Flair Exports Pvt. Ltd. Vs ACIT (ITAT Delhi)
New Delhi: In a ruling favouring a taxpayer impacted by the National Spot Exchange Ltd (NSEL) scam, the Income Tax Appellate Tribunal (ITAT) Delhi bench has allowed a claim of Rs. 56,74,032/- written off as a bad debt. The tribunal set aside the orders of the tax authorities who had disallowed the claim, primarily on the grounds that the write-off was premature and that the underlying NSEL transactions were speculative in nature. The ITAT held the amount to be an allowable business loss incidental to the assessee’s commodity trading activities.
The case involved Flair Exports Pvt. Ltd., which is engaged in various business activities, including making investments and undertaking commodity trading transactions since Financial Year 2012-13. The income derived from these commodity transactions was consistently declared as business income in prior assessment years (2013-14 and 2014-15).
The dispute arose from advances made by Flair Exports to its broker, Phillip Commodities India Pvt. Ltd., for undertaking commodity transactions on the NSEL platform. When the NSEL scam came to light in July 2013, a significant advance amount of Rs. 2,27,89,517/- remained outstanding with the broker. Given the bleak prospects of recovery, the assessee decided to write off portions of this outstanding amount in stages. A 25% write-off was claimed in Financial Year 2013-14 (Assessment Year 2014-15), which was initially allowed by the Assessing Officer (AO) but later questioned by the Principal Commissioner of Income Tax (Pr. CIT) through revision proceedings under Section 263 of the Income Tax Act, 1961. However, the ITAT Co-ordinate Bench subsequently quashed the Pr. CIT’s order in the assessee’s own case for AY 2014-15.
In the Financial Year 2014-15 (Assessment Year 2015-16), which was the year under appeal before the ITAT, Flair Exports wrote off another 25% of the remaining outstanding balance, amounting to Rs. 56,74,032/-. This was done after a small recovery (Rs. 93,390/-) had been made through efforts initiated at the instance of the Bombay High Court.
The Assessing Officer, in completing the assessment for AY 2015-16, disallowed this bad debt claim of Rs. 56,74,032/-. The primary reason cited was that the claim was premature. The AO noted that recovery processes had been initiated by NSEL and other agencies, and therefore, the ultimate recoverable amount had not yet been determined. Citing Section 36(2) of the Income Tax Act, the AO stated that any deficiency is deductible only in the year the ultimate recovery is made. The AO also referred to a CBDT circular cautioning against bogus losses related to NSEL transactions but did not find that the specific advance given by Flair Exports was bogus.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, agreeing with the AO that the claim was premature given the ongoing recovery efforts led by the committee appointed by the Bombay High Court.
In addition to the premature claim argument, the CIT(A) introduced another ground for disallowance: the speculative nature of the NSEL transactions. The CIT(A) held that the transactions undertaken by the assessee on NSEL were speculative transactions as defined under Section 43(5) of the Act. The reasoning for this finding included the observation that NSEL was not a “recognized association/platform” that paid Commodity Transaction Tax (CTT), and investigation agencies had found that despite the T+2 sale and T+35 purchase structure, there was no underlying stock or physical delivery of goods, only money exchange. The CIT(A) concluded that loss from such speculative business is distinct (as per Explanation 2 to Section 28) and cannot be set off against regular business income. It was also noted that the loss might not be allowable under Section 37 (general expenditure) due to the suspension of NSEL trading over alleged violations of law.
Before the ITAT, Flair Exports challenged both the grounds for disallowance. The assessee’s representative argued that the write-off was legitimate as per established legal principles and judicial precedents, emphasizing that once a debt is written off in the accounts, proof of irrecoverability is not required. Crucially, the assessee highlighted that in their own case for AY 2014-15, the ITAT Co-ordinate Bench had already dealt with similar issues, including the revenue’s alternative plea of speculative loss, and had ruled in the assessee’s favour by quashing the Pr. CIT’s revision order.
The assessee also contended that the loss arose from a business advance given for online commodity trading, the income from which was consistently treated as business income. Therefore, the loss was a business loss incidental to the regular business activity, not a loss from trading during the year under appeal, and thus the question of it being speculative under Section 43(5) did not arise in this context.
The ITAT carefully considered the rival submissions and perused the material on record. The tribunal placed significant reliance on its own prior orders concerning similar NSEL-related losses, including the order in Flair Exports’ own case for AY 2014-15 (ITA No. 2286/Del/2017), and other identical cases such as U.K. Paints India Ltd. vs. ACIT (ITA No. 7604/Del/2017) and ACIT vs. Span India Pvt. Ltd. (ITA No. 6451/Del/2017). The ITAT noted that a common reasoning had been adopted in these cases.
Drawing upon the principles laid down by the Supreme Court in Quershi Vs CIT (regarding the distinction between business loss and business expenditure) and CIT Vs Textool Co. Ltd. (concerning the nexus of loss with business), the ITAT’s common reasoning, adopted in this case, held that the amount paid to the broker that became irrecoverable due to the NSEL crash constituted a “business loss”. This loss was found to have arisen from or be incidental to the assessee’s business with the broker.
The ITAT concluded that such a business loss is allowable under Section 28 of the Income Tax Act, as it possesses a direct and proximate nexus with the business operations. The tribunal stated that since the loss was treated as a business loss under Section 28, the provisions of Sections 30 to 37 (which primarily deal with business expenditures or specific allowances like bad debts under Section 36) are not strictly applicable, though the allowability principle remains.
Furthermore, the ITAT effectively rejected the tax authorities’ arguments regarding the premature nature of the write-off and the speculative nature of the transactions by relying on established judicial precedents. The tribunal referred to the Supreme Court judgment in T.R.F. Ltd. vs. CIT, which clarified that after April 1, 1989, it is sufficient for an assessee to write off a bad debt as irrecoverable in their accounts, and it is not necessary to prove actual irrecoverability. Any subsequent recovery is taxable. This principle was reiterated in the ITAT Chennai order in Megh Sakariya International P. Ltd. vs. DCIT, also cited by the tribunal.
The ITAT’s reliance on Chowdry Associates v/s ACIT also supported the rejection of the speculative loss argument. That case held that if an assessee is engaged in the business of commodity derivatives and their income from such transactions has been accepted as business income in prior years, then the losses incurred should be treated as business losses allowable under Section 28, not as speculative losses under Section 43(5).
Based on the clear position emerging from these judicial precedents, the ITAT found substantial merit in the assessee’s submissions. The tribunal concluded that the write-off of Rs. 56,74,032/- was allowable as a business loss.
Accordingly, the ITAT allowed the appeal filed by Flair Exports Pvt. Ltd. and deleted the addition of Rs. 56,74,032/- that had been confirmed by the CIT(A).
FULL TEXT OF THE ORDER OF ITAT DELHI
