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TMI Blog2019 (2) TMI 1532X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are delivery based and thus not speculative in nature, the question of allowability of claim of bad debt under section 36(1)(vii) will arise for consideration. Merely stating that the VAT charges have been levied as per contract notes would not make the transaction as that of sale and delivery unless the transaction is demonstrated by actual stock of commodity and transfer through delivery. Once it is determined that there was actual stock of requisite quantity which has been contracted to be purchased and sold and the delivery thereof has happened, the transaction would be considered as delivery based transaction and not a speculative transaction. The allowability of claim under section 36(1)(vii) will arise for consideration and need to be reconsidered by the AO in light of legal proposition so laid down by the various Courts, so relied upon by the AR, wherein it has been held that when the assessee treats the debt as a bad debt in his books, the decision has to be a business or commercial decision and not whimsical or fanciful. The decision must be based on material that the debt is not recoverable and the decision must be bona fide. The assessee company has to show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case and in law, the Ld. CIT(A) was correct in deleting the disallowance made U/s 14A r.w.r. 8D of the Act and whether the show cause notice issued to the assessee with regard to applicability of sec. 14A r.w.r. 8D is not sufficient compliance to the observation of the Hon ble Supreme Court in Maxopp Investment Pvt. Ltd. vs. CIT in Civil Appeal No. 104-109 of 2015 dated 12.02.2018? 2. Briefly the facts of the case are that during the course of assessment proceedings, the Assessing Officer received certain information that the assessee company has carried out trading through certain registered brokers on National Spot Exchange Limited (NSEL) and for various reasons, the trading on the NSEL exchange platform had stopped on 31.07.2013 and in respect of many traders, their outstanding receivable amounts had remained unsettled. The Hon ble Bombay High Court had subsequently set up a committee which has started recovery proceedings and certain amounts have been recovered. However, like other Brokers/Traders, the assessee company has claimed the outstanding amount as bad debts of ₹ 11.04 Crore. 3. A Show cause was accordingly issued to the assessee by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer disallowed the claim of bad debts of ₹ 10.62 Crores so claimed by the assessee and added the same to the total income of the assessee. Being aggrieved the assessee carried the matter in appeal before the ld. CIT(A) who has allowed the necessary relief to the assessee company. Against the said findings of the ld CIT(A), the Revenue is now in appeal before us. 8. During the course of hearing, ld CIT DR submitted that the assessee company has undertaken certain transactions in commodities on the NSEL platform during the year and has claimed deduction of ₹ 10.62 crores by way of write off of amount in relation to such transactions. It was submitted that the ld. CIT(A) was not justified in deleting the addition of ₹ 10.62 crores holding these transactions as spot transactions without appreciating the fact that the contract notes only state about the derivative transactions and there is nothing on record to suggest that the transactions involves delivery of commodities. It was accordingly submitted that loss in respect of derivate transactions is in the nature of speculative loss and the same cannot be allowed as set off against normal business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount against the last sales transaction done at NSEL in the month of June and July, 2013 and in view of the scam in NSEL, neither the stock nor money could be recovered. The dues from the NSEL to the tune of ₹ 10.62 crore became doubtful and were written off as bad debts in the books of account. At the same time, it was submitted that the assessee company is regularly following the recovery process in the legal pursuit as the recovery and distribution of money of investors is under the control of Hon ble Bombay High Court. It will account for the same in its books of accounts as and when the money will be received by it. It was further submitted that the transactions were covered by the main object clause as stated in its memorandum of association and the claim of written off of bad debts from NSEL amounting to ₹ 10.62 Crore is completely legal and fully allowable as bad debts U/s 36(1)(vii) of the Act as well as U/s 37(1) of the Act. It was submitted that the ld CIT(A) has examined and rightly appreciated the nature of the transactions being in the nature of spot transactions and not derivate transactions and there is no infirmity in his findings which should be conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s commitments. It was accordingly held by the ld. CIT(A) that where there is a loss on account of transactions at NSEL, such a loss would be a trading loss. Since the trade under consideration is not one that is settled without delivery but is a transaction which cannot be completed due to regulatory issues, such a loss is more a type of bad debt in relation to trade receivables. 15. Thereafter coming to the specific factual matrix of the assessee company, the ld CIT(A) stated that the assessee company has executed a number of transactions on regular basis at NSEL platform from 22.04.2013 to 16.07.2013 through four brokers and has earned a profit of ₹ 36,54,098/- which has been duly declared in its profit and loss account under the head other Income in view of requirements of Schedule II of the Companies Act. It was also noted by the ld CIT(A) that the assessee company has paid VAT on purchase and sale of these transactions along with delivery charges. Therefore, it was held by the ld CIT(A) that these systematic and regular transactions in the commodities at NSEL platform are nothing but business activities of the appellant which were discontinued by the appellant becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Explanation 1 to Section 37(1) of the Act is not applicable. 17. We agree with the findings of the ld CIT(A) that conceptually, the derivative transactions are not delivery based but are based on future prices, however the transaction on the spot market are delivery based having certainty of their values. However, question that arises for consideration is whether in the instant case, the transaction of purchase and sell of commodities are delivery based or not and a related issue of whether they are speculative transaction or not. Both the issues are closely linked and connected, and needs to be examined thoroughly to determine the exact nature of the transaction and treatment thereof for tax purposes. Once it is decided that the transactions are delivery based and thus not speculative in nature, the question of allowability of claim of bad debt under section 36(1)(vii) will arise for consideration. 18. A speculative transaction has been defined under section 43(5) of the Act and the relevant provisions read as under: ( 5) 66 speculative transaction 67 means a transaction in which a contract67 for the purchase or sale of any commodity67, including stocks and share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; ( ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 278 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified79 by the Central Government for this purpose;] 80[Explanation 2.-For the purposes of clause (e), the expressions- ( i) commodity derivative shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; ( ii) eligible transaction means any transaction,- ( A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and ( B) which is supported by a time stamped contract note issued by such member or interme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pages 202-205, it is noted that there is purchase of certain commodity and simultaneous sale of same quantity of commodity so purchased at the same time and date of purchase. Thus, every purchase of commodity with purported delivery is simultaneously squared off by corresponding sale marked with purported delivery. However, we find that besides the contract notes, there is nothing on record which suggest that the delivery against purchase is obtained by NSEL on behalf of the assessee on spot against payment by the assessee and is subsequently delivered on behalf of the assessee against sale at a future date and sale consideration is received on delivery of such commodity. In other words, whether there is any actual stock of commodity of requisite quantity which is physically stored in the warehouse or not, and whose purchase and sell has been contracted and delivery thereof has happened through assignment of warehouse receipt or not, these facts are not emerging from records. It is also not clear whether VAT charges so claimed to have been collected as per the contract notes have actually been deposited with relevant authorities. Merely stating that the VAT charges have been levie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. On appeal, the ld. CIT(A) noted that as on 31.03.2014, the total investments were to the tune of ₹ 113.56 crore which includes investments in subsidiary and associates companies amounting to ₹ 55.04 crore on which no dividend income has been received by the appellant. It was also noted that as on 31.03.2014, the appellant was having interest free funds of ₹ 641.27 Crore consisting of share capital, reserve surplus and further investment in the mutual funds was to the tune of ₹ 0.20 Crore. These facts clearly reveal that interest free own funds of the appellant were sufficient to meet the investments, the income from which does not form part of the total income of the assessee company. 23. The ld. CIT(A) also referred to the decision of Bombay High Court in case of CIT vs. Sharada Erectors (P.) Ltd. [2016] 76 taxmann.com 107 (Bombay), Gujarat High Court in case of Pr. CIT vs. Sintex Industries Ltd. [2017] 82 taxmann.com 171 (Gujarat) and CIT vs. Max India Ltd [2017] 80 taxmann.com 98 (Punjab Haryana) and held that: it is evident from the above judicial pronouncements that in a case where the assessee was having its own interest free funds (i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in case of Maxopp Investment Ltd. Vs CIT (Civil Appeal Nos. 104- 109 of 2015 dated 12.02.2018), wherein it was held as under: 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. ( viii) It may be mentioned that in the case of PCIT vs. IL FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi), vide its order dated 16.08.2017, it was held by the Hon ble High Court of Delhi that: 23 .Further, the mere fact that in the audit report for the AY in question, the auditors may have suggested that there should be a disa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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