Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act challenging the order dated 19.07.2023 passed by the Income Tax Appellate Tribunal for Assessment Year 2014-15. The assessee, M/s G-Tekt India Pvt. Ltd., is engaged in the business of manufacturing and sale of automotive parts and components and was incorporated on 23.11.2011.

For AY 2014-15, the assessee filed its return declaring a loss of ₹28,09,72,605. A substantial part of the loss arose from transactions involving purchase of tools and dies from Honda Trading Corporation India Pvt. Ltd. and Tri Inter Thailand Company Ltd., which were subsequently sold to Honda Cars India Ltd. at a price lower than the purchase cost. The dies were thereafter handed back to the assessee for use in manufacturing automotive parts supplied to Honda Cars India Ltd.

The Assessing Officer treated the loss of ₹22.99 crore arising from these transactions as a sham and artificial loss, alleging that there was no commercial necessity for such sale and repurchase arrangement and that the transactions were colourable devices. The loss was disallowed, substantially reducing the returned loss. The disallowance was upheld by the Commissioner of Income Tax (Appeals).

On further appeal, the ITAT allowed the assessee’s appeal holding that the loss was a genuine business loss incurred in the course of commercial operations. Aggrieved, the Revenue approached the High Court.

Issues Involved

Whether the loss incurred by the assessee on sale of tools and dies could be treated as a sham transaction and disallowed on the basis of suspicion and perceived lack of commercial expediency, and whether the ITAT erred in allowing the loss as a genuine business loss.

Petitioner’s Arguments

The Revenue contended that the transaction lacked commercial rationale and was designed only to generate artificial losses. It was argued that the tools and dies should ordinarily have been purchased directly by Honda Cars India Ltd. and that selling them at a loss to an entity within the same business ecosystem raised serious doubts about the genuineness of the transaction.

Respondent’s Arguments

The assessee argued that the transactions were genuine, supported by purchase and sale documents, and undertaken as a conscious business decision to secure long-term supply contracts with Honda Cars India Ltd. It was contended that tax authorities cannot substitute their own judgment for that of the assessee on matters of commercial expediency and that incurring loss in a particular transaction does not render it sham or artificial.

Court Order / Findings

The Delhi High Court examined the findings of the ITAT and held that the Assessing Officer had proceeded purely on surmises and assumptions. The Court observed that neither Honda Trading Corporation India Pvt. Ltd. nor Tri Inter Thailand Company Ltd. were affiliated with the assessee, and there was no allegation that the assessee received any undisclosed consideration to neutralise the loss.

The Court reiterated the settled principle that the Assessing Officer cannot sit in judgment over the commercial wisdom of an assessee. The scope of inquiry is confined to examining whether the transaction is genuine, not whether it was commercially expedient or prudent in the view of the tax authorities.

The Court further noted that the assessee had demonstrated that the loss-making decision resulted in significant increase in turnover and profits in subsequent years. However, the Court clarified that even absence of subsequent profits would not justify disallowance, as not every business decision is required to yield profit.

Finding no perversity in the ITAT’s factual findings and noting absence of any material indicating sham or bogus transactions, the Court held that no substantial question of law arose.

Important Clarification

The High Court clarified that genuine business losses cannot be disallowed merely because the Assessing Officer perceives the transaction to be commercially inexpedient. Suspicion, conjecture or subjective views of the tax authorities cannot replace evidence when examining allowability of business losses.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal allowing the assessee’s claim of business loss on sale of tools and dies and held that no substantial question of law arose for consideration.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769857349_THEPR.COMMISSIONEROFINCOMETAX4NEWDELHIVsMSGTEKTINDIAPVT.LTD.pdf

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