CHOWDRY ASSOCIATES,NEW DELHI vs. ACIT, CIRCLE-6(1), NEW DELHI

Brief facts of the case are that the assessee company is a Non-Banking Financial Company engaged in investment activities in shares and purchase & sale of units of various Mutual Funds. The assessee has been dealing in trading on the NSEL platform and treated the receipts as income from business which has been assessed by the revenue under the head of business income regularly and also in the assessment u/s 143(3) for the year 2013-14, 2014-15. During the current year too the assesse has shown the income under the head “income from profits and gains of Business”. It was submitted that owing to the closer of NSEL, the business could not be carried in the assessment year 2016-17.

During the AY 2015-16, the assessee was trading in commodity derivatives in the association which is National Spot Exchange Limited (NSEL). NSEL ran into regulatory hurdles and as such its operations are stopped by the regulators. The assessee forayed in commodity market since FY 2011-12 and availed services of authorized NSEL agents namely M/s. Anand Rathi Commodities Ltd and M/s. Philips Commodities India Pvt Ltd for that purpose. As the business of trading in NSEL platform was regular one and not in nature of speculative transaction u/s 43(5), the Appellant always treated the trading business of NSEL as regular business and offered for taxation u/s 28. There has been no dispute on these facts since FY 2011- 12 and tax department has always accepted the same.

The ld. CIT (A) confirmed the addition holding that the NSEL is meant for spot dealings resulting in actual and physical delivery of commodities in a specified time. But the appellant has indulged in transactions of speculative nature by short selling and dealing in derivatives. These dealings do not result in physical delivery of commodities but they involve transaction of value of commodities only. The appellant has purchased and sold from and to the same party on the same date. The ld. CIT (A) also held that on many occasions, the commodities are sold the next minute after purchase. It was held that the appellant has sold even before the commodity is purchased. Short selling and dealing in derivatives are prohibited on NSEL, hence, the Chowdry Associates assessee has to be treated as dealing in business of speculation.

Having said that the ld. CIT (A) disallowed the claim of business loss declared by the appellant in respect of amount of unrecoverable balances from brokers M/s. Anand Rathi Commodities Services Pvt. Ltd. and M/s. Philip commodities India Pvt. Ltd.

Before us, the ld. AR repeated the submissions taken up before the authorities below.

The ld. DR submitted his arguments in writing which are as under: “During the course of hearing of the case today, i.e. 18.12.2019, the Ld. Counsel for the assessee referred to the case of M/s Flair Exports Pvt. Ltd, New Delhi, claiming that the facts of that case are similar to those of this case. 1. In this connection, it is submitted that the MD & CEO, National Spot Exchange Ltd, has written a letter dated 23.01.2019 to the Pr. Chief Commissioner of Income Tax, Delhi, raising the issue of bogus claim of bad debts written off by some assessees. He has specifically mentioned the case of M/s Megh Sakariya International Pvt. Ltd. in which the Hon’ble ITAT, Chennai has allowed the assessee’s claim. He has requested the Department to look into the matter to ensure that bogus bad debt claims being made by Members of NSEL are not allowed.

It is an undisputed fact that the assessee has given money to brokers namely, M/s Anand Rathi Commodities Pvt. Ltd. and Philips Commodities Pvt. Ltd. for conducting of their business.

It is also undisputed fact that the monies given above have not been received by the assessee.

The ld. AR argued, reiterating the modus operandi the stockists of the commodities first deposited the commodity with the Exchange accredited warehouse and received a warehouse receipt which was deposited with NSEL for the purpose of transactions under the control and supervision of NSEL. The transactions in NSEL are made through members of NSEL, who are authorized brokers. The assessee has made the transactions under paired contracts. Under the paired contract, generally the purchases were made at T+2 cycle and sales were made at T+25 or T+35 cycle. Under these transactions, the assessee company made full payment for purchase immediately and delivery of the commodity lying in the warehouse was assigned to it. The transactions were subjected to VAT, delivery charges, service tax. As far as sale is concerned, the assessee company immediately put a contract for sale on T+25 and T+35 and delivery was assigned from buyer to the seller. The amount is Chowdry Associates received as and when the transaction is completed. In the assessment years 2013-14 and 2014-15, whatever the transactions were made on NSEL, whatever the profits or losses obtained, the same were duly disclosed in the profit & loss account and assessed as business income.

Heard the arguments of both the parties and perused the material available on record.

From the entirety of the events, we find that in the assessment year 2014-15, the assessee had made purchases in the middle or last week of June 2013 through M/s Anand Rathi Commodities Pvt. Ltd. and M/s Philips Commodities Pvt. Ltd. The NSEL failed to fulfill its commitments and ultimately the Government had prohibited NSEL to make any transactions after 1st July 2013. The details of outstanding unsettled transactions of the assessee through both the brokers has also been furnished to the revenue authorities by the NSEL.

The AO disallowed the losses as claimed by the assessee on the ground that transactions has carried out by the assessee are speculative transactions settled without the delivery in terms of Section 43(5) of the Act. The AO in the assessment order reproduced the relevant provisions of Section 43(5) upto sub-Section (d) of 45(3). The AO stopped at short of sub- Section (d) without going further to sub-Section (e).

Reading further, sub-Section (e) which was introduced by the Finance Act, 2013 w.e.f. 1st April 2014 reveals that in respect of trading and commodity derivatives carried out in a recognized association shall not be a speculative transaction.

Further, Explanation 2 for the purpose of Clause (e) defines what constitutes “commodity derivative”. The meaning has been assigned as per Chapter VII of the Finance Act, 2013.

Chapter VII of the Finance Act, 2013 at definitions mentioned at para 106(5)- Commodity derivative means – (i) a contract for delivery of goods which is not a ready delivery contract; or (ii) a contract for differences which derives its value from prices or indices of prices- (A) of such underlying goods; or (B) of related services and rights, such as warehousing and freight; or (C) with reference to weather and similar events and activities.

The “eligible transactions” means (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognized association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognized association; and Chowdry Associates (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act;

The “recognized association” means "recognized association" means a recognized association as referred to in clause (j) of section 281 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed82 and is notified83 by the Central Government for this purpose;]

We also find that all the transactions made by the assessee are evidencing the client ID and PA No. and also carried out through computerized exchanged through electronic screen (NSEL) as per the details collected by the revenue.

We have also gone through the provisions of the Act introduced vide Finance Bill 2005 in respect of measures to rationalize the tax treatment of derivative transactions. The same is as under: Under the existing provisions clause (5) of Section 43, a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a “speculative transaction”. If it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of the said provision. Further the unabsorbed speculation losses are allowed to be carried forward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an Chowdry Associates anti-evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure.

The revenue has clearly held that the assessee is in the trading of commodity derivatives. Revenue, having said that failed to give the benefit of provisions of Section 43(5)(e). Hence, the transactions done by the assessee shall not be deemed to be a speculative transaction in terms of the provisions of the Act.

We have also gone through the accounts of assessee for the earlier years. The amount kept with M/s Anand Rathi

We have also perused the notice of PCIT, Central, New Delhi issued under the provisions of Section 263 of the Act proposing to withdraw the bad debts claimed by the assessee and accepted by the Assessing Officer. We categorically refrain from adjudicating on the strength of the notice, however, we observe that the said notice also dealt with the issue of bad debts claimed u/s 36(1)(vii) by that assessee.

We have also perused the order of the Chennai Tribunal in the case of Megh Sakariya International Pvt. Ltd. in wherein the bad debts have been allowed by the Tribunal u/s 36(1)(vii) of the Income Tax Act, 1961. In that case too, the revenue has also brought to the notice regarding the information received from NSEL that trading on that platform was topped since 31.07.2014 and the NSEL was in the process of settling the outstanding dues of its traders and auctioning its assets for the said purpose. The revenue claimed

Thus, we find that the CBDT has unequivocally allowed the claim of bad debts once the same is written off in the books of accounts as irrecoverable. Thus, the argument of the ld. DR that the bad debts should not be allowed which is based on the letter issued by the NSEL that NSEL is in the process of settling the amounts in view of the sufficiency of the assets and not to allow bad debts as the claim is pre-mature.

We also hold that, if in any previous year, the debt has been written off as bad and the relevant deduction has also been claimed but later on the same debt is recovered in full or part, then the amount so recovered will be included as income of the financial year in which such amount has recovered. Owing to taxability of the amounts recovered, the revenue would at liberty to tax the amount as and when received in accordance with the provisions of the Act. The department must obtain the information pertaining to payment by the NSEL to Chowdry Associates brokers/traders on real time basis and bring these amounts to tax net. Hence, the advisory of the NSEL not to allow the bad debts claim would be legally untenable owing to the provisions of the Act, Circular of the CBDT and ruling of the Hon’ble Apex Court in the case of TRF Ltd. Vs CIT (323 ITR 397).

Further, we have also perused the order in the case of M/s Omni Lens Pvt. Ltd. in ITA No. 2818/Ahd./2010 wherein the matter was referred back to the file of the AO to examine the issue of speculation/non-speculation business after taking note of crucial aspect of actual delivery of the commodity, if any, as claimed and to ascertain as to how the entire debt has turned bad when the assessee was purportedly in possession of the goods purchased. The issue before us is clear on this aspect.

The matter before us deals with the non-recovery of the advances given to the brokers. The AO, for the instant year held that the assessee is dealing in speculative transactions and invoked provisions Section 43(5) of the Act. The AO has also held that the assessee has been carrying trade in commodity derivatives. Section 43(5)(e) considers an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association shall not be deemed to be a speculative transaction. Hence, we hold that the transactions of the assessee shall not be deemed to be speculative transactions. Chapter VII of the Finance Act, 2013 w.e.f. 01.04.2014, details as to what is a commodity derivative in the Commodities Transaction Tax (CTT). As per the CTT commodity derivative means a contract for delivery of goods which is not a ready delivery contract or a contract for differences which derives its Chowdry Associates value from the prices of such underlying goods. Thus, we find that the assessee is in the business of commodity derivatives but not in the speculation transaction as held by the AO. The revenue has also accepted the income from the transactions of the assessee as business income but not as income from speculation for all the earlier years. (Owing to collapse of the NSEL, no further trading could be conducted by the assessee in the latter years). It is also an undisputed fact that the trade advances given by the assessee stands irrecoverable.

In conclusion, keeping in view the facts of the case, a tax history of the assessee , treatment given by the revenue to the transactions undertaken by the assessee, finding of the AO that the assessee is into commodity derivatives, provisions of the Section 43(5) invoked by the AO, provisions of Section 43(5)(e) relied upon by the ld. AR, Explanation (2) of Section 43 as to what constitutes commodity derivatives, Para 5 of Chapter VII of Finance Act, 2013, CBDT Circular No. 3/2006 dated 27.02.2006, orders of the Co-ordinate Bench of ITAT in Megh Sakariya International (supra), Omni Lens Pvt. Ltd. (supra), judgment of the Hon’ble Apex Court in the case of TRF Ltd. (supra), we hereby hold that the business loss claimed by the assessee is allowable u/s 28 of the Act.