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Department represented by Shri Ashok B. Koli, CIT-DR Assessee represented by Shri Deven Kapadia, CA with Ms. Siddhi Patel, CA. Date of hearing 16/11/2022 Date of pronouncement 24/11/2022 Order under Section 254(1) of Income Tax Act PER: PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by the revenue is directed against the order of learned Commissioner of Income Tax (Appeals), Valsad (in short, the ld. CIT(A) dated 16/03/2018 for the Assessment year (AY) 2014-15. The revenue has raised following grounds of appeal: “1. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 3,30,00,000/- made on account of disallowance of written off bad debts, even though the recovery process is under process and claim of bad debts cannot be concluded in this relevant year.
2. It is, therefore, prayed that the order of the learned CIT(A) be set aside and that the order of the AO be restored.
3. The appellant craves to add, modify or alter any grounds during the course of appeal proceedings.”
ITO Vs M/s Prarthana Enterprises 2. Brief facts of the case are that the assessee is a partnership firm, engaged in the business of trading in equity shares and equity derivatives (F&O), commodity and commodity derivatives and currency derivatives. The assessee filed is return of income for the A.Y. 2014-15 on 27/11/2014 declaring total income of Rs. 17,15,440/-. The case of assessee was selected for scrutiny. During the assessment, from computation of income, the Assessing Officer noted that the assessee has claimed deduction of bad debit of Rs. 3.30 crores. The assessee was asked to furnish the complete details of bad debts and address of the parties with copies of accounts from the books of account of assessee, assessment year in which such amount was booked as sales and profit element of such year. The assessee was also asked to give the details of efforts initiated for recovery of such dues by referring decision of Hon’ble Gujarat High Court in the case of Dhall Enterprises & Engineers P Ltd. 295 ITR 481 (Guj). The assessee filed its reply dated 27/12/2016. The contents of reply of assessee is recorded by the Assessing officer in para 3 of assessment order. In the reply, the assessee stated that they are in trading of equity shares and derivatives, commodity and commodity derivatives. The assessee appointed various persons to trade in such segments on profit sharing basis. The assessee made a transaction with National Stock Exchange Limited (NSEL). The NSEL was promoted by Financial Technologies ITO Vs M/s Prarthana Enterprises India Limited and NAFED and was controlled by Jignesh Shah. The NSEL was in the commodity market from 2007 to 2013. The NSEL was recognized by FMC based in Mumbai. A serious fraud worth Rs. 5600 Crore was committed by Jignesh Shah in such commodity trading. Such fraud was unearthed when NSEL failed to pay its investors in commodity pair contracts after 31st July, 2013. About 13,000 investors across India lost about Rs. 5600 crores. During the year, the assessee entered into a contract for purchase of following transaction with NSEL: Date of Particulars Quantity Rate Total Purchase Purchased Gujarat Castor 5100 2658/- 1,35,55,800/- 25/07/2013 Indian Cotton 10 310150/- 31,01,500/- Steel TMT 5 396120/- 19,80,600/- 26/07/2013 Traders Paddy 51 4,26,575/- 2,17,55,328/- Total due 4,24,25,177/- 3. On the basis of such receipt, the assessee entered a forward contract to sell the commodities on the T+15 basis. All of a sudden, on 31/07/2013, the NSEL issued a Circular notifying that all future contracts would be stopped. It was subsequently concluded that most of the underlying commodities never existed and the buying and selling of commodities like steel, paddy, sugar, ferrochrome etc. was being conducted only on paper and NSEL did not possess any commodities to execute the transaction nor had any money to return to the investors. As a result, the assessee lost (suffered loss) of Rs. 3.30 crores. The assessee also furnished contract notes of the transactions. The assessee ITO Vs M/s Prarthana Enterprises was given a fake warehouse receipt. The assessee made numerous visits to Mumbai for follow up to recover pending dues and participated in various forums and groups created by looser due to such fraud to recover the amount. Since the entire matter was being investigated through government agencies, nothing could be recovered. Out of total dues of Rs. 4.24 crores, the assessee has claimed deduction of Rs. 3.30 crores as bed debts during the year.
The assessee in its without prejudice submission also stated that prior to 01/04/1989, in order to claim deduction for bad debit under Section 36(1)(vii) of the Income Tax Act, 1961 (in short, the Act), the onus was on tax payer to establish that the debt advanced by it had, in fact, became irrecoverable. With a view to reduce litigation, the provisions were amended by Direct Tax Law (Amendment Act), 1987 to remove the condition establishing the ir-recoverability of bad debts. The amended provisions allowed the deduction of bad debts in the year in which such debt or part thereof was actually written off as irrecoverable in the taxpayer’s books of account subject to the condition prescribed under Section 36(2) of the Act which provides that such debt should have been taken into account in computing the income of previous year. The assessee also relied upon the decision of Hon’ble Apex Court in the case of CIT Vs TRF Limited, Civil Appeal No. 5293/2003 dated 09/02/2010 and the CBDT Circular No. 12/2016 dated 30/05/2016 ITO Vs M/s Prarthana Enterprises wherein the decision of Hon’ble Apex Court was accepted by the Revenue.
The explanation furnished by the assessee was not accepted by the Assessing officer by taking a view that the recoveries of bad debt is on- going process, the ultimate recovery shall take longer time and hence any claim earlier to that shall be prima facie considered as premature claim and disallowed such deduction.
Aggrieved by the additions/disallowances, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee made similar submission as made before the Assessing Officer. The submission of assessee are recorded in para 3.1 of the order of ld. CIT(A). As the submissions are almost similar worded, therefore, the same are not repeated here for the sake of brevity. The ld. CIT(A) after considering the submission of assessee held that the assessee claimed that it was in the trading of equity shares, equity derivatives (F&O), commodities and commodities derivatives and currency derivatives as part of the business. They purchased commodity derivatives transaction with NSEL on 25/07/2013 and 26/07/2013 totalling to Rs. 4.24 crores. On the basis of such purchase transactions, the assessee entered into forward contract to sell the commodity on T+15 basis. However, the NSEL issued a circular on 31/7/2013 stopping all the transactions. This happened due to unearthing of a systematic and premediated fraud ITO Vs M/s Prarthana Enterprises committed by Jignesh Shah as underlying commodities pertaining to transactions on NSEL were not existing as neither they have any commodity nor money to return to investors. In such situation, the forward contract of sale of commodities pertaining to purchase on 25/07/2013 and 26/07/2013 worth Rs. 4.24 crores were struck. The assessee at the end of financial year 2012-13, write off bad debt of Rs. 3.30 crores out of Rs. 4.24 crores and balance is shown as receivable under the hope that some portion will be recovered. The assessee claimed that such debt is undoubtedly a trading debt written off in the books of account and is allowable under Section 36(1)(vii) r.w.s. 36(2) of the Act. The ld. CIT(A) further noted that considering such fact and legal position and in view of decision of Hon’ble Supreme Court in TRF Limited (supra) and CBDT Circular No. 12/2016, there is no dispute about the commodities transactions nor about transaction stopped by NSEL w.e.f. 31/07/2013. The assessee is not in a position to recover the proceed from forward sale contract after 31/3/2013. The assessee in its books of account has write off Rs. 3.30 crores out of bad debt of Rs. 4.24 crores. Thus, the claim of assesse of deduction under Section 36(1)(vii) of the Act is allowable as per provisions of the Act and as per decision of Hon’ble Supreme Court in the case of TRF Limited (supra) and CBDT Circular No. 12/2016 on this issue. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before this Tribunal.
ITO Vs M/s Prarthana Enterprises 7. We have heard the submissions of learned Commissioner of Income Tax/ Departmental Representative (ld. CIT-DR) for the revenue and the learned Authorised Representative (ld. AR) of the assessee. The ld. CIT- DR for the revenue supported the order of the Assessing Officer. The ld. CIT-DR for the revenue submits that the assessee was in the process of recovering the debt and may ultimately recover such amount. The ld. CIT(A) failed to appreciate that the assessee has not filed any details pertaining to efforts initiated by the assessee for recovery of such dues as per decision of Hon’ble Gujarat High Court in Dhall Enterprises Engineering Pvt. Ltd. (supra). The claim of assessee is prima facie immature.
On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). the ld. AR of the assessee submits that during the year, the assessee claimed bad debt of Rs. 3.30 crores. The said claim relates to a well-known case of fraud committed in NSEL. Such fraud was systematic and premediated. During the year, the assessee entered for buying commodities transactions of Gujarat Castor, Indian Cotton, Steel TMT and traders’ paddy on NSEL platform. The assessee was given fake warehouse receipt. On the basis of such receipt, the assessee entered into forward contract to sell the commodities on T+15 basis. The contract notes are placed on record. The NSEL suddenly stopped its trading from 31/07/2013. On investigation, it was found that most of ITO Vs M/s Prarthana Enterprises the underlying commodities never existed and buying and sell of commodities were only on papers. Out of total loss of Rs. 4.24 crores, the assessee write off bad debt of Rs. 3.30 crores. The investigation of fraud is being investigated by Mumbai police. Mumbai Police arrested various persons related to such scam. The assessee has attended various meetings of losers of such transactions. However, there is no hope of recovery of such amount, accordingly, the assessee decided to write off of Rs. 3.30 crores during the year under consideration. The assessee has write off bad debt, the details of which is mentioned in the schedule forming part of financial statement, copy of which is filed at page No. 46 of the paper book. The ld. AR of the assessee submits that the assessee is eligible for such deduction. To support his submission, the ld. AR of the assessee has relied on CBDT Circular No. 12/2016 and the following decisions: TRF Ltd. Vs CIT, Civil Appeal No. 5293 of 2003 dated 09/02/2010. Omni Lens P Ltd. Vs DCIT, dated 16/10/2018, Mr. Jay Ashkaran Shah Vs ITO, ITA No. 5596/Mum/2019 order dated 03/05/2021, Flair Exports (P) Ltd. Vs DCIT (2022) 138 taxmann.com 410 (Del Trib), Chowdry Associates Vs ACIT (2020) 117 taxmann.com 840 (Del Trib), Megh Sakariya International P Ltd. Vs DCIT, ITA No. 59/Chny/2018 order dated 05/09/2018, ACIT Vs Ashima Dyecot Pvt Ltd., ITA No. 538/Ahd/2016 order dated 18/01/2011, Bhagwati Prasad Vs ACIT, ITA No. 345/JP/2013 order dated 11/08/2015, CIT Vs Krone Communications Ltd. (2011) 9 taxmann.com 145 (Karnataka) and Ajit Kumar C Kamdar Vs DCIT (2005) 1 SOT 183 (Mum).
ITO Vs M/s Prarthana Enterprises 9. We have considered the rival submissions of both the parties and have also gone through the orders of the lower authorities carefully. We have also deliberated on the various case laws relied upon by the lower authorities as well as by the ld. AR of the assessee. We find that during the assessment, the Assessing Officer disallowed the claim of bad debt by taking a view that a recovery process is on-going and claim of assessee is premature. The ld. CIT(A) allowed the relief to the assessee by taking a view that the assessee was in the trading of equity shares, equity derivatives (F&O), commodities and commodities derivatives and currency derivatives as part of the business. The assessee purchased commodity derivatives transaction with NSEL on 25/07/2013 and 26/07/2013 totalling to Rs. 4.24 crores, details of such purchases were furnished. On the basis of such purchase transactions, the assessee entered into forward contract to sell the commodity on T+15 basis. However, the NSEL issued a circular on 31/7/2013 stopping all the transactions. This happened due to unearthing of a systematic and premediated fraud committed by Jignesh Shah as underlying commodities pertaining to transactions on NSEL were not existing as neither they have any commodity nor money to return to investors. The Ld CIT(A) find that in such situation, the forward contract of sale of commodities pertaining to purchase on 25/07/2013 and 26/07/2013 worth Rs. 4.24 crores were struck. The assessee at the end of financial ITO Vs M/s Prarthana Enterprises year 2012-13, write off bad debt of Rs. 3.30 crores out of Rs. 4.24 crores and balance is shown as receivable under the hope that some portion will be recovered. The assessee claimed that such debt is undoubtedly a trading debt written off in the books of account and is allowable under Section 36(1)(vii) r.w.s. 36(2) of the Act. The ld. CIT(A) on consideration of facts of the present caser held that in view of decision of Hon’ble Supreme Court in TRF Limited (supra) and CBDT Circular No. 12/2016, there is no dispute about the commodities transactions nor about transaction stopped by NSEL w.e.f. 31/07/2013. The assessee is not in a position to recover the proceed from forward sale contract after 31/3/2013. The assessee in its books of account has write off Rs. 3.30 crores out of bad debt of Rs. 4.24 crores. Thus, the claim of assesse of deduction under Section 36(1)(vii) of the Act is allowable as per provisions of the Act and as per decision of Hon’ble Supreme Court in the case of TRF Limited (supra) and CBDT Circular No. 12/2016.
We find that the Hon’ble Apex Court in TRF Vs CIT (supra) held that after 1st April, 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. We find that the assessee has write off the bad debt in its books of account. We find that after the decision of the Hon’ble Apex Court in TRF Ltd. Vs CIT ITO Vs M/s Prarthana Enterprises (supra), the CBDT issued Circular No. 12/2016 informing it officer that any claim or part thereof of anybody in any previous year shall be admissible under Section 36(1)(vii) if it is written off as an irrecoverable in the books of account of assessee in the previous year and fulfilled the conditions stipulated in Section 36(2). It was further directed that no appeal may hence forth be filed on this ground and appeals already filed, if any on this issue before various courts/tribunals may be withdrawn/not placed upon.
We further find that the various Coordinate Benches of this Tribunal on the basis of similar fraud committed in NSEL, wherein those assessee could not recover outstanding payment, allowed the similar deduction of bad debt including in case Mr. Jay Ashkaran Shah Vs ITO (supra), Flair Exports (P) Ltd. Vs DCIT (supra) and Chowdry Associates Vs ACIT (supra). Thus, in view of aforesaid factual and legal position, we do not find any infirmity or illegality in the order passed by the ld. CIT(A) which we affirm with these additional observations. In the result, all the grounds of appeal
raised by revenue are dismissed
12. In the result, this appeal of revenue is dismissed. Order pronounced in the open court on 24th November, 2022.