Pico Capital Private Limited Vs DCIT (ITAT Mumbai)
Conclusion: Loss of ₹7.66 Crore was allowable as bad debt deduction under Section 36(1)(vii), recognising the loss as a genuine business loss arising from NSEL’s operational suspension.
Held: Assessee was engaged in the business of export of garments and investments, filed its return declaring a loss of ₹7.37 crore for AY 2014–15. During the year, it wrote off ₹7.66 crore as bad debts arising from trading in commodities through Anand Rathi Commodities Ltd. on the National Spot Exchange Ltd. (NSEL) platform. Following suspension of NSEL operations by the Forward Markets Commission in July 2013, assessee could not recover sale proceeds for commodities already sold and accounted as income. AO disallowed the bad debt claim u/s 36(1)(vii) and further added ₹7.57 crore as “undisclosed stock,” alleging that ownership of goods remained with the assessee. Assessee contended that without rejecting its audited books, AO had altered accounting treatment and ignored that NSEL default arose because the commodities were non-existent in the warehouses. Hence, the loss was real and allowable either as bad debts under Section 36(1)(vii) or as business loss under Section 28(i). In appeal, CIT(A) examined the contract notes, ledger accounts, and delivery allocation reports and found that all trades occurred before 31 July 2013, were duly recorded as sales, and the delivery allocation reports showed the assessee’s ownership of the goods until delivery. Since NSEL failed to settle the trades after suspension, assessee did not receive sale consideration, rendering the debt irrecoverable. Having later recovered only ₹5.53 lakh in FY 2018–19, CIT(A) held the write-off of ₹7.66 crore allowable as bad debt under Section 36(1)(vii). Aggrieved by the order of CIT(A), the Revenue filed an appeal before the Tribunal. Assessee contended that before Tribunal that assessee was regularly trading in commodities on NSEL through a registered broker, Anand Rathi Commodities Ltd. It was further submitted that the sale transactions were genuine and supported by contract notes, VAT invoices, and warehouse receipts, showing that goods were deliverable and ownership vested with assessee until delivery. Additionally, since the sales had been recorded as income in earlier years, the receivables that became irrecoverable due to the NSEL default were eligible for deduction as bad debts under Section 36(1)(vii). Assessee submitted that alternatively, if sales were not accepted, the amount paid for goods never received constituted a business loss under Section 28(i). It was held that Tribunal observed that assessee had duly recorded the NSEL transactions as sales in its books, satisfying the conditions of Section 36(1)(vii) r.w.s. 36(2). The irrecoverable amounts represented genuine business loss arising from regulatory suspension and failure of NSEL to deliver goods. Following decisions in Chowdry Associates v. ACIT, Cello Pens and Stationery Pvt. Ltd., and Flair Exports Pvt. Ltd., similar NSEL losses were held allowable as bad debts or business loss. Accordingly, the CIT(A)’s factual finding allowing deduction u/s 36(1)(vii) was upheld, and Revenue’s appeal dismissed.
