2008 (11) TMI 441 - AT - Income Tax

Claim of Bad debts written off in the P L account as business loss u/s 28 - bad debts not crystallised in this year - margin is non-existent is not adequately proved - AO denied the benefit of bad debt as the claim did not fulfil the conditions specified u/s 36(2) - he held that such loss is not a legitimate loss not allowable on this account - CIT upheld the action of the AO - CIT allowed the appellant s claim of business loss u/s 28(i) - Since the written of principal amount does not qualify for deduction 36 the same has to be allowed as business loss as this amount forms an integral part of the appellant s business. Since the dispute regarding this liability was settled in the year under consideration the loss in the hands of the appellant has to be taken as relating to the previous year relevant to current assessment year. Thus this amount qualifies to be allowed as business loss of the appellant. HELD THAT - We have examined the notifications issued by the SEBI or agencies and find these notifications are issued mainly in the context of the Risk Management rather than as a penal provision for punishing the defaulters or deeming the transactions illegal. Therefore we are of the considered opinion that with or without the provisions of the margin money the loss cannot be held as illegal loss denying the benefit of set off the same defaulter against the income or allowing the same to carry forward to the later years. There are numerous decisions of the coordinate Benches of the Bombay Tribunal where such losses which are incidental to the clients purchase orders of the shares are deemed as business loss of the assessee. The same is allowable even if it belonged to earlier years as the said amounts are written off during the year under consideration. Therefore judgment of High Court in the case of CIT v. Gawalior Rayon Silk Manufacturing (Wvg.) Co. Ltd. 1998 (11) TMI 102 - BOMBAY HIGH COURT applies to the case of the assessee. In view of the same we are of the considered opinion that the order of the CIT(A) does not call for any interference. Accordingly grounds 1 2 of the Revenue are dismissed. Deletion of the penalty paid to the stock exchange - payment to NSE is not for violation of any provision of SEBI Act - AO held that the payment was incurred for filing the rules and regulations of such violation is a punishable offence - HELD THAT - As seen from the notifications issued by the SEBI. We find that such margins are imposed in order to reduce the risk components and therefore these are basically risk management oriented penalties which are routine in nature. We also find that these violations are offer by payment of penalty as in the instant case. Having regard to the purpose of the provisions of section 37(1) which is aimed at providing deterrence for infraction of Acts of the country the violation as in the instant case are not found to attract the provisions of the said proviso. Therefore we are of the considered opinion that this is not fit case of invoking said proviso. Accordingly order of the CIT(A) does not call for any interference. Accordingly ground of the revenue is dismissed. In the result appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Write-off of Rs. 47,73,220 as bad debts.
2. Allowability of Rs. 60,000 paid to the Stock Exchange as penalty.

Issue-wise Detailed Analysis:

1. Write-off of Rs. 47,73,220 as Bad Debts:
The first issue pertains to the write-off of Rs. 47,73,220 as bad debts. The assessee, a share broker, claimed this amount under 'Bad debts written off' in the Profit & Loss account. The Assessing Officer (AO) denied the benefit of bad debt as the claim did not fulfill the conditions specified under section 36(2) of the Income-tax Act. The AO also rejected the alternative claim of the assessee to allow the amount as a business loss under section 28 of the Act, stating that the loss resulted from the assessee's failure to maintain the receipt of a minimum 20% margin on the price of the securities as per SEBI guidelines, thus deeming the loss as not legitimate.

During the proceedings before the CIT(A), the assessee argued that the loss should be allowed either as bad debt or as business loss. The CIT(A) upheld the AO's decision regarding the bad debt claim but allowed the claim as a business loss, reasoning that the loss incurred was integral to the appellant's business operations and was crystallized in the year under consideration. The CIT(A) referenced the case of DCIT v. V. Vrijlal Lallubhai & Sons, where similar claims were allowed as business losses.

Upon appeal, the Tribunal examined the notifications and press releases issued by SEBI and concluded that the loss could not be deemed illegal even if it resulted from transactions violating SEBI guidelines. The Tribunal found that such losses are incidental to the business and should be allowed as business losses, even if they pertain to earlier years but are written off in the current year. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's grounds.

2. Allowability of Rs. 60,000 Paid to the Stock Exchange as Penalty:
The second issue involves the allowability of Rs. 60,000 paid to the Stock Exchange as a penalty. The AO disallowed this claim, considering it a penalty for infringing the law, referencing the Supreme Court judgment in CIT v. Dhanalakshmi Bank Ltd.

During the appeal, the CIT(A) found that the amount was levied for "excess utilization limits" and not for any legal infringement, thus allowing the claim. The CIT(A) held that the payment was not for violating any SEBI Act provisions.

In the appellate proceedings before the Tribunal, the revenue argued that the penalty was for contravening SEBI regulations, which are mandatory. However, the Tribunal found that such penalties are risk management-oriented and routine in nature, not aimed at deterring legal infractions. Therefore, the Tribunal concluded that the provisions of section 37(1) did not apply and upheld the CIT(A)'s decision, dismissing the revenue's ground.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The write-off of Rs. 47,73,220 was allowed as a business loss, and the Rs. 60,000 penalty paid to the Stock Exchange was deemed allowable.