2011 (7) TMI 390 - AT - Income Tax

Disallowance - Bad debt/trading loss under section 36(1)(vii) - the objection of the revenue that the debt in question has not been established to have become bad - The violations referred to by the Assessing Officer in the order of assessment, do not amount to an offence or something prohibited by law - Therefore direct the Assessing Officer to allow the claim for deduction as made by the assessee after verification as stated in the earlier part of this order - Appeal is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of bad debt/trading loss under section 36(1)(vii) of the Income-tax Act, 1961.

Analysis:
The case involves an appeal by an individual assessee against the order of CIT(A)-4, Mumbai regarding the disallowance of Rs. 16,55,210 as bad debt/trading loss under section 36(1)(vii) of the Income-tax Act, 1961 for the assessment year 2004-05. The assessee, an Advocate and NSE Broker, claimed this amount as a deduction for bad debts written off. The Assessing Officer raised objections, including the failure to establish the bad debts, non-fulfillment of conditions under section 36(2), and violation of SEBI regulations.

The Assessing Officer contended that the assessee did not prove the debts had become bad and unrecoverable. However, post an amendment to section 36(1)(vii) from 1-4-1989, it was no longer necessary to establish the irrecoverability of the debt; it was sufficient if the bad debt was written off as irrecoverable in the accounts. The Tribunal cited the TRF Ltd. v. CIT case, affirming that the debt written off as bad debt need not be established to have become bad.

Regarding the condition under section 36(2), the Special Bench ITAT decision in Dy. CIT v. Shreyas S. Morakhia clarified that the brokerage income taken into account in computing the assessee's income satisfied the condition, entitling the assessee to deduction under section 36(1)(vii) for bad debts. The Tribunal followed this decision, emphasizing that the brokerage income forms part of the trading debt and qualifies for deduction.

Furthermore, the Tribunal dismissed objections related to SEBI regulation violations, stating that such violations do not equate to a prohibited expenditure. The Tribunal directed the Assessing Officer to allow the deduction claimed by the assessee after verifying specific aspects related to the quantification of the bad debts written off.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to grant the deduction claimed by the assessee after due verification, emphasizing the applicability of section 36(1)(vii) over the Explanation to section 37(1) of the Act.

This detailed analysis highlights the key legal aspects and decisions made by the Tribunal in addressing the issues raised in the appeal concerning bad debt/trading loss disallowance under the Income-tax Act, 1961.