ASSTT COMMISSIONER OF INCOME TAX 19(1), MUMBAI vs. KETAN ANIL SHAH, MUMBAI

This appeal by the Revenue is directed against the order dated 07th July, 2022 passed by the Ld. Commissioner of Income-tax (Appeals) (National Faceless Appeal Centre, Delhi [in short, ‘the Ld. CIT(A)] for Assessment Year 2014-15, raising the following grounds:

Ketan Anil Shah 2 ITA No. 2188/M/2022

2. Whether on the facts and circumstances of the case and in law on the facts and circumstances of the case and in law on the facts and circumstances of the case and in law the Ld. CIT(A the Ld. CIT(A) was justified in deleting the entire addition of ) was justified in deleting the entire addition of ₹10,91,53,148/ 10,91,53,148/- with the observation that the transactions were observation that the transactions were carried out through NSEL (Spot Exchange) from M/s Philips carried out through NSEL (Spot Exchange) from M/s Philips carried out through NSEL (Spot Exchange) from M/s Philips Commodities India Pvt Ltd & Motilal Oswal Commodities Broker Commodities India Pvt Ltd & Motilal Oswal Commodities Broker Commodities India Pvt Ltd & Motilal Oswal Commodities Broker Pvt Ltd transaction without appreciating the fact that the contract Pvt Ltd transaction without appreciating the fact that the contract Pvt Ltd transaction without appreciating the fact that the contract ivative transactions. notes only state about the der notes only state about the derivative transactions. 3. Whether on the facts and circumstances of the case and in law Whether on the facts and circumstances of the case and in law Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred the Ld. CIT(A) erred in giving relief by deleting addition of in giving relief by deleting addition of ₹10,91,53,148/ 10,91,53,148/- without appreciating the fact that the Derivative without appreciating the fact that the Derivative transaction was banned on the NSEL platform transaction was banned on the NSEL platform transaction was banned on the NSEL platform (Spot Exchange) hence transaction made by the assessee was not valid as per hence transaction made by the assessee was not valid as per hence transaction made by the assessee was not valid as per section 45V of the RBI Act.” section 45V of the RBI Act.” 2. Briefly stated, facts of the case are that the assessee, an stated, facts of the case are that the assessee, an stated, facts of the case are that the assessee, an individual was engaged in carrying out transactions of commodity individual was engaged in carrying out transactions of commodity individual was engaged in carrying out transactions of commodity dealing on National Spo on National Spot Exchange Ltd (NSEL) and was also t Exchange Ltd (NSEL) and was also engaged in the business of merchant export of products such as engaged in the business of merchant export of products such as engaged in the business of merchant export of products such as brass adapter, brass chain, connectors’ screw, etc. through his brass adapter, brass chain, connectors’ screw, etc. through brass adapter, brass chain, connectors’ screw, etc. through proprietary concern, M/s Conex Metals. concern, M/s Conex Metals. For the year under For the year under consideration, the assessee filed re consideration, the assessee filed return of income on 19 turn of income on 19th November, 2014 declaring total income of ₹19,21,250/ November, 2014 declaring total income of 19,21,250/-. The return of income filed by the assessee was selected for scrutiny and of income filed by the assessee was selected for scrutiny and of income filed by the assessee was selected for scrutiny and statutory notices under the Income statutory notices under the Income-tax Act, 1961 (in short, ‘the tax Act, 1961 (in short, ‘the Ketan Anil Shah 3 Act’) were issued and complied with. Act’) were issued and complied with. In the assessment completed n the assessment completed under section 143(3) of the Act on 29/12/2016, the Assessing under section 143(3) of the Act on 29/12/2016, the Assessing under section 143(3) of the Act on 29/12/2016, the Assessing Officer rejected the claim of Officer rejected the claim of ₹10,91,53,148/- as ‘bad debts’ written as ‘bad debts’ written off in profit and loss account. in profit and loss account. Aggrieved, the assessee filed appeal Aggrieved, the assessee filed appeal before the Ld. CIT(A), who CIT(A), who held the amount of ₹10,91,53,148/ 10,91,53,148/- as business loss rather than ‘bad debt’ business loss rather than ‘bad debt’ and allowed allowed the same. Aggrieved, the Revenue is in appeal before the Tribunal raising Aggrieved, the Revenue is in appeal before the Tribunal raising Aggrieved, the Revenue is in appeal before the Tribunal raising grounds as reproduced above. grounds as reproduced above.

Ketan Anil Shah 4 ITA No. 2188/M/2022

5. Briefly stated, the facts qua the issue in disput Briefly stated, the facts qua the issue in dispute are that in the e are that in the P&L Account the assessee has shown loss of P&L Account the assessee has shown loss of ₹10,91,53,148/ 10,91,53,148/- as irrecoverable loss on account of commodities loss on account of commodities. It was explained by It was explained by the assessee, that assessee had entered into contracts of buying the assessee, that assessee had entered into contracts of buying the assessee, that assessee had entered into contracts of buying and selling of commodity and selling of commodity on NSEL through two brokers, viz. M/s brokers, viz. M/s Motilal Oswal Securities Pvt Motilal Oswal Securities Pvt. Ltd and M/s Philips Commodity Pvt Ltd and M/s Philips Commodity Pvt Ltd. According to the assessee, the contracts were for physical Ltd. According to the assessee, the contracts were for physical Ltd. According to the assessee, the contracts were for physical delivery of goods – purchase and sale. Further it was submitted purchase and sale. Further it was submitted purchase and sale. Further it was submitted that NSEL defaulted NSEL defaulted in its obligation for the first time on he first time on 31/07/2013 and thereafter NSEL was shut down and all the 31/07/2013 and thereafter NSEL was shut down and all the 31/07/2013 and thereafter NSEL was shut down and all the transactions which were pending on 31/07/2013 were abruptly transactions which were pending on 31/07/2013 were abruptly transactions which were pending on 31/07/2013 were abruptly stopped. The sale transactions which were entered into for which stopped. The sale transactions which were entered into for which stopped. The sale transactions which were entered into for which payment was to be made after 25 / 35 days from the date of sale payment was to be made after 25 / 35 days from the date payment was to be made after 25 / 35 days from the date was not completed as the said parties could not get the delivery of was not completed as the said parties could not get the delivery of was not completed as the said parties could not get the delivery of goods purchased by it from the NSEL and in consequence thereto, goods purchased by it from the NSEL and in consequence thereto, goods purchased by it from the NSEL and in consequence thereto, the said parties did not make payment of goods purchased by them. the said parties did not make payment of goods purchased by them. the said parties did not make payment of goods purchased by them. Therefore, the parties, who sold the goods includ Therefore, the parties, who sold the goods including assessee at the ing assessee at the NSEL did not receive their sale proceeds. It was further submitted NSEL did not receive their sale proceeds. It was further submitted NSEL did not receive their sale proceeds. It was further submitted Ketan Anil Shah 5 ITA No. 2188/M/2022 by the assessee that in the enquiries by various law enforcement by the assessee that in the enquiries by various law enforcement by the assessee that in the enquiries by various law enforcement agencies, it was found that goods were not available in many agencies, it was found that goods were not available in many agencies, it was found that goods were not available in many accredited warehouse of NSEL and, therefor warehouse of NSEL and, therefore, it was not possible to e, it was not possible to receive the goods from the NSEL and delivered the goods purchased receive the goods from the NSEL and delivered the goods purchased receive the goods from the NSEL and delivered the goods purchased to the parties, who agreed to purchase the same after 25 / 35 days. to the parties, who agreed to purchase the same after 25 / 35 days. to the parties, who agreed to purchase the same after 25 / 35 days. Therefore, neither assessee received the payment of the sale of the Therefore, neither assessee received the payment of the sale of the Therefore, neither assessee received the payment of the sale of the commodities nor did he rece commodities nor did he receive the stock of commodities or the ive the stock of commodities or the amounts paid for purchase of commodities amounts paid for purchase of commodities from the the NSEL. Since the amounts were paid in normal course the amounts were paid in normal course of the business of the of the business of the assessee, the non-recovery recovery of sale proceeds resulted in business of sale proceeds resulted in business loss to the assessee. However, the Assessing Officer rejected the loss to the assessee. However, the Assessing Officer rejected the loss to the assessee. However, the Assessing Officer rejected the contention of the assessee. In view of the Assessing Officer, the contention of the assessee. In view of the Assessing Officer, the contention of the assessee. In view of the Assessing Officer, the assessee has not made any efforts for recovery of said bad debt of assessee has not made any efforts for recovery of said bad debt of assessee has not made any efforts for recovery of said bad debt of ₹10,91,53,148/- from om M/s Motilal Oswal Securities Pvt /s Motilal Oswal Securities Pvt. Ltd and M/s Philips Commodity Pvt M/s Philips Commodity Pvt. Ltd like sending any legal notice or Ltd like sending any legal notice or filing suit in the Court of Law. He further held that matter of filing suit in the Court of Law. He further held that filing suit in the Court of Law. He further held that recovery from NSEL was subjudice and recovery from NSEL was subjudice and there was no finality on the there was no finality on the status of the debts, therefore, treating the debts as bad and bts, therefore, treating the debts as bad and bts, therefore, treating the debts as bad and Ketan Anil Shah 6 ITA No. 2188/M/2022 immediately writing off from the books of account was premature immediately writing off from the books of account was premature immediately writing off from the books of account was premature and without any substance. According to him, recovery is an and without any substance. According to him, recovery is an and without any substance. According to him, recovery is an ongoing process and the ultimate recovery shall take long time and, ongoing process and the ultimate recovery shall take long time and, ongoing process and the ultimate recovery shall take long time and, therefore, any claim of the bad debt earlier to that shall be prima aim of the bad debt earlier to that shall be prima aim of the bad debt earlier to that shall be prima facie considered as premature claim liable for rejection; hence, the facie considered as premature claim liable for rejection; hence, the facie considered as premature claim liable for rejection; hence, the claim of deduction under section 36(1)(vii) read with section 36(2) / claim of deduction under section 36(1)(vii) read with section 36(2) / claim of deduction under section 36(1)(vii) read with section 36(2) / 37(1) was inadmissible. The relevant finding of the Ld. Assessing 37(1) was inadmissible. The relevant finding of the Ld. 37(1) was inadmissible. The relevant finding of the Ld. Officer is reproduced as Officer is reproduced as under: -

4.14 The facts of the case is that the debt claimed by the appellant relates to the The facts of the case is that the debt claimed by the appellant relates to the The facts of the case is that the debt claimed by the appellant relates to the previous year in which it has been claimed to have become bad. However, law is to previous year in which it has been claimed to have become bad. However, law is to previous year in which it has been claimed to have become bad. However, law is to be interpreted in its essence and spirit. Though the assessee has claimed the bad be interpreted in its essence and spirit. Though the assessee has claimed the bad debt in its account, however, the assessee has not taken pains to show / prove that debt in its account, however, the assessee has not taken pains to show / prove that debt in its account, however, the assessee has not taken pains to show / prove that the debt has actually become bad. The debt is on account of non receipt of sale the debt has actually become bad. The debt is on account of non receipt of sale the debt has actually become bad. The debt is on account of non receipt of sale receipts of commodities from M/s M/s Philips Commodity Pvt Ltd & M/s Motilal receipts of commodities from M/s M/s Philips Commodity Pvt Lt d & M/s Motilal Oswal Securities Pvt Ltd. The debt was only few months old at the time of its write Oswal Securities Pvt Ltd. The debt was only few months old at the time of its write- Oswal Securities Pvt Ltd. The debt was only few months old at the time of its write off and it seems the appellant has not made any effort for the collection of this off and it seems the appellant has not made any effort for the collection of this amount. If they had done it, they would have certainly filed some papers amount. If they had done it, they would have certainly filed some papers or amount. If they had done it, they would have certainly filed some papers evidence or documents to prove their case. The appellant has only relied on the evidence or documents to prove their case. The appellant has only relied on the evidence or documents to prove their case. The appellant has only relied on the amended provision of section 36(1)(vii) for claiming deduction without proving that amended provision of section 36(1)(vii) for claiming deduction without proving that amended provision of section 36(1)(vii) for claiming deduction without proving that the debt has really become bad. Therefore, in the facts and circumstances, I hold the debt has really become bad. Therefore, in the facts and circumstances, I hold the debt has really become bad. Therefore, in the facts and circumstances, I hold that the write off of bad debts are not genuine and with out any substance to prove the write off of bad debts are not genuine and with out any substance to prove the write off of bad debts are not genuine and with out any substance to prove that the debts are actually became bad and virtually irrecoverable. In the absence that the debts are actually became bad and virtually irrecoverable. In the absence that the debts are actually became bad and virtually irrecoverable. In the absence of the same it is held that the claim of bad debts of ₹10,91,53,148/ of the same it is held that the claim of bad debts of ₹10,91,53,148/- is premature and not withstood the test of genuineness of the claim. Hence, the claim of ithstood the test of genuineness of the claim. Hence, the claim of ithstood the test of genuineness of the claim. Hence, the claim of deduction on account of bad debts of ₹10,91,53,148/- is not allowed and added deduction on account of bad debts of is not allowed and added back to the total income of the assessee. Accordingly, the Business loss is disallowed back to the total income of the assessee. Accordingly, the Business loss is disallowed and hence, not allowed to be set off & carried forward. Penalty proceedings u/s and hence, not allowed Penalty proceedings u/s 271(1)(c) are initiated separately for furnishing inaccurate particulars of income 271(1)(c) are initiated separately for furnishing inaccurate particulars of income 271(1)(c) are initiated separately for furnishing inaccurate particulars of income leading to concealment of taxable income. leading to concealment of taxable income.”

Ketan Anil Shah 7 ITA No. 2188/M/2022 5.1 The Ld.CIT(A), however, after going through the submission of CIT(A), however, after going through the submission of CIT(A), however, after going through the submission of the assessee held the loss claimed by the assessee as business loss the assessee held the loss claimed by the assessee as business loss the assessee held the loss claimed by the assessee as business loss observing as under: - - “3.5 I have carefully gone through the observations of the AO in the assessment 5 I have carefully gone through the observations of the AO in the assessment 5 I have carefully gone through the observations of the AO in the assessment order extracted in para 3.1 above, written submissions made by the appellant, order extracted in para 3.1 abo ve, written submissions made by the appellant, evidence filed during the appeal proceedings and the case laws relied by the AO and evidence filed during the appeal proceedings and the case laws relied by the AO and evidence filed during the appeal proceedings and the case laws relied by the AO and also the appellant. The AO disallowed the claim of bad debt on the ground that (i) also the appellant. The AO disallowed the claim of bad debt on the ground that (i) also the appellant. The AO disallowed the claim of bad debt on the ground that (i) the write-off of bad debts is not genuine off of bad debts is not genuine and (ii) the assessee was not able to prove and (ii) the assessee was not able to prove that the debts had actually become bad and irrecoverable and in the alternative (iii) that the debts had actually become bad and irrecoverable and in the alternative (iii) that the debts had actually become bad and irrecoverable and in the alternative (iii) the transaction of purchase and sale of commodities at the NSEL were speculative the transaction of purchase and sale of commodities at the NSEL were speculative the transaction of purchase and sale of commodities at the NSEL were speculative transactions and therefore, the loss on account of speculation trading was a transactions and therefore, the loss on accou nt of speculation trading was a speculative loss and the same may be allowed to be carried forward for set off speculative loss and the same may be allowed to be carried forward for set off speculative loss and the same may be allowed to be carried forward for set off against the speculation gains in the subsequent years. against the speculation gains in the subsequent years. 3.6 Verification of computation of income sheet of the appellant shows 'net 3.6 Verification of computation of income sheet of the appellant shows 'net 3.6 Verification of computation of income sheet of the appellant shows 'net profit before tax as per P&L A/c under the Commodities Trading business head before tax as per P&L A/c under the Commodities Trading business head before tax as per P&L A/c under the Commodities Trading business head shows a loss of Rs.10,91,53,148/-. And the P&L a/c of the assessee for the year shows a loss of Rs.10,91,53,148/ . And the P&L a/c of the assessee for the year ended shows a debit of Rs.10,91,53,148/ debit of Rs.10,91,53,148/- under the title 'Loss on account of under the title 'Loss on account of Commodities : irrecoverbility'. This shows that the loss is actually claimed as Commodities : irrecoverbility '. This shows that the loss is actually claimed as business loss by the assessee in his accounts and the return of income. In the business loss by the assessee in his accounts and the return of income. In the business loss by the assessee in his accounts and the return of income. In the submissions extracted at para 3.3 above, the appellant argued that the loss is submissions extracted at para 3.3 above, the appellant argued that the loss is submissions extracted at para 3.3 above, the appellant argued that the loss is allowable as 'business loss'. However it is seen that the AO discussed the claim as allowable as 'business loss'. However it is see n that the AO discussed the claim as 'bad debt' and made the disallowance of Rs.10,91,53,148/- debited to P&L account 'bad debt' and made the disallowance of Rs.10,91,53,148/ debited to P&L account by treating the same as premature and not genuine. AO also took an alternate by treating the same as premature and not genuine. AO also took an alternate by treating the same as premature and not genuine. AO also took an alternate ground for disallowance to treat the transactions on NSEL as speculative and loss as ground for disallowance to treat the transactions on NSEL as speculative and loss as speculation loss. After detailed examination of the issue, my decision is as under. speculation loss. After detailed examination of the issue, my decision is as under. speculation loss. After detailed examination of the issue, my decision is as under. 3.7 AO in the assessment order quoted a letter of NSEL dated 16.06.2016 to state .7 AO in the assessment order quoted a letter of NSEL dated 16.06.2016 to state .7 AO in the assessment order quoted a letter of NSEL dated 16.06.2016 to state that the claims of loss made by the brokers/clients/agents are prem that the claims of loss made by the brokers/clients/agents are premature, since the that the claims of loss made by the brokers/clients/agents are prem recovery process is underway by EOW and HCC and the assets worth 7000 crores as recovery process is underway by EOW and HCC and the assets worth 7000 crores as recovery process is underway by EOW and HCC and the assets worth 7000 crores as against the claim of 5,600 crores have already been secured. It appears against the claim of 5,600 crores have already been secured. It appears from the against the claim of 5,600 crores have already been secured. It appears record that the AO has not supplied the ecord that the AO has not supplied the assessment proceedings. Appellant contested this letter in his submissions. It is true assessment proceedings. Appellant con tested this letter in his submissions. It is true that the AO was under obliga^jbn to supply the information collected from third that the AO was under obliga^jbn to supply the information collected from third that the AO was under obliga^jbn to supply the information collected from third party to the assessee, if she wanted to use the same in the assessment. Mere party to the assessee, if she wanted to use the same in the assessment. Mere party to the assessee, if she wanted to use the same in the assessment. Mere statement regarding the alleged observations of NSEL, and /making addition is statement regarding the alleged observations of N SEL, and /making addition is against the principles of natural justice. Such statement/letter,, if/any has ,to be against the principles of natural justice. Such statement/letter,, if/any has ,to be against the principles of natural justice. Such statement/letter,, if/any has ,to be Ketan Anil Shah 8 ITA No. 2188/M/2022 supplied to the assessee for giving;an opportunity and;aiso an opportunity to cross supplied to the assessee for giving aiso an opportunity to cross examine the third party. Hon'ble Supreme Court in the case of Andaman Timber examine the third party. Hon'ble Supreme Court in the case of Andaman Timber Industries vs.\ Commissioner of Central Excise (2015) 281 CTR 241 (SC) has Commissioner of Central Excise (2015) 281 CTR 241 (SC) has Commissioner of Central Excise (2015) 281 CTR 241 (SC) has reaffirmed the' principles of natural justice and held that the opportunity of cross reaffirmed the' principles of natural justice and held that the opportunity of cross reaffirmed the' principles of natural justice and held that the opportunity of cross examination of witness is must in a case where some adverse inference is to b examination of witness is must in a case where some adverse inference is to be examination of witness is must in a case where some adverse inference is to b drawn against the assessee. Reliance is also placed on Asst. CIT Vs. Katrina drawn against the assessee. Reliance is also placed on Asst. CIT Vs. Katrina drawn against the assessee. Reliance is also placed on Asst. CIT Vs. Katrina Rosemary Turcotte 87 Taxmann.com 116 (ITAT Mum) Addl. CIT Vs. Miss Lata Rosemary Turcotte 87 Taxmann.com 116 (ITAT Mum) Addl. CIT Vs. Miss Lata Rosemary Turcotte 87 Taxmann.com 116 (ITAT Mum) Addl. CIT Vs. Miss Lata Mangeshkar 97 ITR 696 (Bom). Mangeshkar 97 ITR 696 (Bom). loss of Rs.10,91,53,148/-. And the P&L a/c of the assessee for the year ende loss of Rs.10,91,53,148/ . And the P&L a/c of the assessee for the year ended shows a debit of Rs.10,91,53,148/ debit of Rs.10,91,53,148/- under the title 'Loss on account of Commodities under the title 'Loss on account of Commodities irrecoverbility'. This shows that the loss is actually claimed as business loss by the irrecoverbility'. This shows that the loss is actually claimed as business loss by the irrecoverbility'. This shows that the loss is actually claimed as business loss by the assessee in his accounts and the return of income. In the submissions extracted at assessee in his accounts and the return of income. In the submissions extracted at assessee in his accounts and the return of income. In the submissions extracted at para 3.3 above, the appellant argued that the loss is allowable as 'business loss'. ara 3.3 above, the appellant argued that the loss is allowable as 'business loss'. ara 3.3 above, the appellant argued that the loss is allowable as 'business loss'. However it is seen that the AO discussed the claim as 'bad debt' and made the However it is seen that the AO discussed the claim as 'bad debt' and made the However it is seen that the AO discussed the claim as 'bad debt' and made the disallowance of Rs.10,91,53,148/- debited to P&L account by treating the same as disallowance of Rs.10,91,53,148/ debited to P&L account by treating the same as premature and not genuine. AO also took an alternate ground for disallowance to not genuine. AO also took an alternate ground for disallowance to not genuine. AO also took an alternate ground for disallowance to treat the transactions on NSEL as speculative and loss as speculation loss. After treat the transactions on NSEL as speculative and loss as speculation loss. After treat the transactions on NSEL as speculative and loss as speculation loss. After detailed examination of the issue, my decision is as under. examination of the issue, my decision is as under. 5.7 AO in the assessment order quoted a letter of NSEL dated 16.06.2016 to state the assessment order quoted a letter of NSEL dated 16.06.2016 to state the assessment order quoted a letter of NSEL dated 16.06.2016 to state that the claims of loss made by the brokers/clients/agents are premature, since the loss made by the brokers/clients/agents are premature, since the loss made by the brokers/clients/agents are premature, since the recovery process is underway by EOW and HCC and the assets underway by EOW and HCC and the assets worth 7000 crores as worth 7000 crores as against the claim of 5,600 crores have already been secured. It of 5,600 crores have already been secured. It appears from appears from the record that the AO has not supplied the said letter to the appellant during the record that the AO has not supplied the said letter to the appellant during the assessment proceedings. Appellant contested this letter in his submissions. assessment proceedings. Appellant contested this letter submissions. It is true that the AO was under obligation to supply the information collected from third that the AO was under obli on to supply the information collected from third party to the assessee, to the assessee, if she wanted to use the same in the assessment. Mere the assessment. Mere statement regarding the alleged observations of NSEL, and making addition is statement regarding the alleged observations of NSEL, and making addition is statement regarding the alleged observations of NSEL, and making addition is against theprinciples of natural justice. Such statement/letter,.if any against theprinciples of natural justice. Suc h statement/letter,.if any,has to be supplied to the assessee for giving ;an opportunity and:a!so an opportunity to cross supplied to the assessee for giving a!so an opportunity to cross examine the third party. Hon'ble Supreme Court in the case of Andaman examine the third party. Hon'ble Supreme Court in the case of Andaman Timber examine the third party. Hon'ble Supreme Court in the case of Andaman Industries vs. Commissioner of Central Excise (2015) 281 CTR 241 (SC) has Industries vs. Commissioner of Central Excise (2015) 281 CTR 241 (SC) has Industries vs. Commissioner of Central Excise (2015) 281 CTR 241 (SC) has reaffirmed theprinciples of natural justice and held that the opportunity of cross reaffirmed theprinciples of natural justice and held that the opportunity of cross reaffirmed theprinciples of natural justice and held that the opportunity of cross examination of witness is must in a case where some adverse inference is to be examination of witness is must a case where some adverse inference is to be drawn against the assessee. Reliance is also placed on Asst. CIT Vs. Katrina assessee. Reliance is also placed on Asst. CIT Vs. Katrina assessee. Reliance is also placed on Asst. CIT Vs. Katrina Rosemary Turcotte 87 Taxmann.com 116 (ITAT Mum) Addl. CIT Vs. Miss Lata Rosemary Turcotte 87 Taxmann.com 116 Addl. CIT Vs. Miss Lata Mangeshkar 97 ITR 696 696 (Bom). 3.8 Let the statement of NSEL be as it may, but the opinion of NSEL that Let the statement of NSEL be as it may, but the opinion of NSEL that Let the statement of NSEL be as it may, but the opinion of NSEL that brokers/agents/clients are claiming loss which may result in duplication of bad debt ts are claiming loss which may result in duplication of bad debt ts are claiming loss which may result in duplication of bad debt Ketan Anil Shah 9 ITA No. 2188/M/2022 ;j claims is not the basis for allowing a loss in the assessment in Income Tax ;j claims is not the basis for allowing a loss in the assessment in Income Tax ;j claims is not the basis for allowing a loss in the assessment in Income Tax proceedings. The allowability of a claim has to be examined with respect to the proceedings. The allowability of a claim has to be examined with respect to the proceedings. The allowability of a claim has to be examined with respect to the transactions, books of accounts of the assessee and provisions of the Income Tax transactions, books of accounts of the assessee and provisions of the Income Tax Act. So, the reliance placed by the AO on the said letter regarding the duplication of Act. So, the reliance placed by the AO on the said lette r regarding the duplication of claim of loss and premature claim of bad debts by the tax payers cannot be basis claim of loss and premature claim of bad debts by the tax payers cannot be basis claim of loss and premature claim of bad debts by the tax payers cannot be basis fordisallowance. Further, an agent or broker cannot claim a loss as they cannot fordisallowance. Further, an agent or b roker cannot claim a loss as they cannot account sale and purchases of the clients as their transactions. An agent or broker sale and purchases of the clients as their transactions. An agent or broker sale and purchases of the clients as their transactions. An agent or broker only records commission in its books of account. only records commission in its books of account. 3.9 It transpires from the record that the appellant regularly trades in 3.9 It transpires from the record that the appellant regularly trades in commodities 3.9 It transpires from the record that the appellant regularly trades in on NSEL and the payments are received in 25/35 days. However, due to the on NSEL and the payments are received in 25/35 days. However, due to the on NSEL and the payments are received in 25/35 days. However, due to the manipulation of transactions on NSEL by some of the authorized brokers a scam manipulation of transactions on NSEL by some of the authorized brokers a scam manipulation of transactions on NSEL by some of the authorized brokers a scam broke out and the NSEL as an intermediary between the buyer and sellers of broke out and the NSEL as an intermediary between the buyer and sellers of broke out and the NSEL as an intermediary between the buyer and sellers of to honour the payments on 31st July 2013 for the first time. This commodities failed to honour the payments on 31 July 2013 for the first time. This information was in public domain and it became a scam. AO also described the scam information was in public domain and it became a scam. AO also described the scam information was in public domain and it became a scam. AO also described the scam that has taken place in NSEL in paragraphs 4.3 to 4.7 of the assessment order and that has taken place in NSEL in paragraphs 4.3 to 4.7 of the assessment order and that has taken place in NSEL in paragraphs 4.3 to 4.7 of the assessment order and accepted that NSEL did not honour their commitment and wrongly caused loss to accepted that NSEL did no t honour their commitment and wrongly caused loss to the investors. As NSEL failed to pay the outstanding amounts, the assessee neither the investors. As NSEL failed to pay the outstanding amounts, the assessee neither the investors. As NSEL failed to pay the outstanding amounts, the assessee neither received the payment for the commodities sold nor did he receive the stock of received the payment for the commodities sold nor did he receive the stock of received the payment for the commodities sold nor did he receive the stock of commodities or the amounts paid for the purchase of commodities from NSEL for commodities or the amounts paid for the pu rchase of commodities from NSEL for the contracts through its broker-members. Further,as the investigation by SEBI and the contracts through its broker Further,as the investigation by SEBI and other agencies revealed that stock of goods required to be available in accredited other agencies revealed that stock of goods required to be available in accredited other agencies revealed that stock of goods required to be available in accredited warehouses of NSEL was not found. Appellant argued that as the operations of NSEL warehouses of NSEL was not found. Appellant argued that as the operations of NSEL got completely suspended and was shut consequently, the assessee completely lost got completely suspended and was shut consequently, the assessee completely lost got completely suspended and was shut consequently, the assessee completely lost its chance of recovering the amounts from NSEL. It is argued that since the amount its chance of recovering the amounts from NSEL. It is argued that since the amount its chance of recovering the amounts from NSEL. It is argued that since the amount were paid in the normal course of business of the assessee, the non were paid in the normal course of business of the assessee, t he non-recovery of the sale proceeds would result in regular 'business loss' for the assessee. Therefore he sale proceeds would result in regular 'business loss' for the assessee. Therefore he sale proceeds would result in regular 'business loss' for the assessee. Therefore he claimed the non recoverable amount as a 'business loss' for the year. claimed the non recoverable amount as a 'business loss' for the year.” claimed the non recoverable amount as a 'business loss' for the year. 5.2 Further, the Ld. Further, the Ld. CIT(A) has also rejected the finding of the CIT(A) has also rejected the finding of the Ld.AO that the claim in question was of bad debts written off. he claim in question was of bad debts written off. he claim in question was of bad debts written off. Relevant finding of the Ld. Relevant finding of the Ld. CIT(A) is reproduced as under: CIT(A) is reproduced as under:- “3.10 However, the AO argued that the assessee has not provided any suppor in 3.10 However, the AO argued that the assessee has not provided any suppor in 3.10 However, the AO argued that the assessee has not provided any suppor in respect of the claim of bad debts therefore the claim is illegal. It is seen from the respect of the claim of bad debts therefore the claim is illegal. It is seen from the record that the assessee had provided documentary evidences in the form of record that the assessee had provided documentary evidences in the form of record that the assessee had provided documentary evidences in the form of contract notes of the brokers M/s. Motilal Oswal Securities Pvt. Ltd. and M/s. Phillip contract notes of the brokers M/s. Motilal Oswal Securities Pvt. Ltd. and M/s. Phillip contract notes of the brokers M/s. Motilal Oswal Securities Pvt. Ltd. and M/s. Phillip Commodities Pvt. Ltd to show that the amount of Rs.10,91,53,1487 Commodities Pvt. Ltd to show that the amount of Rs.10,91,53,1487- was Commodities Pvt. Ltd to show that the amount of Rs.10,91,53,1487 Ketan Anil Shah 10 ITA No. 2188/M/2022 recoverable from NSEL. As operations on NSEL were banned and the law enforcing verable from NSEL. As operations on NSEL were banned and the law enforcing verable from NSEL. As operations on NSEL were banned and the law enforcing agencies swooped on it and found that the actual goods were not available in the agencies swooped on it and found that the actual goods were not available in the agencies swooped on it and found that the actual goods were not available in the accredited warehouses of NSEL the appellant felt the amounts due to him not accredited warehouses of NSEL the appellant felt the amounts due to him not accredited warehouses of NSEL the appellant felt the amounts due to him not recoverable. It is seen that the appellant also explained to the AO as to how he recoverable. It is seen that the appellant also explained to the AO as to how he satisfies the conditions section 36(l)(vii) read with section 36(2) of the Act to claim satisfies the conditions section 36(l)(vii) read with section 36(2) of the Act to claim satisfies the conditions section 36(l)(vii) read with section 36(2) of the Act to claim the loss incurred as bad debt. Therefore, I do not find any force in arguments of the the loss incurred as bad debt. Therefore, I do not find any force in arguments of the the loss incurred as bad debt. Therefore, I do not find any force in arguments of the AO that there is no documentary evidence for the loss incurred. AO that there is no docum 3.11 AO observed that the assessee has not made any efforts for recovery of 3.11 AO observed that the assessee has not made any efforts for recovery of said 3.11 AO observed that the assessee has not made any efforts for recovery of bad debts from M/s. Phillip Commodities Pvt. Ltd and M/s. Motilal Oswal Securities bad debts from M/s. Phillip Commodities Pvt. Ltd and M/s. Motilal Oswal Securities Pvt. Ltd like sending legal notices and filing cases against the brokers and the NSEL. Pvt. Ltd like sending legal notices and filing cases against the brokers and the NSEL. This avermment of the AO appears to be not correct as the assessee has filed the ment of the AO appears to be not correct as the assessee has filed the ment of the AO appears to be not correct as the assessee has filed the suit against M/s. Motilal Oswal Securities Pvt. Ltd. & M/s. Phillip Commodities for suit against M/s. Motilal Oswal Securities Pvt. Ltd. & M/s. Phillip Commodities for suit against M/s. Motilal Oswal Securities Pvt. Ltd. & M/s. Phillip Commodities for recovery in the Bombay High Court (Recovery Suit Number 70 of 2017). Against recovery in the Bombay High Court (Recovery Suit Number 70 of 2017). Against NSEL M/s Modern India Ltd. (Investor in NSEL) has filed a Suit under Order 1 Rule 8 NSEL M/s Modern India Ltd. (Investor in NSEL) has filed a Suit under Order 1 Rule 8 NSEL M/s Modern India Ltd. (Investor in NSEL) has filed a Suit under Order 1 Rule 8 of the CPC (Class action suit) which includes all investors in NSEL including the of the CPC (Class action suit) which includes all investors in NSEL including the of the CPC (Class action suit) which includes all investors in NSEL including the appellant. From the above facts it is clear that there is loss that occurred to the appellant. From the above facts it is clear that there is loss that occurred to the appellant in the normal course of business and it became irrecoverable on account appellant in the normal course of business and it became irrecoverable on account appellant in the normal course of business and it became irrecoverable on account of the scam that has taken place in NSEL, ban on operations of NSEL and also that of the scam that has taken place in NSEL, ban on operations of NSEL and also that of the scam that has taken place in NSEL, ban on operations of NSEL and also that there was no stock of commodities in the accredited warehouses. Therefore, as it there was no stock of commodities in the accredited warehouses. Therefore, as it has become bad, the appellant booked loss for the year and claimed in the return of has become bad, the appellant booked loss for the year and claimed in the return of has become bad, the appellant booked loss for the year and claimed in the return of income for the year. 3.12 The Assessing Officer has not disputed the fact that the assessee has The Assessing Officer has not disputed the fact that the assessee has The Assessing Officer has not disputed the fact that the assessee has carried out trading of commodities at NSEL and there were outstanding amounts carried out trading of commodities at NSEL an d there were outstanding amounts that remained to be recovered by the assessee on account to abrupt embargo on that remained to be recovered by the assessee on account to abrupt embargo on that remained to be recovered by the assessee on account to abrupt embargo on trading at NSEL. Once the amount has become irrecoverable and the assessee writes trading at NSEL. Once the amount has become irrecoverable and the assessee writes trading at NSEL. Once the amount has become irrecoverable and the assessee writes off the same in the books of accounts, there is no statutory requirement for the off the same in the books of accounts, there is no statutory re quirement for the assessee to establish that the debt, in fact, has become irrecoverable. It is sufficient assessee to establish that the debt, in fact, has become irrecoverable. It is sufficient assessee to establish that the debt, in fact, has become irrecoverable. It is sufficient if the bad debts are written off as irrecoverable in the accounts of the assessee. [TRF if the bad debts are written off as irrecoverable in the accounts of the assessee. [TRF if the bad debts are written off as irrecoverable in the accounts of the assessee. [TRF Ltd.]. Later, if at any stage", the assessee recovers any money against the sum Ltd.]. Later, if at any stage", the assessee recovers any mon ey against the sum written off as bad debt, the assessee is under obligation to declare it as income. It is written off as bad debt, the assessee is under obligation to declare it as income. It is written off as bad debt, the assessee is under obligation to declare it as income. It is also seen that an amount of' Rs.1,27,98,621/- only was received by the assessee also seen that an amount of' Rs.1,27,98,621/ only was received by the assessee from NSEL as against the outstanding amount of Rs. 15,62,29,161/ from NSEL as against the outstanding amount of Rs. 15,62,29,161/- due and from NSEL as against the outstanding amount of Rs. 15,62,29,161/ receivable from NSEL. Appellant has offered the recovered amount as income in the receivable from NSEL. Appellant has offered the recovered amount as income in the receivable from NSEL. Appellant has offered the recovered amount as income in the year of receipt as per the submissions made. year of receipt as per the submissions made. 3.13 AO has argued that the debt has to be bad and then only he can write off. The 3.13 AO has argued that the debt has to be bad and then only he can write off. The 3.13 AO has argued that the debt has to be bad and then only he can write off. The facts narrated above show that the amounts became irrecoverable and bad. Be that facts narrated above show that the amo unts became irrecoverable and bad. Be that as it may, after the amendment made to the Act with effect from 15th April, 1989, as it may, after the amendment made to the Act with effect from 15 as it may, after the amendment made to the Act with effect from 15 the assessee is not required to establish that the debt has in fact become the assessee is not required to establish that the debt has in fact become the assessee is not required to establish that the debt has in fact become Ketan Anil Shah 11 ITA No. 2188/M/2022 irrecoverable. The only requirement under section 36(l)(vii) read with section 36(2) irrecoverable. The only requirement under section 36(l)( vii) read with section 36(2) of the Act is write off the debt as irrecoverable in the books of account of the of the Act is write off the debt as irrecoverable in the books of account of the of the Act is write off the debt as irrecoverable in the books of account of the assessee for claiming deduction u/s. 36(l)(vii) of the Act which is complied with by assessee for claiming deduction u/s. 36(l)(vii) of the Act which is complied with by assessee for claiming deduction u/s. 36(l)(vii) of the Act which is complied with by the assessee. Reliance in this regard is placed on the decision of the Apex Court in the assessee. Reliance in this regard is placed on the decisi on of the Apex Court in TRF Ltd. Vs. CIT [(2010) 323 ITR 397 (SC)] and the Board Circular No. . CIT [(2010) 323 ITR 397 (SC)] and the Board Circular No. 12/2016 . CIT [(2010) 323 ITR 397 (SC)] and the Board Circular No. [F.NO.279/MISC./140/2015-ITJ], DATED 30-5-2016. Therefore, the observations of [F.NO.279/MISC./140/2015 Therefore, the observations of the AO in para 4.11 and para 4.14 of the assessment order are not correct a the AO in para 4.11 and para 4.14 of the assessment order are not correct and go the AO in para 4.11 and para 4.14 of the assessment order are not correct a against the settled law which is accepted by the Board by issuing a circular. against the settled law which is accepted by the Board by issuing a circular. against the settled law which is accepted by the Board by issuing a circular. 3.14 It is seen that number of other assessees also incurred losses on account of 3.14 It is seen that number of other assessees also incurred losses on account of 3.14 It is seen that number of other assessees also incurred losses on account of scam in NSEL and stoppage of payments by NSEL in July 2013, which have reached scam in NSEL and stoppage of payments by NSEL in July 2013, which have reached scam in NSEL and stoppage of payments by NSEL in July 2013, which have reached higher appellate forums and claim of bad debts of such assessees have been appellate forums and claim of bad debts of such assessees have been appellate forums and claim of bad debts of such assessees have been accepted by courts. Reliance is placed on the following case laws. accepted by courts. Reliance is placed on the following case laws.  DCIT vs. Cello Pens and Stationery Pvt. Ltd. in for A.Y. 2014 DCIT vs. Cello Pens and Stationery Pvt. Ltd. in ITA No. 305/Mum/2019 for A.Y. 2014-15 DCIT vs. Cello Pens and Stationery Pvt. Ltd. in ITA No. 305/Mum/2019 for A.Y. 2014 dated 22nd October, 2021 dated 22nd October, 2021 • Remi Securities Ltd. v. ACIT in ITA No. 3649/Murn/2018 for A.Y. 2014 Remi Securities Ltd. v. ACIT in ITA No. 3649/Murn/2018 for A.Y. 2014 Remi Securities Ltd. v. ACIT in ITA No. 3649/Murn/2018 for A.Y. 2014-15 dated 10th January, 2019 M/s Remi Securities and Engineering Limited vs. ACIT, Circle 13(3)(1), Mumbai [ITA No. M/s Remi Securities and Engineering Limited vs. ACIT, Circle 13(3)(1), Mumbai [ITA No. M/s Remi Securities and Engineering Limited vs. ACIT, Circle 13(3)(1), Mumbai [ITA No. 3650/Mum/2108; dated 06.09.2019 3650/Mum/2108; dated 06.09.2019 • Megh Sakariya International (P.) L • Megh Sakariya International (P.) Ltd. v. Dy. CIT [ITA No.59/Cheny/2018 decided on 5 td. v. Dy. CIT [ITA No.59/Cheny/2018 decided on 5-9- 2018 . (129 taxmann.com 6, Mum.)(dated 3rd May, 2021 • JayAshkaran Shah vs. • JayAshkaran Shah vs. I.T.O. (129 taxmann.com 6, Mum.)(dated 3rd May, 2021 2-2019” • Mohan Jain v. ITO [ITA No. 605/ind/2017forAY2014 • Mohan Jain v. ITO [ITA No. 605/ind/2017forAY2014-15 decided on 5-2 5.3 Further, the Ld.CIT(A) has also rejected the contention of Further, the Ld.CIT(A) has also rejected the contention of Further, the Ld.CIT(A) has also rejected the contention of transactions being in the nature of transactions being in the nature of ‘speculative transaction speculative transaction’ by observing as under:-

“3.15 AO observed that if the assessee succeeds in appeal on the claim as bad AO observed that if the assessee succeeds in appeal on the claim as bad AO observed that if the assessee succeeds in appeal on the claim as bad debts/business loss, as an alternative, the transactions of purchase and sale of commodities debts/business loss, as an alter native, the transactions of purchase and sale of commodities at the NSEL may be held as speculative transactions, the loss as speculation loss and the at the NSEL may be held as speculative transactions, the loss as speculation loss and the at the NSEL may be held as speculative transactions, the loss as speculation loss and the same may be allowed to be carried forward for set off against the speculation gains in the same may be allowed to be carried forward for set off against the speculation gains in the same may be allowed to be carried forward for set off against the speculation gains in the subsequent years. It is seen that the appellant did trading in commodities in earlier years rs. It is seen that the appellant did trading in commodities in earlier years rs. It is seen that the appellant did trading in commodities in earlier years Ketan Anil Shah 12 ITA No. 2188/M/2022 also and the department accepted the income out of these trading transactions as business also and the department accepted the income out of these trading transactions as business also and the department accepted the income out of these trading transactions as business transaction. In the circumstances loss for the year cannot be treated as speculative loss. transaction. In the circumstances loss for the year cannot be treated as speculative transaction. In the circumstances loss for the year cannot be treated as speculative 3.16 The issue of treating the commodity trading transactions on NSEL as speculative The issue of treating the commodity trading transactions on NSEL as speculative The issue of treating the commodity trading transactions on NSEL as speculative transactions is also examined by the courts in similar cases involving the loss from NSEL. transactions is also examined by the courts in similar cases involving the transactions is also examined by the courts in similar cases involving the Hon. Tribunal Mumbai Bench in the case of DCIT vs. M/s Nirshilp Securitie Hon. Tribunal Mumbai Bench in the case of DCIT vs. M/s Nirshilp Securities Pvt. Ltd (ITA No.6321/Mum/2019 for A.Y. 2016-17 held that the loss arising on account of payment No.6321/Mum/2019 for A.Y. 2016 17 held that the loss arising on account of payment made to NSEL through registered broker towards purchase of commodities shall be made to NSEL through registered broker towards purchase of commodities shall be made to NSEL through registered broker towards purchase of commodities shall be allowable as regular business loss u/s 28 of the Act and that the said loss cannot be allowable as regular business loss u/s 28 of the Act and that the said loss c allowable as regular business loss u/s 28 of the Act and that the said loss c construed as speculative in nature. Therefore, the alternate conclusion of the AO to the construed as speculative in nature. Therefore, the alternate conclusion of the AO to the construed as speculative in nature. Therefore, the alternate conclusion of the AO to the effect that the transactions of purchase and sale of commodities by the assessee at NSEL effect that the transactions of purchase and sale of commodities by the assessee at NSEL effect that the transactions of purchase and sale of commodities by the assessee at NSEL were speculative transactions is contrary to the facts, consistency and also the law laid were speculative transactions is contrary to the facts, consistency and also the law laid down.”

Ketan Anil Shah 15 “Circular No. 12/20 F.No.2 79/Misc./14 0/2015-ITJ Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Ministry of Finance Department of Revenue Central Board of Direct Taxes Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, Dated 30th May, 2016 New Delhi, Dated Subject: - Admissibility of claim of deduction of Bad Debt under section 36(1) ( Admissibility of claim of deduction of Bad Debt under section 36(1) ((vii) read with section 36(2) of the read with section 36(2) of the Income-Tax Act, 1961— reg. reg. Proposals have been received by the Central Board of Direct Taxes regarding filing of appeals/pu Proposals have been received by the Central Board of Direct Taxes regarding filing of appeals/pu Proposals have been received by the Central Board of Direct Taxes regarding filing of appeals/pursuing litigation on the issue of allowability of bad debt that are written off as irrecoverable in the accounts of the assessee. The dispute the issue of allowability of bad debt that are written off as irrecoverable in the accounts of the assessee. The dispute the issue of allowability of bad debt that are written off 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. relates to cases involving failure on the part of assessee to establish that the debt is irrecoverable. relates to cases involving failure on the part of assessee to establish that the debt is irrecoverable.

4. In view of the above, claim for any debt or part thereof in any previous year shall be admissible 4. In view of the above, claim for any debt or part thereof in any previous year shall be admissible 4. In view of the above, claim for any debt or part thereof in any previous year shall be admissible under section 36(l)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the under section 36(l)(vii) of the Act, i f 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 assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub 36(2) of the Act.

6. This may be brought to the notice of all concerned. (Sadhana Panwar) DCIT (OSD) (ITJ 6. This may be brought to the notice of all concerned. (Sadhana Panwar) DCIT (OSD) (ITJ. CBDT, New Delhi.

Ketan Anil Shah 17 ITA No. 2188/M/2022

Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, 1963 on 19/01/2023. 01/2023. Sd/- Sd/- - (SANDEEP SINGH KARHAIL SANDEEP SINGH KARHAIL) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 19/01/2023 Pavanan, Sr. P.S (on contract)