LOTUS REFINERIES PRIVATE LIMITED,CHANDIGARH vs. ACIT, CHANDIGARH

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ITA 450/CHANDI/2026Status: DisposedITAT Chandigarh01 September 2026AY 2014-1526 pages

In favour of the Revenue: the assessee's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that while the arbitration award is relevant evidentiary material regarding the civil liability, it does not conclusively determine taxability. The continued existence of a quantified civil liability does not automatically mean the amount is not taxable under Section 28(iv), nor does prolonged non-payment establish remission under Section 41(1).

What were the facts?

The assessee, Lotus Refineries Pvt. Ltd., was a defaulting member of NSEL with an outstanding obligation of Rs. 252.56 crores. The Assessing Officer treated this amount as income under Section 28(iv) and Section 41(1) as the money was not returned to traders. The CIT(A) sustained the addition.

What were the issues?

Whether the amount retained by the assessee from NSEL transactions, despite an adjudicated civil liability, is taxable as income under Section 28(iv) or Section 41(1) of the Income-tax Act.

Which sections of the Income-tax Act were involved?

Section 28(iv),Section 41(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH

Before: SHRI LALIET KUMAR & SHRI VIJAY VARMA

For Appellant: Shri Parveen Kapoor, CA
For Respondent: Smt. Jaishree Sharma, CIT DR
Hearing: 24.08.2026Pronounced: 01.09.2026

PER LALIET KUMAR, JM

This is an appeal filed by the assessee feeling aggrieved by the order passed by the ld. Commissioner of Income Tax (Appeals), NFAC [in short ‘the CIT (A)’] dated 05.01.2026 passed for assessment year 2014-15.

2.

The brief facts of the case, as recorded by the learned CIT(A) and also noticed by this Tribunal in the first round of appeal in ITA No. 242/Chd/2020, are that the National Spot

ITA 450/CHD/2026 A.Y. 2014-15 2 Exchange Limited (NSEL), vide its letter dated 31.10.2017 addressed to the ITO, Ward-1(2), Chandigarh, informed the Department regarding the outstanding payment obligations of the defaulting members of NSEL. Trading on the NSEL platform had been suspended on 31.07.2013 pursuant to various actions taken by the Ministry of Consumer Affairs, Government of India. At that time, 24 members/brokers had pay-in obligations aggregating to about Rs.5,689 crores, whereas 148 members/brokers were entitled to receive the corresponding amounts. The defaulting members had sold commodities prior to their default and were required either to deliver the corresponding commodities or discharge the outstanding monetary obligations. The assessee, M/s Lotus Refineries Pvt. Ltd., was one of the defaulting members, with an outstanding obligation of Rs.252.56 crores.

3.

The information furnished by NSEL further stated that the assessee's liability of Rs.252.56 crores represented the aggregate “pay-in” obligation arising from open and unsettled trades which remained unpaid. It was also stated that the assessee had admittedly received the corresponding monies. The liability of the defaulting members had been considered/confirmed in various proceedings before investigating agencies, Courts, Government authorities and independent auditors. The record further disclosed that a

ITA 450/CHD/2026 A.Y. 2014-15 3 survey was conducted at the premises of the assessee on 22.08.2013 by the Mumbai Income Tax Investigation Wing. During the survey, statements of the employees and the CMD of the assessee-company were recorded. The statements indicated that, in respect of refined oil transactions undertaken on the NSEL platform, there was no actual physical movement of goods. The transactions were described as “rolling transactions”, whereby the commodity purportedly sold to NSEL was repurchased by the assessee at a higher price. The survey at the NSEL-accredited godown at Kakinada also revealed that no stock of palmolein oil was lying there.

4.

The learned CIT(A), while recording the facts, further noted that the NSEL transactions were essentially a finance- raising exercise, involving paired contracts between borrowers and lenders. In a number of cases, no physical delivery of goods had taken place. In the case of the assessee also, the refined oil transactions were found to have been undertaken without physical delivery.

5.

During the assessment proceedings, the Assessing Officer required the assessee to furnish details of the liability towards NSEL and to explain why an appropriate addition should not be made. Despite notices issued under section 142(1) and thereafter a show-cause notice under section 144,

ITA 450/CHD/2026 A.Y. 2014-15 4 the assessee did not attend the proceedings or furnish a reply. On the basis of the information received from NSEL, the survey findings and the material available on record, the Assessing Officer concluded that the transactions were not genuine business transactions involving actual movement of commodities but involved transfer of funds and raising of finance. The Assessing Officer observed that the money received by the assessee in the course of its business had remained with it and had not been returned to the traders for more than four years. He consequently treated the amount of Rs.252.56 crores as income of the assessee under section 28(iv) and, without prejudice, also invoked section 41(1) of the Income-tax Act. The Assessing Officer accordingly made an addition of Rs.252.56 crores to the income of the assessee.

6.

Not satisfied with the order of the Assessing Officer, the assessee went in appeal before ld.CIT (Appeals). The learned CIT(A) sustained the addition. While doing so, the learned CIT(A) recorded that the amount had been received by the assessee in the regular course of its business but had not been returned to the traders despite the passage of more than four years. According to the learned CIT(A), although the amount may not have been income in its original character, its continued retention and non-settlement of the corresponding payment obligation resulted in the amount

ITA 450/CHD/2026 A.Y. 2014-15 5 acquiring a different character, namely that of a definite trade surplus, and consequently it was liable to be treated as income under section 28(iv). The learned CIT(A) also upheld the alternative invocation of section 41(1).

7.

The learned CIT(A) further recorded that the assessee had not maintained books of account and had not produced complete books, bills and vouchers or evidence of physical movement of goods. The amount of Rs.252.56 crores remained due against the assessee and the recovery proceedings were pending. The learned CIT(A), therefore, held that the money received by the assessee in the course of business, having remained with it for a prolonged period without being returned to the traders, had acquired the character of its own money and was consequently taxable.

8.

It was against these findings that the assessee preferred the appeal before the Tribunal in ITA No.242/Chd/2020. In that first round, the assessee relied upon the subsequent arbitration proceedings and the order of the sole Arbitrator dated 21.09.2018, as well as the proceedings initiated for execution of the award. The Tribunal noticed that the Arbitrator had adjudicated the claim of NSEL and that execution proceedings were pending before the Hon'ble Bombay High Court, the Additional District Judge,

ITA 450/CHD/2026 A.Y. 2014-15 6 Chandigarh and subsequently before a committee constituted pursuant to the directions of the Hon'ble Supreme Court. The Tribunal, considering the pendency of those proceedings, set aside the matter to the file of the learned CIT(A) for fresh adjudication after taking into consideration the outcome of execution of the arbitration award.

9.

This factual background is important for the present round because the original taxability of Rs.252.56 crores arose from the finding that monies received in the course of the NSEL transactions had remained with the assessee and had not been returned to the concerned traders, whereas the subsequent arbitration proceedings principally concern the adjudication and recovery of the liability claimed by NSEL against the assessee.

10.

The assessee has challenged the order passed by the learned CIT(A), whereby the addition of Rs.252.56 crores on account of trading liability towards NSEL has been sustained. The assessee has specifically contended that the learned CIT(A), while passing the impugned order pursuant to the directions of the Tribunal in ITA No.242/Chd/2020, failed to properly consider the arbitration award as well as the subsequent proceedings for execution/recovery of the said award before the Hon'ble Courts and the committee

ITA 450/CHD/2026 A.Y. 2014-15 7 constituted pursuant to the directions of the Hon'ble Supreme Court. The grounds of appeal specifically allege that the learned CIT(A) failed to follow the directions of the Tribunal and decide the matter afresh after taking into consideration the outcome of execution of the arbitration award.

11.

The learned AR submitted that the issue had earlier travelled before the Tribunal in ITA No.242/Chd/2020 and the Tribunal, vide its order dated 21.11.2023, had set aside the addition and restored the matter to the file of the learned CIT(A) with a specific direction to examine the matter afresh after taking into consideration the outcome of the execution of the arbitration award and to decide the same in accordance with law after providing reasonable opportunity to the assessee. It was submitted that the assessee had placed on record the order of the sole Arbitrator dated 21.09.2018, whereby the liability of the assessee towards NSEL had been adjudicated, together with the subsequent proceedings initiated for execution of the award. The assessee had also furnished the relevant orders of the Hon'ble Bombay High Court and the proceedings before the committee constituted pursuant to the order of the Hon'ble Supreme Court.

12.

The learned AR submitted that the liability towards NSEL continued to subsist and, therefore, the amount could not be

ITA 450/CHD/2026 A.Y. 2014-15 8 regarded as income merely because the liability had remained outstanding for a considerable period. It was further submitted that the assessee could not make payment on account of attachment of its bank accounts and other assets pursuant to the proceedings initiated by the Economic Offences Wing and the Court. It was accordingly contended that there was neither any remission nor cessation of liability and, therefore, the addition under sections 28(iv) and 41(1) was not justified. It was submitted that the very fact that NSEL had obtained an arbitration award and was pursuing execution proceedings demonstrated that the liability had not ceased. Reliance was accordingly placed upon the earlier order of the Tribunal in ITA No.242/Chd/2020, wherein the Tribunal had observed that the execution proceedings were underway and that the outcome thereof would have a direct bearing on the issue.

13.

Per contra, the learned DR submitted that the learned CIT(A) had correctly appreciated the facts and the statutory provisions and that no interference was called for. It was submitted that the learned CIT(A), while deciding the matter pursuant to the directions of the Tribunal, had considered the material placed on record by the assessee, including the arbitration proceedings and the claim of liability towards NSEL. The learned DR submitted that the mere existence of

ITA 450/CHD/2026 A.Y. 2014-15 9 an arbitration award or pendency of recovery proceedings could not, by itself, establish that the amount received by the assessee continued to retain the character of a genuine trading liability for purposes of taxation. The learned DR further submitted that the assessee had received the funds in the course of its business transactions on the NSEL platform and had neither returned the money nor discharged the corresponding obligation. The survey proceedings had also revealed that the transactions in refined oil were, in substantial part, without physical movement of goods and were used for raising finance. The learned DR relied upon the findings recorded by the lower authorities that the amount received by the assessee had not been returned to the concerned parties and that the assessee had failed to produce evidence demonstrating actual movement of the commodities.

14.

It was further submitted that the statutory scheme contained in sections 28 and 41 of the Act was applicable to the facts of the case. There was no material to establish that the trading liability had been discharged or that the amount was in fact returned to the investors/trading parties.

15.

The ld. DR had drawn our attention to paragraph 6.7 and 6.8 of the order of the CIT(A) which read as under :

ITA 450/CHD/2026 A.Y. 2014-15 10 6.7 In view of these facts and circumstances, a survey was conducted by the Mumbai Income Tax Investigation Wing on 22.08.2013 on office premises of the appellant i.e. A-204, 2nd Floor, Boomerang Complex, Chandivali Farm Road, Chandivali Andheri (E), Mumbai-400072. During survey proceedings, it emerged that sale and purchase of Refined Oil [Palmolien Oil by the appellant at the NSEL Platform was without physical movement of the material. These observations were based on the statement of various key persons. (A) SH.IQBAL DAWOD PATEL- a Commodity Dealer in M/S Lotus Refineries Private Limited had explained the modus operandi in respect of trades executed at NSEL platform. He has stated that he was responsible to execute these trades on behalf of the company but all the rates of sales and purchases were decided by the executives of NSEL like Shri Arpit Mehta and Sh. Mayank and were communicated to him through telephone. In addition to this he admitted that he had standing instructions from Mr. Arun Kumar Sharma (CMD Lotus Refineries Pvt. Ltd.) to execute trades as per the rates quoted by the NSEL executives. In answer to Question No. 12 he states that the company had purchased soya seeds and mustard seeds from NSEL that were physically delivered to appellant company's Plant in Kota. He furnished the Delivery Order issued by NSEL, the LR and the Weighment Slip which substantiate the movement of material to appellant's plant in Kota. The physical delivery of the material at Kota plan was monitored by Shri Anumpam Bhattacharya, Director of the company and the payment of the same was monitored by Shri Sudhir Kuttappan, CFO of the company. However, sale and purchase of refined oil, was without physical movement of the material. Therefore, company was not in a possession of any documentary evidence to substantiate the movement of goods. The company has entered into what is known as 'Rolling Transaction' meaning that the commodity sold to NSEL was again repurchased by M/S Lotus Refineries Pvt. Ltd. at a higher rate. Finally, Sh.lqbal Patel admitted that he has no documentary evidence to substantiate the physical movement of 44,586 MT of Palmolein Oil valued at Rs.247.49 crore which has been claimed by the NSEL to be lying at the godown located at Sarda Agro Oils Ltd. Tank R-4, Survey No.287, Near Light House tammavaram, Kakinada. He narrated the sale made to NSEL on T+2 basis & T+25 basis as discussed supra. (B) SH.ANUPAMBHATTACHARJEEDirector Operations of M/S Lotus Refineries Pvt. Ltd. He has explained in detail the standard procedure being adopted by the company for making the sales and purchases. However, he has also failed to produce various supporting documents like weighment bill, delivery order etc. in respect of trades in refined oil executed at NSEL

ITA 450/CHD/2026 A.Y. 2014-15 11 16. It was further submitted by the ld. DR that the scope of the arbitration award passed in favour of the NSEL in the counter claim of NSEL was as under :

The Respondent alleged that the Claimant had entered into transactions under T+2 and T+25 contracts on the Respondent's exchange platform. According to the Respondent, in respect of the disputed transactions, the Claimant was required to deposit/pay the amounts due in accordance with the applicable contractual and exchange mechanism. The Respondent maintained that the Claimant failed to discharge its obligations. The Counter-Claim was confined to 18 transactions under T+25, concerning commodities allegedly deposited in accredited warehouses/godowns at three locations in Andhra Pradesh. The Respondent relied upon the offer letters, warehouse/deposit receipts and its ledger accounts to substantiate the transactions and the amount allegedly recoverable. The Respondent's case was that the Claimant had received the benefit/credit of the transactions but had failed to make the corresponding payment obligation. The Respondent accordingly claimed the outstanding amount of ₹252,47,64,751.45, with interest

17.

The ld. DR had submitted that the finding of the Arbitration Award was captured in Issue No. 8 and 9 of the Award which is to the following effect :

33.

Relying upon the aforesaid judgments, it is submitted on behalf of the Respondent that the above statements of Mr. Arunkumar Sharma, CW-1 are admissible under Section 50 of the PMLA Act. It is then urged that Mr. Arunkumar Sharma, CW-1 despite several opportunities, did not choose to remain present and step into the witness box to deny the correctness of the above statements. In the circumstances, the Tribunal can safely rely upon the above statements of Mr. Arunkumar Sharma, CW-1 and hold that the same are true and correct in which

ITA 450/CHD/2026 A.Y. 2014-15 12 the Claimant has admitted that he has not deposited the commodity at any stage in the accredited warehouses /godowns. It is further clear that Mr. Sudhir Kuttapan used to handle the work of the Claimant Company and also used to send emails and stock offer letters to NSEL. This has relevance to the trailing emails dated 16-5-2013 sent by Mr. Sudhir Kuttapan at Exh. R-13(colly) Pg 591-595 Counter Claim -Vol-II, wherein he has admitted the liability of the Claimant Company to the extent of Rs.2413626831. In the light of the above admissions, the ledger accounts maintained by the Respondent in due course of business and proved by Mr. Santosh Dhuri, RW-1, I am of the opinion that as per the said ledger documents and statements of Mr. Arunkumar under Section 50 PMLA, I hold that the Claimant owes to the Respondent a sum of Rs.2524764751.45 towards the value of settlement in respect of T+25 transactions entered into by the Claimant with various investors / purchasers.

34.

At this stage, it would be relevant to consider the fact of deposit of various commodities by the Claimant in the accredited warehouses / godowns. The Claimant in order to establish that in fact it had deposited the various commodities in dispute in the accredited warehouses / godowns under “T+2” Contracts, relied upon the Offer Letters and deposit receipts issued by the in-charge of the accredited warehouses / godowns appointed by the Respondent. The burden is upon the Respondent to show that the Claimant had in fact failed to deposit the various commodities traded by the Claimant under T+2 contracts. Mr. Lakhawat, Learned Counsel for the Respondent strongly relied upon the documentary evidence of the Court Receiver filed on the record (see Exh. R-8 (colly) @ pg. 249-85, Vol. II of the Counter Claim). It may be stated that the Claimant has filed a Suit (L) No. 870 of 2013 in the Bombay High Court against the Respondent for various reliefs including recovery of large sum of money. In that Suit, the Claimant took out a Notice of Motion (L) No. 1910 of 2013 praying for interim reliefs and in particular appointment of the Court Receiver. The Hon’ble Bombay High Court vide its Order dated 3rd October 2013 appointed the Court

ITA 450/CHD/2026 A.Y. 2014-15 13 Receiver who as per the directions of the Hon’ble Bombay High Court submitted the report dated 22nd October 2013 after visiting the warehouses located in Kakinada, Andhra Pradesh. The written reports made by the Court Receiver are filed in the present proceedings (Exh. R-11 (colly) at pg. 354-362, 369- 373 and 380-385, Vol. II of the Counter Claim). On 17th October 2013, in the presence of the representative of the Claimant, Mr. Bhaskar Pariyar, the representative of the Court Receiver, Mr. D.G. Chaudhari visited and inspected all the three warehouses / storage tanks located in Kakinada (Andhra Pradesh) where the Claimant claimed to have delivered the commodities under “T+2” Contracts corresponding to the outstanding / unsettled “T+25” contracts as per the stock letters issued by the Respondent (See Exh. R-11 (colly) @ pg. 388 to 402, Vol. II of the Counter Claim). The representative of the Court Receiver referred to the said three warehouses and storage tanks bearing Nos. (i) Tank No. 01-04, Tank No. 11-12, Tank No. T01-T02, NSE Industries, Kakinada (Andhra Pradesh); (ii) Tank No. R1-R6, Sarda Agro Oils Ltd, Kakinada (Andhra Pradesh); and (iii) Tank No. T.5- T.8 NSE Storage Ltd., Kakinada (Andhra Pradesh). Handwritten reports made by the representative of the Court Receiver is dated 17th October 2013. It is signed by the representative of the Court Receiver, Mr. D.G. Chaudhari on the site itself and countersigned by the representative of the Claimant as well as the representatives of the warehouses. It also needs to be noted that these tanks are located at the location No. 1, 2 and 3 as mentioned hereinabove. Location No. 1 (owned by NSE Industries) was visited by the representative of the Court Receiver on 17th October 2013 at 12.00 p.m. and submitted the report on 22nd October 2013. As regards location No. 2 (owned by Sarda Agro Oils Ltd.), it was visited by the representative of the Court Receiver on 17th October 2013 at 2.00 p.m. and submitted the report on 22nd October 2013. As regards location No. 3 (owned by NSE Storage Ltd.), it was visited by the representative of the Court Receiver on 17th October 2013 at 3.15 p.m. and submitted the report on 22nd October 2013.

ITA 450/CHD/2026 A.Y. 2014-15 14 Perusal of the above reports of the representative of the Court Receiver would make it quite clear that the Claimant never deposited any of the commodities as alleged in the Offer Letters in any of these three locations. In fact, Sarda Agro Oils Ltd. had flatly denied that they had any connection with the Claimant at all and it had never offered their location for storing any commodity to the Claimant. This report was also submitted to the Learned Judge (Justice S.J. Kathawalla) who in his Judgment dated 10th September 2014 has observed as under: “106. The plaint in the above suit on perusal indicates that a fraud may have been perpetrated by the Defendant Exchange. The court cannot ignore the facts on record which have been produced before the court. The facts reveal in the report of the Court Receiver dated 21st October 2013 and 22nd October 2013 which have been filed in the present case pursuant to the court’s ad-interim order dated 3rd October 2013, ex-facie reveal the conduct of the Defendant Exchange proclaiming on its website details of stock held on 6th August 2013 when there were no stocks.”

I have myself perused the report of the Court Receiver dated 22nd October 2013. This report shows that the Offer Letters and the receipt of the commodities in the warehouses / godowns submitted by the Claimant to the Respondent do not reflect the true position. In fact, Sarda Agro Oils Ltd. had flatly denied that they had any connection with the Claimant or the Claimant had deposited any stock in any of the tanks at location No. 2. At this stage, it would be appropriate to refer to the Order dated 14th August 2018 passed by the Hon’ble Bombay High Court (Justice A.K. Menon) on the Arbitration Petition (L) No. 898 of 2018. This Petition was filed under Section 27 of the Act seeking assistance of the Hon’ble Bombay High Court to examine the representative of the Court Receiver as a witness who made the reports. However, the Learned Single Judge disposed of the said Application by observing:

ITA 450/CHD/2026 A.Y. 2014-15 15 “Heard counsel for the Petitioner and the Court Receiver. In view of the fact that Court Receiver has already been discharged on 18th November 2015, in my opinion it is sufficient if the Petitioner furnishes a certified copy of the report authored by the Court Receiver to the Arbitral Tribunal. The Court Receiver who is present states that upon an application being made, a certified copy will be furnished.” The Respondent after obtaining the certified copy of the said report, vide their letter dated 20th August 2018 produced the same on record of the Arbitral Tribunal along with the Order of the Learned Single Judge. Taken on record and exhibited the same. The Arbitral Tribunal under Section 80 of the Evidence Act accepts the Report of the Court Receiver. It is contended on behalf of the Respondent that the Claimant in connivance with the officers of the Respondent had played a fraud and caused losses to the Respondent. However, it would not be possible for me to deal with this aspect in the present arbitration proceedings in view of the fact that except the Claimant, no other officers of the Respondent is a party to the arbitral proceedings. I therefore do not deal with this aspect any further. Mr. Lakhawat, Learned Advocate for the Respondent urged the complaint dated 30 March 2015 filed by the Enforcement Directorate, Mumbai before the Special Judge, PMLA, Mumbai bearing PMLA Case No. 4 of 2015 (Exh. RCCA-47 @ pg. 321-472, Vol. II of the documents filed with the affidavit dated 31st March 2017 of Mr. Santosh Dhuri, RW-1) which clearly show that the Respondent-NSEL is arrayed as Accused No. 1 whereas the Claimant Company is arrayed as Accused No. 56 and Mr. Arunkumar Sharma, CW-1 as Accused No. 59. The further investigation by the Enforcement Directorate is pending. I have just noted down the arguments made on behalf of the Respondent and I do not wish to make any comments thereon since it is not an issue before me in the present arbitral proceedings. The statements of Mr. Arunkumar Sharma, CW-1 recorded by the Enforcement Directorate under Section 50 of the PMLA Act are rightly relied upon by the Respondent in the present arbitration proceedings. Mr. Arunkumar Sharma, CW-1 despite several opportunities to appear before the Arbitral

ITA 450/CHD/2026 A.Y. 2014-15 16 Tribunal has failed to abide by the directions and as a result thereof, the Arbitral Tribunal in the circumstances, accepts the above statements of Mr. Arunkumar Sharma, CW-1 as admissible in evidence and the same are true. Thus the presumption of deposit of commodities in the accredited warehouse is successfully rebutted by the Respondent. The various offer letters and deposit receipts are bogus and false. Issue No.8 is answered in favour of the Respondent. Issue No.9 : On the amount if awarded, whether the Claimant or the Respondent are entitled to interest? If so, at what rate? In view of my finding on issue no.8 the Respondent / Counter Claimant is entitled to receive and the Claimant is liable to pay a sum of Rs.2524764751.45 (Rupees Two Hundred Fifty Two Crores Forty Seven Lakhs Sixty Four Thousand Seven Hundred Fifty One and Forty Five Paisa only), to the Respondent/Counter Claimant with interest at the rate of 15%per annum from 9th August 2013 up to the date of payment /realization. Issue is answered in favour of the Respondent/Counter Claimant accordingly.

18.

According to the learned DR, the subsequent arbitration proceedings did not obliterate the factual position that the assessee had retained the funds and had failed to fulfil its corresponding obligations. The learned DR accordingly submitted that the appeal of the assessee deserved to be dismissed.

19.

We have heard the rival contention of the parties and perused the material available on the record. In our considered view, the effect of the arbitration proceedings has to be examined

ITA 450/CHD/2026 A.Y. 2014-15 17 in its proper perspective and by keeping in view the distinction between civil liability and the Arbitration proceeding and taxability of the amount under the Act

20.

Undoubtedly vide earlier order, Tribunal had restored the matter to the file of the learned CIT(A) with a direction to examine the issue afresh after taking into consideration the outcome of the execution proceedings arising from the arbitration award. The said direction necessarily required the subsequent developments to be taken into account. However, the direction cannot be understood to mean that the ultimate result of the arbitration proceedings was to be treated as conclusive or determinative of the taxability of the amount under the Income- tax Act. The purpose of taking the arbitration proceedings into consideration was to ascertain their factual and legal effect upon the controversy before the tax authorities. A perusal of the award shows that the learned Arbitrator examined, inter alia, the circumstances in which the NSEL transactions were purportedly undertaken by the assessee, the alleged movement/deposit of commodities, the role of the concerned persons, and the manner in which the amounts received from the traders were dealt with. The learned Arbitrator, upon consideration of the material placed before him, did not accept the assessee's case regarding actual deposit of the commodities and upheld NSEL's counter- claim in respect of the specified T+25 transactions. The award

ITA 450/CHD/2026 A.Y. 2014-15 18 thus contains findings which are relevant to the factual matrix surrounding the transactions and the assessee's conduct.

21.

At the same time, the nature and scope of the arbitral proceedings must be kept distinctly in view. The arbitration proceedings were concerned with determination of the civil rights and liabilities inter se NSEL and the assessee, including NSEL's counter-claim arising out of the specified transactions. The learned Arbitrator ultimately determined the assessee's liability at Rs.252,47,64,751.45, together with interest at 15% per annum from 09.08.2013 till payment/realisation. The award, therefore, essentially quantified and adjudicated the civil liability recoverable by NSEL from the assessee.

22.

The assessment proceedings, however, involve a different and independent enquiry. The question before the Assessing Officer was not whether the assessee was civilly liable to NSEL, but whether the amount of approximately Rs.252.56 crores received and retained by the assessee in connection with the NSEL transactions, having regard to the manner in which the transactions were conducted and the subsequent conduct of the assessee, acquired the character of taxable income under the Income-tax Act. The determination of civil liability and the determination of taxability are, therefore, conceptually distinct

ITA 450/CHD/2026 A.Y. 2014-15 19 exercises, though the factual findings in the former may constitute relevant material for the latter.

23.

The arbitration award is, accordingly, a relevant piece of subsequent material which was required to be taken into consideration pursuant to the specific direction issued by this Tribunal in the earlier round of proceedings. Its relevance, however, must necessarily be confined to the matters which it actually adjudicated. The award cannot be treated as a determination of the assessee's tax liability under the Income- tax Act. An arbitral tribunal adjudicates the contractual/civil rights and obligations of the parties before it; it does not exercise jurisdiction to determine the taxability of a receipt under the Income-tax Act. Consequently, while the findings recorded in the award may have evidentiary relevance to the underlying facts, the ultimate question of taxability has to be determined independently by the income-tax authorities in accordance with the provisions of the Act.

24.

This distinction assumes particular significance in the context of the assessee's alternative contention regarding section 41(1). The assessee seeks to rely upon the continuing liability determined in the arbitration proceedings to contend that there could be no remission or cessation of liability. In this regard, the award is indeed material. The learned Arbitrator did

ITA 450/CHD/2026 A.Y. 2014-15 20 not hold that the assessee's liability to NSEL had been discharged, waived, remitted or otherwise extinguished. On the contrary, the award expressly determined the assessee's liability at Rs.252,47,64,751.45, together with interest at 15% per annum from 09.08.2013 till payment/realisation.

25.

The legal effect of this finding cannot be overlooked. An adjudication which quantifies the amount payable by the assessee and directs payment thereof, together with continuing interest until realisation, is prima facie indicative of the subsistence and enforceability of the liability, rather than its remission or cessation. The subsequent execution or recovery proceedings, insofar as they proceed upon the award, are likewise premised upon the amount determined thereunder remaining recoverable from the assessee. Thus, the arbitration award cannot legitimately be relied upon by the Revenue as establishing that the liability to NSEL itself stood remitted or ceased to exist.

26.

It is, therefore, necessary to keep two questions separate. The first is whether the amount received and retained by the assessee, in the factual circumstances established on record, constitutes taxable income under the substantive provision invoked by the Assessing Officer, including section 28(iv), if otherwise applicable. The second is whether the liability

ITA 450/CHD/2026 A.Y. 2014-15 21 corresponding to such amount was subsequently remitted or ceased, so as to attract the deeming fiction contained in section 41(1). These questions operate in different fields and cannot be answered merely by reference to each other.

27.

Insofar as section 41(1) is concerned, mere non-payment of a liability for a prolonged period does not, by itself, establish remission or cessation of that liability. There must be material demonstrating remission or cessation within the meaning of the statutory provision. In the present case, the subsequent adjudication by the learned Arbitrator assumes considerable significance because, rather than recording that the liability had ceased, the award expressly affirmed and quantified the liability and directed payment thereof with interest until payment/realisation. The award, therefore, cannot, by itself, constitute a foundation for invoking section 41(1) on the premise that the liability had ceased merely because it remained unpaid for a considerable period.

28.

This conclusion, however, does not by itself determine the assessee's appeal. The subsistence of the assessee's civil liability to NSEL is one matter and the tax character of the amount originally received and retained by the assessee is another. The fact that NSEL continued to have an enforceable civil claim may be relevant to the question of remission or

ITA 450/CHD/2026 A.Y. 2014-15 22 cessation under section 41(1), but it does not necessarily conclude the independent question whether, on the facts and circumstances of the case, the receipt had acquired the character of taxable income under section 28(iv) or any other provision of the Act validly invoked by the Assessing Officer.

29.

The factual findings contained in the arbitration award nevertheless have substantial evidentiary relevance. The learned Arbitrator examined the assessee's assertion regarding deposit of commodities in the accredited warehouses and considered, inter alia, the reports of the Court Receiver and other material produced before him. On such examination, the claim of actual deposit of commodities was not accepted and NSEL's counter- claim was upheld, resulting in determination of the monetary liability of the assessee. These findings may legitimately be taken into account while examining the true nature and substance of the NSEL transactions and the conduct of the assessee. However, the legal consequences flowing from those facts for the purposes of the Income-tax Act must necessarily be determined independently under the relevant statutory provisions.

30.

In our considered view, therefore, the subsequent arbitration proceedings cannot simply be ignored, particularly when this Tribunal, in the earlier round, had specifically

ITA 450/CHD/2026 A.Y. 2014-15 23 directed consideration of the execution of the arbitral award. At the same time, the award cannot be treated as conclusive on the question of taxability. Its proper evidentiary effect is that it provides subsequent adjudicatory material concerning the nature of the transactions, the assessee's conduct and, importantly, the existence and quantum of the civil liability owed to NSEL.

31.

Consequently, neither of the two extreme propositions advanced on the basis of the award can be accepted. The award cannot, merely because it confirms a civil liability in favour of NSEL, be regarded as establishing that the amount received by the assessee was necessarily non-taxable. Conversely, the mere fact that the amount remained unpaid for a prolonged period cannot, in the face of an adjudicated and enforceable liability, be treated as sufficient to establish remission or cessation so as to attract section 41(1).

32.

We accordingly hold that the learned CIT(A) was justified in taking the arbitration proceedings and the award into consideration pursuant to the direction of this Tribunal in the earlier round. However, the effect of the award must be confined to the matters adjudicated therein. The award is materially relevant to the factual controversy concerning the NSEL transactions and, in particular, establishes, subject to the rights

ITA 450/CHD/2026 A.Y. 2014-15 24 available in execution/appeal, that the assessee's civil liability to NSEL was adjudicated and quantified. It does not, however, constitute an adjudication of the assessee's tax liability under the Income-tax Act.

33.

Insofar as section 41(1) is concerned, the award materially stares against the proposition of the assessee that the liability had ceased or stood remitted. A quantified and enforceable liability alongwith carrying interest until payment/realisation, cannot ordinarily be characterised as a liability which has ceased merely by reason of its prolonged non-payment. Therefore, we do not find any force in the submission of the assessee.

34.

The position under section 28(iv) requires a separate examination. The taxability of the amount received and retained by the assessee has to be determined with reference to the statutory ingredients of the provision, the true nature of the receipt, the manner in which the NSEL transactions were conducted, the findings recorded by the Assessing Officer and the learned CIT(A), the assessee's conduct, and the surrounding circumstances established on record. The mere pendency or execution of the arbitral award does not, by itself, determine the tax character of the receipt. Equally, the continuing civil liability established by the award does not, by itself, render the receipt

ITA 450/CHD/2026 A.Y. 2014-15 25 immune from taxation if the statutory requirements of section 28(iv) are otherwise satisfied.

35.

Viewed in this manner, the arbitration award operates as relevant evidentiary material, but not as a determinative adjudication of taxability. It supports the conclusion that the civil liability of the assessee to NSEL was adjudicated and remained enforceable; it does not establish remission or cessation of that liability. At the same time, the findings recorded in the award regarding the manner in which the transactions were conducted and the absence of actual deposit of commodities constitute relevant material which may legitimately be considered in determining the true nature of the receipt for income-tax purposes. The Arbitrator in clear words have held that there was no goods received in the godown of the assessee and the assessee has wrongly retained the amount received by it from the traders in connivance and collusion with the officials of NSEL.

36.

We thus find that the learned CIT(A) was justified in considering the arbitration proceedings in accordance with the direction issued by this Tribunal in the earlier round. However, the legal consequence of the award has to be confined to its proper evidentiary scope. The continued existence of the civil liability does not, by itself, answer the question of taxability

ITA 450/CHD/2026 A.Y. 2014-15 26 under section 28(iv), while the mere fact of prolonged non- payment cannot, in the circumstances of the present case, establish remission or cessation under section 41(1).

37.

In view of the foregoing discussion, and having regard to the findings recorded by the Assessing Officer and the learned CIT(A), we find no infirmity in the impugned order sustaining the addition. Hence, the appeal of the assessee is dismissed.

Order pronounced on 01 s t September,2026.

Sd/- Sd/-

(VIJAY VARMA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER “Poonam” आदेश क� �ितिलिप अ�ेिषत/ Copy of the order forwarded to : अपीलाथ�/ The Appellant 1. ��यथ�/ The Respondent 2. आयकर आयु�/ CIT 3. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 4. गाड� फाईल/ Guard File 5.

Assistant Registrar Income Tax Appellate Tribunal Kendriya Sadan, Sector 9-A, Chandigarh.

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