2009 (7) TMI 894 - HC - Income Tax

Assessee carrying on the business of shares and stock broking, had purchased shares on behalf of and on instructions from its sub-broker - the assessee did not deliver those shares to the sub-broker. However, in the said year, brokerage was shown as income in the previous year relevant to AY 2001-02 in income-tax return, which was assessed as well. - for the assessment year 2001-02 assessee claimed deduction of the amount as bad debt under section 36(1)(vii), which it could not recover from the sub-broker - only because shares were not delivered for want of full payment, which was to be made by the sub-broker to the assessee, it cannot be said that there was no transaction between the parties - Shares remained in the possession of the assessee. Therefore, the assessee could sell the said shares in the market for whatever consideration it could fetch and that was to be adjusted against the balance amount of Rs.41,37,881 payable by the debtor, i.e., the sub-broker, to the assessee, before arriving at the actual figure of bad debt . This aspect has not even been looked into by the Income-tax Appellate Tribunal in its impugned order. matter remitted for fresh consideration

Summary

Issues:
1. Whether the amount claimed as "bad debt" under section 36(1)(vii) of the Income-tax Act, 1961 can be treated as debt.
2. Whether the assessee can claim the amount as "bad debt" without selling the shares in the market.

Analysis:
1. The case involved the assessee, a member of the Delhi Stock Exchange engaged in stock broking activities, who purchased shares on behalf of a sub-broker but did not deliver them due to non-payment. The assessee claimed deduction of the unpaid amount as "bad debt" in the income-tax return for the assessment year 2001-02. The assessing authority disallowed the deduction, but the Income-tax Appellate Tribunal allowed it. The Revenue contended that the amount could not be treated as debt under section 36(2) of the Act. However, the court held that since there was a valid transaction between the parties and the assessee had paid on behalf of the sub-broker but could not recover the full amount, it constituted a debt. The court rejected the Revenue's argument and upheld the Tribunal's decision regarding the treatment of the amount as "bad debt."

2. The Revenue further argued that since the shares remained in the possession of the assessee, the amount could not be classified as "bad debt" without selling the shares in the market. The court agreed with this contention, emphasizing that the assessee could have sold the shares to recover the outstanding amount from the sub-broker. The court noted that the Tribunal had not considered this aspect while allowing the deduction. Consequently, the court set aside the Tribunal's order and remitted the case for fresh consideration, instructing to evaluate the possibility of selling the shares to determine the actual figure of "bad debt." The court allowed the appeal on these grounds, highlighting the importance of considering the sale of shares in assessing the claim of bad debt.