Income Tax Appellate Tribunal - JabalpurShri Gopal Agrawal Huf, Betul vs Income Tax Officer Ward Betul, Betul on 22 October, 2021Gopal Agrawal, HUF v.ITO\n                                                  ITA No. 255/Jab/2018 (AY 2013-14)\n\nIN THE INCOME TAX APPELLATE TRIBUNAL, JABALPUR BENCH,\n                    JABALPUR (SMC)\n\n  BEFORE SH. SANJAY ARORA, HON'BLE ACCOUNTANT MEMBER\n\n                            ITA No.255/JAB/2018\n                           Assessment Year: 2013-14\n\n      Gopal Agrawal HUF,                        Income Tax Officer,\n      Betul, (M.P.)                      vs.    Ward - Betul,\n                                                Betul (M.P.)\n      [PAN: AADHG 8828B]\n           (Appellant)                                 (Respondent)\n\n      Appellant by                          Sh. H.S. Modh Adv.\n      Respondent by                         Smt. Swati Agarwal, Sr. DR\n      Date of hearing                       08/10/2021\n      Date of pronouncement                 22/10/2021\n\n\n                                    ORDER\n\nPer Sanjay Arora, AMThis is an Appeal by the Assessee directed against the Order by the\nCommissioner of Income Tax (Appeals)-1, Bhopal ('CIT(A)' for short) dated\n31.10.2018, dismissing the assessee's appeal contesting its' assessment undersection 143(3)of the Income Tax Act, 1961 ('the Act' hereinafter) for the\nAssessment Year (AY) 2013-14 vide order dated 26/2/2016.2.1    Opening the arguments for and on behalf of the assessee, it was submitted\nby Shri Modh, the ld. counsel for the assessee, that the only issue arising and\nraised in appeal is the disallowance of loss of Rs.10,43,274 suffered by the\nassessee on account of 'Sauda Settlement'. The same stands disallowed for\nwant of substantiation, for which he would take the Bench through the\nassessment and the first appellate order. The assessee, a wholesale trader in food\ngrains, oilseeds, etc. makes several bargains in the course of his business, which\nare entered into on oral basis. An oral contract is equally valid in law. As the1Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)contract for supply of wheat was, due to adverse price movement, reversed,\nagain orally, the resulting loss was charged by the buyer, M/s. Sanwaria Agro\nOils Ltd., Itarsi (SAOL) - with whom the assessee has a regular account (PB\npg. 4), which agrees with the assessee's account in its' books (PB pg. 5),\nthereto. There is therefore nothing to mistrust the assessee when it says so. The\nbasis of the journal entry booking the said loss on 31/03/2013 by the assessee, is\na debit note raised by SAOL, a limited company, on 31/03/2013 (PB pg. 7),\nwhich stands further confirmed by it as accounted as its' income for the current\nyear (PB pg. 6). No defect has been otherwise pointed out by the assessing\nauthority in the assessee's accounts. The assessee has thus produced all the\nrelevant material as well as the necessary explanation/s in the matter. There is\ntherefore no question of having not furnished any bills and vouchers in respect\nof the relevant transaction, as stated by the Revenue authorities. There is further\nno basis to suggest, as do both by the Assessing Officer (AO) and the ld.\nCIT(A), of the assessee having not accounted for the said amount as its' income\nfor the current or earlier year/s.2.2   The ld. Sr. DR, Mrs. Agarwal, would submit that the assessee has\ncompletely failed to explain the nature of the transaction/s stated to result in a\nloss, much less substantiate it, and which is the principal reason for the non-\nacceptance thereof, adverting to the findings by the Revenue authorities, whose\norders, in the relevant parts, stood already read out during the course of the\nassessee's pleadings.2.3   At this stage, it was enquired by the Bench from Shri Modh about the\n(availability of the) relevant details of the transaction/s inasmuch as none stood\nfurnished at any stage. That is, what was sold; at what rate; where and by whom\nwas the delivery to be made; the obtaining market rate/s at the time of the\ncontract as well as at the time the goods were to be delivered, etc., and if there\nwas any material, viz. Sauda Book, contract notes, etc., to substantiate the same.2Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)This is as this only would give some clarity on, as well as the basis of, the\ntransaction, which had not even been explained, i.e., as he seeks to do now\nbefore the Tribunal for the first time, albeit without any details whatsoever,\neven as the debit note, unnumbered, raised by SAOL, states of details\naccompanying the same, while none have been brought on record. He would\nreply in the negative. And, further, take the Bench through the ledger account of\ntransport expenses (PB pg. 32), in the assessee's accounts, reflecting a gross\nexpense of Rs.56.25 lac towards railway and local freight and reloading\ncharges, of which Rs.34.71 lac stands recovered from the parties to whom the\ngoods had been supplied directly, so that only the balance Rs.21.54 lacs stands\ncharged by the assessee to it's profit & loss account (PB pg. 21). Of Rs.34.71\nlac, Rs.9.93 lac was stated to pertain to SAOL and, accordingly, debited by the\nassessee thereto. The assessee, on being asked, was stated by him to be entitled\nto a commission/ brokerage on the said supply. When further enquired about the\nabsence of such income in the assessee's operating statement (PB pg. 21), he\nwould state the same to be by way of a difference in the purchase and sale rate.\nBut was, however, unable to explain the absence of any entry in its respect in\nthe ledger account of SAOL (PB pgs. 4 & 5). Rather, as it appears, in that case\nSAOL would make the payment for the purchase directly to the supplier in\nrespect of this supply, while none has been shown to be, and at any stage.\nBesides, that would only mean that the transaction/s had indeed matured, and\nnot reversed, as stated earlier in explanation of the sauda (bargain) settlement.\nHe was unable to explain the same during hearing.3.    I have heard the parties, and perused the material on record.3.1   My first observation in the matter is that the disallowance being in respect\nof a specific loss or expenditure, made on the basis of non-acceptance of the\nassessee's explanation qua the same, the fact of the assessee's accounts being\naudited, or its' book results having been, by inference, otherwise accepted by3Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)the Revenue, is of no consequence in-so-far as the said disallowance is\nconcerned, which is to be adjudged on its merits.3.2   My second observation in the matter is that, much less substantiated, even\nthe nature of the transaction has not been explained at any stage and, despite\nabundant opportunity to do so. No doubt oral contracts are entered into in the\nbusiness world, as over phone. However, these are duly recorded immediately\nthereafter, if not almost simultaneously, and, further, confirmed through\nexchange of notes, as over fax, e-mails, etc. This is the regular trade practice,\nadopted uniformly, as without it, it will be well neigh impossible to execute the\nsame; the contracts being forward contracts and the rates volatile, changing\nevery day; rather, even during the course of the day itself. These cannot be acted\nupon or trusted to be so on the basis of memory, a faculty different for different\npeople and, besides, eliminates any controversy that may arise. How would, for\nexample, in case of any difference, the matter be resolved? Reducing the oral\ncontract in writing by some cotemporaneous material is thus a trade imperative.\nThe concerned broker or commission agent/s, being more than one where the\ntwo sides are represented by different ones, do this on behalf of their principals.\nWhy, only a couple of decades ago, i.e., before the advent of electronic\nexchanges, share markets operated in this manner, with saudas translated into\ncontract notes immediately thereafter and got confirmed/countersigned by the\nopposing broker on the trading floor itself. The transaction in the instant case is\nwithout any relevant details. In fact, the question of adverse price movement\nwould not normally arise as forward contracts are hedged by a similar forward\ncontract. A trader would not leave a trade open, exposing himself to market risk.\nIn fact, he cannot quote without obtaining a similar forward contract. How\nwould a trader quote a price for, or even honor, his contract, i.e. without such a\ncontract, which becomes a necessity? This also contradicts the payment of\nfreight by SAOL, which only means, as also observed during hearing, that the\nsupply stands made thereto. Why else, one may ask, would it bear the same?4Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)Further, if the supply is made, as stated, directly by the assessee, implying that\nthe delivery was ex-works (godown), SAOL would yet be obliged to pay the\ncost to the assessee, who in turn would pay its' cost to its' supplier. Where the\nassessee acted as, as again stated, a broker, he would be entitled to a positive\nincome in the form of commission/brokerage from SAOL, the buyer. Rather,\nthe same only means that the transaction has been, contrary to what stands\nstated, completed. The explanation further contradicts its earlier explanation of\nthe loss as on account of reversal due to adverse market condition, not shown,\nwith the assessee bearing the difference due to price increase. This explanation\nthus contradicts the assessee's earlier explanation of the impugned loss as on\naccount of reversal of a trade due to adverse market condition, not shown, with\nthe assessee bearing the difference due to the price increase. In fact, the credit\nnotes for freight (Rs.9.93 lac) debited by the assessee to the account of SOAL,\nare by Sanwaria Foods Limited (PB pg. 34), for Rs.8.66 lacs, and one, Surya\nTrading Corporation (PB pg. 33), for Rs.1.27 lacs, and not by SAOL. Why,\nthen, had the railway freight been debited to SAOL? Sh. Modh was at loss to\nexplain. The assessee, thus, ties itself in knots in trying to explain the\ntransaction/s. There is another aspect of the matter, also referred to in their\norders by the Revenue authorities. That is, apart from debits in respect of two\ndifferent parties (at Rs.9.93 lacs) to the account of SAOL (i.e., in the books of\nthe assessee), which stands responded to by it, there are no trade transactions\nbetween the assessee and the SAOL, which has a credit balance of Rs.250.80\nlacs as on 31/03/2013, the year-end. The entire account comprises sums\nreceived from, and paid back to, SAOL, so that the balance represents monies\nreceived from it. On what account, one may ask? To no answer, again, by Sh.\nModh. Why would any person pay such huge sums to another, the assessee in\nthe instant case, i.e. without business consideration, which is clearly missing, or\nat least not apparent, much less explained. In the context of the instant case, the5Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)relative quantum of this sum is that it finances almost the whole of the stock-in-\ntrade of the assessee, being at Rs. 268.74 lacs as on 31/3/2013 (PB pg. 20).3.3    Further still, without prejudice, even if one were to ignore all this, and go\nby what stands stated by Sh. Modh earlier, i.e., of it being an open-ended\ntransaction, which was not honored and, accordingly, obligation under the\ncontract of supply discharged by bearing the loss - on the basis of current\nmarket rate, the same, apart from being sans any details and evidence, would be\na speculative transactionu/s. 43(5). The assessee shall not be, because of the\ntransaction being open-ended and, in any case, unsupported by any materials,\nsaved bysection 43(5)(a). The same, being carried in the regular course of the\nassessee's business, shall qualify for being set off only against the profits of a\nspeculative business which, in terms of Explanation 2 tosection 28, is to be\nregarded as a separate and distinct business. There is, thus, no question of it\nbeing set off against the assessee's other, regular business of trading in food\ngrains and oilseeds or, as stated before me, of commission agent/broker. This,\nfurther, would also result in non-explanation of the recovery of railway freight\nby the assessee therefrom. This also explains of this being stated as in the\nalternative, even as, as afore-stated, it is also without any details or material in\nsupport.3.4    Again, much less several, as claimed, no similar bargain stands shown as\nexecuted during the year, or even in the past, even as the same does not detract\nfrom the fact that the bargain under reference is wholly unproved, so that the\nfactum of other bargains would not impact positively on the allowance of this\ntransaction. Such transactions would, similarly, result in either a gain or a loss\nto the assessee, also demonstrating the manner in which the same is accounted\nfor.4.     There is, to speak in nutshell, complete opaqueness about the nature and\ntruth of the transaction/s between the assessee and SAOL, including the6Gopal Agrawal, HUF v.ITOITA No. 255/Jab/2018 (AY 2013-14)impugned credit of Rs.10,43,274 thereto on 31/03/2013. The same thus cannot\nbe regarded as a business loss and, in any case, is not available for set off\nagainst the business profit from its' wholesale business. The same stands rightly\ndisallowed by the Revenue. I decide accordingly.5.    In the result, the assessee's appeal is dismissed.Order pronounced in the Open Court on October 22, 2021\n\n                                                                  Sd/-(Sanjay Arora)\n                                                           Accountant Member\n\nDated: 22/10/2021\n\n*Singh\n\nCopy of the Order forwarded to:1. The Appellant: Gopal Agrawal (HUF), Prop.: M/s. Shri Shyam\n            Trading Company, Betul Ganj, Betul - 460002 (M.P.)2. The Respondent: Income Tax Officer, Ward - Betul, Betul - 460002\n            (M.P.)3. The Pr. CIT-1, Bhopal4. The CIT(Appeal)-1, Bhopal5. The Sr. DR, ITAT, Jabalpur6. Guard File\n                                                     // True Copy //7