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TMI Blog2010 (9) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable - Decided in the favour of the assessee by way remand X X X X Extracts X X X X X X X X Extracts X X X X ..... clients. On the settlement date, the Assessee has to collect delivery of the shares, where client has sold shares. He has to collect the amount for the value of shares, where he effects purchase on behalf of the clients. Whenever, clients fails to give delivery for shares sold or payment for purchase of shares, the assessee has to make good the delivery of shares or payment to the stock exchange. The claim of the assessee for bad debt written off partly arises out of the assessee having to make good the delivery of shares for shares sold, payment for purchase made on behalf of the clients. The assessee accounts only for brokerage income in the books of account and does not account for value of the transaction of sale or purchase made on beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Assessing Officer did not dispute the fact that the debts in question were really outstanding. 10. As far as the stand of the revenue that the assessee has to establish that the debts which were written off as bad debts have in factor become bad, we are of the view that the same is not the requirement of the law. Prior to 1stApril, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act',for short]. For the sake of clarity, we re-produce herein below provisions of Section 36(1)(vii) of the Act, both prior to 1st A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) are not satisfied and, therefore, the deduction under section 36 (1)(vii) cannot be allowed. We find that this issue has been decided by Special Bench of Mumbai ITAT in the case of Shreyas Morarkha (2010) 42 DTR(Mum) (SB)(Trib) 320. The facts before the special Bench were the assessee, a broker, claimed deduction for bad debts in respect of shares purchased by him for his clients. The AO rejected the claim though the CIT (A) upheld it. On appeal by the Revenue, the matter was referred to the Special Bench. Before the Special Bench, the department argued that u/s 36(2), no deduction on account of bad debt can be allowed unless "such debt or part thereof has been taken into account in computing the income of the assessee". It was argued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect is the same; (ii) The argument that the loss was suffered owing to breach of SEBI Guidelines framed to safeguard the interest of brokers in respect of amount receivable from the clients against purchase of shares is irrelevant. If the broker chooses not to follow the guidelines, it is a decision taken by him as a businessman having regard to his business relations with the client. The loss cannot be equated to expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. (CIT vs. Pranlal Kesurdas 49 ITR 931 (Bom) followed where bad debts on account of forbidden vayada transactions were held allowable); (iii) The contention of the Revenue that the sale value of the shares remaining with the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Bench referred to above, the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. The other aspects referred to in the earlier para ..... X X X X Extracts X X X X X X X X Extracts X X X X
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