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Income Tax Appellate Tribunal, ‘C’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI DUVVURU RL REDDY]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
In this appeal filed by the assessee, which is directed against an order dated 14.11.2017 of ld. Commissioner of Income Tax (Appeals)-8, Chennai, it is aggrieved on disallowance of bad debts of �2,02,42,194/-, written off.
ITA No.59 /2018 :- 2 -:
Facts apropos are that assessee engaged in the business of developing and maintenance of shipyard had filed its return of income for the impugned assessment year declaring ‘’Nil’’ income. During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee had claimed bad debts of �2,02,42,194/-. Ld. Assessing Officer required the assessee to explain the claim of bad debt, since according to him in the preceding assessment year assessee had not made any claim for bad debt. Reply of the assessee was as under:-
‘’During the Assessment year we have incurred a Loss by way of Bad debts amounting to ₹2,02,42,194.10. The Bad debts has arisen on account of the following: During the Assessment year 2014-15 we have traded in National Spot Exchange Ltd (NSEL) through the brokers Sugal Commoditiy Brokers Pvt Ltd dealing in commodity Trading, We have entered into the transactions of purchase and sales of commodities through Sugal commodities Brokers Pvt Ltd. ………………… From the statement it can be seen that amount due to us on 3110312014 by Sugal Commodities Brokers Pvt Ltd. and also there is no trading transactions after July 2013. It was suddenly stopped due to problems in NSEL and which resulted in payment crisis and the settlement was not made by NSEL to its customers. Even after 3 years the above said amount could not recovered from them in spite of various steps taken through NS6L Investors Forum. Therefore the above due as on 3110312014, was written (llf as bad debts while filing return for the assessment year 2014-15. "
ITA No.59 /2018 :- 3 -:
However, ld. Assessing Officer was not impressed by the above reply. According to him, there was no evidence available with the assessee to show that debt had become bad. Further, as per the ld. Assessing Officer, Department had received information from National Spot Exchange Ltd (in short ‘’the NSEL’’) that trading in their platform was stopped since 31.07.2014. As per the ld. Assessing Officer, NSEL was in the process of settling outstanding dues of its traders and auctioning its assets for the said purpose. According to the ld. Assessing Officer, the claim of bad debt was premature. Such claim was disallowed.
Assessee’s appeal before the ld. Commissioner of Income Tax (Appeals) was not successful. According to the ld. Commissioner of Income Tax (Appeals), sum of �2,02,42,194/- claimed as bad debt was not shown as part of assessee’s income in any earlier years. As per the ld. Commissioner of Income Tax (Appeals) it was only part of the capital employed by the assessee towards its business activity. Thus, according to the ld. Commissioner of Income Tax (Appeals), loss incurred by the assessee was a capital loss and not a bad debt eligible for deduction u/s.36(1)(ii) of the Income Tax Act, 1961 (in short ‘’the Act’).
ITA No.59 /2018 :- 4 -:
Now before us, the ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that the ld. Assessing Officer had accepted the claim as one of bad debt but had disallowed it taking a view that it was too premature to come to that conclusion. As per the ld. Authorised Representative, assessee had started trading in NSEL through its broker only during the previous year relevant to impugned assessment year. Further, as per the ld. Authorised Representative, the sum of �2,02,42,194/- due to the assessee on account of commodity trading done through NSEL was found to be no more recoverable. According to him, by virtue of judgment of Hon’ble Apex Court in the case of T.R.F. Ltd vs. CIT, (2010) 323 ITR 397, after 1st April, 1989, it was not necessary for the assessee to establish that the debt, had become irrecoverable and it was enough if the bad debt was written off as irrecoverable in the books. Thus, according to him, the claim was unjustly disallowed.
Per contra, ld. Departmental Representative strongly supporting the order of the ld. Commissioner of Income Tax (Appeals) submitted that ld. Commissioner of Income Tax (Appeals) had given a clear observation with regard to the nature of the debt. According to him, it was only a loss of capital. As per the ld. Authorised Representative, it could not be considered as bad debt.
ITA No.59 /2018 :- 5 -:
We have considered the rival contentions and perused the orders of the authorities below. It is not disputed that assessee had started commodity trading in NSEL through its broker Sugal Commodity Brokers Pvt Ltd during the relevant previous year. It is also not disputed that debt of �2,02,42,194/- became due to the assessee from the said exchange, on account of the commodity trading undertaken by the assessee during the relevant previous year.
Observation of the ld. Assessing Officer with regard to the claim as it appears at page 3 of its order is reproduced hereunder:-
‘’It is pertinent to mention here that the Department has' received information from the National Spot Exchange that due to various reasons the trading on the exchange platform was stopped on 3pt July, 2013, and the NSE has to settle the outstanding receivables of the traders. The NSE also stated that the amounts recovered have been distributed to the brokers under the supervision of the Forward Market Commission (FMC). The NSC further stated that there are enough assets to liquidate and recover the outstanding amounts of the traders / Brokers. It has come to the light that most of the brokers 1 traders have claimed the outstanding amount as deduction as bad debt u/s 36(1) (vii) / 37(i) of the Income tax Act, 1961. Similarly, most of the NBFC companies which had lent money to Brokers / Traders have also written off such amounts as bad debts.
The NSC further stated that it is in the process of auctioning of the assets and the process have started. It is evident that significant amounts will be received by the brokers / traders. Thus, the claim of bad-debt are premature’’.
ITA No.59 /2018 :- 6 -:
It is significant to note that ld. Assessing Officer had accepted the debt to be bad, but had disallowed the claim deeming it to be premature.
It is also clear that debt arose on account of trading in commodities in the exchange and not due to sale of any capital assets. Hon’ble Apex Court in the case of T.R.F. Ltd (supra) had held as under at para 4 of its judgment.
‘’4. This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write-off’’.
It is clear that once a debt is written off as irrecoverable in the accounts of the assessee, it has to be allowed. It is not required that debt should have arose on account of transactions in any preceding years. Once a debt is claimed as bad and written off in the accounts it
ITA No.59 /2018 :- 7 -: has to be allowed. No doubt, if the assessee at a later point of time recovers any money against any sum, it is bound to show it as income. Considering the judgment of Hon’ble Apex Court in the case of T.R.F. Ltd (supra), we are of the opinion that the claim of the assessee had to be allowed. Orders of the lower authorities on this issue are set aside.
In the result, the appeal of the assessee stands allowed. 8.
Order pronounced on Wednesday, the 5th day of September, 2018, at Chennai.