2025 (1) TMI 1291 - AT - Income Tax

Disallowance of bad debts claim - claim is premature is unjust illegal arbitrary uncalled for and devoid of any merit and the appellant prays that the same be delete - whether the first appellate authority was justified in upholding the order of the Ld. AO with the further findings that the amount of loss written off is speculative in nature ? HELD THAT - Hon ble Supreme Court in the case of TRF Ltd 2010 (2) TMI 211 - SUPREME COURT has held that this position in law is well settled. After 1-4-1989 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. On the basis of judicial precedents mentioned hereinbefore it is crystal clear that it is not required for the assessee / appellant to establish that the debt in question has became irrecoverable and bad debt is written off as irrecoverable in the account of the assessee is quite sufficient. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core issues considered in this judgment include:

1. Whether the amount of Rs. 56,74,032/- written off by the assessee as bad debt during the relevant year is allowable.

2. Whether the transactions entered into by the assessee, resulting in bad debts, are speculative in nature.

3. Whether the National Spot Exchange Limited (NSEL) was a recognized association/platform, and if the transactions were speculative due to lack of Commodity Transaction Tax (CTT) payment.

4. Whether the transactions qualify as forward contracts covered under the exception to section 43(5) of the Income Tax Act.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of Bad Debt Write-off

Relevant Legal Framework and Precedents: Under section 36(2) of the Income Tax Act, a bad debt can be deducted if it is written off as irrecoverable in the accounts of the assessee. The Supreme Court in TRF Ltd. vs. CIT clarified that post-1989, it is not necessary to establish that the debt has become irrecoverable; writing it off suffices.

Court's Interpretation and Reasoning: The Tribunal noted that the debt arose from regular business operations and was written off as irrecoverable. The precedent set by TRF Ltd. was pivotal in determining that the mere act of writing off the debt suffices for deduction.

Key Evidence and Findings: The assessee had previously written off 25% of the advance in an earlier assessment year, which was allowed by the Assessing Officer after verification. The Tribunal found no evidence suggesting that the advances were bogus.

Application of Law to Facts: The Tribunal applied the principle from TRF Ltd., emphasizing that the write-off in the accounts was sufficient for claiming the deduction.

Treatment of Competing Arguments: The Revenue's argument that the write-off was premature was countered by the Tribunal's reliance on established legal principles that do not require proving irrecoverability.

Conclusions: The Tribunal concluded that the bad debt write-off was allowable as it was written off in the accounts, aligning with the Supreme Court's interpretation.

Issue 2: Speculative Nature of Transactions

Relevant Legal Framework and Precedents: Section 43(5) of the Income Tax Act defines 'speculative transaction' as one settled otherwise than by actual delivery. The Tribunal referenced prior cases where similar transactions were deemed business losses, not speculative.

Court's Interpretation and Reasoning: The Tribunal found that the transactions were not speculative as the loss arose from amounts recoverable, not from trading during the year.

Key Evidence and Findings: The assessee's transactions were through a recognized broker, and the income from these transactions was declared as business income in prior years.

Application of Law to Facts: The Tribunal applied the principle that losses incidental to business should be treated as business losses, not speculative.

Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the transactions were speculative due to lack of physical delivery, emphasizing the nature of the transactions and prior treatment as business income.

Conclusions: The Tribunal concluded that the transactions were not speculative and the loss was a business loss.

Issue 3: Recognition of NSEL and CTT Payment

Relevant Legal Framework and Precedents: Recognition of exchanges and CTT payment are factors in determining the nature of transactions under section 43(5).

Court's Interpretation and Reasoning: The Tribunal noted that the lack of CTT payment did not automatically render transactions speculative, especially given the prior treatment as business income.

Key Evidence and Findings: The Tribunal considered the ongoing recovery process and the nature of transactions as business operations.

Application of Law to Facts: The Tribunal applied the principle that the absence of CTT does not solely determine the speculative nature, focusing on the business context.

Treatment of Competing Arguments: The Tribunal countered the Revenue's reliance on CTT absence by focusing on the broader business context and prior legal interpretations.

Conclusions: The Tribunal concluded that the transactions were not speculative despite the lack of CTT payment.

Issue 4: Forward Contracts Exception under Section 43(5)

Relevant Legal Framework and Precedents: Section 43(5) provides exceptions for certain forward contracts, which the Tribunal considered in the context of the assessee's transactions.

Court's Interpretation and Reasoning: The Tribunal found that the transactions were business-related and did not fall under speculative exceptions.

Key Evidence and Findings: The Tribunal noted the nature of the transactions as business operations and the historical treatment of similar transactions.

Application of Law to Facts: The Tribunal applied the exception criteria, finding that the transactions were not speculative forward contracts.

Treatment of Competing Arguments: The Tribunal addressed the Revenue's arguments by emphasizing the business context and prior legal interpretations.

Conclusions: The Tribunal concluded that the transactions were not speculative forward contracts and were part of regular business operations.

SIGNIFICANT HOLDINGS

The Tribunal held that:

- The bad debt write-off was allowable as it was written off in the accounts, consistent with the Supreme Court's interpretation in TRF Ltd.

- The transactions were not speculative as they arose from amounts recoverable and were treated as business income in prior years.

- The absence of CTT payment did not render the transactions speculative, given the business context and historical treatment.

- The transactions did not qualify as speculative forward contracts under section 43(5) and were part of regular business operations.

Final determination: The appeal of the assessee was allowed, with the Tribunal concluding that the bad debt write-off was justified and the transactions were not speculative.