DCIT, New Delhi v. M/s. Orient Overseas Pvt. Ltd., Delhi

FIT FOR PUBLICATION. IN THE INCOME TAX APPEL LATE TRIBUNAL SD/- SD/- [ DELHI BENCH F DELHI ] J. M. A. M. BEFORE SHRI R. P. TOLANI JM & SHRI K. D. R ANJAN AM I. T. APPEAL NO. 4563 (DEL) OF 2010. ASSESSMENT YEAR : 200708. DY. COMMISSIONER OF INCOME-TAX M/S. ORIE NT OVERSEAS PVT. LTD. CIRCLE : 13 (1) VS. PLOT NO. 9 1 ST FLOOR SAGAR CENTRE N E W D E L H I. G U J R A N W A L A T O W N D E L H I 110 006. P A N / G I R NO. AAA CO 0036 B. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI AJAY VOHRA ADV.; & SHRI AVDH ESH BANSAL A.C.A.; DEPARTMENT BY : SHRI A. D. MEHROTRA [CIT] D. R.; O R D E R. PER K. D. RANJAN AM : THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 200 7-08 ARISES OUT OF ORDER OF THE LD. CIT (APPEALS)-III NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA D AS UNDER :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) ERRED IN DELETING THE ADDITION OF RS.3 08 75 218/- MADE BY THE ASSESSING OFFICER HOLDING THAT THE TRANSACTION IN THIS CASE CANNOT BE BRANDED AS A SPECULATIVE TRANSACTION IN TERMS OF SECTION 43 OF THE ACT; 2 I. T. APPEAL NO. 4563 (DEL) OF 2010. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) ERRED IN IGNORING THE FACT THAT THE LOSS OF RS.3 08 75 218/- WAS INCURRED BY THE ASSESSEE BY SALE OF PULSES AT LOWER PRICES THAN WHA T THEY WERE BOUGHT AND WITHOUT TAKING DELIVERY. THE CONTRACTS WERE CANCELLED WITH A SPECULATIVE INTENT AS THE PULSES WERE SOLD EVEN BEFORE DELIVERY; 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) ERRED IN NOT TREATING THE LOSS AS SPECULATION LOSS UNDER SECTION 43(5) OF THE ACT; 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) ERRED IN DELETING THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER OF RS.24 62 800/- FROM INTEREST CLAIMED IN THE P/L ACCOUNT BY HOLDING THAT THE AO HAD DISALLOWED THE INTEREST PURELY ON AD-HOC BASIS AND IGNORING TH E FACT THAT INTEREST PAID TO ONE SHRI MAHESH GUPTA AND WAS NOT FOR ANY BUSINESS PURP OSES. 3. THE FIRST ISSUE FOR CONSIDERATION RELATES TO DEL ETING THE ADDITION OF RS.3 08 75 218/- BEING LOSS INCURRED BY THE ASSESSEE BY SALE OF PULSES AT LOWER PRICES WITHOUT TAKING DELIVERY THAN THE PRICE AT WHICH THEY WERE BOUGHT. THE FACTS OF TH E CASE STATED IN BRIEF ARE THAT THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION WAS TRA DING IN PULSES FOR WHICH IT HAD ENTERED INTO AGREEMENTS WITH FOREIGN PARTIES. THE ASSESSEE CANCE LLED TWO CONTRACTS FOR IMPORT OF YELLOW PEAS AND TOOR WHOLE WHEN IT SAW THAT PRICES OF PULSES HA D STARTED FALLING. THIS HAD RESULTED IN LOSS OF RS.3 08 75 218/-. THIS LOSS WAS NOT BY SALE OF PUL SES AT PRICES LOWER THAN AT WHAT THEY WERE BOUGHT. THE ASSESSEE HAD ALLEGED TO HAVE PAID FOR C ANCELING OF THE CONTRACTS. THE CONTRACTS WERE CANCELLED WITH THE SPECULATION THAT THE ASSESSEE MI GHT INCUR LOSSES AS THE PRICES HAD FALLEN. IN OTHER WORDS IT WAS NOT ACTUAL LOSS INCURRED BY THE ASSESSEE IN THE REGULAR COURSE OF BUSINESS BUT A LOSS INCURRED UNDER SPECULATION OF LOSS. THE ASS ESSING OFFICER RELYING ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF HOOSAM K ASAM DADA 52 ITR 171 (CAL.) HELD THAT A TRANSACTION IN WHICH A CONTRACT FOR PURCHASE AND SA LE OF ANY COMMODITY IS SETTLED OTHERWISE THAN BY DELIVERY IS A SPECULATIVE TRANSACTION IRRESPECT IVE OF WHETHER THE PARTY IS INITIALLY INTENDED TO GIVE DELIVERY OR NOT AND THE LOSS IN CONTRACT IN WH ICH DELIVERY WAS NOT GIVEN COULD NOT BE ALLOWED TO BE SET OFF. HE ALSO PLACED RELIANCE ON THE DECI SION IN THE CASE OF CIT VS. MAYA RAM JIA LAL 3 I. T. APPEAL NO. 4563 (DEL) OF 2010. 162 ITR 520 (P&H) WHEREIN IT HAS BEEN HELD THAT COM PENSATION PAID BY THE ASSESSEE FOR NOT COMPLETING THE CONTRACT WAS SPECULATIVE IN NATURE W ITHIN THE MEANING OF SECTION 43(5) OF THE ACT. THE AO THEREFORE TREATED THE LOSS OF RS.3 08 75 2 18/- AS SPECULATIVE LOSS AND REFUSED TO SET OFF THE SAME AGAINST THE OTHER INCOME OF THE ASSESSEE. 4. ON APPEAL IT WAS SUBMITTED THAT THE ASSESSEE CO MPANY WAS REGULARLY FOLLOWING THE PRACTICE OF PAYMENT OF DAMAGES FOR THE BREACH OF CO NTRACT AND DURING THE YEAR UNDER CONSIDERATION UNDER COMPELLING CIRCUMSTANCES THE AS SESSEE HAD TO PAY DAMAGES FOR BREACH OF CONTRACT. SIMILARLY THE ASSESSEE HAD RECEIVED DAM AGES OF RS.31.76 LAKHS ON 27/07/2004 FROM M/S. AGROCORP. INTERNATIONAL P. LTD. AND RECEIVED D AMAGES DURING THE YEAR OF RS.13.87 LAKHS FROM M/S. JAI SHREE IMPEX FOR CANCELLATION OF CONTR ACTS. AS SUCH IT WAS A NORMAL PRACTICE TO RECEIVE OR PAY DAMAGES AS AND WHEN BREACH OF CONTRA CT OCCURRED. THE LD. CIT (APPEALS) AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE OB SERVED THAT THE ASSESSEE HAD IMPORTED PULSES FROM AUSTRALIA AND SINGAPORE. THE ASSESSEE HAD SIG NED THE MEMORANDUM OF UNDERSTANDING ON 6 TH MAY 2003 AND 5 TH APRIL 2004. AS PER CLAUSES 3 AND 4 OF TERMS AND CONDITIONS OF MOU WITH J.K. INTERNATIONAL PTY LTD. THE BUYER AND SELLERS I N CASE OF BREACH OF CONTRACT HAD THE RIGHT TO CLAIM DAMAGES FROM EACH OTHER AT THE PREVAILING MAR KET PRICE. SIMILARLY AS PER CLAUSE 3 AND 4 OF MOU WITH AGROCORP. INTERNATIONAL PTE STIPULATED THE IDENTICAL CONDITIONS. THE MAJOR QUANTITY OF PULSES HAVE BEEN IMPORTED FROM AUSTRALIA AND SINGAP ORE. DUE TO UNAVOIDABLE CIRCUMSTANCES THE ASSESSEE WAS NOT IN A POSITION TO HONOUR THE CONTRA CTUAL OBLIGATION IN RESPECT OF CONTRACT ENTERED INTO BETWEEN THREE PARTIES. THE ASSESSEE HAD RECEI VED PAYMENT FOR BREACH OF CONTRACT FROM JAISHREE IMPEX AND HAD PAID MONEYS TO J. K. INTERNA TIONAL PTE LTD. AND AGROCORP. PTE. THE ASSESSING OFFICER HAD TREATED THE LOSS ON ACCOUNT O F BREACH OF CONTRACT AS SPECULATION LOSS. THE LD. CIT (APPEALS) RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SHANTI LAL P. LTD. 144 ITR 57 (SC); AND THE DECISION OF HO NBLE DELHI HIGH COURT IN THE CASE OF BHAGWAN DASS RAMESHWAR DAYAL 149 ITR 387 (DEL.) WHE REIN IT HAS BEEN HELD THAT IF THE CONTRACT IS SETTLED OTHERWISE THAN BY ACTUAL DELIVE RY OR TRANSFER OF THE COMMODITY IT IS A SPECULATIVE TRANSACTION BUT IF THERE IS A SETTLEME NT AFTER THE BREACH IT IS THE CASE OF SETTLING THE QUANTUM OF DAMAGES AND THE LOSS IS INCIDENTAL TO BU SINESS AND IS ALLOWABLE AS A BUSINESS LOSS. HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE DEL HI HIGH COURT IN THE CASE OF CIT VS. HANS 4 I. T. APPEAL NO. 4563 (DEL) OF 2010. MACHOO & CO. 247 ITR 79 (DEL). THE LD. CIT (APPEAL S) AFTER CONSIDERING THESE DECISIONS HAS OBSERVED THAT THERE IS A THIN LINE THAT DIVIDES WHA T IS THE TERMED AS SPECULATIVE TRANSACTION AS ENVISAGED BY SECTION 43(5) OF THE ACT AND THE PAYME NT MADE UNDER A SETTLEMENT WHICH FALLS OUTSIDE ITS AMBIT. A TRANSACTION CANNOT BE DESCRIB ED AS A SPECULATIVE TRANSACTION WITHIN THE MEANING OF SECTION 43(5) OF THE ACT WHERE THERE IS A BREACH OF CONTRACT AND ON A DISPUTE BETWEEN THE PARTIES DEMAGES ARE AWARDED AS COMPENSATION BY AN ARBITRATION AWARD. THE AWARD OF DAMAGE FOR THE BREACH OF THE CONTRACT IS NOT THE SAME THIN G AS A PARTY TO THE CONTRACT ACCEPTING SATISFACTION OF THE CONTRACT OTHERWISE THAN IN ACCO RDANCE WITH THE ORIGINAL TERMS THEREOF. HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. MAYA RAM JIA LAL (SUPRA) WHEREIN IT HAS BEEN HELD T HAT IF THE DISPUTE IS SETTLED BETWEEN THE PARTIES THEN IT IS NOT A SPECULATION TRANSACTION BUT A CONTRACT IS SETTLED AND UNDER THE SETTLEMENT OF CONTRACT DAMAGES ARE PAID IT WOULD BE A SPECUL ATIVE TRANSACTION. THE LD. CIT (A) THEREFORE HELD THAT THE PAYMENTS MADE BY THE ASSESSEE AT RS.3 08 75 218/- WERE MADE FOR BREACH OF CONTRACT AND COULD NOT BE REGARDED AS SPECULATIVE T RANSACTIONS. 5. BEFORE US THE LD. CIT(DR) SUBMITTED THAT THE ASS ESSEE HAD NOT TAKEN THE DELIVERY OF PULSES AND THEREFORE TRANSACTION HAS BEEN TREATED BY THE AO AS SPECULATIVE TRANSACTIONS. THE LD. CIT(DR) REFERRING TO THE AGREEMENT ENTERED INTO BET WEEN AGROCORP. INTERNATIONAL PTE LTD SUBMITTED THAT THERE IS TOLERANCE RANGE OF 10 PER C ENT ON AGREED PRICE BETWEEN THE PARTIES. HE FURTHER SUBMITTED THAT THE ASSESSEE IS DOING SPECUL ATIVE BUSINESS AND THE ASSESSEES CASE DOES NOT FALL UNDER CLAUSES (A) (B) (C) AND (D) OF SUB-SEC TION (5) OF SECTION 43 OF THE ACT. THERE IS NOTHING ON RECORD TO SUGGEST THAT THERE WERE DISPUT ES BETWEEN THE PARTIES. THE ASSESSEE HAD NOT SIMPLY TAKEN THE DELIVERY AND THERE IS NO NEGOTIATI ON ON THE DATE OF ASSESSMENT WHEN THE BREACH OF CONTRACT TOOK PLACE. HE FURTHER SUBMITTED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SHANTI LAL P. LTD. (SUPRA) IS NOT APPLICABL E TO THE FACTS OF THE CASE OF THE ASSESSEE AS IN THAT CASE COMPENSATION WAS PAID AFTER ARBITRATION F OR BREACH OF CONTRACT. WHEREAS IN THE CASE OF THE ASSESSEE NO NOTICE WAS ISSUED AND NO NEGOTIATI ONS TOOK PLACE. THEREFORE THE ASSESSEES CASE IS NOT COVERED BY THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF SHANTI LAL P. LTD. (SUPRA). ON THE OTHER HAND THE LD. AR OF THE ASSE SSEE SUBMITTED THAT TRANSACTION HAD TAKEN PLACE WITH UNRELATED PARTY. THE ASSESSEE HAD RECEIVED PA YMENTS ON BREACH OF CONTRACT FROM JAISHREE 5 I. T. APPEAL NO. 4563 (DEL) OF 2010. IMPEX LTD. AND HAS SHOWN AS INCOME OF THE ASSESSEE. IN ASSESSMENT YEAR 2005-06 THE ASSESSEE RECEIVED DAMAGES OF RS.31.76 LAKHS FROM AGROCORP. P TE. ON ACCOUNT OF CANCELLATION OF THE CONTRACT. HE FURTHER SUBMITTED THAT THE PRICES OF PULSES WERE DECLINING. IN ORDER TO AVOID FURTHER LOSSES THE ASSESSEE DID NOT IMPORT THE PULSES AND M ADE PAYMENTS ON ACCOUNT BREACH OF CONTRACTS. THEREFORE THESE ARE NOT SPECULATIVE TRANSACTIONS F ALLING WITHIN THE MEANING OF PROVISIONS OF SECTION 43(5) OF THE ACT. HE FURTHER SUBMITTED THAT THE LOSS WAS NOT INCURRED BY SALE OF THE PULSES AT PRICES LOWER THAN WHAT THEY WERE BOUGHT. THE AS SESSEE HAD TO PAY THE AMOUNT FOR CANCELLATION OF THE CONTRACT; THEREFORE IT IS A CASE BREACH OF CONTRACT TO WHICH PROVISIONS OF SECTION 43(5) WOULD NOT BE APPLICABLE. THE ASSESSEE HAD RECEIVED PAYMENTS ON CANCELLATION OF CONTACTS AND HAD OFFERED THE SAME FOR TAXATION. THEREFORE IT IS NOR MAL TRADE PRACTICE AND SUCH TRANSACTIONS CANNOT BE TREATED AS SPECULATIVE TRANSACTIONS. 6.1 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE IS AN IMPORTER. THE ASSESSEE ENTERED INTO AGREEMENT ON 6 TH MAY 2003 WITH J. K. INTERNATIONAL PTY. LTD. AUSTRALIA FOR IMPORT OF C ERTAIN GOODS WHICH INCLUDED ALL TYPES OF PULSES FIT FOR HUMAN CONSUMPTION. SIMILARLY THE ASSESSEE ENTERED INTO MEMORANDUM OF UNDERSTANDING WITH AGROCORP. PTE LTD. SINGAPORE FOR PURCHASE O F ALL TYPES OF PULSES AND OTHER GOODS OR TRANSACTIONS AS THE BUYER AND SELLER MAY AGREE ON T ELEPHONE OR E-MAIL MESSAGES OR FAX. CLAUSE 3 OF MEMORANDUM OF UNDERSTANDING DEALS WITH THE BREAC H OF CONTRACT BY THE BUYER AND READS AS UNDER:- THE TIMELY COMPLIANCE OF THE CONTRACT IS THE ESSENCE OF THIS LETTER OF UNDERSTANDING AND THE BUYER SHALL BE DEEMED TO HAVE BREACHED THE CONTRACT WHEN HE FAILS TO SUBMIT THE REQUIRED DOCUMENTS AND TO AC CEPT THE DELIVERIES OF GOODS WITHIN THE AGREED PERIOD. THE SELLER HAS THE RIGHT TO CLAIM ALL LOSSES AND DAMAGES FROM THE BUYER AT THE PREVAILING MARKET PRICE. 6.2 LIKEWISE CLAUSE 3 OF TERMS AND CONDITIONS OF MO U WITH J. K. INTERNATIONAL PTY. LTD. DEALS WITH THE SITUATION UNDER WHICH THE BUYERS SHA LL BE DEEMED TO HAVE BREACHED THE CONTRACT. CLAUSE 3 OF MOU READS AS UNDER:- 6 I. T. APPEAL NO. 4563 (DEL) OF 2010. 3. THE BUYER UNDERTAKES TO SUBMIT THE REQUIRE D DOCUMENTS AND TO ACCEPT THE DELIVERIES OF GOODS WITHIN THE AGREED PERIOD FAILIN G WHICH THE BUYER SHALL BE DEEMED TO HAVE BREACHED THE CONTRACT AND THE SELLER HAD RIGHT TO CLAIM DAMAGES FROM THE BUYER AT THE PREVAILING MARKET PRICE. 6.3 ON PLAIN READING OF CLAUSE 3 OF BOTH THE MOUS A CONTRACT CAN BE SAID TO HAVE BEEN BREACHED ON THE PART OF THE BUYER IN TWO SITUATIONS I.E. FIRSTLY WHEN THE BUYER FAILS TO SUBMIT THE REQUIRED DOCUMENTS; AND SECONDLY WHEN HE FAILS TO A CCEPT THE DELIVERIES OF GOODS WITHIN THE AGREED PERIOD. THE ASSESSEE ENTERED INTO AGREEMENT WITH AGROCORP. INTERNATIONAL PTE. LTD. FOR PURCHASE OF 16 500 MT OF TOOR WHOLE AT THE RATE OF US $ 365 PER MT VIDE CONTRACT DATED 7/08/2006. THE SHIPMENT WAS TO BE MADE ON OR BEFOR E 31 ST AUGUST 2006. M/S. AGROCORP. INTERNATIONAL PTE. LTD. VIDE LETTER DATED 8/09/2006 RAISED A CLAIM NOTE ON ACCOUNT OF BREACH OF CONTRACT AT THE RATE OF US $ 25 PER MT FOR US $ 4 1 2 000 BEING THE DIFFERENCE BETWEEN US $ 365 PER MT ORIGINALLY AGREED AND US $ 340 PER MT PREVAL ENT ON THE DATE OF BREACH OF CONTRACT. THE ASSESSEE ALLOWED THE CREDIT NOTE ON THE SAME DAY I. E. 8/09/2006 FOR US $ 4 12 000 AS CLAIMED BY THE PARTY. 6.4 SIMILARLY IN THE CASE OF J. K. INTERNATIONAL PTY. LTD. THE AGREEMENT WAS ENTERED INTO ON 10 TH MAY 2006 FOR SUPPLY OF YELLOW PEAS WEIGHING 13 40 0 MT AT THE RATE OF US $ 265 PER MT. THE SHIPMENT WAS TO BE MADE UPTO 30 TH JUNE 2006. M/S. J. K. INTERNATIONAL PTY. LTD. VI DE LETTER DATED 5 TH JULY 2006 ADDRESSED TO THE ASSESSEE STATED THAT THE ASSESSEE HAD NOT HONOURED CONTRACT NUMBER 13050 DATED 10/05/2006 WITHIN THE AGREED TIM E. THE REASONS OF BREACH OF CONTRACT HAVE NOT BEEN MENTIONED. THE LETTER SIMPLY SAYS THAT BE CAUSE OF FALL IN THE MARKET THE SELLER HAD SUFFERED HEAVILY ON THIS ACCOUNT. THE CONTRACT WAS SETTLED AT PRICE OF US $ 240 PER MT AS AGAINST ORIGINALLY AGREED AT US 265 PER MT. THE MATTER WAS DISCUSSED ON PHONE AND SETTLED AMOUNT OF US $ 3 35 000 (13 400 25) WAS AGREED TO BE PAID. IN RESPECT OF THIS CONTRACT THE ASSESSEE ACCEPTED THE DAMAGES TELEPHONICALLY ON ACCOUNT OF BREACH OF CONTRACT FOR US$ 3 55 000 WHICH WAS ENDORSED ON LETTER DATED 5 TH JULY 2006 OF SELLER TO THE ASSESSEE ITSELF. 7 I. T. APPEAL NO. 4563 (DEL) OF 2010. 6.6 WE HAVE ALSO GONE THROUGH THE REPLY SUBMITTED B Y THE ASSESSEE TO THE ASSESSING OFFICER ON 23 RD NOVEMBER 2009. THE RELEVANT PORTION OF LETTER IND ICATING THE DISPUTES ARISING BETWEEN THE PARTIES IS REPRODUCED AS UNDER :- (III) THERE WERE DISPUTES BETWEEN THE COMP ANY AND THE FOREIGN PARTIES DUE TO FIXATION OF DELIVERY SCHEDULE. THE COMPANY HAD BEEN INSISTING FOR LATE DELIVERY OF PULSES AGAINST THE AFORESAID CONTRACTS DUE TO LO WER DEMAND IN THE MARKET AND THE FOREIGN PARTIES DID NOT AGREE AS IT HAD READY S TOCKS WITH THEM. AS A RESULT THE FOREIGN PARTIES PLACED THEIR CLAIMS FOR THE DAMAGES FOR THE BREACH OF CONTRACT. THE COMPANY HAD TO PAY DAMAGES FOR ITS FAILURE TO FULFI LL THE CONTRACT IN ORDER TO AVOID LITIGATION AND TO SAVE ITS REPUTATION IN THE INTERN ATIONAL MARKET. IN VIEW OF THIS THE DAMAGES WERE ONLY IN THE NATURE OF BUSINESS LOSS AN D ALLOWABLE UNDER SECTION 37 OF THE INCOME-TAX ACT 1961. THE CLAIMS WERE BEING PAID FOR THE BREACH OF CONTRACT AFTER THE SETTLEMENT OF THE DISPUTES. THE SAID CLAIMS ARE THEREFORE NEITHER IN THE NATURE OF SPECULATIVE LOSS NOR IN TH E NATURE OF CAPITAL EXPENDITURE. 6.7 FROM THE REPLY SUBMITTED BEFORE THE AO IT APPE ARS THAT THE DISPUTE BETWEEN THE ASSESSEE COMPANY AND THE FOREIGN PARTIES WAS IN RESPECT OF E XTENSION OF DATE OF DELIVERY. THE DELIVERY SCHEDULE OF YELLOW PEAS WITH M/S. J. K. INTERNATION AL PTY. LTD. WAS 30 TH JUNE 2006 AGREED IN CONTRACT DATED 10 TH MAY 2006. AS REGARDS M/S. AGROCORP. INTERNATION AL PTE. LTD. THE SHIPMENT WAS TO BE MADE ON OR BEFORE 31 ST AUGUST 2006. IT MEANS THAT THE ASSESSEE AS BUYER MUST HAVE GIVEN THE SELLERS THE DESIRED DOCUMENTS NECESSARY F OR IMPORTS. UNDER THE CONTRACT AGREEMENTS WITH BOTH THE PARTIES THE BUYERS OBLIGATIONS INTER -ALIA INCLUDES TO MAKE AVAILABLE IMPORT PERMIT WITHIN THREE DAYS OF CONTRACT AND IRREVOCABLE L/C ( NEGOTIABLE) 100% PAYABLE AT SIGHT. FURTHER SELLERS OBLIGATIONS INCLUDES TO PROVIDE (I) COMMER CIAL SIGNED INVOICE; (II) FULL SET OF CLEAN ON BOARD BILL OF LADING MARKED FREIGHT PAID; (III) CERTIFICATE OF ORIGIN ISSUED AND SIGNED BY CHAMBER OF COMMERCE AND INDUSTRY; (IV) CERTIFICATE OF WEIGHT & QUALITY ISSUED BY INDEPENDENT SURVEYOR; (V) PHYTOSANITARY CERTIFICATE ISSUED BY T HE GOVERNMENT AUTHORITY; (VI) FUMIGATION CERTIFICATE BY COMPETENT AUTHORITY; AND (VII) PACKI NG LIST. L/C WAS TO BE NEGOTIABLE AGAINST AFORESAID DOCUMENTS. WHEN ASSESSEES CASE IS FOR B REACH OF CONTRACT DUE TO EXTENSION OF DATE OF DELIVERY THE SELLERS MUST HAVE ALSO FULFILLED THEI R OBLIGATIONS AS INDICATED ABOVE. 8 I. T. APPEAL NO. 4563 (DEL) OF 2010. 6.8 HOWEVER NO SUCH EVIDENCE IS FILED BY THE ASSE SSEE INDICATING THAT THE ASSESSEE HAD DISCHARGED ITS OBLIGATION TO FILE IMPORT PERMIT WIT HIN THREE DAYS OF CONTRACT AND IRREVOCABLE L/C (NEGOTIABLE) 100% PAYABLE AT SIGHT. THE DOCUMENTS S END BY THE SELLERS HAVE ALSO NOT BEEN FILED. THESE FORMALITIES WILL BE FULFILLED BY BUYER AS WEL L AS SELLER IN REASONABLE PERIOD OF TIME IN CASE OF A GENUINE CONTRACT INVOLVING IMPORT OF COMMODITI ES FOR HUMAN CONSUMPTION. FURTHER CLAUSE 12 OF BOTH THE MOUS PROVIDES THAT THE SELLER RESER VES THE RIGHT TO RECALL THE TITLE DOCUMENTS IF NOT PAID/ACCEPTED WITHIN 7 WORKING DAYS FROM THE DA TE OF PRESENTATION. THERE IS NO WHISPER SINGLE WORD IN THE SETTLEMENT CLAIMS OR INDEPENDENT CORRESPONDENCE IN THIS REGARD. WHEN THERE WAS A DISPUTE AS ARGUED BEFORE THE ASSESSING OFFICE R THE DISPUTE IS TO BE RESOLVED EITHER BY COURT PROCEEDINGS OR BY MUTUAL NEGOTIATIONS THROUGH ARBIT RATOR AS PROVIDE IN MOU WITH BOTH THE PARTIES. ALL THESE EVIDENCES ARE MISSING IN THE PR ESENT CASE. M/S. AGRO CORP. INTERNATIONAL PTE. LTD. VIDE LETTER DATED 8 TH SEPTEMBER 2006 FILES A CLAIM OF 4 12 000 US $ AND THE ASSESSEE WITHOUT ANY MURMUR OR OBJECTION ACCEPTS THE CLAIM. SIMILA RLY IN THE CASE OF M/S. J. K. INTERNATIONAL PTY. LTD. LETTERS WRITTEN BY THEM ON 5 TH JULY 2006 STATING THEREIN THAT BECAUSE OF FALL IN THE PRICES THEY HAVE SUFFERED HEAVY LOSSES. ANOTHER INTERESTI NG POINT TO BE NOTED IS THAT M/S. J. K. INTERNATIONAL PTY. LTD. DISCUSS THE ISSUE ON TELEP HONE AND THE ASSESSEE AGREES TO ALLOW THE CREDIT OF 3 35 000 US $. THE CONTRACT IS ACCEPTED WITHOUT ANY NEGOTIATIONS ETC. IT IS THE CASE OF THE ASSESSEE THAT THE ASSESSEE HAD TO PAY FOR BREACH OF CONTRACTS AND HENCE BUSINESS LOSS. THE ASSESSEE SHOULD BE IN POSSESSION OF DOCUMENTS PROVI NG ITS CONTENTION THAT THERE WERE BREACHES OF CONTRACTS ON FAILURE OF THE ASSESSEE (BUYER) TO HON OUR THE CONTRACTS. BUT NO EVIDENCE HAD BEEN LED TO PROVE THAT THERE WAS IN FACT ANY BREACH OF CONTR ACTS LEADING TO BUSINESS LOSSES. IT IS A SETTLED LAW THAT IN TAX MATTERS THE ONUS OF PROVING A FACT IS ON THE ASSESSEE WHICH IS EXCLUSIVELY IN HIS KNOWLEDGE. WHEN ALL THE FACTS ARE WITHIN THE EXCLUS IVE KNOWLEDGE OF THE ASSESSEE IT WOULD MAKE LITTLE SENSE TO EXPECT THE REVENUE TO ASSUME THE BU RDEN OF JUSTIFYING EVERY COMPONENT FIGURE OF ASSESSMENT. THE ASSESSEE HAS NOT EVEN DISCHARGED IT S ONUS BY FILING DOCUMENTARY EVIDENCES OR CORRESPONDENCE BETWEEN THE PARTIES SUGGESTING THAT THE ASSESSEE WAS REQUESTING THE SELLER TO ALLOW MORE TIME FOR SHIPMENTS OF THE COMMODITIES. 9 I. T. APPEAL NO. 4563 (DEL) OF 2010. 6.9 ANOTHER IMPORTANT POINT TO BE NOTED RELATES CON TENTION OF ASSESSEE THAT IT WAS SEEKING RESCHEDULING OF DELIVERY DATES DUE FALL IN THE PRIC ES OF THE PULSES. IF THE PRICE OF PULSES WAS GOING DOWN IN THE MONTH OF JUNE ITSELF IT IS NOT UNDERST OOD AS TO WHY THE ASSESSEE ENTERED INTO AGREEMENT WITH M/S. AGROCORP. INTERNATIONAL PTE. LT D. ON 7 TH AUGUST 2006 FOR SUPPLY OF 16 500 MT OF TOOR WHOLE ON OR BEFORE 31 ST AUGUST 2006 WITHIN THE PERIOD OF 23 DAYS. THOU GH THE CONTENTION OF THE ASSESSEE BEFORE THE ASSESSING OFF ICER WAS THAT THERE WAS DISPUTE ABOUT THE DELIVERY SCHEDULE OF PULSES BUT NO DOCUMENTARY EVI DENCE HAS BEEN FILED TO SUPPORT THIS CONTENTION THAT THERE WAS ANY DISPUTE OF SUCH NATUR E BETWEEN THE PARTIES. THE ASSESSEE HAD ALSO NOT SHOWN WITH EVIDENCE THE FALL IN THE PRICES OF P ULSES IN INDIA BECAUSE OF WHICH THE ASSESSEE WAS ALLEGEDLY SEEKING FOR BELATED DELIVERY OF PULSE S. WE HAVE ALSO EXAMINED THE CLAIM OF THE ASSESSEE THAT IT HAD RECEIVED COMPENSATION FOR BREA CH OF CONTRACT ON SELLERS FAILURE TO SUPPLY THE BLACK MATPE (URAD). THE ASSESSEE ENTERED INTO AGREE MENT (PAGE 24 OF PB) FOR SUPPLY OF 312 MT BLACK MATPE @ US $ 580/MT ON 5.7.2006. 312 MT BL ACK MATPE WAS TO BE SHIPPED BY 31.08.2006. BREACH OF CONTRACT OCCURRED ON 2.8.2006 DUE FAILURE OF SELLER TO SUPPLY BLACK MATPE AND CLAIM WAS SETTLED AT US $ 676.15 PMT AS AGAINST US $ 580/MT. THIS GIVES CLEAR INDICATION OF UPWARD MOVEMENT OF PRICES OF PULSES. THE INTERNA TIONAL PRICE OF BLACK MATPE INCREASED FROM US $ 580/MT TO US $ 676.15 WITHIN SHORT PERIOD OF L ESS THAN ONE MONTH. HENCE THERE APPEARS TO BE CONTRADICTION IN THE STATEMENT OF ASSESSEE THAT THERE WAS FALL IN INTERNATIONAL PRICES. NEITHER LD CIT(A) NOR ASSESSING OFFICER HAD EXAMINED THE CONTE NTION OF ASSESSEE. NEITHER THE ASSESSEE HAD SUPPLIED MARKET RATES OF PULSES NOR THE ASSESSING O FFICER OR LD CIT(A) HAVE GIVEN ANY FINDINGS ON THE ISSUE. 6.10 IN CASE OF BREACH OF CONTRACTS THE ASSESSEE MUST HAVE REMITTED AMOUNT TO FOREIGN PARTIES AFTER TAKING PERMISSION OF RBI. FOR THE PURPOSES OF IMPORTS THE ASSESSEE MUST HAVE OBTAINED THE IMPORT PERMITS FROM RESPECTIVE DEPARTMENT OF GOVT. OF INDIA AND PERMISSION OF RBI FOR REMITTANCE OF FOREIGN EXCHANGE. THE DOCUMENTS EVIDE NCING THESE FACTS ARE NOT FILED BY THE ASSESSEE. 10 I. T. APPEAL NO. 4563 (DEL) OF 2010. 6.11 IT IS ALSO NOT KNOWN AS TO WHETHER RBI PERMITS THE INDIAN RESIDENTS TO INDULGE IN SPECULATION BUSINESS ABROAD WHICH MAY INVOLVE DRAIN AGE OF FOREIGN EXCHANGE OUT OF INDIA IN THE TRANSACTIONS INVOLVING IN LOSSES. NEITHER LD. CIT(A ) NOR ASSESSING OFFICER HAD EXAMINED THE ISSUE IN RIGHT PERSPECTIVE. LD CIT(A) HAD SIMPLY PRESUMED THAT THE TRANSACTION WERE IN NATURE OF BREACH OF CONTRACT WITHOUT GOING INTO NECESSARY DET AILS. THE ASSESSEE HAD NOT LED ALL EVIDENCES NECESSARY FOR DECIDING THE ISSUE INVOLVING BREACH O F CONTRACT OR SPECULATIVE TRANSACTIONS. UNDER THESE CIRCUMSTANCES IN THE ABSENCE OF MISSING LINKS NECESSARY FOR A TRANSACTION OF GENUINE IMPORTS WE ARE UNABLE TO DECIDE THE ISSUE WHETHER I T IS A CASE OF BREACH OF CONTRACT OR SPECULATIVE TRANSACTIONS. WE THEREFORE SET ASIDE MATTER TO THE FILE OF ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE CLAIM OF THE ASSESSEE FOR BREACH OF CON TRACT IN THE LIGHT OF OBSERVATION MADE AS ABOVE. THE ASSESSING OFFICER WILL OBTAINED ALL INFO RMATION FROM THE ASSESSEE INCLUDING ANY OTHER INQUIRY NECESSARY TO DECIDE ISSUE WHETHER IT IS A C ASE OF BREACH OF CONTRACT OR SPECULATIVE TRANSACTIONS. 7. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DELE TING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.24 64 800/- FROM INTEREST C LAIMED IN THE PROFIT AND LOSS ACCOUNT. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE G RANTED INTEREST-FREE LOANS TO SHRI MAHESH GUPTA AGGREGATING TO RS.2 05 24 007/- AT THE CLOSE OF THE YEAR. ON THE OTHER HAND THE COMPANY WAS INCURRING INTEREST BURDEN AND BANK CHARGES OF RS.1 48 96 621/- ON OVER-DRAFT BEING GIVEN BY THE ASSESSEE. THE ASSESSING OFFICER FROM THESE FACTS O BSERVED THAT INTEREST AND BORROWED CAPITAL IS TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT ONLY IF THE CAPITAL BORROWED IS UTILIZED FOR THE PURPOSE OF BUSINESS OR PROFESSION OF THE ASSESSEE. SINCE THE ASSESSEE WAS NOT IN THE BUSINESS OF BORROWING OR LENDING OF MONEY THE EXPENDITURE ON A CCOUNT OF SUCH ADVANCES WHICH RESULT IN RETURN OF ONLY 4 PER CENT COULD NOT BE CONSIDERED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE INTEREST EXPENSES TO THE EXTENT THE BORROWED FU NDS WERE ADVANCED FREE OF INTEREST WITHOUT ANY EVIDENCE OR SUCH ADVANCES FURTHERING ANY BUSINE SS OBJECTIVES OF THE ASSESSEE COMPANY. THE AO DISALLOWED 12 PER CENT ON THE AMOUNT ADVANCED TO SHRI MAHESH GUPTA AS THE SAME WAS NOT UTILIZED FOR THE PURPOSE OF BUSINESS. 11 I. T. APPEAL NO. 4563 (DEL) OF 2010. 8. ON APPEAL IT WAS SUBMITTED THAT THE ASSESSING OF FICER HAS WRONGLY STATED THAT THE ASSESSEE COMPANY WAS MAINLY IN POSSESSION OF BORROWED FUNDS. THE ASSESSEE HAD ITS OWN FUNDS IN THE SHAPE OF SHARE CAPITAL FREE RESERVES TO THE TUNE O F RS.6.04 CRORES AS ON 1/04/2006 WHICH COULD HAVE EASILY BE GIVEN AS INTEREST FREE OR LOW INTERE ST BEARING ADVANCES. IT WAS ALSO SUBMITTED THAT IT WAS NOT NECESSSARY THAT EVERY TRANSACTION SHOULD FETCH INTEREST OR GOOD PROFIT. THE ASSESSEE HAD EARNED INTEREST OF RS.6 75 615/- AT THE RATE OF 6 PER CENT PER ANNUM ON ITS SURPLUS FUNDS WHICH IS ALMOST EQUAL TO FDRS. RATES. IT WAS ALSO SUBMITTED THAT THE AO IS WRONG IN SAYING THAT THE ASSESSEE COMPANY INCURRED INTEREST BURDEN ON BO RROWED CAPITAL AND MADE A DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT. THE ASSESSEE COMPANY HAD PAID INTEREST OF RS.1 05 40 394/- TO BANKS ON VARIOUS L/C PAYMENTS WHICH DO NOT FALL UNDER SECTION 36(1)(III). THE ASSESSEE HAD PAID INTEREST OF RS.5 01 507/- TO BANKS ON OD LIMIT S UNDER SECTION 36(1)(III) OF THE ACT. THEREFORE THE AO HAD SUPERFICIALLY CO-RELATED THE ENTIRE INTEREST PAYMENTS WITH THE ADVANCE GIVEN TO SHRI MAHESH GUPTA. IT WAS ALSO SUBMITTED THAT THE AO HAD WRONGLY STATED THAT THE EXPENDITURE ON ACCOUNT OF ADVANCES HAD RESULTED RET URN OF ONLY 4 PER CENT WHEREAS THE CORRECT RATE OF RETURN IS 13.39 PER CENT [INCOME RETURNED / SHARE HOLDERS FUND]. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD RECEIVED INTEREST INCOME OF RS.6 7 5 615/- FROM SHRI MAHESH GUPTA DURING ASSESSMENT YEAR 2007-08 WHICH IS MORE THAN THE OD INTEREST. THE LD. CIT (A) ON THE BASIS OF THE ABOVE FACTS CAME TO THE CONCLUSION THAT THE AO HAD DISALLOWED THE INTEREST PURELY ON AD-HOC BASIS. THE ASSESSEE HAD MADE PAYMENT OF INTEREST O F RS.5 01 507/- TO THE BANK ON OD LIMITS WHEREAS THE ASSESSEE HAD RECEIVED INTEREST OF RS.6 75 615/- FROM SHRI MAHESH GUPTA. HE THEREFORE CAME TO THE CONCLUSION THAT THERE WAS NO CASE OF DISALLOWANCE OF INTEREST OF RS.24 62 800/-. 9. BEFORE US THE LD. CIT DR SUPPORTED THE ORDER O F THE ASSESSING OFFICER AND SUBMITTED THAT NO BUSINESS EXPEDIENCY HAD BEEN SHOWN WHILE ADVANCI NG THE AMOUNTS TO SHRI MAHESH GUPTA. ON THE OTHER HAND THE LD. AR OF THE ASSESSEE SUBMI TTED THAT THE ASSESSEE HAD OWN FUNDS OUT OF WHICH THE AMOUNT WAS ADVANCED TO SHRI MAHESH GUPTA. THE INTEREST WAS PAID ON LETTER OF CREDIT AND OVER-DRAFT FACILITIES. THE INTEREST RECEIVED F ROM SHRI MAHESH GUPTA IS MORE THAN THE INTEREST PAID ON OVER-DRAFT FACILITIES. HE THEREFORE SUPP ORTED THE ORDER OF THE LD. CIT (A) THAT NO DISALLOWANCE CAN BE MADE. 12 I. T. APPEAL NO. 4563 (DEL) OF 2010. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE CONTENTION OF THE ASSESSEE THAT THE ASSESSEE HAD IT S OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES OUT OF WHICH THE SAID FUNDS HAVE BEEN ADVA NCED. FROM THE DETAILS OF RESERVES AND SHARE CAPITAL IT CANNOT BE SAID THAT THOSE FUNDS WERE FR EELY AVAILABLE WITH THE ASSESSEE. THE RESERVE CAPITAL AND FUNDS ARE PARKED EITHER IN STOCK-IN-TRA DE OR INVESTMENTS OR SUNDRY DEBTORS OR CASH IN HAND/BANK. THEREFORE IN THE ABSENCE OF ANY NEXUS HAVING BEEN SHOWN BETWEEN THE ASSESSEES OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES WE ARE UNABLE TO AGREE WITH THE CONTENTION OF THE ASSESSEE THAT MONEYS HAVE BEEN ADVANCED TO S HRI MAHESH GUPTA OUT OF OWN FUNDS. THE ASSESSEE HAD TRIED TO LINK THE ADVANCE OF MONEY OF RS 1 00 00 000/- ON 9.6.2006 FROM RECEIPTS OF RS1 91 00 000/- FROM M/S RAM & CO. NAYA BAZAR. THE COPY OF BANK ACCOUNT HAS NOT BEEN GIVEN TO PROVE THAT MONEY CAME OUT OF SAID RECEIPTS . ANOTHER PAYMENT OF RS 1 00 00 000/- ON 2.12.2006 HAD ALSO BEEN CLAIMED TO HAVE BEEN PAID O UT OF AMOUNTS RECEIVED FROM M/S RAM & CO. ON 5.12.2006 AND OTHER PARTIES OUT OF SALE PROC EEDS RECEIVED ON 2 ND DECEMBER (RS 14 66 183); RS 9 31 402 ON 4.12.2006; AND RS 27 77 248 ON 5.12.2006. BUT AS POINTED OUT BY LD. CIT(DR) THAT PAYMENT FROM THE PARTIES HAD COME LAT TER TO DATE OF ADVANCEMENT OF FUNDS OF RS 1.00.00 000/-. HENCE NO NEXUS HAS BEEN ESTABLISHED BETWEEN THE FUNDS BORROWED AND LOAN OBTAINED. MOREOVER NO CASE OF BUSINESS EXPEDIENCY H AS BEEN ESTABLISHED. THE ASSESSEE HAD PAID OVERDRAFT CHARGES @11%. IN THE ABSENCE OF ANY BUSIN ESS EXPEDIENCY THE ASSESSEE HAS TO ESTABLISH NEXUS BETWEEN OWN FUNDS OR FUNDS RECEIVED WITHOUT P AYMENTS OF INTEREST AND AMOUNT GIVEN FREE OF INTEREST IN THE YEAR UNDER CONSIDERATION. THE CO NTENTION OF THE ASSESSEE THAT IT HAD RECEIVED INTEREST OF RS.6 75 615/- @ 6% FROM SHRI MAHESH GUP TA DURING THE YEAR UNDER CONSIDERATION WHICH IS MORE THAN PAID THE OD INTEREST IS OF NO HE LP AS INTEREST AT LOWER RATE OF 6% HAS BEEN CHARGED FROM SH. MAHESH AGAINST PAYMENT OF OD INT EREST @ 11%. HOWEVER IT IS A FACT THAT THE AO HAD DISALLOWED THE AMOUNT ON AD-HOC BASIS. OUT O F INTEREST AND BANK CHARGES THE MAJOR INTEREST PAYMENT RELATES TO L/C CHARGES WHERE INTER EST IN RESPECT OF OD LIMIT IS ONLY RS.5 01 517/-. IT IS SETTLED LAW THAT IN TAX MATTER S THE ONUS OF PROVING A FACT WHICH IS EXCLUSIVELY IN THE KNOWLEDGE OF ASSESSEE IS ON HIM. WHEN ALL T HE FACTS ARE WITHIN THE EXCLUSIVE KNOWLEDGE OF THE ASSESSEE IT WOULD MAKE LITTLE SENSE TO EXPE CT THE ASSESSING OFFICER TO ASSUME THE BURDEN OF JUSTIFYING EVERY COMPONENT FIGURE OF ASSESSMENT. T HUS THE INITIAL ONUS IS ON THE ASSESSEE TO PROVE WITH EVIDENCES THAT ITS OWN FUNDS WERE GIVEN AS INTEREST FREE. THE ASSESSEE IS POSSESSION OF 13 I. T. APPEAL NO. 4563 (DEL) OF 2010. SUCH EVIDENCES AND MUST BE FILED BY IT. ONUS CANNOT BE SHIFTED TO REVENUE. IN VIEW OF ABOVE FACTS WE ARE OF THE VIEW THAT THAT DISALLOWANCE OF INTEREST CAN BE MADE TO THE EXTENT NEXUS BETWEEN OWN FUNDS AND MONEY BORROWED IS NOT ESTABLI SHED. WE THEREFORE SET ASIDE THIS MATTER ALSO TO THE FILE OF ASSESSING OFFICER TO DECIDE ISS UE AFTER CONSIDERING NECESSARY EVIDENCE ON RECORDS/ TO BE FILED BY THE ASSESSEE. 11. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON : 28 TH FEBRUARY 2011. SD/- SD/- [ R. P. TOLANI ] [ K. D. RA NJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28 TH FEBRUARY 2011. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT 4. CIT (APPEALS) 5. DR ITAT NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR ITAT.