2012 (3) TMI 103 - HC - Income Tax

Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 - The requirement which has been imposed by Parliament in Section 36(2)(i) is that a deduction on account of a bad debt can be allowed only where such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of the debt is written off - The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee - Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee - Decided in favor of the assessee

Issues Involved:
1. Entitlement of a share broker to claim deduction for bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961.
2. Whether the debt due from clients, apart from the brokerage, can be considered for deduction.
3. Compliance with the conditions stipulated in Section 36(2)(i) regarding the inclusion of debt in computing the income of the assessee.

Detailed Analysis:

1. Entitlement of a Share Broker to Claim Deduction for Bad Debts:
The primary issue addressed was whether a share broker could claim a deduction for bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961, for amounts irrecoverable from clients, beyond just the brokerage earned. The Special Bench of the Income Tax Appellate Tribunal answered this affirmatively, favoring the assessee. The Court acknowledged the Tribunal's decision and proceeded to evaluate the appeal based on this question of law.

2. Debt Due from Clients Beyond Brokerage:
The assessee, a share broker, claimed a deduction for an amount due from clients on share transactions, which was written off as irrecoverable. The Assessing Officer disallowed this, arguing that the business had ceased and no recovery action was taken. The Commissioner (Appeals) overturned this, stating the business continued as a sub-broker and non-initiation of recovery proceedings did not invalidate the bad debt claim. The Revenue's contention was that only brokerage credited to the profit and loss account could be considered, not the entire debt due from clients. The Special Bench clarified that both the value of shares and brokerage form part of one composite transaction, and thus, the entire debt could be considered for deduction.

3. Compliance with Section 36(2)(i):
Section 36(2)(i) stipulates that a debt must be taken into account in computing the income of the assessee for the relevant or any previous year to qualify for deduction. The Revenue argued that since only brokerage was credited to the profit and loss account, the debt for the share value was not considered in computing income. The assessee countered that the entire transaction, including the value of shares and brokerage, constitutes a single debt. The Tribunal agreed, stating that once brokerage is taxed as income, the debt is considered in computing the assessee's income, thus fulfilling Section 36(2)(i) requirements.

Conclusion:
The Court upheld the Tribunal's view, stating that the debt due from clients, including the value of shares and brokerage, forms a composite transaction. The brokerage being credited to the profit and loss account implies that part of the debt is considered in computing income, satisfying Section 36(2)(i). The Court referenced the Supreme Court's judgment in Commissioner of Income Tax Vs. T. Veerabhadra Rao, which supported this interpretation. Additionally, the Delhi High Court's decision in Commissioner of Income Tax Vs. Bonanza Portfolio Ltd. was cited, affirming that money receivable from clients is a debt, and if brokerage is taxed as income, the entire debt meets Section 36(2)(i) conditions. The Court concluded that the requirements of Section 36(2)(i) were met and disposed of the appeal in favor of the assessee, with no order as to costs.

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