BEIERSDORF INDIA (P) LTD.,PANAJI vs. INCOME TAX OFFICER, WARD - 2(4),, PANAJI

PER CHANDRA MOHAN GARG, J.M.

This appeal has been filed by the assessee against the Order of the Ld. CIT(A)-2, Panaji, dated 28.02.2018, for the A.Y. 2014-2015.

2 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 2. The grounds raised by the assessee read as follows :

3 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. is not deductable as a non-expected business loss. Learned Counsel for the Assessee further submitted that the First Appellate Authority has also erred in holding that the provision of section 43(5) and proviso (e) to the said section was not operative for the A.Y. 2014-15 and thus, the said proviso does not cover the facts of the appellants’ case. Learned Counsel for the Assessee drawing our attention to para-4.3 of the First Appellate Order submitted that the Ld. CIT(A) after considering the entire facts and circumstances and position of law in para-4.9 wrongly held that the appellant is not entitled to claim benefit of clause (e) of proviso to Section 43 (5) of the I.T. Act, 1961 and the loss incurred on stock exchange which was not recognised at the time of entering into the transactions and the investigation into the matter has brought out by the A.O. is still pending. Therefore, the amount cannot be claimed as bad debt as the amount in question has not been proved as debt in the first case as it is investment of the appellant has been loss due to fraudulent activities of NSEL and thus, appellant case is not covered under section 36(vii)(i) of the I.T. Act, 1961.

4 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. Learned Counsel for the Assessee also placed reliance on the decision of ITAT, Chennai Bench dated 05.09.2018 in ITA.No.59/CHNY/2018 for the A.Y. 2014-15 in the case of M/s. Megh Sakariya International P. Ltd., Chennai vs., The DCIT, Corporate Circle-4(1), Chennai submitted that in para-7 the Tribunal held that it is clear that once the debt is written-off as irrecoverable in the accounts of the assessee, it has to be allowed as bad debts. Learned Counsel for the Assessee submitted that as per the Judgment of Hon’ble Supreme Court in the case of TRF Ltd., vs., CIT 323 ITR 397 (SC) submitted that after 01.04.1989 it was not necessary for the assessee to establish that debt had become irrecoverable and it was enough if the bad debt was written- off as irrecoverable in the books. Therefore, the alternative plea of assessee treating the impugned amount as bad debt may kindly be allowed, if the main prayer of assessee is not found to be acceptable.

3.1. Further the Learned Counsel for the Assessee placing reliance on the order of ITAT, Delhi Bench dated 11.03.2020 in the case of Chowdry Associates, New Delhi

5 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. vs., ACIT, Circle-6(1), New Delhi in ITA.No.3298/Del./2019 for the A.Y. 2015-16 submitted that as per paras-31 and 32 of the said order the business loss claimed by the assessee is allowable under section 28 of the I.T. Act, 1961. The Learned Counsel for the Assessee also placed reliance on the Judgment of Hon’ble Calcutta High Court in the case of Asian Financial Services Ltd., vs., CIT [2017] 8 ITR-OL 209 (Cal.) submitted that the loss was not a loss in speculative transaction. The loss could be set off against the profits of other business because the activities appearing in proviso (a) to (e) to clause (5) of section 43 are not to be deemed to be speculative transactions and this comes within the category of deemed business which is however distinct and separate from any other business. Learned Counsel for the Assessee submitted that if the main plea of assessee is not found to be allowable, then, the impugned amount may kindly be allowed as bad debts in view of Judgment of Hon’ble Supreme Court in the case of TRF Ltd., vs., CIT (supra) as the assessee in its books of account has written- off the same as bad debts.

6 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 4. Replying to the above, the Ld. D.R. supported the assessment order as well as First Appellate Order and submitted that the assessee is not entitled to claim benefit of clause (e) of proviso to Section 43(5) of the Act as the loss incurred on Stock Exchange which was not recognized at the time of entering into the transactions. It was submitted by the Ld. D.R. that the investigation into the matter as brought out by the A.O. is still pending and hence, the amount cannot be claimed as bad debt as well as the amount in question has not been proved as debt in the first case as it is the investment of assessee has been lost due to fraudulent activities in NSEL. The Ld. D.R. submitted that the claim of assessee is not covered under section 36(1)(vii) of the Act. Therefore, the A.O. as well as the Ld. CIT(A) was right in dismissing the claim of assessee.

7 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. “We had invested in commodity contract. The total outstanding as on 31.3.2014 was Rs.4,80,13,874/-. The cases are going on at different levels and no conclusive action is being taken. Considering the recovery chances as prudent business practice and to give fair picture of profit and loss we have written off 50% of total dues. The money is invested out of surplus funds available with the company. In the normal business practice 100% should have been written off. Almost all investors have written off 100%>. But we have written off only 50% since the assets of defaulters are attached and we feel we should be able to recover 50%.”

5.1. Further from the First Appellate Order, we have also observed that the assessee made the following submissions in support of his impugned claim :

“The appellants commenced activity of trading on NSEL sometime in 2012-13. The purchases and sales of commodities were done based on guidance by a selected broker (Motilal Oswal Commodities Brokers Pvt.

8 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. Ltd.) as to the choice of commodities, timing etc. The purchases were concluded by the counter party delivering to the broker a warehouse receipt. The underlying commodities were sold by transfer of such warehouse receipts, by the broker. The payouts being made by the clearing house on settlement dates. The difference between the selling price and cost price of the commodities after deduction of brokerage was the income arising from this activity. It is not disputed by the AO that such income has been returned as business income for A.Y. 2013-14 and A.Y. 2014-15.

Due to certain fraudulent/illegal activities by some brokers/members observed by the regulators, the trading in the exchange was abruptly suspended. The warehouses were seized as it was found that there were instances of fraudulent warehouse receipts issued without depositing the underlying stock with the warehouses. Due to this, appellant could neither sell the warehouse receipts through the exchange nor take actual delivery of the stock against these receipts. The

9 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. members defaulted on payments and the clearing house was not able to clear our dues. The outstanding of Rs.4.8 crores against the broker’s name in effect represented the value of sales/closing stock as of the cut-off date due to the abrupt closure of trading on NSEL for no fault of the assessee. Let alone any connivance, the assessee did not even have any hint of any fraud/conspiracy by certain brokers/members.

Considering the audit objections, the appellant booked 50% of the loss and despite interventions sought through the investors association and the regulatory action like making the promoters own up responsibility for the NSEL failure, the appellant did not believe anything over 50% of the loss could be recovered. As of date the management has only a small ray of hope of some recovery through liquidation of defaulting members properties that have been attached as well as possibility of some payments being honoured by FTL - the parent company in which NSEL has been ordered to be merged. There are reports that FTL is about to

10 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. challenge such forced merger before the Apex Court. It may be noted that — nothing has been recovered even against such balance 50% since 2014. As is clear from the above facts, the amount written off is a trading loss to be computed in deriving the taxable income u/s. 28. Neither section 36(2) nor section 37(1) are applicable as the same is not a deduction from taxable income. The business activity was varied out by the appellants as they had investible surplus and were looking for an opportunity to engaged in a lucrative activity. No offence/prohibited activity has been conducted by the appellant. You are therefore requested to kindly consider the above submissions and grant us the relief sought by us in the appeals based on grounds urged therein.”

5.2. From the above submissions before the authorities below it is clearly observed that the assessee on the strength of Judgment of Hon’ble Supreme Court in the case of TRF Limited (supra) is submitting that considering the recoverable chances as prudent business practice and

11 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. to give fair picture of profit and loss, the assessee has written off 50% of total dues which should be allowed. Since the assets of defaulters are attached and the assessee feel that it would be able to recover only 50% of total dues, therefore, remaining 50% has been written-off as bad debts in its books of account which is allowable under section 36(1)(vii) of the I.T. Act, 1961. At this juncture, we also take cognizance of submissions of the Learned Authorised Representative of the assessee that the issue of allowing bad debt is covered in favour of the assessee by the order of ITAT, Chennai Bench, Chennai in the case of M/s. Megh Sakariya International P. Ltd., Chennai vs., The DCIT, Corporate Circle-4(1), Chennai vide order dated 05.09.2018 in ITA.No.59/CHNY/2018 and order of ITAT, Delhi Benches, Delhi in the case of Chowdry Associates, New Delhi vs., The ACIT, Circle-6(1), New Delhi vide order dated 11.03.2020 in ITA.No.3298/Del./2019.

5.3. From the order of ITAT, Chennai Bench, Chennai in the case of M/s. Megh Sakariya International P. Ltd., Chennai vs., The DCIT, Corporate Circle-4(1), Chennai

12 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. (supra), we observed that the Coordinate Bench of the Tribunal by following the Judgment of Hon’ble Supreme Court in the case of TRF Limited (supra) has held as under :

“7. 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 B2,02,42,194/- 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

13 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 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''.

14 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 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,

15 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 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 :- 7 -: ITA No.59 /2018 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.”

16 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 5.4. Further from the order of ITAT, Delhi Benches, Delhi in the case of Chowdry Associates, New Delhi vs., The ACIT, Circle-6(1), New Delhi (supra), we observed that the Tribunal after considering the entire facts and circumstances of the case held that the claim of assessee has to be allowed in view of various Judgments including the Judgment of Hon'ble Supreme Court in the case of T.R.F. Ltd (supra), the relevant portion of the order of the Tribunal read as follows :

“31. 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 derivative 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

17 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 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 o f 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.

18 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 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.”

5.5. In view of the above, first of all we make it clear that the assessee consistently claiming the impugned amount as bad debts before the authorities below and the assessee in grounds of appeal no.3 same claim has been raised as an alternative prayer before this Bench. So far as grounds of appeal nos. 1, 2 and 3 is concerned, as per Judgment of ITAT, Delhi Benches, Delhi in the case of Chowdry Associates, New Delhi vs., The ACIT, Circle-6(1),

19 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. New Delhi (supra) is concerned, we hold that as per the newly inserted clause-(e) to sub-section (5) of Section 43 of the Act by Finance Act, 2013 w.e.f. 01.04.2014 the transactions of assessee shall not be deemed to be speculative transactions, but to avail this benefit the assessee has to demonstrate that the transactions were undertaken or carried-out in recognized Stock Exchange which is chargeable to Commodities Transactions Tax. In the present case, the Learned Authorised Representative has not established that the loss incurred by the assessee by the transactions were eligible transactions in respect of trading in commodities derivatives were carried-out in a recognized stock exchange which was chargeable to Commodities Transaction Tax. As we have noted above, at the cost of repetition, we observe that the assessee did not raise any contention before the authorities below to avail the benefit of clause (e) of sub-section (5) of Section 43 of the I.T. Act, 1961. Therefore, grounds of appeal nos. 1, 2 and 3 being devoid of merits, are dismissed.

20 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. 5.6. So far as alternative ground no.3 is concerned, in view of foregoing discussion, we are satisfied that in view of Judgment of Hon’ble Supreme Court in the case of TRF Limited (supra), when the assessee has claimed 50% of the impugned amount as bad debts keeping in view the litigation and other proceedings against the debtors, then, the claim of assessee has to be allowed under section 36(1)(vii) of the I.T. Act, 1961 and, therefore, the alternative grounds of appeal no.3 of assessee is allowed.

Order pronounced on this 17th day of August, 2022 under Rule 34(4) of IT (AT) Rules, 1963. Sd/- Sd/-

(GIRISH AGRAWAL) (CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Delhi, Dated 17th August, 2022

VBP/-

21 ITA.No.337/PAN./2018 Beiersdorf India Pvt. Ltd., Panaji, Goa. Copy to

// BY Order //

Assistant Registrar : ITAT Panaji Bench : Panaji.