2010 (8) TMI 1140 - AT - Income Tax

Summary

Issues Involved:
1. Legality of disallowance of Rs. 7,62,787/- as trading loss.
2. Disallowance of Rs. 2,83,134/- related to Tulsi Investment.
3. Disallowance of Rs. 4,79,653/- related to 20 other debtors.
4. Allowance of the claim in the year it was considered irrecoverable.

Summary:

1. Legality of Disallowance of Rs. 7,62,787/- as Trading Loss:
The assessee, a share broker, filed a return declaring nil income, which was processed and selected for scrutiny. The AO disallowed the claim for deduction of bad debts of Rs. 7,62,787/- written off by the assessee, which included Rs. 2,83,134/- related to Tulsi Investment and Rs. 4,79,653/- related to 20 other debtors. The AO observed that the debts were not accounted for as the assessee's income in any previous year and thus could not be allowed as bad debt u/s 36(1)(vii) of the Act. The CIT(A) upheld the AO's findings, stating that the debts were not the assessee's but those of Tulsi Investment and other debtors.

2. Disallowance of Rs. 2,83,134/- Related to Tulsi Investment:
The AO disallowed the claim for deduction of Rs. 2,83,134/- related to Tulsi Investment, a sub-agent of the assessee, as the debts were accounted for in the books of Tulsi Investment and not the assessee. The CIT(A) upheld this disallowance, noting that Tulsi Investment was an intermediary and the debts were not directly connected to the assessee's business.

3. Disallowance of Rs. 4,79,653/- Related to 20 Other Debtors:
The AO disallowed the claim for deduction of Rs. 4,79,653/- related to 20 other debtors, stating that the assessee did not provide complete details or evidence of efforts made for recovery. The CIT(A) upheld this disallowance, noting that the assessee failed to show any steps taken for recovery of the dues.

4. Allowance of the Claim in the Year It Was Considered Irrecoverable:
The Tribunal, relying on various judicial pronouncements, concluded that the amount receivable by the assessee as a share broker from his clients against the purchase of shares constitutes a trading debt. The brokerage income arising from such transactions forms part of the debt, and when the brokerage has been taken into account in the computation of income, the conditions stipulated in section 36(2) are satisfied. The Tribunal held that the amount of Rs. 7,62,787/- written off in the year under consideration as bad debt is allowable as a deduction u/s 36(1)(vii)/36(2) of the Act. Consequently, the Tribunal reversed the order of the CIT(A) and allowed the claim of the assessee.

Conclusion:
The appeal was allowed, and the disallowance of Rs. 7,62,787/- as trading loss was reversed, allowing the claim of the assessee.