INCOME TAX ACT, 1961

Section 28

Revision under section 263 - Erroneous and prejudicial order - Allowability under section 28 - Amount advanced to purchase commodities became irrecoverable--Assessee engaged in commodity trading

Assessee a non-banking financial company engaged in investment activities in shares and purchase and sale of units of various Mutual Funds could not recover amounts kept with these two brokers owing to suspension of operations by NSEL which was given as a part of business transaction for purchase of commoditeis in the conduct of regular business operations. Hence, amount advanced to purchase the commodity was allowed as business loss allowable undr section 28. Pr.CIT held assessment order as erroneous and prejudicial to the interest of revenue on the ground that loss being speculative in nature was not deductible.Held: 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. Hence, transactions of assessee could not be deemed to be speculative transactions. Chapter VII of the Finance Act, 2013 with effect from 1-4-2014, details as to what is a commodity derivative in the Commodities Transaction Tax (CTT). 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. Thus, assessee was in the business of commodity derivatives but not in speculation transaction. Revenue had also accepted income from the transactions of assessee as business income but not as income from speculation for all the earlier years. (Owing to collapse of NSEL, no further trading could be conducted by assessee in the latter years). It is also an undisputed fact that trade advances given by assessee irrecoverable. In view of all this, business loss claimed by assessee was allowable under section 28 and, therefore, assessment order could not be held as erroneous and prejudicial.

Supported by: Megh Sakariya International Pvt. Ltd. in ITA No. 59/Chennai/2018 and TRF Ltd. v. CIT (2010) 320 ITR 397 (All) : 2010 TaxPub(DT) 0589 (All-HC).