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TMI Blog2011 (7) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... 61." 2. The assessee is an individual. He is an Advocate by profession. He also carries on the business as NSE Broker. The assessee claimed as deduction while computing income under the head 'Bad debts' written off a sum of Rs. 16,55,210. The details of the debts written off as bad and doubtful are as follows : Name of the party Amount (Rs.) Reasons for non-payments Chetna Gogri 10,481.91 Party incurred huge losses hence not able to make payment in A.Y. 2000-01 Harsh M. Sha 21,545.33 Party incurred huge losses hence not able to make payment in A.Y. 2000-01 M.K. Sheth (HUF) 6,058.91 Party incurred huge losses hence not able to make payment in A.Y. 2000-01 HRS Insight Intermedia Pvt. Ltd. 16,17,124.24 BSE Member defaulted in 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 behalf of the client. Under section 36(1)(vii) read with section 36(2) of the Act, it is a condition to claim deduction on account of bad debt that the amount written off as bad debt should have been taken into account while computing income of the assessee. According to the Assessing Officer, this condition was not satisfied in the case of the assessee because the assessee accounts only for income from brokerage and not the value of shares sold or purchased on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 April, 1989 and post-1st April, 1989 : "Pre -1st April, 1989 : Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28(i) to (vi) ** ** ** (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. Post -1st April, 1989 : Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as argued that as the assessee had offered only the brokerage income to tax but not the value of shares purchased on behalf of clients, the latter could not be allowed as a bad debt under section 36(1)(vii). The Special Bench held rejecting the claim of the department : (i) In CIT v. T. Veerabhadra Rao [1985] 155 ITR 152/22 Taxman 45 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been "taken into account in computing the income of the assessee" and qualifies for deduction u/s 36(1)(vii). The effect of the judgment is that in order to satisfy the condition stipulated in section 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) The contention of the Revenue that the sale value of the shares remaining with the assessee should be adjusted against the amount receivable from the client so as to arrive at the actual amount of bad debt should be raised, if permissible, before the Division Bench. The decision of the Hon'ble Delhi High Court in the case of CIT v. DB (India) Securities Ltd. [2010] 318 ITR 26/187 Taxman 161 (Delhi) and CIT v. Bonanza Portfolio Ltd. [2010] 320 ITR 178 (Delhi) was followed. 9. We hold following the decision of the Special 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These aspects should be looked into by the Assessing Officer and for this limited purpose, the issue is remanded to the Assessing Officer. 11. With regard to the applicability of Explanation to section 37(1) of the Act, we are of the view that those provisions would not be relevant because the deduction is to be allowed under section 36(1)(vii) of the Act. Section 37(1) would apply only to expenditure, other than the one referred to in sections 30 to 36 of the Act. Even otherwise, the violations referred to by the Assessing Officer in the order of assessment, do not amount to an offence or something prohibited by law. 12. Those regulations are meant for protection of investors, rather than the share broker. By not following those regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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