2020 (5) TMI 436 - AT - Income Tax

Disallowance of business loss being the amount of unrecoverable balances of brokers - non- recovery of the advances given to the brokers - HELD THAT - AO for the instant year held that the assessee is dealing in speculative transactions and invoked provisions Section 43 (5) - AO has also held that the assessee has been carrying trade in commodity derivatives. 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. We hold that the transactions of the assessee shall not be deemed to be 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 of goods which is not a ready delivery contract or a contract for differences which derives its value from the prices of such underlying goods. 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. A tax history of the assessee , treatment given by the revenue to the transactions undertaken by the 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 Megh Sakariya International 2018 (9) TMI 1961 - ITAT CHENNAI , Omni Lens Pvt. Ltd. 2018 (10) TMI 1426 - ITAT AHMEDABAD and case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT we hereby hold that the business loss claimed by the assessee is allowable u/s 28 of the Act. - Appeal of the assessee is allowed

Issues Involved:
1. Disallowance of business loss due to unrecoverable balances from brokers.
2. Nature of transactions on the National Spot Exchange Limited (NSEL) platform.
3. Classification of transactions as speculative or non-speculative.
4. Eligibility for claim of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act.
5. Treatment of the transactions and losses in previous assessment years.

Detailed Analysis:

1. Disallowance of Business Loss Due to Unrecoverable Balances from Brokers:
The assessee claimed a business loss of ?5,56,24,659 due to unrecoverable balances from brokers M/s Anand Rathi Commodities Services Pvt. Ltd. and M/s Philip Commodities India Pvt. Ltd. The Assessing Officer (AO) disallowed the loss, treating it as speculative in nature. The AO argued that the transactions were paired contracts, meaning the assessee entered into two contracts on the same day for buying and selling the same commodity in the same quantity, thus classifying it as speculative business.

2. Nature of Transactions on the National Spot Exchange Limited (NSEL) Platform:
The assessee was involved in trading on the NSEL platform, which was intended for delivery-based spot contracts. The AO contended that NSEL was conducting futures contracts, prohibited by its mandate, and thus the transactions should be settled by delivery within 11 days. The assessee argued that the transactions were delivery-based and supported by contract notes and other charges, indicating it was a regular business activity.

3. Classification of Transactions as Speculative or Non-Speculative:
The AO classified the transactions as speculative under Section 43(5) of the Income Tax Act, which defines speculative transactions as those settled otherwise than by actual delivery. However, the Tribunal noted that Section 43(5)(e), introduced by the Finance Act, 2013, excludes eligible transactions in commodity derivatives carried out in a recognized association from being deemed speculative. The Tribunal found that the assessee's transactions met the criteria for commodity derivatives and were conducted on a recognized electronic platform, thus not speculative.

4. Eligibility for Claim of Bad Debts Under Section 36(1)(vii) Read with Section 36(2):
The Tribunal referred to the Supreme Court's decision in TRF Ltd. vs CIT, which held that post-1989, it is sufficient if the debt is written off as irrecoverable in the books of accounts. The CBDT Circular No. 12/2016 also supports this view. The Tribunal concluded that since the assessee had written off the debt in its books, it was eligible for the bad debt deduction.

5. Treatment of the Transactions and Losses in Previous Assessment Years:
The Tribunal observed that the revenue had consistently treated the assessee's income from NSEL transactions as business income in previous years. The AO's decision to classify the transactions as speculative only in the current year lacked consistency. The Tribunal emphasized that the assessee's business model and the nature of transactions had not changed, and the losses were genuine business losses due to the collapse of NSEL.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the business loss claimed was allowable under Section 28 of the Income Tax Act. The transactions were not speculative, and the bad debt claim was justified as per the legal provisions and judicial precedents. The appeal was allowed, and the order was pronounced in the open court on 11/03/2020.

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