Case Law Details
Hemant Brothers (Firm) Vs ACIT (ITAT Ahmedabad)
Material Facts
The appeal arose from the order of the CIT(A) affirming the Assessing Officer’s disallowance of ₹2,69,16,348 claimed as bad debts for AY 2014-15. The assessee, engaged in trading in shares and commodities, had undertaken commodity transactions on the National Spot Exchange Limited (NSEL) through M/s Chimanlal Popatlal Commodities Brokers Pvt. Ltd. The amount was written off by debiting the Profit & Loss Account.
Procedural History
The original assessment under Section 143(3) was revised under Section 263, following which a fresh assessment under Sections 143(3) read with 263 disallowed the bad debt claim. The CIT(A) upheld the disallowance on the ground that recovery proceedings relating to NSEL transactions were still pending and the claim was premature. The assessee appealed before the Tribunal.
Legal Issues
- Whether the assessee was entitled to deduction of ₹2,69,16,348 as bad debt under Sections 36(1)(vii) and 36(2).
- Alternatively, whether the amount was allowable as a business loss under Section 28.
Relevant Statutory Provisions
Sections 28, 36(1)(vii), 36(2), 43(5), 143(3) and 263 of the Income-tax Act, 1961.
Parties’ Contentions
The Assessing Officer held that the assessee had not established actual delivery of commodities and that the bad debt claim was premature as recovery proceedings were pending. The assessee relied on contract notes, broker confirmations and delivery reports, contending that the amount had become irrecoverable and had been duly written off in its books.
Tribunal’s Findings
The Tribunal found that the assessee had produced contract notes, delivery reports and ledger confirmations, and that the Revenue had not disputed that the assessee was engaged in commodity trading or that the transactions were undertaken in the ordinary course of business. It also noted that the Revenue had not alleged non-compliance with Section 36(1)(vii).
The Tribunal held that the debt of ₹2,69,16,348 arising from NSEL commodity transactions had been written off during the relevant previous year and qualified for deduction under Section 36(1)(vii). It disagreed with the CIT(A)’s conclusion that the claim was premature solely because recovery proceedings were continuing.
The Tribunal further held that, in any event, the assessee was entitled to deduction under Section 28 as a business loss arising during the normal course of business, following the decisions cited before it. It also noted that there was no allegation that the assessee was involved in the NSEL scam.
Final Ruling
The Tribunal overturned the orders of the Assessing Officer and the CIT(A), deleted the disallowance of ₹2,69,16,348, directed the Assessing Officer to recompute the taxable income accordingly, allowed Grounds 4 and 5, partly allowed Ground 3, and treated Grounds 1 and 2 as infructuous and not pressed. The appeal was partly allowed.
Cases Discussed
- Fair Exports Pvt Ltd Vs Assistant Commissioner of Income Tax (ITAT Delhi), ITA No.7091/Del/2019, Dated 24.01.2025, AY 2015-2016
- ACIT Vs. Ketan Anil Shah (ITAT Mumbai), ITA No.2188/Mum/2022, Dated 19.01.2023, 2014-2015
- Chowdray Associates Vs. Assistant Commissioner of Income Tax (ITAT Delhi), ITA No.3298/Del/2019, Assessment Year 2015-2016, dated 11/03/2020
- TRF Ltd. Vs CIT (Supreme Court of India), 320 ITR 397
- TRF Ltd. Vs CIT (Supreme Court of India), 323 ITR 397
- MeghSakariya International Pvt. Ltd. (ITAT Chennai), ITA No. 59/Chennai/2018
- M/s Omni Lens Pvt. Ltd. (ITAT Ahmedabad), ITA No. 2818/Ahd./2010
SEO Titles (Five Alternatives)
Bad Debt Disallowance Deleted for NSEL Trading Dues Under Section 36(1)(vii): ITAT Ahmedabad
NSEL-Related Bad Debt Allowed as Business Loss Under Section 28: ITAT Ahmedabad
Disallowance of ₹2.69 Crore NSEL Bad Debt Deleted: ITAT Ahmedabad
Deduction Allowed for NSEL Trading Debt Written Off in Books: ITAT Ahmedabad
NSEL Commodity Trading Debt Held Deductible Under Section 36(1)(vii): ITAT Ahmedabad
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
1. The present appeal preferred by the Assessee is directed against the Order, dated 18/07/2024, passed by the National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the ‘CIT(A)’] whereby Learned CIT(A) had dismissed the appeal against the Assessment Order, dated 05/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], for the Assessment Year 2014-2015)
2. The Assessee has raised the following grounds of appeal:
1. Ld. CIT(A) has erred in passing order on 18-7-24 i.e. more than three years after the hearing which took place on 20-3-2021. It is submitted that since not passing order within 15 days of the hearing as per Circulars bearing F.No. 279/Misc 53/2003-ITJ dated 19/6/2015 and No.20/2013 dated 23/12/2003 of CBDT is in violation of Law and principals of Equity and Natural Justice, the same be quashed.
2. Without prejudice to above, Ld CIT(A) has erred in not taking into consideration submissions and enclosures filed along with submissions dated 22.03.2021, 09.11.2023, 03.01.2024, 08.02.2024,07.03.2024, 02.05.2024, 05.06.2024 & 08.07.2024 respectively.
It is submitted that since Ld. CIT(A) has himself acknowledged of the Appellant having filed all the above submissions in the order itself, he ought to have taken them into consideration and adjudicated the submissions and enclosures filed therewith and ought to have allowed the Appeal.
3. Ld CIT(A) has also erred in holding that:
i. there is nothing on record to suggest that the requirement of Law that the bad debt was written-off in Appellant’s accounts,
ii. the claim for bad debt is premature,
iii. the Appellant has not furnished evidences of the fact that the transactions of purchase and sale were backed by actual delivery,
iv. and that main requisites to claim deduction on account of bad debts remaining unfulfilled while confirming the disallowance.
It is submitted that since the Appellant has furnished all the details and evidences to prove that the amount in question has become bad, it has become irrecoverable, it has been written off in the books of account, the writing off is not premature and the transactions are backed by actual delivery vide submissions mentioned above, Ld CIT(A) ought to have held that the Appellant’s claim for bad debts is correct and the same ought to have been allowed.
4. Ld. CIT(A) has also erred in not appreciating the fact that the provisions of Sec. 36(1)(vii) and 36(2) are fulfilled and hence the claim for bad debt of Rs. 2,69,16,348/- ought to have been allowed.
It is submitted that since all the conditions laid down u/s.36(1)(vii) r.w.s 36(2) are fulfilled as demonstrated in submissions stated above, the CIT(A) ought to have allowed the claim of bad debts.
5. Without prejudice to above, CIT(A) has erred in holding that Appellant’s alternative ground that the amount in question is the trading/business loss and allowable u/s.28/29 is not required to be adjudicated.
It is submitted that since the amount in question has also resulted into a trading loss, the same ought to have been allowed as deduction u/s.28/29 in computing taxable income.
3. The relevant facts in brief are that assessment was framed on the Assessee for the Assessment Year 2014-2015 vide Assessment Order, dated 05/12/2016, passed under Section 143(3) of the Act. Subsequently, order of revision was passed by Learned Principal Commissioner of Income Tax, Ahmedabad-5 under Section 263 of the Act on 01/03/2019 setting aside the aforesaid Assessment Order and directing the Assessing Officer to frame denovo assessment for the Assessment Year 2014-2015. Pursuant thereto, the Assessing Officer passed Assessment Order under Section 143(3) read with Section 263 of the Act on 26/12/2019. The Assessing Officer made an addition of INR.2,69,16,348/- in the hands of the Assessee by disallowing the deduction claimed by the Assessee in respect of bad debts written off by way of debiting the Profit & Loss Account. The Assessing Officer was of the view the Assessee had failed to give any evidence to establish that the transactions of purchase and sale of commodities were backed by actual delivery. The contention of the Assessee that the Assessee had furnished the Delivery Report as well as copy of the Ledger Account of M/s Chimanlal Popatlal Commodities Brokers Pvt. Ltd. [hereinafter referred to as ‘the Broker’] through which transactions of purchase and sale of commodities had been undertaken was not acceptable as the Learned Principal Commissioner of Income Tax had rejected the said documents. The Assessing Officer further noted that the bad debts were written off prematurely since the recovery proceedings in relation to commodity purchase/sale transactions undertaken at National Sport Exchange Limited (NSEL) were still pending. Hence, the Assessing Officer concluded that the Assessee was not entitled to claim deduction for the same under Section 36(1)(vii) of the Act.
4. Being aggrieved Assessee carried the issue in appeal before the Learned CIT(A) and filed written submissions reiterating the stand taken before the Assessing Officer. However, the same did not find any favour with the Learned CIT(A) as the Learned CIT(A) proceeded to confirm the disallowance made by the Assessing Officer observing as under:
“4.7. Since, the deduction of bad debt amounting to Rs.2,69,16,348/-by debiting to P & L A/c. had not yet attained finality and was premature as recovery process from the defaulters through attaching and auctioning of their assets by the investigation agency under monitoring of High Court Committee, Mumbai was under process. In the circumstances, one of the main requisite to claim deduction on account of write off of bad debt i.e. it should become irrecoverable, remains unfulfilled, I, therefore, do not find any infirmity with the order of the AO involving disallowance of claim for bad debt of Rs.2,69,16,348/- u/s. 36(1) (vii) of the Act to add to the total income of the assessee. The ground of appeal is, therefore, dismissed.
5. In the result, the appeal of the appellant stands dismissed.”
5. Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced in Paragraph 2 above.
6. We have considered the rival submissions and have perused the material on record. For the Assessment Year 2014-2015, the Assessee had claimed deduction for bad debts written off amounting to INR.2,69,16,348/-. The Assessee had indulged in trading in shares and sale of commodities on NSEL through the Broker (i.e. M/s Chimanlal Popatlal Commodities Brokers Pvt. Ltd.). According to the Assessing Officer, the Assessee had not undertaken actual delivery of commodities. However, we find that the Assessee had placed on record contract notes as well as Ledger Account confirmation given by the the Broker. It is admitted position that the Assessee is engaged in the business of trading in commodities and had entered into the transaction under consideration during its ordinary course of business. It has not been disputed by the Revenue that the Assessee had furnished contract notes, the delivery report provided by the Broker (i.e. Chimanlal Popatlal Commodities Brokers Private Limited). While the Assessing Officer has rejected the aforesaid documents observing that the the Broker was a related party, there is nothing on record to substantiate the same. Further, the sole reason given by Learned CIT(A) for confirming the disallowance of bad debts made by the Assessing Officer is that the claim for bad debts written off made by the Assessee was premature since recovery process was underway. It is not the case of the Revenue that the provisions of Section 36(1)(vii) of the Act have not been complied with. Therefore, we are not in agreement with the reasoning given by the Learned CIT(A) for confirming the disallowance of bad debts made by the Assessing Officer. It is admitted position that the debt amounting to INR.2,69,16,348/- was due to the Assessee in respect of purchase/sale of commodities on NSEL (undertaken through the Broker) and the same was written off by debiting the Profit & Loss Account during the relevant previous year. Therefore, the Assessee was entitled to claim deduction for the same in terms of Section 36(1)(vii) of the Act. Further, the Assessee had also raised alternative contention claiming deduction under Section 28 of the Act for bad debts written off as loss suffered by the Assessee during the normal course of business on account of N. During the course of hearing the Learned Authorised NSEL scam. Representative for the Assessee had placed reliance upon the decisions of the Delhi Bench of the Tribunal in the case of Chowdray Associates Vs. Assistant Commissioner of Income Tax [ITA No.3298/Del/2019, Assessment Year 2015-2016, dated 11/03/2020], the relevant extract reads as under:
“25. We have also gone through the accounts of assessee for the earlier years. The amount kept with M/s AnandRathi Commodities Pvt. Ltd. was Rs.1.30 crores for the year ending 31.03.2014 and Rs.4.60 crores for the ending 31.03.2013 and Rs.2.95 crores for the year ending 31.03.2012. Similarly, the amount kept with M/s Philips Commodities India Pvt. Ltd. was Rs.4.33 crores for the year ending 31.03.2014 and Rs.14.95 crores for the ending 31.03.2013. During the year, the assessee could not recover the amounts from these two brokers owing to suspension of operations by the NSEL which was given as a part of the business transaction for purchase of commodities in the conduct of regular business operations . Hence, the amount advanced made to purchase the commodity during the course o f the business is a business loss allowable u/s 28 o f the Act.
26. We have also perused the notice of PCIT, Central, New Delhi issued under the provisions of Section 263 of the Act proposing to withdraw the bad debts claimed by the assessee and accepted by the Assessing Officer. We categorically refrain from adjudicating on the strength of the notice , however, we observe that the said notice also dealt with the issue of bad debts claimed u/s 36(1)(vii) by that assessee.
27. We have also perused the order of the Chennai Tribunal in the case of MeghSakariya International Pvt. Ltd. in ITA No. 59/Chennai/2018 wherein the bad debts have been allowed by the Tribunal u/s 36(1)(vii) of the Income Tax Act, 1961. In that case too, the revenue has also brought to the notice regarding the information received from NSEL that trading on that platform was topped since 31.07.2014 and the NSEL was in the process of settling the outstanding dues of its traders and auctioning its assets for the said purpose. The revenue claimed that the claim of bad debts was premature. However, the ITAT has allowed the claim of the assessee based on the judgment of the Hon’ble Apex Court in the case of TRF Ltd. Vs CIT 320 ITR 397 wherein it was held that after 1st April, 1989, it was not necessary for the assessee to establish that the debt has become irrecoverable and it was enough if the debt was written off as irrecoverable in the books . Further, the CBDT vide Circular No. 12/2016 clarified regarding the claim of the bad debts, the same is reproduced as under:
Circular No. 12/2016
F.No .279/Misc./140/2015-ITJ
Government of India
Ministry of Finance Department of Revenue C
entral Board of Direct Taxes
New Delhi , Dated 30th May, 2016
Subject: – Admissibility of claim of deduction of Bad Debt under section 36(1) (vii) read with section 36(2) of the Income-Tax Act , 1961— reg.
Proposals have been received by the Central Board of Direct Taxes regarding filing o f appeals/pursuing litigation on the issue of allowability of bad debt that are written of f as irrecoverable in the accounts of the assessee. The dispute relates to cases involving failure on the part of assessee to establish that the debt is irrecoverable.
2. Direct Tax Laws (Amendment) Act, 1987 amended the provisions of sections 36(1)(vii) and 36(2) of the Income Tax Act 1961, (hereafter referred to as the Act) to rationalize the provisions regarding allowability of bad debt with effect from the April , 1989.
3. The legislative intention behind the amendment was to eliminate litigation on the issue of the allowability of the bad debt by doing away with the requirement for the assessee to establish that the debt, has in fact, become irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon’ble Supreme Court in the case of TRF Ltd. in CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010 , has stated that the position o f law is well settled. “After 1.4.1989, for allowing deduction for the amount o f any bad debt or part thereof under section 36(1)(vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee.”
4. In view of the above, claim for any debt or part thereof in any previous year shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act.
5. Accordingly, no appeals may henceforth be filed on this ground and appeals already filed, if any, on this issue before various Courts/Tribunal s may be withdrawn/not pressed upon.
6. This may be brought to the notice of all concerned.
(SadhanaPanwar) DCIT (OSD) (ITJ), CBDT, New Delhi.
28. Thus, we find that the CBDT has unequivocally allowed the claim of bad debts once the same is written off in the books of accounts as irrecoverable. Thus, the argument of the ld. DR that the bad debts should not be allowed which is based on the letter issued by the NSEL that NSEL is in the process of settling the amounts in view of the sufficiency of the assets and not to allow bad debts as the claim is pre-mature.
29. We also hold that, if in any previous year, the debt has been written off as bad and the relevant deduction has also been claimed but later on the same debt is recovered in full or part, then the amount so recovered will be included as income of the financial year in which such amount has recovered. Owing to taxability of the amounts recovered, the revenue would at liberty to tax the amount as and when received in accordance with the provisions of the Act. The department must obtain the information pertaining to payment by the NSEL to ITA No. 3298/Del/2019 Chowdry Associates 18 brokers/traders on real time basis and bring these amounts to tax net. Hence , the advisory o f the NSEL not to allow the bad debts claim would be legally untenable owing to the provisions of the Act, Circular of the CBDT and ruling o f the Hon’ble Apex Court in the case of TRF Ltd. Vs CIT (323 ITR 397).
30. Further, we have also perused the order in the case of M/s Omni Lens Pvt. Ltd. in ITA No. 2818/Ahd./2010 wherein the matter was referred back to the file of the AO to examine the issue of speculation/non-speculation business after taking note of crucial aspect of actual delivery of the commodity, if any, as claimed and to ascertain as to how the entire debt has turned bad when the assessee was purportedly in possession of the goods purchased. The issue before us is clear on this aspect.
31. The matter before us deals with the non-recovery of the advances given to the brokers. The AO, for the instant year held that the assessee is dealing in speculative transactions and invoked provisions Section 43(5) of the Act. The AO has also held that the assessee has been carrying trade in commodity derivatives. Section 43(5)(e) considers an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association shall not be deemed to be a speculative transaction. Hence , we hold that the transactions of the assessee shall not be deemed to be speculative transactions. Chapter VII o f the Finance Act, 2013 w.e.f. 01.04.2014, details as to what is a commodity derivative in the Commodities Transaction Tax (CTT). As per the CTT commodity derivative means a contract for delivery of goods which is no t a ready delivery contract or a contract for differences which derives its value from the prices o f such underlying goods. Thus, we find that the assessee is in the business of commodity derivatives but not in the speculation transaction as held by the AO. The revenue has also accepted the income from the transactions o f the assessee as business income but not as income from speculation for all the earlier years. (Owing to collapse of the NSEL, no further trading could be conducted by the assessee in the latter years). It is also an undisputed fact that the trade advances given by the assessee stands irrecoverable.
32. In conclusion, keeping in view the facts of the case, a tax history of the assessee, treatment given by the revenue to the transactions undertaken by the assessee, finding of the AO that the assessee is into commodity derivatives, provisions o f the Section 43(5) invoked by the AO, provisions of Section 43(5)(e) relied upon by the ld. AR, Explanation (2) of Section 43 as to what constitutes commodity derivatives , Para 5 of Chapter VII of Finance Act, 2013, CBDT Circular No. 3/2006 dated 27.02.2006, orders of the Co-ordinate Bench of ITAT in MeghSakariya International (supra), Omni Lens Pvt. Ltd. (supra), judgment of the Hon’ble Apex Court in the case of TRF Ltd. (supra), we hereby hold that the business loss claimed by the assessee is allowable u/s 28 of the Act.
33. In the result, the appeal of the assessee is allowed.”
7. The above decision of the co-ordinate bench of the Tribunal supports the alternative contention raised by the Assessee. In that case the loss incurred on non-recovery of debts on account of suspension of operations by NSEL was held to a ‘business loss’ allowable as deduction under Section 28 of the Act. To the same effect are the following decisions of the Co-ordinate Benches of the Tribunal which were cited by the Learned Authorised Representative for the Assessee during the course of hearing:
a. Fair Exports Pvt Ltd Vs Assistant Commissioner of Income Tax: ITA No.7091/Del/2019, Dated 24.01.2025, AY 2015-2016
b. ACIT Vs. Ketan Anil Shah: ITA No.2188/Mum/2022, Dated 19.01.2023, 2014-2015
8. There is no allegation to the effect that the Assessee was involved in the scam. Therefore, respectfully following the above decisions of the co-ordinate Benches of the Tribunal we overturn the decision of the Assessing Officer and the CIT(A) holding that the Assessee is entitled to claim deduction for the bad debt of INR.2,69,16,348/- written off during the relevant previous year by debiting the Profit & Loss Account under Section 36(1)(vii) read with Section 36(2) of the Act. Even otherwise, the Assessee was entitled to claim deduction for the same under Section 28 of the Act as a business loss incurred during the relevant previous year. Thus, disallowance of INR.2,69,16,348/- made by the Assessing Officer is deleted and the Assessing Officer is directed to compute the taxable income accordingly. In terms of the aforesaid Ground No. 4 & 5 raised by the Assessee are allowed, Ground No. 3 is partly allowed and while Ground No. 1 & 2 are dismissed as having been rendered infructuous and not pressed.
9. In result, the present appeal preferred by the Assessee is partly allowed.
Order pronounced on 30.06.2026.
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