DCIT Vs Nirshilp Securities Pvt. Ltd. (ITAT Mumbai)
Conclusion: The loss arising on account of payment made towards purchase of commodities, which were never delivered to assessee, shall be allowable as regular business loss u/s 28 of the Act and the said loss cannot be considered as speculative.
Held: In present facts of the case, the AY 2014-15 is under consideration, wherein Revenue have challenged the deletion of disallowance u/s 14A of the Act read with Rule 8D(2) of the Rules, wherein Revenue have challenged the deletion of disallowance of business loss on account of National Spot Exchange Ltd (NSEL) and also treating the said loss as speculative loss.
NSEL is a national-level institutionalised, electronic, transparent spot trading platform for commodity. It commenced “Live” trading on October 15, 2008. It was operational in 16 states in India, providing delivery-based spot trading in around 52 commodities. NSEL provided the following functions for trading opportunities.
The assessee purchased and sold commodities on the exchange platform of NSEL by trading in the paired trader’s contracts offered by the NSEL through their broker. An independent auditor “SGS” was appointed to ascertain the discrepancy of the stocks lying in the warehouse after the NSEL scam broke out in public. As per the SGS Audit Report of the NSEL warehouses, it was revealed that commodities of the stated quantity were not stored in the NSEL designated warehouse. The assessee was given warehouse receipt after making payment for the purchase of commodities. Therefore, as stock of goods purchased was not found but following amounts would have been due and payable to assessee company by the NSEL on the various dates towards settlement of the trades had the goods were found in warehouse and sold by assessee in normal course of business. The assessee filed a complaint before Economic Offence Wing (EOW) jointly with other traders explaining the fraud committed by NSEL by not having the requisite quantity and quality of commodities at its accredited warehouses and a legal notice was also served on the NSEL for winding up of their Company under Section 434 of the Companies Act, 1956 in the capacity of one of the creditor. In response thereto, the assessee received a reply from the advocate of NSEL disowning their responsibility to make payment to the assessee. These details with supporting evidences were furnished before the lower authorities and are forming part of the records.
The Hon’ble Tribunal after going through the records observed that the assessee had actually made payment of Rs 8793.87 lakhs towards cost of commodities for which no stock was received by the assessee. Hence the argument advanced by the ld DR that no payment was actually made by the assessee to NSEL, deserve to be dismissed. This trading transaction was admittedly done on NSEL platform through SEBI registered broker. The assessee was given only warehouse receipt, which is supposed to prove that the commodities are lying in the NSEL accredited warehouses. But the SGS Audit Report (independent auditor) had pointed out that the requisite stocks were not available in the NSEL accredited warehouses. Hence it could be safely concluded that the assessee had not got back any commodities for the actual payments made by it to NSEL through its registered broker. These payments were actually made by the assessee for cost of commodities purchased (but not delivered). The assessee had been consistently showing the trading transactions of commodities in NSEL platform from Asst Year 2012-13 onwards under the head “income from business” only , which has been accepted by the revenue in the past. Even during the year under consideration, the ld AO had accepted the other trading transactions of commodities in NSEL platform as business income.
Further, it was observed that the NSEL scam got unearthed in July 2013, the assessee after taking all the steps for recovery of its purchase cost of commodities from NSEL , and after coming to a conscious conclusion that the NSEL had in connivance with various brokers had resorted to cheat various traders such as assessee. All these information got triggered and concluded within the assessment year itself. Hence there is nothing wrong on the part of the assessee to write off the purchase cost of commodities in the same year in which payments were made as irrecoverable amounts and claim the same as regular business loss arising in normal course of its business u/s 28 of the Act.
In furtherance, it was observed that the ld AO treated the impugned transactions as speculative transaction as there was no actual delivery of the goods. Therefore, by applying the test of “actual delivery” without first satisfying whether a contract for purchase and sale falls within the ambit of a contract envisaged under law was totally erroneous.
The Hon’ble Tribunal placed its reliance on Chowdry Associates vs ACIT reported in 117 Taxmann.com 840 (Delhi Tribunal), wherein it was held that the loss arising thereon would be allowable as business loss u/s 28 of the Act. The operative portion of the said judgement is reproduced hereinbelow for the sake of convenience :-
31 ………….As per the CTT commodity derivative means a contract for delivery of goods which is not a ready delivery contract or a contract for differences which derives its value from the prices of 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 of 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 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 27-2-2006, 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.
On basis of the above, it was held that the loss arising on account of payment made to NSEL through registered broker towards purchase of commodities (which were never delivered to assessee) , shall be allowable as regular business loss u/s 28 of the Act and the said loss cannot be construed as speculative in nature.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal in ITA No.6321/Mum/2019, for A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-50, Mumbai in appeal No.CIT(A)-50/10023/2019-20 dated 16/07/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/12/2016, 10/12/2018 & 28/12/2016 by the ld. Asst. Commissioner of Income Tax-10(3)(1) Mumbai (hereinafter referred to as ld. AO).
1.1 The ld DR before us stated that the appeal of the revenue for the Asst Year 2014-15 in the case of Nirshilp Securities Private Limited may be taken as the lead year in ITA No. 6321/Mum/2019 and the decision rendered thereon could be applied for other assessment years except variance in figures. The ld AR also fairly agreed for the said submission of the ld DR. Accordingly, the facts of Asst Year 2014-15 in the case of Nirshilp Securities Private Limited are taken up for adjudication and the decision rendered thereon would apply with equal force for other assessment years with respect to same assessee and also in the case of Dolat Investments Ltd in respect of identical issues, except with variance in figures.
2. The Ground No. 1 raised by the revenue is challenging the deletion of disallowance u/s 14A of the Act read with Rule 8D(2) of the Rules.
2.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee had earned exempt income in the form of dividend to the tune of Rs 2,03,57,802 /- and had made suo moto disallowance u/s 14A of the Act amounting to Rs 20,35,780/-, being 10% of dividend income , while filing its return of income. The ld AO recomputed the disallowance u/s 14A of the Act by applying the computation mechanism provided in Rule 8D(2) of the Rules as under:-
