TaxTMI 
TaxTMI 
2018 (10) TMI 1426
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....hat it had been wrongly categorized by the appellant as a bad debt. 2. That the learned CIT(A) failed in appreciating that the appellant having fulfilled all relevant conditions for claim of Bad Debts u/s. 36(1)(vii) rws 36(2), its case was squarely covered by the ratio of the decision of the Hon'ble SC in the case of TRF Ltd. and the clear guidelines as laid down by the CBDT Circular No. 12/2016 dtd. 30-05-2016." 3. Briefly stated, the assessee is engaged in the business of manufacturing of optical lenses. The assessee filed its return of income for AY 2014-15 declaring total income of Rs. 12,21,74,920/- which was subjected to scrutiny assessment. In the course of scrutiny assessment, the AO inter alia observed that the assessee is also engaged in commodity trading business on NSEL (National Spot Exchange Ltd.) platform. The assessee has entered into several contracts for buying of various commodities on NSEL platform. Simultaneous reverse sale contract of the exact specification of purchase also entered on NSEL platform for delivery at future date at a gap of 25/36 days after the purchase contract. Thus, each purchase transaction was matched by a cross contract of simultaneo....
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....NSEL vide its Circular dated 31st July, 2013 suspended its trading activities in commodities. A substantial fraud purportedly committed by NSEL and its management was claimed to be discovered. Consequently, the Ministry of Consumer Affairs vide its notification dated 06.08.2013 barred NSEL from issuing any new contracts. The trading activity on NSEL Platform was thus in effect permanently suspended. In this backdrop, the assessee claimed to have written off an amount of Rs. 3,90,02,779/- in aggregate receivable from its two brokers against the unrealised contracts in commodities. It was the case of the assessee before the AO that in view of large scale fraud perpetrated by NSEL management and in view of negligible chance of recovery of the amount due to the assessee from its brokers (acting as agents of NSEL), the assessee company considered it commercially prudent to write off the outstanding amount of Rs. 3.90 Crores as bad debts while closing the financial accounts pertaining to AY 2014-15 in question. The AO however declined the claim of bad debts of such unrealized contracts on the ground that bad debts in question cannot be considered as bad debts and the claim of bad debts b....
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.... amount could not be outrightly regarded as bad debt. The CIT(A) accordingly held that the debt was wrongly categorized as bad debt in the given facts and consequently, confirmed the disallowance of bad debt made by the AO. 6. Further aggrieved, the assessee preferred appeal before the Tribunal. 7. When the matter was first called for hearing, the learned AR for the assessee reiterated various submissions made before the lower authorities and essentially submitted that the debt had arisen in the course of commodity business conducted on the platform of NSEL and therefore, the debt arose in the course of carrying ordinary business. The profits arising on various contracts entered into for purchase and sale of commodity were taken into account while computing the income of the assessee during financial year in which the amount of such debt became irrecoverable. It is contended on behalf of the assessee that the trading activities were permanently suspended on the spot exchange platform by the Government notification and serious fraud was alleged to be committed by the spot exchange. The NSEL failed to honour its commitment and, in turn, the two brokers could not pay amount due to a....
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....ooks of account. Adverting to the delivery notes, the learned AR pointed out that the receipt of delivery on purchase is backed by warehouse receipts allocated in favour of the assessee representing the custody of various quantities of different commodities as per the contract on behalf of the assessee. In the light of all these facts, the learned AR strongly professed that the Revenue authorities have misdirected themselves in law and on facts in denying the legitimate claim of bad debts befall upon the assessee. The learned AR accordingly sought suitable relief in the matter as urged in its grounds of appeal. 8. The learned DR, on the other hand, relied upon the orders of the AO and CIT(A). The learned DR submitted that the debt was in the process of being realized and certain allocations were also made by the spot exchange to the respective participants (through their affiliated brokers) even after the financial accounts for AY 2013-14 were drawn and audited. In such a situation, where the recovery process had commenced from the spot exchange and was in motion, the action of the assessee to write off the entire debt in a hurried manner is clearly premature and not befitting wit....
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....he debt in the year of transaction itself on the assessee forming an opinion that such debt has turned irrecoverable. It is thus the case of the assessee that the claim of bad debt cannot be denied on the ground that recovery process is in place and the claim is purportedly premature. 11. We find ourselves in agreement with this pivotal contention on behalf of the assessee that it is not necessary for the tax payer to establish that the debt has become irrecoverable for allowance of deduction. It is an admitted position that the debt has arisen in course of commodity trade and such debt or a part thereof has been taken into account while computing the chargeable income of the assessee. The amount outstanding from the respective brokers has been shown to be duly written off in the books of accounts. Therefore, there is a good deal of force in the point of view expressed on behalf of assessee that the claim of bad debt becomes allowable as per the scheme of the Act having regard to the decision of the Hon'ble Supreme Court in TRF Ltd. allowed by and CBDT Circular (supra). 12. However, the matter does not end here. There is another crucial aspect that requires to be necessarily look....
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....bad is rather innocuous. 13. We therefore consider it expedient to remit the matter back to the file of the AO to ascertain as to whether the transaction of purchase and sale were backed by actual delivery as claimed or not and a fair value of stock lying undelivered against unrealized sale is thus required to deducted from the quantum of debt. In case, it is found that the assessee or other intermediatories have not obtained the possession of goods purchased as contracted and demonstrated by way of warehousing receipts and the purchase and sale contracts are settled otherwise than by actual delivery of goods, it will naturally be a case of business transactions of speculative nature in terms of Section 43(5) of the Act. Notably, the loss/bad debt arising from transactions of speculative nature without actual delivery of goods under contract carry differential treatment under the scheme of the Act. It may be pertinent to take note of relevant statutory provisions in this regard as follows: Section 43(5) of the Act defines 'speculation transaction' which means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically ....