2012 (8) TMI 710 - HC - Income Tax

Disallowance of Bad debt on vatav kasar - assessee is a stock and share broker - assessee contended that even if the deduction is not allowable as bad debts,the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business - Held that - The expression Profits and gains of business or profession u/s 28 is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. As decided in Badridas Daga Versus CIT 1958 (4) TMI 2 - SUPREME COURT if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee s claim for deduction as business loss - The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker - in favour of the assessee

Summary

Issues:
- Whether the 'vatav kasar' of Rs.44,98,210, not deductible as a bad debt under Section 36(2) of the Income Tax Act, can be considered as an allowable business loss?

Analysis:

1. The case involves a reference under Section 256(1) of the Income Tax Act, 1961, where the Income Tax Appellate Tribunal referred a question regarding the deductibility of 'vatav kasar' of Rs.44,98,210 as a bad debt or as an allowable business loss. The Tribunal's order dated 19.12.1994 in Income Tax Appeal No.1495/Bom/94 for the assessment year 1991-1992 is under consideration.

2. The assessee, a stock and share broker, claimed bad debts amounting to Rs.47.58 lacs due to a breach by members of the Bombay Stock Exchange. The Assessing Officer disallowed the claim under Section 36(2) as the amount was not offered to tax in a previous year. The Commissioner of Income Tax (Appeals) upheld the disallowance partially, allowing Rs.2.60 lacs as a business loss and disallowing the rest.

3. The Tribunal held that unless the conditions of Section 36(2) are met, benefits of bad debts deduction cannot be extended. The Tribunal opined that specific provisions govern bad debts deduction, precluding claiming the amount as a business loss. The applicant argued that even if not a bad debt, the amount should be allowed as a business loss under Section 28 of the Act.

4. The applicant relied on a previous court order to support the contention that even if part of bad debts was considered in earlier tax computation, it satisfies Section 36(2). Additionally, any loss related to business operations should be deductible under Section 28, citing a court decision.

5. The Revenue contended that the loss did not meet the conditions for bad debts deduction under Section 36 and cannot be claimed under other sections. It argued against considering the loss as a business loss due to speculation nature and lack of trading activities.

6. The High Court clarified that the issue referred was limited to whether a non-deductible bad debt could be considered as an allowable business loss. It highlighted that Section 28 allows deductions for expenses and losses incidental to business operations, even if not qualifying under specific provisions like bad debts.

7. Referring to past judgments, the High Court emphasized that losses incidental to business should be deductible under Section 28, even if not meeting the criteria for bad debts deduction. It cited a case supporting the allowance of losses as revenue loss under Section 10(1) of the Indian Income Tax Act, 1922, similar to Section 28.

8. Consequently, the High Court answered the referred question in favor of the assessee, allowing the 'vatav kasar' amount of Rs.44,98,210 to be considered as an allowable business loss. The judgment did not address the issues of speculation loss or trading activities, focusing solely on the deductibility of the amount as a business loss.