Sham Transaction between Associated Enterprises: ITAT Disallows Proprietary Business Loss [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has disallowed the proprietary business loss since sham transactions were found between associated enterprises.

The assessee Samtel Glass Ltd. is a public limited company engaged in the business of manufacture and sale of glass shells and a funnel used in colour television picture tubes and also claims to be engaged in the manufacturing of specialised glass for avionic purposes.

In the course of the assessment proceedings, the Assessing Officer observed that the assessee company had inter alia claimed deduction on account of impairment loss. The Assessing Officer issued show cause notice for substantiation of the aforesaid claim of deduction along with original agreement towards payment of security deposit to Samtel Avionics Ltd. (SAL) which is stated to be associate company of the assessee on appraisal of facts and attendant circumstances,

The Assessing Officer alleged that the payment made towards security deposit to Samtel Avionics Ltd. was not a genuine transaction but a sham transaction with an aim to inflate losses and also to siphon of funds of the assessee-company.

The impairment loss consisting of forfeiture of security deposit and inventory of glass written off was found to be untenable and unsubstantiated. The Assessing Officer thus held that the loss claimed had arisen out of sham transactions between two Associated Enterprises (AE) in collusion with each other under guise of an agreement with a view to squeeze the funds out of the assessee company and inflate the losses..

D.C. Garg,on behalf of the assessee submitted that the loss had been incurred by the assessee in the ordinary course of business arising from business commitment for which agreement was also executed.He further submitted that the SAL was not Associated Enterprises of the assessee and therefore, no mala fide could be attributed on the assessee.

Jitender Chand, on behalf of the revenue, submitted that the directors of both the companies were from the same family and the director of the assessee-company is father the director of SAL. The SAL was also a shareholder of the assessee company with 10.98% shareholdings.

He also submitted that the assessee had failed to prove the propriety of the transaction in light of the wide-ranging observations made by the Assessing Officer.

The two-member Bench of Chandra Mohan Garg, (Judicial Member) and Pradip Kumar Kedia, (Accountant Member) dismissed the appeal filed by the assessee hilding that both the assessee and the SAL were family controlled with common shareholding and therefore were privy to the exact affairs and It was not a case where a third party had been caught unaware resulting in unintended losses.

“The basis of calculation of security deposit, the proof of production of specialised glass, cost involved thereon is not available on record. The agreement with the AE is also not available in original. Except for the transfer of funds to SAL, no other substantive evidence is available to enable us to appreciate the facts in its perspective,” the Bench further observed.

To Read the full text of the Order CLICK HERE

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