2010 (9) TMI 538 - AT - Income Tax

Addition - In respect of transactions done on behalf of the clients the assessee had to pay a sum of Rs. 3,24,147.12 on behalf of the clients - The aforesaid sum was claimed as bad debt in the P&L Account - 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 - 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 - Decided in the favour of the assessee by way remand

Summary

Issues:
1. Deduction of bad debts written off irrevocably.
2. Allowability of business loss under the Income Tax Act, 1961.

Issue 1: Deduction of Bad Debts:
The appellant, a partnership firm acting as a broker in the Bombay Stock Exchange, claimed a deduction for bad debts amounting to Rs. 3,24,147.12 incurred on behalf of clients but not recovered. The Assessing Officer (AO) contended that the appellant failed to prove the debts had genuinely turned bad. Additionally, the AO argued that since the appellant only accounted for brokerage income and not the value of shares sold or purchased on behalf of clients, the conditions under Section 36(1)(vii) and 36(2) were not met, leading to the rejection of the claim. However, the Income Tax Appellate Tribunal (ITAT) clarified that post-April 1, 1989, it is not necessary for the assessee to establish the irrecoverability of the debt, but sufficient if it is written off as irrecoverable in the accounts. Citing the TRF Limited Vs. CIT case, the ITAT emphasized that the revenue's argument that the debts were not proven to be bad was unsustainable.

Issue 2: Allowability of Business Loss:
The appellant alternatively sought to treat the loss as a business loss incidental to its operations. The AO rejected this claim, stating that the appellant did not demonstrate that the loss had crystallized during the relevant year. On appeal, the Commissioner of Income Tax (Appeals) upheld the AO's decision. However, the ITAT, after considering the submissions and orders, observed that the AO did not contest the outstanding nature of the debts. Referring to the Special Bench decision in the case of Shreyas Morarkha, the ITAT held that the amount receivable by the share broker from clients against share transactions constitutes a trading debt, and the brokerage income forms part of this debt. The ITAT directed the AO to verify certain aspects related to the quantification of the bad debts written off, remanding the issue for further examination.

In conclusion, the ITAT allowed the appeal for statistical purposes, emphasizing that the appellant, as a share broker, was entitled to a deduction for bad debts written off after meeting the conditions specified in the Income Tax Act, 1961. The ITAT highlighted the importance of verifying specific aspects related to the transactions for accurate quantification of the deduction, underscoring the need for further examination by the AO.