2010 (9) TMI 424 - AT - Income Tax

Disallowance of loss - Assessee had in the P&L Account debited a sum of Rs. 35,58,980 as bad debts and sundry balance written off and claimed the same as deduction while computing income - According to AO even after the amendment to the provisions of section 36(1)(vii) of the Act it was necessary for the assessee to establish that the debts in fact have became bad, to claim deduction on account of bad debts - Further according to AO, Assessee accounts only for income from brokerage and not the value of shares sold or purchased on behalf of a client and therefore - CIT(A) allowed the claim in part - CIT(A) disallowed the claim of bad debts on the ground that assessee did not file confirmation of balances from the debtors and that there was no other evidence to establish that the debts were really outstanding - The decision of the Hon ble Delhi High Court in the case of DB (India) Securities (2009 -TMI - 35509 - DELHI HIGH COURT) & Bonanza Portfolio (2009 -TMI - 77117 - DELHI HIGH COURT). Held that - The amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. - Claim of bad debts allowed. It is to be seen as to whether the commission income accruing to the assessee as a result of the transactions done on behalf of the client which has resulted in the debt which is written off as bad, was offered to tax. It is also to be seen as to whether the Assessee has taken any margin money from the customers and whether the margin money has been adjusted and only the net amount is written off as bad debts. Similarly, in cases where there was no delivery taken by the client, whether the Assessee has sold those shares and adjusted the sale proceeds against the amounts due by his clients, has to be verified - matter remanded back.

Summary

Issues Involved:

1. Deduction of bad debts under Section 36(1)(vii) of the Income Tax Act.
2. Compliance with conditions under Section 36(2) for claiming bad debt deduction.
3. Alternative claim for business loss deduction.
4. Verification of outstanding debts and their irrecoverability.

Detailed Analysis:

1. Deduction of Bad Debts under Section 36(1)(vii):

The assessee, a sub-broker, claimed a deduction of Rs. 35,58,980 for bad debts and sundry balances written off. The Assessing Officer (A.O.) disallowed the claim, arguing that the assessee did not establish that the debts had become bad, which was necessary even after the amendment to Section 36(1)(vii). The Tribunal clarified that post-1st April 1989, it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. The Supreme Court in TRF Limited v. CIT confirmed that the assessee need not establish the debt's irrecoverability.

2. Compliance with Conditions under Section 36(2):

The A.O. contended that the debts did not meet the conditions under Section 36(2) because the assessee only accounted for brokerage income, not the value of shares sold or purchased. The Tribunal referred to the Special Bench decision in Shreyas Morarkha, which held that for a share broker, the brokerage income is part of the debt receivable, satisfying Section 36(2)(i) if it is taken into account in computing income. The Tribunal directed the A.O. to verify if the commission income from transactions leading to the bad debt was offered to tax and if any margin money was adjusted.

3. Alternative Claim for Business Loss Deduction:

The assessee alternatively claimed the loss as a business loss incidental to its operations. The A.O. rejected this claim, stating the assessee did not prove the loss crystallized during the relevant year. The Tribunal did not specifically address this issue, focusing instead on the bad debt deduction under Section 36(1)(vii).

4. Verification of Outstanding Debts and Their Irrecoverability:

The CIT(A) allowed the bad debt claim for three debts (Sl. Nos. 1, 2 & 6) but required confirmation of balances from other debtors, which the assessee failed to provide. The Tribunal found the A.O. did not dispute the debts' outstanding status and criticized the CIT(A) for requiring unnecessary confirmation. The Tribunal emphasized that the A.O. should verify if the commission income related to the bad debts was taxed and if any margin money was adjusted, remanding the issue for this limited verification.

Conclusion:

The Tribunal held that the assessee, a share broker, is entitled to a deduction under Section 36(1)(vii) if the brokerage/commission income from the transactions leading to the bad debt was included in the taxable income. The case was remanded to the A.O. for verifying the quantification of the bad debt deduction, considering margin money adjustments and sale proceeds of undelivered shares. Both appeals were allowed for statistical purposes.