2011 (1) TMI 1458 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of bad debts claimed by the appellant.
2. Disallowance of Research & Development (R&D) fee.
3. Disallowance of payment for Keyman Insurance Policy.

Detailed Analysis:

1. Allowance of Bad Debts Claimed by the Appellant:
The appellant, a share and stock broker, claimed bad debts of Rs. 27,48,260/-. The Assessing Officer (AO) disallowed the claim, arguing that the appellant had only shown brokerage as income and not the entire proceeds, thus not fulfilling the conditions under section 36(2). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision.

The Tribunal found that this issue was covered in favor of the appellant by the Special Bench decision in the case of Dy. CIT vs. Shri Shreyas S. Morakhia, which held that amounts receivable by a share broker from clients against share transactions constitute trading debts. When brokerage/commission from such transactions is included in the income computation, it satisfies section 36(2)(i), allowing the bad debt claim under section 36(1)(vii) if written off as irrecoverable. The Tribunal remitted the matter back to the AO to verify if brokerage/commission was credited to the customers' accounts and if any security or proceeds from shares were credited against the bad debts.

2. Disallowance of Research & Development (R&D) Fee:
The appellant claimed Rs. 47,55,000/- as R&D fees paid to Swiss Consultancy and Premium Investments for providing information on various companies. The AO disallowed the claim, citing insufficient evidence of services rendered and discrepancies in the accounts of Swiss Consultancy, which lacked the infrastructure and capability to conduct equity research worth Rs. 42 lakhs. The CIT(A) upheld the AO's decision, finding the claim non-genuine and aimed at reducing tax liability.

The Tribunal noted that the appellant failed to provide detailed research reports and only submitted two reports, which contained information easily available in newspapers or online. The Tribunal also highlighted discrepancies in the outstanding amounts shown by the appellant and Swiss Consultancy. Consequently, the Tribunal upheld the CIT(A)'s decision, confirming the disallowance of the R&D fee.

3. Disallowance of Payment for Keyman Insurance Policy:
The appellant claimed a deduction of Rs. 1,25,000/- for a Keyman Insurance Policy premium paid for the director, Shri Ketan B. Mehta. The AO disallowed the claim, noting that the premium covered the period 1-4-2005 to 31-3-2006, which pertains to the next financial year. The CIT(A) confirmed the AO's action.

The Tribunal acknowledged the decision of the Hon'ble Bombay High Court in CIT vs. B. N. Exports, which allows the deduction of Keyman Insurance Policy premiums. However, the Tribunal remitted the matter back to the AO to verify the appellant's accounting policy regarding prepaid expenditure and to decide the issue in light of the Bombay High Court's decision.

Conclusion:
The Tribunal partially allowed the appellant's appeal for statistical purposes, remitting the issues of bad debts and Keyman Insurance Policy back to the AO for further verification and decision. The disallowance of the R&D fee was upheld.