IMPORTANT POINT
The genuineness of business transactions is paramount, and tax authorities cannot disallow losses based on assumptions without substantial evidence.

JUDGMENT :

VIBHU BAKHRU, J.

1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [hereafter the Act] impugning an order dated 19.07.2023 passed by the learned Income Tax Appellate Tribunal [hereafter the ITAT] in ITA No. 5922/Del/2018 captioned G-Tekt India Pvt. Ltd. v. DCIT. The said appeal was preferred by the respondent (Assessee) assailing an order dated 18.06.2018 passed by the learned Commissioner of Income Tax (Appeals)-35, New Delhi [CIT(A)] in Appeal No. 534/2016-17, which in turn was filed by the Assessee assailing an assessment order dated 26.12.2016 passed under Section 143(3) of the Act.

2. The Assessee is engaged in the business of manufacturing and sale of automotive parts and components. The Assessee had filed its return in respect of AY 2014-15 declaring a loss of Rs. 28,09,72,605/-. It is also material to note that the Assessee was incorporated on 23.11.2011 and thus, the financial year (FY) 2013-14 was effectively the second year of its operations.

3. The Assessing Officer [AO] had found that the loss as declared had arisen on account of transactions of purchase and sale of tools and dies, which were used for cars manufactured by Honda Car India Ltd. [hereafter HCIL]. The assessee company was an OEM (original equipment manufacturer) supplier to HCIL and there is no dispute that the Assessee required the dies for manufacturing the automotive parts, which were to be supplied to HCIL. The Assessee had procured tools and dies for automotive parts from two entities - an Indian company, named, Honda Trading India Pvt. Ltd. [hereafter HTIPL] and a company in Thailand named Tri Inter Thailand Company Ltd. [ hereafter TITC].

4. There is no cavil as to the transactions relating to the purchase of dies from the said two entities. However, the AO had doubted the transactions of sale of the said dies to HCIL at a price lower than the purchase consideration paid by the Assessee. Admittedly, the Assessee had sold the said dies to HCIL, which were thereafter handed over to the Assessee for manufacturing the automotive parts. According to the Assessee, bulk of the loss was related to the dies procured from TITC, which the Assessee quantified at Rs. 14.51 crores (out of a total loss of Rs. 22.99 crores).

5. It is the Assessee’s case that it was necessary for the Assessee to procure the dies at its own cost for carrying on its business. In terms of the business arrangement, the Assessee was required to transfer the ownership of the dies in question to HCIL, which it had done. HCIL had purchased the dies at a negotiated price.

6. The learned AO had found that the said transaction was a sham transaction and the Assessee’s loss from the said transaction was, thus, an artificial loss. The said conclusion was founded on the basis that HTIPL was a “sister concern” of HCIL and there was no necessity for the Assessee to have first sold the tools and dies to HCIL and then receive it back for manufacture of the parts. Paragraph 6.3 of the assessment order, which sets out the reasoning of the AO is set out below:

“6.3 In respect of the said loss, the assessee company was show caused as to why the said loss must not be disallowed being sham transaction on the following grounds:

(a) Majority of the traded goods (tools and dies) were purchased from M/s Honda Trading Corporation India Pvt. Ltd. i.e. a sister concern of HCIL to whom these products were ultimately sold at a loss. The supplier to assessee and the purchaser both belonged to the same business group and in ordinary course should have been aware of the commercial caveats including the price of traded goods. The submission of the assessee that HCIL had lower quotes remains unsubstantiated and untenable.

(b) There could have been no necessity to have first sold the tools and dies to HCIL and then to have received them back for manufacture of parts. The whole transaction thus seemed to be a colorable device.”

7. The Assessee had responded to the said allegat