2012 (7) TMI 180 - AT - Income Tax

Disallowance of the claim of Bad debts - AO stated to be existence of no valid transactions - Held that - As assessee had purchased shares on behalf of the sub-broker and in fact paid the amount of Rs. 1,06,10,247/- and as against this amount has received only a sum of Rs.64 lacs. The brokerage which was received in the aforesaid transaction was shown as income by the assessee which was taxed as such as well by the Assessing Authority. Thus only because shares were not delivered for want of full payment it cannot be said that there was no transaction between the parties and the amount which could not recover to the extent of Rs. 41,37,881/- is to be treated as debt. As shares remained in the possession of the assessee he could sell the said shares for whatever consideration it could fetch and it would be adjusted against the balance amount of Rs. 41,37,881/- payable by the debtor, i.e. the sub broker - in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of "Bad Debts" claimed under section 36(1)(vii) of the Income Tax Act.
2. Determination of whether the amount due from a sub-broker constitutes a debt.
3. Consideration of shares not delivered to the sub-broker in quantifying the bad debt.

Analysis:
1. The Assessee contested the disallowance of "Bad Debts" claimed under section 36(1)(vii) of the Income Tax Act. The Assessee argued that the claimed amount of Rs. 41,73,881.00 due from a sub-broker should be allowed as bad debts. The Authorities initially disallowed the claim, but the Ld. CIT(A) affirmed it. The ITAT, in an earlier order, allowed the deduction, which was contested by the Revenue before the High Court. The High Court acknowledged the amount as a debt but highlighted the need to consider the shares not delivered to the sub-broker in quantifying the bad debt.

2. The High Court clarified that the amount due from the sub-broker could be treated as a debt under section 36(1)(vii) of the Act. It emphasized that even though the shares were not delivered due to non-payment, a valid transaction existed between the parties. However, the Court noted that the shares held by the Assessee should be considered in determining the bad debt. The High Court remitted the case back for fresh consideration, highlighting the importance of assessing the value of the undelivered shares.

3. In light of the High Court's guidance, the ITAT remitted the issue to the Assessing Officer (AO) for further evaluation. The AO was directed to ascertain the value of the shares not delivered to the sub-broker and adjust this amount against the outstanding balance payable by the sub-broker. The ITAT emphasized the need for a thorough assessment considering all relevant aspects, ensuring the Assessee's right to be heard during the process.

In conclusion, the appeal filed by the Assessee was allowed for statistical purposes, and the matter was remitted to the AO for a detailed assessment in accordance with the High Court's directions. The decision aimed to ensure a fair and comprehensive evaluation of the bad debt claim, taking into account all relevant factors, including the shares not delivered to the sub-broker.