAI
• Keywords: Cost of acquisition; Speculation loss; Bad and doubtful debts; Speculative transactions; Set aside
• Section: 37; 143(3); 115JB; 37(1); 43(5); 201; 43

Judgement Text

आयकर अपीलीय अधिकरण, हैदराबाद पीठ में IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”, HYDERABAD BEFORE SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER & SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER आ.अपी.सं / ITA No. 17/Hyd/2017 (निर्धारण वर्ा / Assessment Year: 2012-13) M/s. Leo Edibles & Fats Limited, Hyderabad [PAN No. AAACL4123E] Vs. Income Tax Officer, Ward-16(1), Hyderabad अपीलधर्थी / Appellant प्रत् यर्थी / Respondent निर्धाररती द्वधरध/Assessee by: S/Shri T.S. Ajai & A.V. Raghuram, ARs रधजस् व द्वधरध/Revenue by: Shri Kumar Aditya, DR स ु िवधई की तधरीख/Date of hearing: 29/09/2022 घोर्णध की तधरीख/Pronouncement on: 31/10/2022 आदेश / ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the order dated 21/11/2016 passed by the learned Commissioner of Income Tax(Appeals)-4, Hyderabad (“Ld.CIT(A)”) in the case of M/s. Leo Edibles & Fats Ltd., (“the assessee”) for the assessment year 2012-13, assessee preferred this appeal. ITA No. 17/Hyd/2017 Page 2 of 10 2. Brief facts of the case are that the assessee is a closely held company carrying on the business of trading in edible oils and coal. For the assessment year 2012-13, assessee filed the return of income on 27/8/2012 disclosing total income of Rs. 1,44,629/- and book profit under section 115JB of the Income Tax Act, 1961 (for short “the Act”) at Rs. 1,33,944/-. 3. During the course of assessment proceedings, from the purchase register of the assessee, learned Assessing Officer noticed that the purchases (exclusive of VAT) was Rs. 52,07,23,164/- whereas the purchases debited to the Profit and Loss Account (P&L Account) was Rs. 53,03,64,902/- and since the sales and purchases carried out throughout the year with only one and the same party, namely, in NCS Sugars Ltd and purchases are more than sales, the learned Assessing Officer sought the explanation of the assessee as to why the excess of purchases claimed of Rs. 96,41,738/- should not be added to the income of the assessee. 4. Assessee explained that the company’s normal practice of purchase accounting consists of cost of the material and inward expenses such as operating charges, fright expenses, insurance, banking in terms, shortage claims, settlement expenses, trading account-National Commodity Exchange (NCDEX) etc., which practice they have been following consistently for all the years. According to the assessee the purchase value consists of the cost of material at Rs. 52,07,23,164/- and inward expenses such as settlement expenses of Rs. 96.50 lakhs under trading account- NCDEX Rs. 8,262.12 thereby bringing the total purchase cost to Rs. 53,03,64,901.88. Assessee therefore, explains the so-called excess of purchase at Rs. 96,41,738/- as not excess purchase amount but forms part of normal purchase cost and prayed the learned Assessing Officer not to add the same. 5. Learned Assessing Officer, however, completed the assessment under section 143(3) of the Act by order dated 23/3/2015 by making ITA No. 17/Hyd/2017 Page 3 of 10 addition of Rs. 96,41,738/- towards the disallowance of the heading loss, Rs. 5 lakhs by disallowing under section 37(1) of the Act and Rs. 3,81,038/- by disallowing the bad debts. 6. Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal before the Ld. CIT(A). In respect of the addition of Rs. 96,41,738/- on account of disallowance of the heading loss, assessee contended before the Ld. CIT(A) that in order to protect its interest from fluctuation in price of the commodities which deals at a future date, the assessee enters into forward contracts with various purchases and is a loss in commodities through the NCDEX as well as directly; that the assessee entered into transactions for purchase and sale of coal M/s NCS sugars Ltd on various dates and in order to guard against the risk of fluctuation in the price of coal, they thought it expedient to enter into forward contracts for purchase and sale of palmolein oil and in that forward contract transaction they incurred loss of Rs. 96.50 lakhs. Assessee further contended that since such expenditure is not exclusively covered under section 30 to 36 of the Act, it is not for acquiring a capital asset and was incurred wholly and exclusively for the purpose of business of the assessee, the same is eligible for deduction under section 37 of the Act. 7. Further contention of the assessee before the Ld. CIT(A) was that, what proviso (a) to section 43(5) states is that for the purpose of subsection, a contract in respect of raw materials or merchandise is entered into by the person in the course of his merchanting business to guard against loss through future price fluctuations in respect of his contract for actual delivery of goods sold by him shall not be deemed to be a speculative transaction. Assessee placed reliance on the CBDT Circular No. 23 (XXXIX-4) wherein it is stated that hedging transactions having reasonable relation to the value and volume of dealers or investors holdings are excepted from the ambit of speculative transactions, but not the transactions in scripts outside his holding. ITA No. 17/Hyd/2017 Page 4 of 10 8. Further case of assessee before the Ld. CIT(A) was that the assessee entered into forward contracts only to hedge against the fluctuations in price of the goods in which the trades and the transaction value of the commodities transacted has to be compared instead of comparing the price of each commodity. Assessee also placed reliance on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Ramachandra Shivnarain (1993) 201 ITR 862 and the decision of the Hon’ble Andhra Pradesh High Court in the case of CIT vs. M/s VST industries Ltd ITA No. 284 of 2014. 9. Ld. CIT(A) considered the contentions of the assessee in the light of the CBDT circular and also the decision is relied upon by the assessee. Ld. CIT(A) observed that as per the Profit and Loss Account (P&L Account), the Revenue from operations was to the tune of Rs. 52,44,40,743/- , other income was Rs. 2,20,79,124/- totalling Rs. 2,54,65,19,867/- ; whereas the cost of material consumed was Rs. 53, 03, 64, 902/- and finance cost and other expenses arrived at loss of Rs. 9,58,856/- by the assessee. The cost of material was arrived as per schedule 18 by taking purchase of Rs. 53,03,64,902/- and, therefore, purchasers of figure was reached as per schedule 15 by taking domestic and imported coal of Rs. 52,07,23,164/- and adding the expenses of Rs. 96,50,000/- to reach the figure of Rs. 53,03,64,901/- . 10. Ld. CIT(A) perused the statement of purchases and sales and found that hedging transactions from NSL Sugars Ltd was shown as transaction without actual delivery and thereby hedging transactions. Ld. CIT(A) recorded that the assessee explained that the transaction of coal was taken as actual transaction even though not delivered and the transaction of edible oils was shown as hedging transaction and as a matter of fact, according to the Ld. CIT(A), from the accounts on the details submitted by the assessee it was observed that the assessee shown sale and purchase of coal and edible oil both as not on actual delivery basis and since there is no actual delivery, both are hedging transactions as disclosed by the ITA No. 17/Hyd/2017 Page 5 of 10 assessee itself. On this premise Ld. CIT(A) held that the learned Assessing Officer rightly rejected the claim of the assessee and rightly disallowed the heading loss of Rs. 96,41,738/- . 11. In respect of the addition of Rs. 3,81,038/- by disallowing the bad debts, assessee contended that the amounts of Rs. 82,836/- and Rs. 2,71,306/- were receivable against the high sea sale transactions since 2004 and 2008 and another sum of Rs. 26,896/- was receivable against various sundry creditors; and since these receivables were outstanding for several years and there was no likelihood of recording the same, the management of the assessee decided to write off these amounts to the Profit and Loss Account (P&L Account) in the previous year. According to the assessee under section 36(1)(vii) of the Act as clarified by the CBDT in the Circular No. 12/2016 dated 30/5/2016 the claim for any bad debt or part thereof in any previous year shall be admissible under section 36(1)(vii) of the Act if it is written off as irrecoverable in the books of accounts of the assessee further previous year. 12. In this respect, Ld. CIT(A) observed that the amount of Rs. 3,81,038/- was not accounted as bad debt but as a sundry balances written off. It is therefore, the Ld. CIT(A) confirmed this disallowance. 13. Assessee is aggrieved by these findings of the learned CIT(A) and filed this appeal contending that the hedging loss was incurred to guard against the risk of fluctuation in trading in commodities carried out by it and hence false outside the definition of speculative loss under section 43(5) of the Act and that the loss of Rs. 96,41,738/- to have been allowed as normal business loss. Alternative claim of the assessee is that the profit of Rs. 37,17,579/- may be set off against the loss of Rs. 96,41,738/- determined a speculative loss by the learned Assessing Officer. 14. It is the argument of the Ld. AR that the authorities below went wrong in denying the claim of the assessee for deduction of the hedging ITA No. 17/Hyd/2017 Page 6 of 10 loss to the tune of Rs. 96, 41, 738/- because the assessee deals both in coal and edible oil and in order to guard against the risk of fluctuations in price in trading in coal, the assessee had to contract the hedging transaction in edible oils. According to him, the learned Assessing Officer is wrong in holding that inasmuch as the assessee did not do the hedging transactions in respect of the imported, but it was in respect of Palmolein oil, the loss incurred in hedging contracts fall within the definition of speculation loss as defined under section 43 (5) of the Act. While placing reliance on the CBDT Circular 23 (supra) he argued that the learned Assessing Officer should not treat genuine hedging transactions in connected communities as a speculative transactions, though the transactions may not be in identically the same commodity. According to him, the assessee deals with both coal and edible oil and therefore, hedging transactions in respect of coal with the edible oil is permissible under section 43 (5) of the Act in view of the circular. He also placed reliance on the decision reported in Ramachandra Shivnarain (supra), VST Industries Ltd (supra) and also in the case of assessee itself for the assessment year 2008-09 in Leo Edibles and Fats Ltd Vs. DCIT in ITA No. 396/Hyd/2012. 15. Per contra, it is the submission of the Ld. DR that the CBDT circular (supra) clarified the expression “connected commodities” by stating that the hedging transactions are “one type of cotton against another type of cotton, one variety of oilseed against another, one type of green against another”, and therefore, is not open for the assessee to contend that the hedging transactions in the edible oil is permissible in respect of the actual transaction of coal. According to him, the words have to be understood with reference to the other words which they keep in company with, and therefore, by any stretch of imagination, it cannot be said that “edible oil” is in any way connected to “coal”. By stating so, he justified the action of the learned Assessing Officer. ITA No. 17/Hyd/2017 Page 7 of 10 16. He further submitted that on verification of the material furnished by the assessee the Ld. CIT(A) found, as a matter of fact that even in respect of the alleged actual transaction in coal, it was without any delivery and therefore, both the transactions, namely, in coal as well as edible oil, or the transactions without any actual delivery. When both the transactions are hedging transactions as disclosed by the books of assessee itself, there is no such thing as to guard against the risk of raw material or merchandise in stock falling in value, the losses arising as a result of such forward sales were transacted. By placing reliance on the CBDT circular (supra), Ld. DR submitted that it is only where the forward sales are entered into with a view to guarding against the risk of raw materials or merchandise, in stock falling in value, the losses arising as a result of such forward sales should not be treated as speculation losses and the hedging sale can be taken to be genuine only to the extent the total of such transactions does not exceed the total stock of raw materials or merchandise in hand. 17. According to the learned DR, in this case, both the transactions under question referring to the hedging loss are themselves hedging transactions taking the colour of speculative transaction, because in neither of the transactions, actual delivery is contemplated. According to him, there is possibility of assessee quoting the losses occurred in the hedging transactions in respect of both the coal and the edible oils, which requires the assessee to prove that one is actual transaction and other one is hedging transaction. 18. We have gone through the record in the light of the submissions made on either side. It is clear from the record that the reason for the learned Assessing Officer to disallow the hedging losses is that such hedging transaction is not in connected commodities and, therefore, it is a speculative transaction; whereas the reason for the learned CIT(A) to confirm the disallowance of hedging loss is that such transaction in palmolein oil was not in respect of the coal which was taken actual delivery ITA No. 17/Hyd/2017 Page 8 of 10 of. It is therefore clear that the Learned Assessing Officer and the learned CIT(A) are eluding to points No. (ii) and (i) of circular (supra) respectively, inasmuch as point (ii) refers to the transactions in “connected commodities” and point No. (iii) refers to the hedging transactions in respect of the raw materials or the merchandise in stock. 19. A reading of the first appellate orders shows that even according to the information furnished by the assessee, the transaction for purchase of coal was also not intended for actual delivery in order to form it part of stock, so as to guard against the fall in its value the hedging transaction was entered. Further, though the case of assessee has been that they are dealing in imported and domestic commodities in vegetable oils, coal and sugar etc. neither the assessment order nor the first appellate order clarify in unequivocal terms whether or not the assessee has been dealing in edible oils also apart from the coal. In this situation, the findings of the authorities below cannot be held to be baseless without facts being first fixed. Factual determination is required to give a finding whether the edible oils are connected commodity in the context of point (ii) of the circular (supra). Further factual verification that is required is in respect of point (i) to know whether the hedging transaction in edible oils was against another hedging transaction in coal or it was to guard against the risk of merchandise in stock falling in value. 20. In respect of the bad bebts, according to the learned Assessing Officer, the assessee failed to furnish any evidence in support of the claim that the same was offered as income in the respective years; where as according to the learned CIT(A), the amount of Rs. 3,81,038/- was written off as sundry balances but not accounted as bad debts. This also requires verification at the end of the Learned Assessing Officer as to whether the assessee offered such an amount in the earlier years as income or that this amount is properly written off in the books of accounts. ITA No. 17/Hyd/2017 Page 9 of 10 21. We are, therefore, of the considered opinion that it is a fit case to set aside the impugned order on these aspects and restore the issues to the file of the learned Assessing Officer for verification of the facts stated above in the light of proviso (a) to section 43(5) of the Act. We accordingly set aside the impugned order and restore the issues to the file of the learned Assessing Officer for verification of the facts stated above. While doing so, the learned Assessing Officer will consider the necessity and possibility of set off of the profits arising from sale of coal against the loss incurred in the transactions of palmolein oil. Grounds are accordingly treated as allowed for statistical purposes. 22. In the result, appeal of the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on this the 31 st day of October, 2022. Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 31/10/2022 TNMM ITA No. 17/Hyd/2017 Page 10 of 10 Copy forwarded to: 1. M/s. Leo Edibles & Fats Limited, Flat No. 203, Diamond House, Behind Topaz Building, Panjagutta, Hyderabad. 2. The ITO, Ward-16(1), Hyderabad. 3. CIT(A)-4, Hyderabad. 4. Pr.CIT-4, Hyderabad. 5. DR, ITAT, Hyderabad. 6. GUARD FILE TRUE COPY ASSISTANT REGISTRAR ITAT, HYDERABAD