Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI B. R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee filed this appeal challenging the order dated 16.05.2019 passed by Ld. CIT(A)-3, Bengaluru and it relates to the assessment year 2016-17. The assessee is aggrieved by the decision of Ld. CIT(A) in confirming the disallowances of following expenses:- a) Bad debts claim - Rs.6,61,216/- b) Interest expenditure claim – Rs.1,59,969/-
The facts relating to the case are stated in brief. The assessee is engaged in share trading activity and he has reported turnover of Mr. Arunesh Kumar Madan, Bengaluru
Page 2 of 7 Rs.6.63 crores. The assessee filed his return of income declaring a total income of Rs.16,88,310/-, which consisted of income from salary, business, long term capital gains and other sources. The A.O. noticed that the assessee has declared an income of Rs.13.65 lakhs under the head “Income from other Sources” after claiming following expenses:- a) NSEL loss set off - Rs.6,61,216/- b) Interest expenditure on loss taken against - Rs.1,59,969/- The A.O. was of the view that both the above expenses are not allowable as deduction and accordingly disallowed them. The Ld. CIT(A) also confirmed the same. Hence the assessee has filed this appeal before the Tribunal.
The first issue relates to disallowance of“National Spot Exchange Limited (“NSEL”) loss” (described as “bad debts claim”) of Rs.6,61,216/-. The facts relating thereto are that the assessee had dealt with NSEL, which was a platform for undertaking onlinetrading operations in commodities. During the year ending 31.3.2014, the assessee had made sale and purchase of commodities worth Rs.95.53 lakhs and Rs.94.02 lakhs respectively. As on 31.3.2014, a sum of Rs.29.33 lakhs was due to the assessee by NSEL. In the mean time, the NSEL was closed down due to allegations of large scale of fraud and hence, the assessee could not realisethe above said amount of Rs.29.33 lakhs. Hence the assessee chose to write off the above said amount in its books of accounts for the year ending 31.3.2014. However, the assessee chose to claim the above said amount as deduction in staggered manner in three assessment years viz. 2014-15, 2015-16 & 2016- 17. It appears that the quantum of deduction was determined by the assessee on some basis. It is the submission of the assessee
Mr. Arunesh Kumar Madan, Bengaluru
Page 3 of 7 that the claim of the assessee was allowed in assessment years 2014-15 & 2015-16.
Accordingly, the assessee claimed a sum of Rs.6.61 lakhs as deduction in AY 2016-17, i.e., during the year under consideration. The above said amount represented the final amount of claim, out of the loss of Rs.29.33 lakhs. The assessee claimed the same as “bad debt” in his return of income and further claimed it as deduction against “interest income” declared under the head “Income from other sources”. It was so claimed on the reasoning that the investment made in NSEL is treated as “deposits” under the Maharashtra Protection of Interest of Depositors (in financial establishments) Act, 1999.The A.O. disallowed the claim by observing that there is no provision for the deduction of bad debts while computing income under the head “Income from other Sources” u/s 57 of the Income-tax Act,1961 ['the Act' for short].
Before Ld. CIT(A), the assessee admitted that it has made the claim wrongly under the head “Income from other Sources”. It was submitted that the above said loss is allowable as deduction against business income and accordingly it was prayed before Ld CIT(A) to allow the same as deduction against the business income. The Ld. CIT(A) however noticed that the assessee has written off the entire amount of Rs.29.33 lakhs, being the loss of amount due from NSEL, in financial year 2013-14 itself in its books of accounts. Accordingly, he took the view that the assessee cannot make bad debt claim u/s 36(1)(vii), since the deduction of bad debts is allowable in the year in which the debt was written off as bad in books of account. Accordingly, he confirmed the disallowance.
Mr. Arunesh Kumar Madan, Bengaluru
Page 4 of 7 6. I heard the parties on this issue and perused the record. It is an admitted fact that the assessee is engaged in the business of share trading activities. Hence, the transactions carried out with NSELwere in the course of carrying on of his business. There is no dispute with regard to the fact that the assessee could not realize a sum of Rs.29.33 lakhs in respect of transactions carried out during the financial year ending 31.3.2014, since NSEL was closed due to large scale frauds. It is also an admitted fact that court proceedings were undertaken against NSEL for recovery of the amounts payable to its clients. Hence, in view of uncertainty, the assessee has decided that the above said amount could not be recovered and hencehe chose to write off the amount of Rs.29.33 lakhs in his books of accounts. However, he chose to claim the amount of Rs.29.33 lakhs as deduction in 3 assessment years namely 2014-15, 2015-16 & 2016-17. It was submitted by the assessee that the claim made in assessment years 2014-15 & 2015- 16 has been allowed. In this year, the AO disallowed the claim by observing that there is no provision u/s 57 to allow such kind of deduction. Before Ld CIT(A), the assessee has accepted that this claim is not allowable as deduction against interest income. Accordingly it was prayed that this amount be allowed as deduction against business income. The Ld CIT(A) has, however, taken the view that the claim of the assessee u/s 36(1)(vii) is not allowable as deduction, since the amount was not written off as bad during the year under consideration.
The transactions in commodities have been undertaken by the assessee in NSEL platform, which is the coordinating authority between the buyers and sellers. It is the responsibility of the NSEL to settle the accounts of the assessee. Due to closure of NSEL on account of large scale frauds, the realisation of the amount has Mr. Arunesh Kumar Madan, Bengaluru
Page 5 of 7 become doubtful. In the instant case, it is the NSEL which has failed to pay the money due to the assessee. Hence, in my opinion, the amount of Rs.29.33 lakhs lost by the assessee in NSEL was not a bad debt, but it is a case of business loss. Hence it is a case of trading loss allowable as deduction u/s 28 of the Act and not as bad debt u/s 36(1)(vii) of the Act. Hence, in my view, there is no requirement to refer to the provisions of sec.36(1)(vii) of the Act.
Even though the assessee wrote off entire amount of Rs.29.33 lakhs in one go in his books of account, he chose to claim the deduction in a staggered manner in three years. The major portion of the amount has been claimed in AY 2014-15 & 2015-16. The possibility of staggered claim could be that the assessee might have expected that he could realize some amount of Rs.29.33 lakhs. Since, it did not happen, the assessee has claimed the remaining amount of Rs.6.61 lakhs in the year under consideration. When the claim of the assessee had been allowed in AY 2014-15 and 2015-16 and further, since it is a trading loss, in my view, the assessee was justified in making claim of Rs.6.61 lakhs during the year under consideration. However, as rightly admitted before Ld CIT(A), this amount is deductible against the business income only. Accordingly, I set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of Rs.6.61 lakhs against the business income.
The next issue relates to disallowance of interest expenditure of Rs.1,59,969/-. The assessee had taken loan against fixed deposits kept with Banks. The interest paid on that loan has been claimed as deduction against interest income declared under the head “Income from other sources”. The assessee submitted before the AO that he had availed overdraft facility from State Bank of Mr. Arunesh Kumar Madan, Bengaluru
Page 6 of 7 India in respect of his business/trading activity. The interest payable on overdraft facility fallen due and the assessee had availed loan against fixed deposit in order to pay the interest liability of overdraft facility. The A.O. held that it is not an expenditure incurred for earning the interest income. The AO also observed it is an item of business expense incurred during the course of conducting business. Accordingly, the A.O. disallowed the claim. Even though the A.O. has observed that it is an item of business expenses, yet he did not allow deduction of interest expenditure of Rs.1,59,969/- against business income also. The Ld. CIT(A) confirmed the same, inter alia, observing that the assessee did not furnish any supporting documents in respect of this claim.
I heard the parties on this issue and perused the record. The A.O., in para 6 of his order has clearly observed that the interest expenditure of Rs.1,59,969/- is an item of business expenditure incurred during the course of conducting of business. Hence, there should not be any dispute that the impugned interest expenditure is allowable as deduction against business income of the assessee. There is also no dispute with regard to the fact that the assessee had availed loan against fixed deposits in order to pay the interest liability arisen on overdraft facilities availed by the assessee. The A.O. has also recorded that the overdraft facility has been used by the assessee during the course of business/trading activity carried on by the assessee, meaning thereby the loan against fixed deposit has also been availed for business purposes only. In that case, the interest expenditure is also allowable as deduction against income from business. The Ld CIT(A) has observed that the assessee has not furnished any supporting document in respect of this claim. I notice that the same is not the point of dispute arising from the assessment order. The issue is whether the interest expenditure of Mr. Arunesh Kumar Madan, Bengaluru
Page 7 of 7 Rs.1,59,969/- is allowable as deduction against interest income. If it is not allowable as deduction against interest income, then whether it is allowable as deduction against business income. From the facts discussed above, I am of the view that the interest expenditure is allowable as deduction against business income only. Accordingly, I set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to allow the above said interest expenditure as deduction against business income.
If both the claims discussed above are allowed against business income, then the income from business may result in a negative figure, in which event, the A.O. is directed to allow intra- head adjustments as per provisions of section 71 of the Act.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 19th Apr, 2021