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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
Before: Ms. Suchitra KambleDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-1, New Delhi dated 27.03.2017.
Following grounds have been raised by the assessee:
“1. That in view of the facts and in the circumstances of the case the Ld. Pr. CIT, Central-1 erred in not passing a speaking order against submission made by the appellant, therefore, the order so passed in furtherance thereto is invalid, arbitrary, uncalled for and bad in law.
That on the facts and in the circumstances of the case and in law, the order passed by the Pr. CIT u/s 263 of the Act, setting aside the assessment framed u/s 143(3) of the Act as erroneous and prejudicial to the interest of the revenue is without jurisdiction,
ITA No. 2286/Del/2017 2 Flair Exports Pvt. Ltd. contrary to the settled preposition of law and therefore, the order so passed is bad in law, arbitrary and void ab-initio.
That on the facts and in the circumstances of the case and in law, the Ld. Pr. CIT erred in exercising jurisdiction u/s 263 by setting aside the assessment order with the direction to make fresh assessment with regard to bad debts claimed of Rs. 56,97,379/- by the appellant even though the issue relating to bad debts has been discussed and scrutinized by the Assessing Officer while framing the assessment u/s 143(3) of the Act.”
The order u/s 263 passed by the ld. PCIT is as under:
“During the assessment proceedings for A.Y. 2014-15, the Assessing Officer had asked the explanation for die amount written off vide order sheet entry dated 16/05/2016 and assesses had filed the following reply:
“It is submitted that the assessee company during the previous assessment year had paid an amount w M/s. Philips Commodities India (P) Ltd. for doing business with NSEL in the normal course of business. Since the exchange started making defaults in making payments to its clients ultimately it went burst during the month of July, 2013, as widely reported in the Media, The exchange lost all its money with the borrowers, therefore a proportionate amount was written off during the period under assessment as a bad debt being non- recoverable, as suggested y the promoters and borrowers of NSEL in the media and balance amount was shown as doubtful receivable."
ITA No. 2286/Del/2017 3 Flair Exports Pvt. Ltd. The Assessing Officer has accepted the submission of the assessee and has not made any further enquiries from NSEL or any other third party.
However, subsequently, information has been received from the ‘Central Board of Direct Taxes’ regarding the ‘Companies claiming bogus losses for transactions on National Spot Exchange Ltd. (MSEL) in A.Y. 2014-15 and 2015-16, In this regard, it may he noted that:
“NSSL was a spot exchange in which contracts were traded on the exchange for on the spot purchase and sale of commodities. Due to various reasons, the trading on the exchange platform was stopped on 31st July, 2013. There were 12,735 traders whose outstanding receivable amounts had remained unsettled aggregating to approximately Rs. 5600 crores.“
Now, vide information it has been informed that;
“The recovery process is being monitored by the Hon'ble High Court Committee (HCC) appointed by the Horrible Bombay High Court. There are enough assets to liquidate and recover the outstanding amounts. For instance, an amount of approx Rs. 16 crores have been recovered as recent as in May 2016. These Brokers /Traders have safer received about 10% of the outstanding amount.
However, it has come to light that most of the Brokers / Traders have claimed the outstanding amount as deduction as bad debt u/s. 36(1)(vii)/37(1) of the Income Tax Act, 1961. Similarly, most of the NBFC Companies, which had lent money to
ITA No. 2286/Del/2017 4 Flair Exports Pvt. Ltd. Brokers/Traders have also written of such amounts as bad debts."
In this regard, a list of 744 Brokers / Traders has been provided who may have claimed /claim the amount as deduction. In the list, assessee’s name is also appearing, wherein amount receivable in Crores has been shown for Rs.2.43 Cr.
From the information received and from further enquiries, it is noticed that in this matter, recovery process has been initiated by NSEL and various other agencies including EOW, Mumbai and HCC. EOW Mumbai has confiscated assets worth over Rs. 5600 crores. All the aforesaid details indicate that ultimate deficiency in the amount recoverable cannot be arrived at immediately and hence claim of the bad debt of the assessee cannot be concluded in AY 2014-15, till the final deficiency amount is arrived at. Since recovery shall take longer time and hence any claim earlier to that shall be prima facie, considered as premature claim liable for rejection.
In view of above facts, it is evident that assessee’s claim of bad debt has been allowed by the Assessing Officer without verification as the said debt is premature to be written off. Therefore the order u/s 143(3) of the Act as passed by the Assessing Officer on 19.05.2016 in the ease of M/s Flair Exports Pvt. Ltd. is erroneous and prejudicial to the interests of revenue.
In view of the above facts and reasons proceedings u/s 263 of Income Tax Act, 1961 were initiated against the assessee for revision of assessment order for the A. Y. 2014-15 and the
ITA No. 2286/Del/2017 5 Flair Exports Pvt. Ltd. assessee was required to show reasons as to why should its claim for bad debts of Rs. 56,97,379/- be not rejected / disallowed.
In response to the notices Mr. Deepak Malik, Advocate appeared who filed reply Dated 02/03/2017 and discussed the case.
The Assessee has mainly claimed that the position is well settled from 01/04/1989, it is not necessary for the assessee to establish that the debts, in fact, has become irrecoverable. IE is enough if the bad debt is written, off as irrecoverable in the accounts of the assessee. The assessee has also claimed that the information received from CBDT regarding the companies claiming bogus transactions and not otherwise and further claimed that it is not relevant in their ease.
We have considered the facts of the case and submission of the assessee. Admittedly assessee has claimed bad debts of Rs. 56,97,379/- being 25% of the dues from commodities market margin-NSEL in A.Y. 2014-15. It is also clear that the assessee’s name appear at Serial No. 466 of the list of 744 brokers / traders received from CBDT as stated earlier. The recovery process is being monitored by the Hon’ble High Court Committee (HCC) appointed by the Hon’ble Bombay High Court. There are enough assets to liquidate and recover the outstanding amounts. For instance, an amount of approx. Rs. 16 crores have been recovered as recent as in May 2016. These Brokers / Traders have so far received about 10% of the outstanding amount.
ITA No. 2286/Del/2017 6 Flair Exports Pvt. Ltd. Therefore, in view of the above facts and circumstances it is clear that the claim of the assessee for bad debts of Rs. 56,97,379/- is not based on correct facts and not allowable. Hence, the assessment order passed by the Assessing Officer for A.Y. 2014-15 is erroneous and prejudicial to the interest of revenue, in so far as, the deduction claim for bad debts to the extent of Rs. 56,97,397/- has been wrongly allowed.”
During the hearing before us, the ld. AR reiterated the arguments taken up before the ld. PCIT that the assessee was doing business with NSEL in the normal course of business and since the exchange has fallen it lost all the money of the borrower and therefore the assessee has written off a proportionate amount as doubtful receivables and bad debts. The ld. DR strongly supported the orders of the ld. PCIT and relied on the instructions of the CBDT. He argued that since the monies are on the way to be recovered, it is too early for the assessee to write it off as bad debts. The ld. DR has also relied on the order of the Co-ordinate Bench of ITAT in the case of Omni Lens Pvt. Ltd. Vs DCIT in ITA No. 2818/Ahd/2017 order dated 16.10.2018.
Heard the arguments of both the parties and perused the material available on record. We have perused the facts and issues involved in the case of Omni Lens Pvt. Ltd. Vs DCIT in ITA No. 2818/Ahd/2017 order dated 16.10.2018 and the adjudication thereof.
ITA No. 2286/Del/2017 7 Flair Exports Pvt. Ltd. 6. The para no. 11 of the order is as under:
“11. We find ourselves in agreement with this pivotal contention on behalf of the assessee that it is not necessary for the tax payer to establish that the debt has become irrecoverable for allowance of deduction. It is an admitted position that the debt has arisen in course of commodity trade and such debt or a part thereof has been taken into account while computing the chargeable income of the assessee. The amount outstanding from the respective brokers has been shown to be duly written off in the books of accounts. Therefore, there is a good deal of force in the point of view expressed on behalf of assessee that the claim of bad debt becomes allowable as per the scheme of the Act having regard to the decision of the Hon’ble Supreme Court in TRF Ltd. allowed by and CBDT Circular (supra).”
Further, the Co-ordinate Bench in that particular case has gone to examine the issue of delivery of the stocks and remanded the matter to the AO to determine whether the business transactions of the assessee falls within the purview of Section 43(5)- “speculation transaction”. However, the moot issue before us is whether the bad debts is an allowable deduction or not. In the instant case, the assessee has been regularly showing the income under the head profits from the business and hence dwelling into the issue of speculation doesn’t arise.
The similar issue has been adjudicated in the case of M/s U.K. Paints India Ltd. Vs. ACIT in ITA No. 7604/Del/2017 order dated 27.11.2020 with specific reference to the NSEL losses. Further, the issue of allowability and claim of bad debts has
ITA No. 2286/Del/2017 8 Flair Exports Pvt. Ltd. been adjudicated by the Hon’ble Supreme Court in the case of TRF Ltd. vs. CIT 323 ITR 397 and also in the case of CIT Vs. Sunbeam Auto Ltd. 332 ITR 167 by the Hon’ble Jurisdictional High Court. The only reason for resorting to provisions of Section 263 by the ld. PCIT was that the CBDT has directed not to allow the bad debts in view of the recovery proceedings out of liquidation. The CBDT has also informed the field authorities that 10% of the outstanding amounts have already been received by the brokers and hence the bad debts may not be allowed. We hold that the assessee cannot be forced to wait till the recoveries are made. The assessee is liable to treat the recoveries and offer the same as income in the year and the bad debts are recovered. The CBDT which had a list of 744 brokers who have claimed the deduction can also monitor the recoveries from the liquidator effectively from time to time and intimate the field authorities who in turn can examine whether the amounts recovered are duly offered to tax or not. This would aid in garnering accurate revenues without infringing the judgment of Hon’ble Apex Court in the case of TRF Ltd. (supra). Further, the incurring of loss and the interplay between Section 36(2)(ii) and Section 28 have been dealt by this Tribunal in the case of U.K. Paints in ITA No. 7604/Del/2017 for the A.Y. 2014- 15 vide order dated 27.11.2020. For the sake of convenience and ready reference, the relevant portion of the said order is reproduced as under:
“13. During the year, the assessee has invested Rs.1,50,66,407/- with NSEL in the month of July 2013 and lost the amount owing to the scam. Out of which an amount of Rs.49,01,320/- is yet to be recovered. This amount has been
ITA No. 2286/Del/2017 9 Flair Exports Pvt. Ltd. written off in the P&L account. The Assessing Officer held that since this amount of Rs.49,01,320/- has not been taken into account while calculating the income in the previous year, the deduction u/s 36(2) is not allowable.
Before the ld. CIT (A), the assessee has taken two fold arguments, one that the amount is allowable u/s 36(2)(ii), the other being the amount is allowable u/s 28 of the Income Tax Act, 1961. The ld. CIT (A) held that since the amount has not been offered to tax hither to, it cannot be considered for application of provision u/s 36(2)(ii). The judgment of the Hon’ble Supreme Court in the case of TRF Ltd. 323 ITR 397 found to be inapplicable by the ld. CIT (A). The ld. CIT (A) has also not allowed the loss as capital loss on the grounds that there has not been any existence of a capital asset.
During the hearing before us, the ld. AR argued mainly that if the amount is not allowable u/s 36(2)(ii), the same is still allowable u/s 28 of the Act as the amount has been invested and lost in the same year.
The ld. DR argued that the primary intention of the assessee is investment and hence at the most it can be allowed as capital loss.
Heard the arguments of both the parties and perused the material available on record.
The issue involves deduction under two specific section namely Section 28 and Section 36 and 37. There is a subtle difference between the business loss and business expenditure
ITA No. 2286/Del/2017 10 Flair Exports Pvt. Ltd. while loss arises from regular operation of the business, business expenditure is conscious charge in an endeavor to earn income. Sections 30 to 36 deal specifically with expenditure allowable in computing the taxable income and Section 37 is a general provision for allowing the deductions of expenditure taking into consideration the business of the assessee. The exception being capital expenditure and personal expenditure. The Hon’ble Supreme Court in the case of Quershi Vs CIT 287 ITR 547 held that explanation II Section 37 is not applicable to the case of business loss but to business expenditure. In the instant case, the assessee paid amount to Philip Commodities India Pvt. Ltd. in the month of June 2013 of Rs.1,50,66,407/- and also got the amounts till March 2014 and could not receive money of Rs.47,58,533/- owing to crash of NSEL. This gives rise to a situation where the assessee incurred business loss owing to his transaction with M/s Philip Commodities India Pvt. Ltd. Hence, the loss will have to be allowable at loss incidental to the business while computing the income u/s 28. Since, it is not an expenditure, the provisions u/s 30 to 37 are not attracted in this case. We hold that loss must be during the course or of incidental to business. It is the nexus with the business which is more relevant to claim the loss (CIT Vs Textool Co. Ltd. 135 ITR 200). The loss must have a direct and proximate nexus with the business operations and the loss is incidental to it, then such loss is deductible as, without business operations, no profit can be earned. If profit is earned in such an endeavour it is to be taxed and if loss is earned it is to be allowed. Without going into the grammatical issue of debt or bad debts or receivables, since the facts clearly prove that the assessee has incurred loss by the way of his business with M/s Philip Commodities India
ITA No. 2286/Del/2017 11 Flair Exports Pvt. Ltd. Pvt. Ltd. and the loss has been in the current year itself, in the peculiar facts and circumstances of the case, such loss incurred in such transaction with regard to NSEL is allowable. Any subsequent recovery needs to be taken into consideration in computation of total income.”
On going through the entire factum of the case, since the order of the AO is not erroneous and prejudicial to the interest of revenue, we hereby hold that the order passed u/s 263 is liable to be obliterated.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 24/11/2021.
Sd/- Sd/- (Suchitra Kamble) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 24/11/2021 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR