INCOME TAX ACT, 1961

Section 28(i) Section 37

Business income - Business loss - Loss in value of material loan returned by assessee -

Assessee in the present case was a private limited company and engaged in the business of trading in gold, shares, and stock and trading in gold in MCX. The assessee had borrowed material loan in the form of silver weighing 4938.423 KG from 3 parties, related within the meaning as provided under section 40A(2)(b) of the Act. The assessee obtained the material loan for 3 years. The assessee at the end of the loan period was under the obligation to return the same in the form of quantity only. As per the agreement the assessee was under the obligation to pay interest on such material loan at the rate of 2% per annum which the assessee had been paying regularly. The deduction of the same was also allowed to the assessee. The issue raised by the Revenue was that the Commissioner (Appeals) erred in deleting the addition made by the assessing officer for Rs. 6,14,20,769 treating the same as capital loss, whereas the Commissioner (Appeals) treated the same as a trading loss. The material loan taken by the assessee was recorded in the accounts as stock-in-trade by crediting the current liabilities/sundry creditors. The assessee in the year under consideration claimed to have repaid the material loan in the form of quantity by crediting the sales account at the value of the loan obtained initially. The assessee in the year under consideration had also taken fresh material loan from the same parties at a value of Rs. 58,100 per KG. Assessee also claimed that it has revalued the fresh material loan at the end of the accounting year as on 31-3-2012 which had resulted gain to it which was offered to tax. However, the assessing officer was dissatisfied with the classification of such material loan under the head sundry creditors by treating the same as trading liability. As such the material loan should have been classified by the assessee under the head loan account and any loss incurred thereon should be treated as capital loss which cannot be allowed as deduction while computing the income under the head business and profession. Commissioner (Appeals) after considering the submission of the assessee deleted the addition made by the assessing officer Held: In the present case the loan was not obtained by the assessee under the normal prevailing market practices. Generally, the loans were obtained in cash which were subject to interest and repayable over a certain period of time as agreed between the parties. However, in the present case the assessee had taken a material loan in the form of silver with the understanding that it has to return the silver only to the parties concerned at the end of the agreement. The agreement in question came to an end in the year under consideration. It is a fact on records that the material loan obtained by the assessee was utilized for its business purposes. As such the assessee after receiving the material from the parties has started making sales at the market rate which was recorded as sales in the trading account. Accordingly, there has to be corresponding purchases against the sales. As such the sales cannot be made without making the purchases. Thus what the assessee has done, it has shown the material loan as stock-in-trade in its trading account which was utilized for making the sales. The profit generated by the assessee on account of sales made of the material (taken in the form of loan) was offered to tax which was accepted by the Revenue. The undisputed fact is that the loan liabilities whether material loan/cash loan was utilized for the purpose of the business activities of the assessee. In the present case the assessee was able to carry on its business activities with the assistance of the material loan without which it was not possible for it to carry on the business. Therefore in our considered view such business loss had been incurred in the course of the business and therefore the assessee was eligible for deduction under the provisions of section 37/28 as the case may be.

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