2018 (10) TMI 1426 - AT - Income Tax

Disallowance of Bad Debts written off - AO observed that the aforesaid claim was not a bad debt at all and that it had been wrongly categorized by the appellant as a bad debt - what has happened to the delivery of the goods purportedly obtained on purchase as per the contract note which has given rise to the present unrealized debt in question? - Held that - The integral aspect about the fate of delivery of commodity acquired and retained in the warehouses by the intermediatories purportedly on behalf of the assessee is required to be necessarily examined. A perusal of the order of the lower authorities gives an infallible impression that such crucial aspect has not been addressed. Without understanding the fate of the goods purchased purportedly in the custody of or on behalf of the assessee, it will not be possible to determine the issue. Where the purchase with delivery is settled by cross contract of sale with delivery at future date against sale proceeds, the entire debt turning bad is rather innocuous. 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. The solemn duty requires us to direct the AO to examine the issue after taking note of crucial aspect of actual delivery of commodity, if any, as claimed and to ascertain as to how the entire debt has turned bad when the assessee was purportedly in possession of the goods purchased. The matter is remanded back to the file of AO accordingly. - Appeal of the assessee is allowed for statistical purposes.

Issues Involved:
1. Disallowance of bad debts claim by the assessee.
2. Applicability of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961.
3. Relevance of the Supreme Court decision in TRF Ltd. vs. CIT.
4. Impact of CBDT Circular No. 12/2016 dated 30-05-2016.
5. Nature of transactions on the NSEL platform.
6. Requirement of actual delivery of goods in commodity trading.
7. Classification of transactions as speculative under Section 43(5) of the Act.
8. Powers of the ITAT under Section 254 of the Act.

Detailed Analysis:

1. Disallowance of Bad Debts Claim by the Assessee:
The assessee, engaged in manufacturing optical lenses and commodity trading on the NSEL platform, claimed bad debts of ?3,90,02,779/- due to irrecoverability from buyers. The Assessing Officer (AO) disallowed the claim, arguing that the debt was not genuinely bad and the claim was premature.

2. Applicability of Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961:
The assessee contended that the conditions for claiming bad debts under these sections were fulfilled, referencing the Supreme Court's decision in TRF Ltd. and CBDT Circular No. 12/2016. However, the AO and CIT(A) disagreed, stating that the debt was not genuinely bad and recovery efforts were ongoing.

3. Relevance of the Supreme Court Decision in TRF Ltd. vs. CIT:
The assessee relied on this decision, which states that it is not necessary to establish that the debt has become irrecoverable. The CIT(A) rejected this, noting that the debt was written off immediately after NSEL's suspension, and some recovery occurred later, indicating the debt was not genuinely bad.

4. Impact of CBDT Circular No. 12/2016 dated 30-05-2016:
The assessee argued that this circular supports their claim, as it eliminates the need to prove irrecoverability. The AO and CIT(A) maintained that the circular does not allow for premature write-off without genuine irrecoverability.

5. Nature of Transactions on the NSEL Platform:
The transactions involved simultaneous purchase and sale contracts with delivery at a future date. The assessee claimed these were delivery-based transactions, but the AO questioned the genuineness, suggesting speculative nature.

6. Requirement of Actual Delivery of Goods in Commodity Trading:
The Tribunal noted the importance of verifying whether the transactions involved actual delivery of goods. If delivery was not obtained, the transactions could be speculative, affecting the classification of bad debts.

7. Classification of Transactions as Speculative under Section 43(5) of the Act:
If transactions are settled without actual delivery, they are speculative. The Tribunal emphasized the need to ascertain the nature of transactions to determine the correct classification and treatment of bad debts.

8. Powers of the ITAT under Section 254 of the Act:
The Tribunal highlighted its duty to ensure proper inquiry and correct determination of tax issues. It directed the AO to re-examine the transactions, focusing on delivery aspects and the nature of debts, to decide the issue accurately.

Conclusion:
The Tribunal remanded the matter back to the AO for re-examination, emphasizing the need to verify the actual delivery of goods and the speculative nature of transactions. The appeal was allowed for statistical purposes.

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