2012 (3) TMI 544 - AT - Income Tax

Addition u/s 36 - Held that - We are of the opinion that the assessee satisfies the conditions stated under section 36(2) and accordingly the Assessing Officer is directed to allow the amounts. Ground No.1.1 is accordingly allowed. Disallowance under section 40(a)(i) - TDS u/s 195 - Held that - We are of the opinion that the issue requires detailed examination by the CIT (A). The CIT (A) has not adjudicated whether the amount paid by the assessee was chargeable under the provisions of the act so as to attract the provisions of section 195 and consequently 40(a)(i). The contentions of the assessee with reference to the nature of the payment, applicability of various provisions and the DTAA between India and USA require detailed consideration. Since these aspects were not examined, we are of the opinion that the issue is to be restored to the file of the CIT (A) with a direction to adjudicate the issue on merits accordingly. Therefore, we set aside his order to that extent and restore the issue in Ground No.1.2 to the file of the CIT (A). Gains arising out of sale of shares/units are treated as business income instead of short term capital gain - Held that - We were informed that in earlier years when assessee suffered Capital Loss the AO treated them as business loss and Speculation loss. As seen from the paper book placed, the assessee had made specific request to the Assessing Officer to set off speculation losses determined in earlier year s consequent to change of head from short term capital loss to speculation loss on the same set of transactions. This aspect of the claim has to be examined by the authorities, since earlier year orders were not available on record. Without going into merits of rival contentions, we are of the opinion that the additional ground being a legal ground can be admitted and we order accordingly.

Issues Involved:
1. Bad Debts Disallowance
2. Disallowance under Section 40(a)(i) of the Income Tax Act
3. Treatment of Gains from Sale of Shares/Units

Issue-wise Detailed Analysis:

1. Bad Debts Disallowance:
The assessee claimed bad debts amounting to Rs. 13,70,139 under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the claim, arguing that the assessee only offered brokerage income and the debts related to amounts not recoverable from clients did not satisfy the conditions prescribed under section 36(2). The CIT (A) upheld this disallowance. However, the Tribunal noted that under section 36(1)(vii), it is sufficient if the debt is written off as irrecoverable in the accounts of the assessee, as per the Supreme Court judgment in TRF Ltd vs. CIT. The Tribunal found that the amounts written off as depository receipts and WDM charges, which were offered as income in earlier years, satisfied the conditions under section 36(2). The Tribunal also referenced the Special Bench decision in DCIT vs Shreyas S. Morakhia, upheld by the Bombay High Court, to conclude that the assessee satisfied the conditions under section 36(2). Consequently, the AO was directed to allow the bad debts claim, and Ground No.1.1 was allowed.

2. Disallowance under Section 40(a)(i) of the Income Tax Act:
The assessee made a payment of Rs. 31,77,416 as professional fees to a foreign party, Aurbach Grayson & Co (AGC), without deducting tax at source, based on a CA certificate citing the DTAA between India and the USA. The AO disallowed the amount under section 40(a)(i), relying on the Supreme Court judgment in Transmission Corporation of India. The CIT (A) upheld the disallowance, referencing the Karnataka High Court decision in Samsung Electronics. However, the Tribunal noted that the Supreme Court in GE India Technology Centre (P) Ltd had reversed the Karnataka High Court decision, clarifying that tax is not deductible if the amount is not chargeable under the Act. The Tribunal found that the CIT (A) did not examine the merits of the assessee's contention regarding the applicability of the DTAA and the provisions of the Act. Therefore, the Tribunal restored the issue to the CIT (A) for a detailed examination on merits, and Ground No.1.2 was allowed for statistical purposes.

3. Treatment of Gains from Sale of Shares/Units:
The assessee contested the treatment of gains from the sale of shares/units amounting to Rs. 69,56,813 as business income instead of short-term capital gain, which resulted in a higher tax rate. The assessee also raised an additional ground to adjust deemed speculation loss from earlier periods against the current income from share trading. The Tribunal noted that in earlier years, the AO had treated similar transactions as speculation loss under section 73 explanation (2). The Tribunal admitted the additional ground and found that the issue required examination of the treatment given by the AO in earlier years. The Tribunal restored the matter to the CIT (A) for fresh adjudication, considering the principles laid down by the Bombay High Court in Lokmat Holdings. Consequently, Ground No.2 and the additional ground were allowed for statistical purposes.

Conclusion:
The appeal was partly allowed, with specific directions for the AO and CIT (A) to re-examine certain issues based on the Tribunal's observations and legal precedents. The Tribunal emphasized the need for a detailed examination of the facts and applicable legal provisions in each issue.

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