Mahavir Singh, Member (J) -
(1.) THESE cross appeals are arising out of assessment order framed, by DCIT, Central Circle -XXV, Kolkata for assessment year 2009 -2010 u/s. 143(3) r.w.s. 144C(5) and 144C(13) of the Income -Tax Act, 1961 (hereinafter referred to as 'the Act') dated 07.01.2014, in view of directions of Disputes Resolution Panel, Kolkata dated 22.11.2013 u/s. 144C(5) of the Act.
(2.) THE first common issue in these cross appeal is as regards to disallowance of damages for breach of contract (sauda cancellation/sauda settlement charges). For this, the assessee has raised following grounds:
Assessee's grounds of appeal:
1. Damages for Breach of Contract (Sauda Cancellation) considered as Speculation Loss
1.1. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in treating the damages of Rs. 23,48,59,500/ - incurred for breach of contract i.e. price difference on account of Sauda Cancellation in the course of its business as a 'speculative transaction' u/s. 43(5) of the Act and such loss/expense as speculative business loss and denied set off of such loss against income. The reasons given by them for doing so are wrong, contrary to the facts of the case and against the provisions of law.
1.2. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in treating damages incurred for breach of contract in the course of its business as a 'speculative transaction' u/s. 43(5) of the Act solely on the basis of assumptions, presumptions and surmises without any evidence or conviction.
1.3. The Ld. DRP/AO erred in law and facts in observing that the transactions were of accommodative nature without any evidence to prove such allegation.
1.4. The Ld. DRP/AO failed to appreciate that the damages for breach of contract i.e. price difference on account of cancellation of purchase contract in the normal course of is business expenses wholly incurred for its business hence allowable u/s. 37 of the Act.
1.5. Without prejudice to above, on the facts and in the circumstances of the case and in law, the Ld. DRP/AO erred in treating speculation transactions as speculation business. Without appreciating the fact that speculative transaction does not amount to speculative business and assessee has never been held to be in such business.
1.6. The Ld. AO ought to have allowed the loss as speculation loss as held by him in the draft asst. order.
Revenue's ground is as under:
1. In the facts and circumstances of the case, Ld. D.R.P. erred in issuing directions not to treat Sauda Settlement Charges as speculation loss by ignoring provisions of Sec. 43(5) of the Act which clearly indicates that any transaction not settled by actual Delivery or transfer is to be treated as speculative transaction without excluding trade related transaction from the term "transaction".
Briefly stated facts relating to the above issue are that during the year under consideration, the assessee claimed loss of Rs. 23,48,59,500/ - on account of sauda cancellation charges. The assessee claimed this loss due to the cancellation of eight transactions during the year entered through sauda agreement. The assessee also claimed loss on account of settlement of Sauda amounting to Rs. 50,91,187/ -. The AO noticed that the loss incurred on account of Sauda cancellation charges was actually derived from transactions between the suppliers of raw materials and buyer's only manufacturing unit at Haldia. The details of Sauda cancellation charges are appended in the draft assessment order framed under section 143(3) r.w.s. 144C of the Act dated 31.03.2013 at page 45 of assessee's paper book and inner page 3 of the draft assessment order. For the sake of clarity of facts, the same is reproduced hereunder:
The AO noted that the assessee has accepted all the debit notes of the above three parties, according to their demand and debit notes without any arbitration. He further noted that Sauda cancellation charges are adjusted on account of known parties without actual delivery of goods and accordingly he noted facts, which are summarized as under:
(i) Sing Global Oil Products Ltd. is based at Singapore and one of the raw material suppliers
(ii) Mantora Oil Products Ltd. had neither supplied any goods nor any other kind of transaction during this year except this transaction resulting in loss to the assessee, which was also resulted without delivery of any goods to the assessee and
(iii) K.S. Oil Ltd., which has supplied goods to the assessee during this year. But K.S. Oils Ltd. had already signed an MOU on 23.8.2008 to purchase the manufacturing unit of the assessee at Haldia.
(iv) It is pertinent to note that the all contracts (except with K.S. Oil) with said parties related to incur Sauda Cancellation Charges (Loss) for the sum of Rs. 23,48,59,500.00 and then such loss was claimed as business expenditure for the first time, on transactions between 17.08.2008 to 21.08.2008 and again on 17.11.2008 (with K.S. Oil Ltd.).
(v) The MOU for the above discussed slump sale was made on 23.08.2008 and signed by both assessee (seller) & K.S. Oil Ltd. (purchaser). Thus all the contracts pertain to Sauda Cancellation Charges (Loss) of Rs. 23,48,59,500.00 were prepared on the letter head pad with above mentioned three(3) parties in connection with alleged purchases just immediately before the official agreement i.e. MOU dated 23.08.2008 and subsequently terminated without actual delivery of any good and ultimately generated huge loss to assessee company in the later part of this year under consideration. The unit at Haldia was handed over to K.S. Oil Ltd., the purchaser, on 18/02/2009.
Further, the AO noted the consolidated turnover and net profit from manufacturing and trading business of the assessee for the last three years and stated that this is a clinching evidence to distinguish such Sauda cancellation charges from the normal manufacturing and trading business of the assessee. He recorded the following facts:
Finally in para 2.7 of assessment order, by following directions of Dispute Resolution Panel (DRP), AO made the following disallowance: -
2.7 On the basis of above finding the Sauda Cancellation Charges of Rs. 23,48,59,500/ - was proposed to be disallowed vide draft assessment order, which was communicated to the assessee on 11/02/2013 u/s. 144C(1) of the Income Tax Act' 1961.
The assessee referred the issue to the Dispute Resolution Panel (D.R.P.) by filing objection u/s. 144C(2)(b)(i). The D.R.P. on examination of the facts and circumstances of the case rejected the assessee's objection vide it's order u/s. 144C(5) dated. 22/11/2013 received by the undersigned on 10/12/2013. The relevant part of para of the D.R.P.'s conclusion in page 24 is reproduced as under,
The purchase transactions said to have been undertaken by the assessee which resulted in "sauda cancellation" losses appear to be accommodative nature and cannot be said to be attributable to the business of the assessee. The methodology adopted by the assessee in our considered view seems to be with the intent to save himself from tax liabilities arising out of the sale of business assets as discussed above. Accordingly the objection raised by the assessee is not sustainable and the objection raised on this ground is rejected.
In view of the above decision of the Dispute Resolution Panel, the claim of loss on account of Sauda Cancellation Charges of Rs. 23,48,59,500/ - is disallowed.
Aggrieved the assessee came in appeal before us against the directions of DRP as well as against assessment order.
(3.) THE undisputed facts are that the assessee is manufacturer of edible oil with a production capacity of 500 TPD. The assessee normally imports raw materials that include crude palm oil and crude soya and refined oil for the plant. The assessee sells refined products i.e. palm and soya in bulk i.e. loose and packed in tin, jar and pouch. The assessee sells these products to manufacturers of vanaspati, biscuits and bakery products and also to small traders. The purchases and sales were mostly made through brokers. During the relevant assessment year, assessee's case was picked up for scrutiny assessment by issuing notice under section 143(2) by the AO and therefore reference was made to Transfer Pricing Officer (TPO), who proposed adjustment of Rs. 16,62,25,514/ - to the returned income of the assessee. The AO framed draft assessment order under section 143(3) r.w.s. 144C(ii) of the Act dated 11.02.2013 incorporating adjustment determined by the TPO as well as other additions and disallowances. The assessee referred the matter to DRP against the determination of transfer pricing by TPO as well as other additions and disallowances proposed in the draft assessment order.;