Case Law Details
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
The aforetitled appeal by the assessee arising out of the order dated 11.07.2019 passed by Ld. Commissioner of Income Tax (Appeals)-3, New Delhi (“Ld. CIT(A)”, for short) pertaining to Assessment Year 2015-16.
2. Following grounds have been raised by the assessee / appellant for adjudication of this appeal:
“1. The action of the CIT(A) in upholding the disallowance of the claim of the assessee on account of bad debts amounting to Rs.56,74,032/on the ground that the claim is premature is unjust, illegal, arbitrary, uncalled for and devoid of any merit and the appellant prays that the same be deleted.
2. The action of the CIT(A) in holding that the transactions entered into by the assessee resulting in bad-debts are speculative in nature and confirming the addition of 56,74,032/- is unjust, illegal, arbitrary, uncalled for and devoid of any merit and the appellant prays that the same be deleted.
3. The action of the CIT(A) in holding that NSEL was nota recognized association/ platform as it did not pay commodities transaction tax (CTT) is unjust, illegal, arbitrary, uncalled for and devoid of any merit.
4. The action of the CIT(A) in not accepting the transactions as a forward contract covered under exception to section 43(5) is unjust, illegal, arbitrary, uncalled for and devoid of any merit.
5. The appellant craves leave to add, alter, modify or delete any ground of appeal either before or at the time of the ”hearing.
3. Brief facts of the case may be summarized as that the assessee/ appellant E-filed its return of income on 09.2015, declaring total income of Rs. 3,05,02,810/-. Subsequently, the case was selected for Manual scrutiny on the basis of guidelines of CBDT issued vide Instruction No. 4/2016 dated 13.07.2016. Accordingly, notice u/s 143(2) dated 30.09.2016 was issued and served upon the assessee within stipulated time. Thereafter, notices u/s 142(1) was issued to the assessee from time to time, in which on behalf of the assessee, Sh. A.Κ. Sethi, attended the proceeding and filed the necessary details as called for. The Ld. AO, keeping in view that details filed and discussion with the Ld. AR, computed total income Rs. 3,71,08,043/ inclusive of impugned additions. Then, the assessee / appellant filed appeal before the Ld. CIT(A), who partly allowed the appeal filed by the assessee by confirming the addition of Rs. 56,74,032/- and by aggrieved so, this appeal before us.
4. Heard rival submissions and carefully perused the material available on record.
5. In the course of hearing, reiterating the grounds of appeal, the AR submitted that the solitary issue exists in this appeal for adjudication is whether an amount of Rs. 56,74,302/- written off by the assessee/ appellant during the relevant year under consideration as bad debt is allowable and also whether the first appellate authority was justified in upholding the order of the Ld. AO with the further findings that the amount of loss written off is speculative in nature ?
6. The AR submitted that the assessee / appellant is engaged in the business of making investments in securities and earning of interest income form ICD’s including capital gains and income from house property and undertaking commodity trading transactions from Financial Year 2012-13 onwards and income from undertaking such commodity transaction was declared as business income in Assessment Years 2013-14 and 2014-15. The income declared from such activity, being commodities income was Rs.3.25 lakhs in Assessment Year 2013-14 and Rs. 19.48 lakhs in Assessment Year 2014-15. He submitted that one the largest scam came to be detected on the NSEL platform occurred sometime in July 2013, widely circulated in the national media and CBI as well as SEBI became active. The issue was referred to Economic Offences Wing of Mumbai Police who found large scale irregularities on the part of certain brokers in which officials of NSEL was also found to be involved.
6.1 The AR submitted that, the assessee was undertaking the commodity transactions through a recognized broker namely Phillip Commodities India Pvt. Ltd. The outstanding advance with this broker, when the scam occurred was Rs.2,27,89,517/-. The assessee / appellant opted to write off 25% of the advance in Financial Year 2013-14 relevant to the Assessment Year 2014-15. As the chances of recovery of this amount was quite remote, the assessee opted to write off 25% of the advance in F.Y. 2013-14 relevant to A.Y. 2014-15 and on the same basis 25% of the amount which remained outstanding as on 31.03.2015 (Rs.93,390/- was recovered through the efforts/ committee appointed for making recoveries at the instance of Hon’ble Bombay High Court), another write off during the year @ 25% was Rs.56,74,032/-.
6.2 Further more, the learned AO disallowed the amount by holding that because the government authorities have stepped in for making recoveries on behalf of various persons who got stuck in the scam and the write off by the assessee was The Assessing Officer referred to a Circular issued by CBDT regarding alleged bogus losses for transaction on the National Stock Exchange on account of said scam in which, the Departmental officer were cautioned that certain brokers are claiming bogus loses. However, in the case of the assessee no finding has been rendered that the advance given by the assessee to its broker namely Phillip Commodities India Pvt. Ltd. were bogus or had not been advanced by the assessee in the ordinary course of business. The Ld. AO was of the view that such losses are write off loss is premature.
6.3 The AR also submitted that 25% of such loss was claimed in the Assessment Year 2014-15 and the learned AO had allowed it after proper verification. However, the learned Pr. CIT on receipt of Board Circular initiated proceedings u/s 263 and directed the Ld. AO to withdraw the claim which had been allowed by him towards the write off of 25% as bad debts by the assessee in AY 2014-15, and the Co-ordinate Bench of the ITAT, Delhi, dismissed the alternative plea of the Revenue that such loss represent speculative loss in the appeal filed by assessee and this other fully and squarely covered the issue in hand in assessee’s own case for A.Y. 2014-15. It was further submitted on behalf of the assessee /appellant that the Co ordinate Bench of ITAT, while quashed the order of the Ld. PCIT has also relied upon another order of Co- ordinate Bench in the case of M/s. U.K. Paints India Ltd. in ITA No. 7604/Del/2017 in Assessment Year 2014-15 wherein write off has been allowed as the facts were identical including the broker namely M/s. Philip Commodities India Pvt. Ltd. from whom the amount was recoverable in that case. It was also argued on behalf of the Ld.AR that no commodity trading transaction took place during this year and the same were stopped after the detection of scam in July, 2013. This loss is not on account of trading of commodities during this year but towards business advances which the assessee had given for the day today online trading in the commodity market the income from which had been admittedly accounted for as business income and therefore the question of trading the same as speculative does not arise. Assessee’s loss has arisen from amounts recoverable and not from trading during the year. Hence the question of determining the nature of transaction as speculative is irrelevant.
7. Relevant extract of the order passed by the AO is reproduced as under:
4.3 The reply of the assessee was considered but the same was not found satisfactory. As has already been mentioned, the recovery process has already been initiated by NSEL and various other agencies. Thus, it is cleare that the debt which has been written off by the assessee company for A.Y. 2014-15 are not in mature stage to be written off. The ultimate deficiency in the amount recoverable cannot be arrived at this stage and hence, the claim of bad debt of the assessee cannot be concluded till the final deficiency amount is arrived at.
As per section 36(2) of Income tax Act, 1961,”
“In making any deduction for a bad debt or part thereof, the following provisions shall apply-(ii) If the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;”
4.4 Since the recovery shall take longer time and hence, any claim earlier to that shall be, prima facie, considered as premature claim, liable for rejection. In view of the above facts, it is evident that assessee’s claim of bad debt is not allowable. Hence, written off amount of bad debt of Rs. 56,74,032/- is added back to the total income of the assessee company. The undersigned is satisfied that the assessee company has concealed income by furnishing inaccurate particulars of income, and hence penalty proceedings u/s 271(1)(c) are initiated separately.
Addition of Rs. 56,74,032”
8. The CIT(A) upheld the addition made by the Ld. AO, relevant part of the order of CIT(A) is reproduced as under:
“5.3 I have considered the facts of the case and the submission made by the AR. It is observed that the appellant had entered into forward contracts in raw wool, sugar and paddy on NSEL and after the NSEL scam was detected, some amount to be recovered by the appellant was left pending. As per the report received by the CBDT, a high powered committee has been appointed by Hon’ble Bombay High Court to liquidate the assets of the defaulters and to recover the outstanding amounts and it has been stated that there are enough assets to recover the whole amount. It is also observed that the name of the appellant is appearing in the report of CBDT and it is also stated that recovery process has already started and some amount has already been recovered. In view of these facts, I am of the opinion that the appellant has treated the amount as bad debts at a premature time and therefore, the claim of the appellant is liable to be rejected.
5.3.1 Without prejudice to the above argument, the AR was asked vide this office order sheet entry dated 19.03.2019 as to why the NSEL transactions undertaken by the appellant be not treated as speculative in nature and the loss from this commodity business did not treated as speculative loss. In response, the AR has submitted that the transactions are not covered by the provisions of section 43(5) of the Act as the transactions were delivery based. In this regard, it is important to analyze the nature of transaction undertaken by various vendors including the appellant on NSEL. It is observed that the appellant had made bids on National Spot Exchange Ltd. (NSEL) for purchase & sale of paddy and other items. The sale contract is entered by the appellant on T+2 trading cycle i.e. the appellant makes bid for sale of paddy and the contract is finalized within 2 days of the transaction and the appellant receives the payment and is expected to make delivery of the goods contracted for. On the same day of the transaction, the appellant enters into another contract for purchase of same goods and this contract is done on T+35 (or T+37, etc.) trading cycle i.e. the appellant makes the payment after 35 days of the transaction date and is expected to be delivered the goods. However, all such transactions were later found to be simply speculative transactions as in both the sale/purchase transactions, it was found by the investigation agencies that there was no underlying stock i.e. with respect to the contracts, contracts, only money was being exchanged and no delivery of goods was being done. In this regard, it is to be noted that NSEL was not a recognized Association/platform and it did not pay any commodity transaction tax. Section 43(5) defines ‘speculation transaction’ which means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips and accordingly, in view of the facts and the provisions of section 43(5)(e) of the Act, the transactions done by the assessee on NSEL were speculative transactions as no commodity transaction tax was being paid on these transactions and there was no physical delivery of goods. Explanation 2 to section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business, i.e., the speculation business shall be deemed to be distinct and separate from any other business and therefore, any loss on account of such speculation business cannot be allowed under Chapter 4 of the Act. Further, the said claim can also be not allowed under section 37 in view of Explanation 1 to the said section since trading on NSEL was suspended due to its violations of law and its operations going beyond the mandate provided to it. In view of these facts, I am of the opinion that the appellant is not entitled for adjustment of speculative loss incurred through the transactions undertaken on NSEL against the regular business income (the appellant has shown Nil receipts from commodity business and has claimed bad debts of Rs. 56,74,032/-). Accordingly, the addition made by the AO is upheld and the grounds of appeal are dismissed.”
9. The DR relied upon the orders of the both authorities below, by stating that there is no any substance in the present appeal.
10. During hearing, the AR submitted three annexures containing the orders of the Co-ordinate Bench of ITAT, Delhi in the cases of M/s Flair Exports Pvt. Ltd. vs. DCIT in ITA No. – 2286/Del/2017 vide order dated 24.11.2021, U.K. Paints India Ltd. vs. ACIT in ITA No.- 7604/Del/2017 vide order dated 27.11.2020 and ACIT vs. Span India Pvt. Ltd. in ITA No.- 6451/Del/2017 vide order dated 04.03.2024. The relevant para18 of these three orders, which is identical, is reproduced as under:
“18. The issue involved deduction under two specific section namely section 28 and section 36 and 37. There is a subtle difference between the business loss and business expenditure while loss arises from regular operation of the business, business expenditure is conscious charge in an endeavor to earn Income. Sections 30 to 36 deal specifically with expenditure allowable in computing the taxable income and Section 37 is a general provision for allowing the deductions of expenditure taking into consideration the business of the assessee. The exception being capital expenditure and personal expenditure. The Hon’ble Supreme Court in the case of Quershi Vs CIT 287 ITR 547 held that explanation II Section 37 is not applicable to the case of business loss but to business expenditure. In the instant case, the assessee paid amount to Philip Commodities India Pvt. Ltd. in the month of June 2013 of Rs.1,50,66,407/- and also got the amounts till March 2014 and could not receive money of Rs.47,58,533/- owing to crash of NSEL. This gives rise to a situation where the assessee incurred business loss owing to his transaction with M/s Philip Commodities India Pvt. Ltd. Hence, the loss will have to be allowable at loss incidental to the business while computing the income u/s 28.Since,it is not an expenditure, the provisions u/s 30 to 37 are not attracted in this case. We hold that loss must be during the course or of incidental to business. It is the nexus with the business which is more relevant to claim the loss (CIT Vs Textool Co. Ltd. 135 ITR 200). The loss must have a direct and proximate nexus with the business operations and the loss is incidental to it, then such loss is deductible as, without business operations, no profit can be earned. If profit is earned in such a endeavour it is to be taxed and if loss is earned it is to be allowed. Without going into the grammatical issue of debt or bad debts or receivables, since the facts clearly prove that the assessee has incurred loss by the way of his business with M/s Philip Commodities India Pvt. Ltd. and the loss has been in the current year itself, in the peculiar facts and circumstances of the case, such loss incurred in such transaction with regard to NSEL is allowable. Any subsequent recovery needs to be taken into consideration in computation of total income.”
11. The AR also referred order of Co-ordinate Bench [2020] 117 taxmann.com 840 (Delhi) Chowdry Associates v/s ACIT, wherein held that since assessee was in business of commodity derivatives and revenue had also accepted income from transactions of assessee as business income and not as income from speculation for all earlier years, business losses as claimed by assessee was allowable u/s 28, relevant extract of para 32 reproduced as under:
“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 of 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 Megh Sarkariya 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.”
12. The AR referred the order passed by the Co-ordinate Bench of ITAT, in the case of Megh Sakariya International P. Ltd. vs. DCIT, in ITA No. 59/Chny/2018 vide order dated 05.09.2018. The relevant part of this order is reproduced as under:
“It is significant to note that Ld. Assessing Officer had accepted the debt to be bad, but had disallowed the deeming it to be premature. It is also clear that debt arose on account of trading in commodities in the exchange and not due to sale of any capital assets. Hon’ble Apex Court in the case of T.R.F. Ltd. (supra) had held as under at para 4 of its judgment:
“4. This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off”. It is clear that once a debt is written off as irrecoverable in the accounts of the assessee, it has to be allowed. It is not required that debt should have arose on account of transactions in any preceding years. Once a debt is claimed as bad and written off in the accounts it has to be allowed. No doubt, if the assessee at a later point of time recovers any money against any sum, it is bound to show it as income. Considering the judgment of Hon’ble Apex Court in the case of T.R.F. Ltd. (supra), we are of the opinion that the claim of the assessee had to be allowed. Orders of the lower authorities on this issue are set aside.”
12. The Hon’ble Supreme Court in the case of TRF vs. CIT (2010), 13 Supreme Court cases 532, has held that this position in law is well settled. After 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.
13. On the basis of judicial precedents mentioned hereinbefore, it is crystal clear that it is not required for the assessee / appellant to establish that the debt in question has became irrecoverable and bad debt is written off as irrecoverable in the account of the assessee is quite sufficient.
14. Foregoing discussion and judicial pronouncement cited hereinbefore, enables us to reach this conclusion that there is material substance in the submission advanced on behalf of the assessee / appellant and we finds ground of appeal of the assessee deserve to be allowed.
15. Consequently, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 24th January, 2025.
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