2010 (2) TMI 988 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 10,68,000 written off as irrecoverable from the deposits made with the Calcutta Stock Exchange (CSE).

Summary:

Disallowance of Rs. 10,68,000 Written Off:

The assessee challenged the disallowance of Rs. 10,68,000 written off as irrecoverable from the deposits made with the Calcutta Stock Exchange (CSE). The Assessing Officer (AO) noticed that the assessee claimed this amount as a debit entry described as "CSE deposit write off" and asked for an explanation and the relevant provisions u/s which this deduction is allowable. The assessee explained that the deposit was made when becoming a corporate member of the CSE and due to the financial crisis at CSE, the amount was not recoverable and thus written off. However, the AO rejected the claim on several grounds, including that the deposit did not contribute to the profit of the assessee and no substantial effort was made to recover the amount.

The Commissioner of Income-tax (Appeals) upheld the AO's decision, noting that the assessee failed to justify the write-off during the accounting year 2002-03 and did not make any serious effort to recover the amount. The Commissioner emphasized that the CSE, being a large organization, did not negate the payment, and no material evidence was provided to support the claim of irrecoverability during the relevant financial year.

The assessee argued that the deposits were connected with its business as a stock broker and due to the financial crisis at CSE, the deposits were utilized towards settlement guarantee funds and other interest-free deposits. The assessee cited previous Tribunal decisions in similar cases where such losses were allowed as business deductions.

The Tribunal considered the rival submissions and the material on record, noting that the nature of the assessee's business was stock broking and trading in shares. It was established that the deposits were made for business purposes and were not refunded due to the financial crisis at CSE. The Tribunal referred to the decisions of the Punjab and Haryana High Court and the Supreme Court, which allowed business losses on ordinary commercial principles. The Tribunal also considered its previous decisions in similar cases, where such losses were allowed as business deductions u/s 28(1) of the Income-tax Act, 1961.

Ultimately, the Tribunal concluded that the assessee suffered a business loss on account of the non-refund of the security amount and was entitled to a deduction. The orders of the lower authorities were set aside, and the addition was deleted, allowing the appeal of the assessee.

The order was signed, dated, and pronounced in the court on February 5, 2010.