ITAT upholds ₹7.66 Cr Business Loss from NSEL Suspension as Bad Debt u/s 36(1)(vii) [Read Order]
The assessee had booked sales of commodities on NSEL before its suspension by the Forward Markets Commission (FMC) in July 2013. Due to the suspension, the receivables of ₹7.66 crore from trades through Anand Rathi Commodities Ltd. became irrecoverable. The AO had disallowed the claim, treating it as undisclosed stock.
The Mumbai bench of Income Tax Appellate Tribunal (ITAT) upheld the ₹7.66 Crore loss as a bad debt deduction under Section 36(1)(vii), recognising the loss as a genuine business loss arising from NSEL’s operational suspension.
The assessee, engaged in the business of export of ready-made garments and investment in shares and intercorporate deposits, filed its return of income for AY 2014–15 declaring a total loss of ₹7.37 crore, later revised to ₹7.37 crore (approx). During the year, it had debited ₹7.66 crore as bad debts written off, representing amounts receivable from Anand Rathi Commodities Ltd. (ARCL) for commodity trades executed on the National Spot Exchange Ltd. (NSEL).
Trading on NSEL, a regulated commodity exchange under the Forward Markets Commission (FMC), was suspended on 31 July 2013 due to large-scale defaults and discrepancies, leading to non-settlement of transactions. The assessee claimed that, as the commodities traded had already been recorded as sales in earlier years and the corresponding receivables had become irrecoverable, the amount was written off as bad debts.
The Assessing Officer (AO) disallowed the claim of ₹7.66 crore towards bad debts and made an additional addition of ₹7.57 crore, treating the cost of purchases as undisclosed stock, holding that the assessee failed to prove the genuineness of the trades and recovery efforts were still possible.
The assessee contended that without rejecting its audited books, the AO had altered accounting treatment and ignored that the NSEL default arose because the commodities were non-existent in the warehouses. Hence, the loss was real and allowable either as bad debts under Section 36(1)(vii) or as business loss under Section 28(i).
In appeal, the CIT(A) examined the contract notes, ledger accounts, and delivery allocation reports and found that all trades occurred before 31 July 2013, were duly recorded as sales, and the delivery allocation reports showed the assessee’s ownership of the goods until delivery.
Since NSEL failed to settle the trades after suspension, the assessee did not receive sale consideration, rendering the debt irrecoverable. Having later recovered only ₹5.53 lakh in FY 2018–19 , the CIT(A) held the write-off of ₹7.66 crore allowable as bad debt under Section 36(1)(vii). Aggrieved by the order of CIT(A), the Revenue filed an appeal before the Tribunal
The assessee contended that before the tribunal that the assessee was regularly trading in commodities on NSEL through a registered broker, Anand Rathi Commodities Ltd. it was further submitted that the sale transactions were genuine and supported by contract notes, VATinvoices, and warehouse receipts, showing that goods were deliverable and ownership vested with the assessee until delivery.
Additionally, since the sales had been recorded as income in earlier years, the receivables that became irrecoverable due to the NSEL default were eligible for deduction as bad debts under Section 36(1)(vii). The assessee submitted that alternatively, if sales were not accepted, the amount paid for goods never received constituted a business loss under Section 28(i).
The Tribunal noted that CIT(A) had verified all relevant records, including contract notes, delivery allocation reports, and ledgers of ARCL, confirming that trades occurred before 31 July 2013 and were duly recorded as sales.
The Tribunal opined that it was undisputed that NSEL’s operations were suspended thereafter, and the assessee never received consideration for the sales due to the non-existence of goods in warehouses, rendering the amounts irrecoverable.It was further observed that the assessee subsequently recovered only ₹5.53 lakh in FY 2018–19, which was offered to tax, reinforcing the genuineness of the write-off.
The two-member bench of Beena Pillai(Judicial Member) and Girish Agrawal (Accountant Member) Relying on coordinate bench decisions in Chowdry Associates v. ACIT (2020), Cello Pens & Stationery Pvt. Ltd. (2022), and Flair Exports Pvt. Ltd. (2022), the Tribunal held that losses arising from NSEL suspension are allowable either as bad debts under Section 36(1)(vii) or as business loss under Section 28(i).
Accordingly, the ITAT upheld CIT(A)’s order allowing the bad debt claim and dismissed the Revenue’s appeal.
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