2022 (8) TMI 1476 - AT - Income Tax

ITAT allows bad debt claims and rejects speculative loss classification for NSEL commodity trading transactions

Smt. Asha Devi Poddar Versus ACIT-19 (1) Mumbai

ITAT Mumbai ruled in favor of the assessee regarding bad debts and speculative loss claims. The matter was remanded to AO for examining two aspects: (a) ... Disallowance of bad debts - relevant date of sales of commodities - AO has proceeded on the belief that the assessee has booked sales of commodities on 3.8.2013 and 17.8.2013 i.e. after the date of suspension of trading operations in NSEL - AR submitted that the commodities have been sold by the assessee prior to 31.7.2013 - CIT(A) has expressed the view that the assessee has not complied with the provisions of section 36(2) of the Act i.e. the assessee has not proved the amount written off as bad debts has been declared as her income in any of the years, but it is the submission of the learned AR that the assessee has duly recorded both purchases and sales of commodities in her purchases and sales account disclosed in the profit and loss account - HELD THAT:- Since there is contradiction with regard to the facts surrounding the issue, we are of the view that the issue relating to claim of bad debts requires examination at the end of the AO on two aspects, viz., (a) the date of sale of commodities and (b) whether the assessee has disclosed the amount claimed as bad debts as her revenue. If the assessee is able to show that sale of commodities have taken place prior to 31st July, 2013 and further the assessee has proved that she has declared the above sales amount as revenue in her Trading/Profit & Loss account, then the claim of bad debts is allowable as per the decision rendered in the case of TRF Ltd [2010 (2) TMI 211 - SUPREME COURT]. In the case of Nirship Securities Pvt. Ltd. [2021 (6) TMI 814 - ITAT MUMBAI], the claim of business loss has been accepted by the co-ordinate bench of Tribunal and this claim may also be examined from this angle also, if the assessee makes such a claim. Thus we set aside the order passed by learned CIT(A) with regard to the claim of bad debts and restore the same to the file of the AO for the limited purposes of examining two aspects discussed in the preceding paragraph. The assessee may, if so advised, may raise alternative claim of business loss, which may be examined by the AO, if so raised. Treating the claim of bad debts as speculation loss - HELD THAT:- We notice that AO has taken the view that the purchase and sales have taken place without availability of corresponding commodities on the basis of enquiries conducted by EOW in the hands of Anand Rathi Commodities and accordingly, he has held that these transactions are speculative in nature. The assessee on the other hand denies such claim and it has been submitted that the assessee has entered into the commodities transactions on delivery basis. The admitted fact is that the NSEL platform has allowed trading in commodities on “delivery basis” and the transactions have been entered by the assessee on that basis only through the broker. Though there are allegations that the broker of the assessee has given false confirmations on availability of the stock, yet there is no proof to show that the stocks dealt within by the assessee were not available. Hence the view taken by the assessing officer, in our view, is not supported by any material. We notice that the assessee has carried on trading operations prior to the sale of two commodities referred above and has declared business income therefrom. AO has accepted the same as trading of commodities on delivery basis. AO was not justified in treating the loss as speculative loss in respect of this transaction alone, when he has accepted the business income declared by the assessee in respect of other transactions. Claim of the assessee does not represent profit/loss from trading operations, but it represents debts which were not recovered from NSEL Only profit/loss from trading operations could be examined for deciding as to whether it is speculative in nature or not. On this reason also, the AO was not correct in law in treating claim of the assessee as speculative in nature. Decided in favour of assessee. Issues:1. Disallowance of claim of bad debts written off.2. Treatment of claim of bad debts as speculation loss.3. Treatment of non-receipt of sale consideration as speculation loss.Issue 1: Disallowance of Claim of Bad Debts Written Off:The appeal challenges the order confirming the disallowance of a claim of Bad Debts written off, amounting to Rs.1,79,73,982, by the Assessing Officer and the CIT(A). The assessee engaged in trading commodities through a broker on the National Spot Exchange Ltd. (NSEL), where trading stopped due to a scam and payment crisis. The Assessing Officer disallowed the claim, considering it premature and speculative. The CIT(A) upheld the disallowance, suggesting the amount should have been shown as income in any year. The appellant argued compliance with sec. 36(1)(vii) and sec. 36(2) and cited the TRF Ltd. case to support the claim. The Tribunal noted factual contradictions and directed the AO to examine the date of sales and revenue disclosure, allowing the claim if proven.Issue 2: Treatment of Claim of Bad Debts as Speculation Loss:The Assessing Officer treated the claim of bad debts as speculation loss due to investigations revealing irregularities by the broker. The CIT(A) affirmed this view. The appellant contended that the trading was regular business activity, not speculative, and income was declared accordingly. The Tribunal found no material supporting the speculative nature of the transactions and highlighted that the claim represented unrecovered debts, not trading profit/loss. Consequently, the Tribunal directed the AO not to treat the claim as speculative.Issue 3: Treatment of Non-Receipt of Sale Consideration as Speculation Loss:The AO considered the non-receipt of sale consideration as speculation loss based on investigations into the broker's activities. The CIT(A) upheld this treatment. The Tribunal disagreed, emphasizing that the transactions were on a delivery basis and not speculative. It noted the absence of evidence showing the commodities were unavailable and highlighted that only trading profit/loss could be speculative. Consequently, the Tribunal directed the AO not to treat the claim as speculative.In conclusion, the Tribunal allowed the appeal for statistical purposes, setting aside the orders disallowing the claim of bad debts and directing the AO not to treat the claim as speculative. The judgment focused on factual discrepancies, compliance with tax provisions, and the nature of the transactions to determine the appropriate treatment of the claims.