The Hon'ble ITAT Amritsar in DCIT v. Apex Fibre India Ltd. [IT APPEAL NO. 337 (CHD.) OF 2022 C.O. NO. 4 (CHD.) OF 2022 (Amritsar - Trib.) dated June 12, 2024] held that transactions of buying and selling edible oil via high sea sales where the end user took final and physical delivery of goods at the port of destination could not be termed as speculative under section 43(5). The Tribunal also deleted an addition made under Section 36(1)(iii) for interest on advances given without charging interest, as these were funded by interest-free loans shown in the audited balance sheet.
Facts of the Case:
Apex Fibre India Ltd., the assessee-company, filed its return of income for the assessment year 2015-16 under section 139(1), disclosing a total income of Rs. 14,93,400, which was processed under section 143(1).
The case was later reopened under section 148 by the Assessing Officer on the ground that during the year, the assessee had entered into a speculative transaction within the meaning of section 43(5), involving high sea sales of palm oil, incurring a loss of Rs. 4.43 crores. This loss was set off against interest income of Rs. 4.59 crores earned by the assessee during the year, which the AO claimed was not legally permissible under section 73(1).
The assessment was completed on a total income of Rs. 4.60 crores, disallowing the claim of adjustment of speculative loss of Rs. 4.43 crores. The Assessing Officer also made an addition of Rs. 1,97,688 under Section 36(1)(iii) for interest on advances given to three parties without charging interest.
On appeal, the Commissioner (Appeals) deleted the addition of Rs. 4.43 crores, allowing the assessee's claim as business loss arising out of trading of edible oils on high sea sales, which was allowed to be set off against interest income. However, the addition of Rs. 1,97,688 on interest account was sustained.
The revenue appealed to the ITAT against the deletion of Rs. 4.43 crores, while the assessee filed a cross-objection on the issue of disallowance of interest of Rs. 1,97,688.
Held by the Tribunal:
The Hon'ble ITAT Amritsar in DCIT v. Apex Fibre India Ltd. [IT APPEAL NO. 337 (CHD.) OF 2022 C.O. NO. 4 (CHD.) OF 2022 held as under:
The ITAT observed that the main point of contention was whether the transaction of purchase and sale of edible oil entered into by the assessee on the basis of high sea sales agreement, where physical delivery was taken by the ultimate purchaser at the port of destination in India, falls within the provisions of speculative transaction under section 43(5).
The Tribunal examined the modus operandi of the assessee's business, which involved loading of goods on a ship by the selling party, transfer of documents to the assessee, and subsequent sale by the assessee during transportation by handing over documents to the purchaser.
The ITAT noted that the physical delivery of the edible oil was taken from the port of arrival by the end user, and the delivery report was evidence of physical delivery.
The Tribunal held that there was a valid transfer within the meaning of section 2(47) by executing the agreement to sale, and the final and physical delivery of the goods was taken by the end user at the port of destination after compliance with all customs formalities.
The ITAT distinguished the cases cited by the revenue (Davenport and Co (P.) Ltd. v. CIT, Nirmal Trading Co vs CIT, Jute Investment Co Ltd) as these cases involved no physical delivery of goods at any stage.
Following the judgments of various High Courts (Hoosen Kasam Dada (India) Ltd. v. CIT, Lakshmi Narayan Trading Company, Sripal Satyapal v. ITO), the Tribunal concluded that the transactions of sale and purchase in the instant case do not fall within the provisions of section 43(5) and are not speculative transactions.
The ITAT held that the ultimate settlement of the transactions entered into by the assessee has been settled by the actual delivery of the goods to the ultimate buyer.
Regarding the addition of Rs. 1,97,688 under Section 36(1)(iii), the ITAT noted that the advances were for business dealings and were funded by interest-free loans shown in the audited balance sheet under long-term borrowings.
The Tribunal found no reason to disbelieve the figures contained in the audited balance sheet, particularly the availability of unsecured loans (free of interest) reflected in the balance sheet.
Following the Supreme Court decision in CIT v. Reliance Industries Ltd., the Tribunal deleted the addition of Rs. 1,97,688, holding that there was no reason to disbelieve the figures in the audited balance sheet showing sufficient interest-free funds to cover the advances.
The ITAT thus dismissed the revenue's appeal and allowed the assessee's cross-objection.
Relevant Sections:
- "Section 43(5)" of the Income-tax Act, 1961
- "Section 36(1)(iii)" of the Income-tax Act, 1961
High sea sales tax treatment
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