SPAN INDIA PVT. LTD.,NEW DELHI V. ACIT, CIRCLE- 24(1), NEW DELHI

ITA 9648/DEL/2019

AI Insights

The case involves Span India Pvt. Ltd, which appealed against the additions made by the Assessing Officer (AO) regarding Corporate Social Responsibility (CSR) expenses and losses from trading in commodities through the National Spot Exchange Ltd (NSEL). The Tribunal examined whether CSR expenses should be added back to the book profit under section 115JB and whether the losses from NSEL trading were speculative. The Tribunal found that CSR expenses mandated by the Companies Act should not be added back to the book profit as they are not appropriations of profit but charges on profit. Regarding the NSEL trading losses, the Tribunal agreed with the CIT(A) that these were business losses and not speculative, as the trading involved compulsory delivery and was regulated by multiple authorities, ensuring that the transactions were not speculative in nature.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 303129 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2015-2016
• Other Referred Cases: Apollo Tyres Ltd Vs. CIT Ltd, TRF Ltd Vs. CIT, Commissioner Of Income-Tax vs Bhagwan Dass Rameshwar Dayal
• Laws Referred To: Income-tax Act, 1961, Companies Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAHIL KUMAR BANSAL
• Assessee Lawyers: R.K. KAPOOR; MAKING
• Keywords: Speculation loss; Bad and doubtful debts; Earning of tax free income; Rule 8D
• Section: 143(3); 13; 37; 14A; 43(5); 115JB

Judgement Text

"Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “G”: NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No. 9648/Del/2019 (Assessment Year: 2015-16) Span India Pvt. Ltd, 220, Okhla Industrial Estate, Phase-III, New Delhi Vs. ACIT, Circle-24(1), New Delhi (Appellant) (Respondent) PAN: AAACS0079A ITA Nos. 609 & 610/Del/2020 (Assessment Years: 2015-16 & 2016-17) ACIT, Circle-24(1), New Delhi Vs. Span India Pvt. Ltd, 220, Okhla Industrial Estate, Phase-III, New Delhi (Appellant) (Respondent) PAN: AAACS0079A Assessee by : Shri R. K. Kapoor, Adv Revenue by: Shri Sahil Kumar Bansal, Sr. DR Date of Hearing 01/04/2025 Date of pronouncement 23/04/2025 O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in ITA No.9648/Del/2019 filed by the assessee for AY 2015-16 and ITA No. 609 & 610/Del/2020 filed by the revenue for AYs 2015-16 and 2016-17, arises out of the order of the ld. Commissioner of Income Tax (Appeals)-8, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in dated 26.11.2019 for AY 2015-16 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2017 ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 2 by the Assessing Officer, DCIT, Circle-24(1), New Delhi (hereinafter referred to as ‘ld. AO’). Identical issues are involved and hence they are taken up together and dispose of by his common order for the sake of convenience. ITA No. 9648/2019 for AY 2015-16 (Assessee’s appeal) 2. The only issue to be decided in this appeal of the assessee is as to whether the addition of CSR expenses of Rs. 7,80,750/- could be made while computing book profit u/s 115JB of the Act. 3. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of manufacturing, trading and export of all types of readymade garments. The return of income for AY 2015-16 was electronically filed on 30.09.2015 declaring total income of Rs. 7,24,05,240/-. This return was later revised on 04.12.2015 declaring total income of Rs. 7,23,37,560/- under normal provisions of the Act and book profit of Rs. 11,44,39,560/- u/s 115JB of the Act. 4. The assessee debited a sum of Rs. 7,80,750/- as provision of Corporate Social Responsibility (CSR) expenses in its Profit and Loss Account. This sum was duly added back in the computation of income voluntarily by the assessee under normal provisions of the Act. Accordingly, the ld AO concluded that this sum is to be added back in the computation of book profit u/s 115JB of the Act also. This action of the ld AO was upheld by the ld CIT(A). 5. At the outset, we find that CSR expenditure has been thrusted on the assessee by mandatory provision of the Companies Act to earmark certain percentage of the profits towards the same. Hence, it is an expenditure incurred as per mandate of the provisions of the Companies Act. None of the provisions of the Companies Act sought to treat the said expenditure as appropriation of profit, even though the computation thereon is based on percentage of profit. Hence, CSR expenditure becomes a charge on the profits of a company under the Companies Act. Under the provisions of the Section 37 of the Income Tax ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 3 Act, the same was specifically provided to be disallowed. The provisions of Section 37 of the Act are applicable only for computation of income under normal provisions of the Act. As far as the computation of book profit u/s 115JB of the Act, the same are governed by additions and deductions that are contemplated in Explanation 1 to Section 115JB(2) of the Act. The ld AO is not empowered to travel beyond those additions and deductions contemplated in Explanation 1 to section 115JB(2) of the Act if the accounts of the assessee are duly approved by the shareholders in the annual general meeting and no objections have been raised on the company by the Registrar of Companies and no qualifications have been made to that effect by the auditors in the audit report. In support of this, the ld AR rightly placed reliance on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd Vs. CIT Ltd reported in 255 ITR 273(SC). 6. In view of the aforesaid observations and respectfully following the decision of the Hon'ble Supreme Court referred supra, we direct the ld AO to delete Rs. 7,80,750/- made in the computation of book profit u/s 115JB of the Act and accordingly allow the grounds of the assessee. In the result, the appeal of the assessee is allowed for AY 2015-16. ITA No. 609/Del/2020- Revenue Appeal - AY 2015-16 7. The first issue to be decided in the appeal of the revenue as to whether the ld CIT(A) was justified in deleting the disallowance made in the sum of Rs. 1,76,00,487/- made on account of balance written off of National Spot Exchange Ltd (NSEL) in respect of commodities trading. 8. We have heard the rival submissions and perused the materials available on record. The ld AO found from P&L Account a sum Rs. 1,76,00,487/- was reflected as bad debt written off. The details for the same were called for. The assessee submitted that the same represents amounts receivable from NSEL on account of trading of commodities undertaken by the assessee on that exchange in the past and due to irrecoverability of the amount from NSEL, the assessee ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 4 choose to write off 25% each year of the amounts receivable which was claimed as bad debt written off. The assessee explained the complete narration of events which lead to the write off of the amounts due from NSEL after duly getting satisfied that the same is irecoverable from NSEL, but the ld AO concluded that nature of the transaction in commodities market had no linkage with the business of the assessee and it is speculative in nature. The ld AO observed that the assessee had dealt in earlier years, commodities like sugar, alloys, etc and had paid monies towards that business to NSEL and those monies were sought to be written off as irrecoverable during the year under consideration. Since, the assessee is engaged in the business of manufacturing and sale of readymade garments, the said write off of commodities trading loss has got no link with the business of the assessee and accordingly disallowed. The ld AO treated the said loss as speculative in nature. 9. The assessee before the ld CIT(A) gave a tabulation of various activities carried out in financial years 2012-13, 2013-14 and 14-15 as under:- Particulars F.Y. 2012-13 (Rs.'lacs) F.Y. 2013-14 (Rs.'lacs) F.Y. 2014-15 (Rs.'lacs) Turnover from manufacture and export of garments 1,912.66 2,159.40 1,529.43 Turnover from trading in commodities 3,465.57 10,714.64 0.00 Total Turnover 5,378.23 12874.04 1529.43 Commodities turnover as percentage of total turnover 64.44% 83.26% 0.00% 10. It was submitted that turnover from commodities constituted substantial portion of the assessee’s total business of the assessee during FYs 2012-13 and 2013-14 and hence, the ld AO’s contention that it had no nexus with the assessee’s business is totally baseless and devoid of any logic. The assessee duly brought on record that it was indeed in the business of trading of commodities in the earlier years. The monies struck with NSEL was sought to be written off during the year under consideration. The income earned from trading in commodities in earlier years was taxed as income from business. Hence, any write off arising out of such business will also become business loss and not ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 5 speculative loss. The assessee also gave the details of commodities income earned for FYs 2012-13 and 2013-14 as under:- Particulars F.Y. 2012-13 (Rs.'lacs) F.Y. 2013-14 (Rs. 'lacs) F.Y. 2014-15 (Rs.'lacs) Gross Sales 3,470.42 10,728.71 0.00 Purchases 3,414.66 10,554.77 0.00 Gross Profit 55.76 173.94 0.00 Expenses Exchange Delivery Allocation Charges 6.20 17.97 0.00 Clearing & Forwarding Agent Charges 1.26 3.21 0.00 Other Charges 1.62 6.32 0.00 Net Profit reflected in the Statement of Profit & Loss 46.68 146.44 0.00 11. The ld AO had also stated that the assessee was asked to produce the delivery of items traded, which it could not produce. Accordingly, he concluded that transaction to be speculative in nature. The assessee submitted that it undertook trading in commodities of NSEL. The NSEL is managed and regulated by the 3 different regulators i.e. i. State Agriculture Marketing Board (SAMB), which regulates the transaction involving farmers' sale of agricultural commodities on electronic platforms; ii. Forward Market Commission (FMC) - FMC regulates all the trade where netting of intraday transaction in the commodities contract is allowed by the Exchange; iii. Warehouse Development Regulatory Authority (WRDA) - covers the aspect of negotiability of warehouse receipt thus trading of warehouse receipt of commodities in all the notified commodities. 11.1. The assessee further submitted as under:- ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 6 a) All contracts with single day duration. b) All positions outstanding at end of day result into compulsory delivery. c) Fully automated screen based trading system with national reach. d) An order driven trading system. e) Transparent and Fair system for automatic order matching. f) Identity of the participants undisclosed. g) Flexibility for placing orders. 11.2. In the chapter relating to \"Delivery Procedure At NSEL Warehouse\", the salient features of the delivery system are as under:- a. The sellers desirous to sell/buy through NSEL have to compulsorily deliver the commodity in the NSEL designated warehouse of a particular location specified in the Exchange circular. For example, Ex-Kadi castor seed contract has delivery centre in Kadi. b. The quality of the commodities brought for the trading purpose should be as per the quality specification laid down by the Exchange. c. Before deposit, goods have to be compulsorily weighed at the designated weigh bridge/ weigh scale and will be monitored and certified by the warehouse supervisor. 11.3. The delivery mechanism has also been explained in the said document by way of a flow chart in the chapter \"Delivery Mechanism At Electronic Spot Market\". 11.4. A perusal of the aforementioned Government-sanctioned operating procedure at NSEL clearly shows the following:- a. All positions outstanding at end of day result into compulsory delivery. ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 7 b. The sellers desirous to sell/buy through NSEL have to compulsorily deliver the commodity in the NSEL designated warehouse. 11.5.The assessee, therefore, submits that the said NSEL, as the name suggests, was a SPOT EXCHANGE meaning that all transactions needed to be settled in delivery. It was not a futures exchange (such as MCX) where futures trading is permitted. 11.6. There is, therefore, no question of trades being settled otherwise than by delivery. 11.7. The exchange also issued \"Delivery Allocation Reports\". Copies of a few of the Delivery Allocation Reports are submitted herewith. 11.8. As regards production of delivery receipts, it is submitted that the AO asked for delivery receipts on the very last hearing, not having raised the issue at any time earlier during the assessment proceedings. It was explained to the AO that: α. The undersigned, who was representing the assessee in the assessment proceedings, was not carrying delivery receipts with him. b. The contract notes themselves contain details of delivery of commodities for which the assessee is also being charged by the exchange. c. Copies of all contract notes in respect of trades entered into by the assessee have already been submitted during assessment proceedings vide letter dated 16.10.2017. A copy of the said letter dated 16.10.2017 is submitted herewith along with copies of a few contract notes. 12. The assessee also furnished contract-wise details of the contracts entered into by the assessee. The ld AO also submitted that assessee had not complied with the provisions of Section 36(2) of the Act by offering income on account of commodities in earlier years. The assessee submitted before the ld CIT(A) from the various commodities income offered by the assessee as tabulated supra in ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 8 earlier years. It is very clear that assessee had indeed duly offered the income and complied with the provisions of Section 36(2) of the Act. During the year under consideration, the assessee had written off the amounts due from the NSEL. In fact the assessee even specifically said that the bad debts emanated in respect of contract note dated 25.07.2013 for AY 753.28 lacs and further enclosed copy of the said contract. It was pointed out that a sum of Rs. 46.60 crores was recovered during the FY 2013-14 thereby leaving balance of Rs. 706.89 lacs as on 31.03.2014. The debt actually become bad debt. It was pointed out only a sum of Rs. 21,85,961.13 has been recovered by the assessee during the FY 2014-15 against the total outstanding of Rs. 7,06,89,348.62. However, there was no recovery after 24.11.2014. The assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of TRF Ltd Vs. CIT reported in 323 ITR 397 (SC) in support of its contention by stating debt actually become irrecoverable, the assessee had indeed written off the sum in its books of account and claimed deduction as bad debt and also placed on the decision the CBDT Circular No. 12/2016 dated 30.05.2016. 13. The ld CIT(A) duly understood the complete modus operandi of the different trading business that happened in NSEL together with the problems that occurred thereon and found that assessee claim of amount becoming irrecoverable to be factually correct and arising during the course of business and accordingly allowed deduction on account of bad debts written off. The relevant observations made by the ld CIT(A) are reproduced herein:- “4.2 I have gone through the assessment order and the submissions made by the appellant. The AO has disallowed the claim of the appellant on account of bad debts mainly for the reason that it is speculative activity and has advanced several reasons for the same. 4.3 The first contention of the AO in disallowing the claim of the assessee is that this \"is the case of speculation income where the assessee was involved in sale purchase of items through NSEL which have no connection with its business.\" 4.4 On the other hand, the appellant has submitted that trading in commodities was one of the business activities of the appellant ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 9 although it had no relation with the existing business of the appellant, i.e. manufacture and export of readymade garments. Towards this end the appellant has filed tabulated details of the transactions entered into by it in the commodities trade. The appellant has also filed contract-wise details of transactions entered into by it. 4.5 I find that the transactions were carried out by the assessee during February, 2013 and July, 2013 after which the operations of the exchange were suspended. I also find that the transactions were not isolated transactions and several transactions were carried out by the appellant during this period. The volume of transactions in monetary terms also was quite large. 4.6 I am, therefore, of the opinion that the appellant has been able to amply justify that trading in commodities was one of the business streams of the appellant though it lasted only for a short period. 4.7 The next contention of the AO in treating the activity as speculative is that \"The assessee was asked to produce the evidences of delivery of the items traded, which it could not produce. It was not able to produce a single evidence in the form of delivery notes. Thus, in absence of the evidence of the delivery the trading activities in commodities were speculative in nature. Merely claiming that the contract notes were containing the details of charges which indicates the delivery is not tenable as it has been proved that there was no actual delivery of the commodities. 4.8 In response the appellant has submitted copies of the various literature of NSEL such as \"NSEL Regulatory Set Up\", \"Delivery Procedure At NSEL Warehouse\" and \"Delivery Mechanism At Electronic Spot Market\". 4.9 The appellant states that the delivery was being handled by NSEL for which the appellant was also being charged in the contract notes. The appellant has also submitted copies of Delivery Allocation Reports to justify that the deliveries were actually made and received though they were handled by NSEL. Further, the appellant has also drawn attention to section 43(5) of the IT Act, 1961 and has claimed that the nature of the transactions entered into by the appellant are in the nature of \"forward contracts\" and these are specifically excluded from the definition of speculative activity. 4.10 The appellant has further submitted that by its very definition, forward contracts are dealing in commodities, currencies, and securities for future (forward) delivery at prices agreed-upon today (date of making the contract). In commodity and currency markets, ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 10 forward trading is used as a means of hedging against sharp fluctuations in their prices. The appellant has, therefore stated that a forward contract is a contract between two parties to buy or sell an asset (commodities, currencies, and securities) for delivery on a future date at a specified price agreed-upon today (date of making the contract). The appellant has further stated that forward contracts are only settled on the settlement date and are not marked-to-market like futures. Therefore, forward contracts are not settled by payment of periodical differences and are compulsorily settled in cash at the conclusion of the contract. 4.11 The appellant has drawn attention to the ledger account of the broker, Phillip Commodities Private Limited where it can be seen that all purchase contracts have been settled by the appellant making full payment and similarly all sales contracts have also been settled by receiving the full consideration. Thus, the purchase and sales contracts were settled by the appellant by making/ receiving full payments against the contracts and not by payment of periodical differences. The appellant has also shown that the amount outstanding at the closure of operations of NSEL was Rs.740.22 against two sales contracts dated 23.07.2013 which add up to Rs.743.94 lacs. Some amount was received against the outstanding amount during FY 2013-14 leaving a balance of Rs.706.89 lacs. 4.12 The appellant has also contended that all transactions not resulting in delivery are not speculative and the circumstances leading to such non-delivery also have a bearing on the matter. 4.13 The appellant has quoted and drawn support from the decision of the Hon'ble Delhi High Court in Commissioner Of Income-Tax vs Bhagwan Dass Rameshwar Dayal 1984 149 ITR 387 where it has been held that \"If it was settled by mutual consent to avoid delivery then it would be speculative. But if it was settled because of inability of the assessee to supply or on account of the fact that it did not have necessary resources to give the, delivery then it would be a breach of contract and not the speculative transaction.\" 4.14 The contention of the appellant is that delivery against the contracts dated 23.07.2013 could not happen because of cessation of operations by NSEL and that it was not a wilful decision to not deliver the goods. 4.15 I agree with the submission of the appellant that the transactions entered into by the appellant have all the characteristics of a forward contract and that the nature of transactions is essentially forward contracts. I also agree that the deliveries of the contracts failed because of reasons beyond the control of the appellant, i.e. the closure of NSEL. ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 11 4.16 Having said so, this contention of the AO for treating the transactions as speculative does not hold. 4.17 The next contention of the AO is that \"while claiming deduction for bad debts written off, assessee must take into account such debt or part thereof in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off.\" 4.18 My attention has been drawn to the provisions of section 36(2)(i) of the IT Act, 1961 which states as follows. Section 36(2) in The Income Tax Act, 1961 (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money- lending which is carried on by the assessee; Section 36(2)(1) clearly uses the words \"the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year\". Further there seems to be no ambiguity in the matter since the appellant has already demonstrated that it has included the income from trading in commodities in its profit & loss account during the FY 2012-13 and 2013-14. 4.19 I, therefore, cannot agree with the AO on this reason for disallowance of bad debts. In conclusion, I agree with the submissions made by the appellant with regard to bad debts and accordingly the appellant succeeds on these grounds. I hold that the disallowance on account of bad debts is to be deleted. Therefore grounds No. 1 to 3 are allowed in favour of appellant.” 14. None of the aforesaid factual findings of the ld CIT(A) could be controverted by the revenue before us with cogent evidences. Hence, we do not find any infirmity in the order of the ld CIT(A) in granting relief to the assessee in this regard. ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 12 15. The next issue to be decided is as to whether the ld CIT(A) was justified in deleting the disallowance made in the sum of Rs. 40,85,023/- by the ld AO u/s 14A of the Act while computing book profit u/s 115JB of the Act. 16. We have heard the rival submissions and perused the materials available on record. The ld AO observed that assessee had made suo moto disallowance of Rs. 50,47,934/- u/s 14A of the Act while computing income under normal provisions of the Act. Further, while computing book profit u/s 115JB of the Act, a sum of Rs. 9,62,911/- was considered for disallowance as per provisions of clause (f) of Explanation to Section 115JB(2) of the Act. Accordingly, the ld AO proceeded to disallow the remaining Rs. 40,85,023/-[Rs. 50,47,934 (-) 9,62,911) under clause (f) of Explanation to Section 115JB(2) of the Act in the assessment. 17. The basis of disallowance of Rs. 50,47,934/- by the assessee was by applying the computation mechanism provided in Rule 8D(2) of the Income Tax Rules under normal provisions of the Act. Further for the purpose of computation of book profit u/s 115JB of the Act, the assessee had taken actual expenses incurred and expenses allocated for the purpose of earning exempt income and arrived at the figure of Rs. 9,62,911/- and added the same in the book profit u/s 115JB of the Act in the return. No error or deficiency whatsoever was found in the computation or the basis of allocation adopted by the assessee by the ld AO in his assessment order. The ld CIT(A) deleted the said addition on the ground that no satisfaction was recorded by the ld AO as to why the disallowance made by the assessee is incorrect. We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments (P) Ltd. reported in (2017) 165 ITD 27 (Del) (SB) had categorically held that computation mechanism provided in Rule 8D(2) of the Income Tax Rules cannot be applied for the purpose of disallowance of expenses in terms of clause (f) of Explanation 1 to Section 115JB(2) of the Act. Hence, the actual expenditure debited in the profit and loss account and considered by the assessee in the sum of Rs. 9,62,911/- alone need to be added back in the computation of book profit u/s 115JB of the Act. Hence, we hold that ITA No. 9648/Del/2019 ITA Nos. 609 & 610/Del/2020 Span India Pvt. Ltd Page | 13 the ld CIT(A) had rightly deleted the addition of Rs. 40,85,023/-. Accordingly, we do not find any infirmity in the said order. 18. In the result, the appeal of the revenue is dismissed for AY 2015-16. ITA 610/Del/2020 - AY 2016-17 –Revenue Appeal 19. The issues raised in revenue appeal for AY 2016-17 are exactly identical to those raised in AY 2015-16. Hence, the decision rendered by us in AY 2015-16 shall apply mutatis mutandis for AY 2016-17 also in view of the identical facts except with variance in figures. 20. To sum up, the appeal of the assessee is allowed and both the appeals of the revenue are dismissed. Order pronounced in the open court on 23/04/2025. -Sd/- -Sd/- (SATBEER SINGH GODARA) (M BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:23/04/2025 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi "