2016 (3) TMI 1068 - AT - Income Tax

Capital gains v/s business income - nature of income - Held that - Taking into consideration the total effect of the principles, as advised by the Board, it would be clear that the short term capital gains is not on account of business activity. It is but similar to the activity in long term capital gains. As noted earlier, AO has accepted the long term capital gains on similar transactions in investment account. More over assessee has substantial trading income which was dealt separately in books of accounts. Therefore, we do not find any infirmity in the order of the CIT(A) in treating the gains on shares as capital gains as against the profits from business by the AO. - Decided against revenue Disallowance of bad debts written off - Held that - Once the bad debt is written off as irrecoverable in the books of assessee, the claim of bad debt cannot be disallowed. Moreover as held by the honourable Bombay High Court in the case of Shreyas S Morakhia 2012 (3) TMI 103 - BOMBAY HIGH COURT and in the case of Bonanza Portfolio Ltd 2009 (8) TMI 636 - DELHI HIGH COURT , as assessee offered brokerage income which was taken into account in the books, the principle amount has to be considered as full amount of debt for claim of deduction. Even if a fraud was committed on that account the same is allowable as bad debt. We, therefore, uphold the order of the CIT(A) in allowing assessee s claim of bad debts. - Decided against revenue

Summary

Issues:
1. Classification of short term capital gains as business income.
2. Disallowance of bad debts claimed by the assessee.

Issue 1: Classification of Short Term Capital Gains as Business Income
The case involved the assessment of short term capital gains declared by the assessee as business income. The Assessing Officer (AO) treated the gains as business income due to the short holding period of shares and minimal dividend income. However, the Commissioner of Income Tax (Appeals) (CIT(A)) analyzed the issue extensively, considering factors like classification in books, nature of transactions, absence of borrowed funds, and frequency of trading. The CIT(A) concluded that the gains should be assessed as capital gains, not business income. The tribunal upheld the CIT(A)'s decision, citing principles of consistency and judicial precedents supporting the treatment of gains as capital gains.

Issue 2: Disallowance of Bad Debts
The second issue pertained to the disallowance of bad debts claimed by the assessee in a specific assessment year. The assessee claimed bad debts due to a fraud at one of its branches, with only a partial recovery made. The Assessing Officer disallowed the claim citing lack of formal complaint to the police and doubts regarding the debt write-off. However, the CIT(A) allowed the claim, noting that the bad debts were indeed written off in the books of account. The tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling that once a bad debt is written off in the books, the claim cannot be disallowed. The tribunal also referenced other High Court judgments supporting the allowance of bad debts in such cases.

In conclusion, the tribunal dismissed the revenue's appeals on both issues, affirming the CIT(A)'s decisions. The judgment emphasized adherence to accounting principles and legal precedents in determining the treatment of short term capital gains and the allowance of bad debts.