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TMI Blog2014 (7) TMI 961X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss which was incurred by assessee is a business loss or bad debt - The provision of section 28 read with section 4 of the Act imposes a charge on profit and gains of any business or profession carried on by the assessee - The business profit is to be computed in accordance with the provisions of section 30 to 43(c) and this section deals with deduction and allowances - The scheme of this provision is that profits and gains should be computed subject to certain express deduction and allowances and to certain express provisions of deductions - The list of allowances incurred in this section is not exhaustive or all allowances which can be made in ascertaining the profit of the business taxable u/s. 28 of the Act and an item of loss or expenditure incidental to business may be deducted in computing profits and gains of business or profession, even if it is not falling under any of these sections. Relying upon Badrinath Daga Vs. CIT [1958 (4) TMI 2 - SUPREME Court] - the assessee who was in the business of trading and investment in shares, had advanced a sum to a share broker with whom the assessee has regular dealings in earlier years and the advance made were during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by observing in para 3.2 as under: 3.2. I have considered facts of the case. It is seen that the appellant has been maintaining two portfolios of shares- one for investment and other for stock in trade, since long and such treatment has been accepted by the department as well. It has been informed that even in the scrutiny assessment for the subsequent assessment year, the assessing officer has accepted this system. It is true that in income tax assessment, principle of res judicata is not strictly applicable. However, once a view has been taken and is being consistently followed, the same should be not changed unless there are strong reasons for the change. So far as the facts in the case of appellant are concerned, it is seen that investments are made wholly out of own funds as there are no borrowed funds employed at all. Investment in shares and debentures as on 31.03.2008 amounted to ₹ 95,86,519/- and investment in mutual fund was of ₹ 2,37,75,000/-. As against that, total sale of securities held for short term amounted to ₹ 2,34,40,473/-. Even in these transactions, period of holding, in majority of cases, was, of several months. Thus, it cannot be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 20,25,500/- and short term capital gain at ₹ 21,55,499/- from share transactions carried out of investment port folio and declared the same as capital gains. In respect to long term capital gains, the assessee has paid STT but in respect to short term capital gain STT was not paid. The AO during the course of assessment proceeding by giving general observations treated the capital gains declared by the assessee as business profits. We find that investment in shares and mutual funds aggregating to the tune of ₹ 3.33 cr. is out of assessee's own capital, which is to the tune of ₹ 4.89 cr. The assessee is maintaining separate port folios for investment in shares and trading in shares. Once this is the position, we are of the view that the issue is squarely covered in favour of the assessee and against revenue by the decision of Hon'ble Bombay High Court in the case of CIT Vs. Gopal Purohit (2010) 228 CTR 582 (Bom) has held as under: The assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arish Chandra Biyani. Copies of such letter of advance in three installments, the share received by assessee, copies of demat account reflecting such shares, valuation of such shares on the dates of advance have been submitted during the course of appellate proceedings. It was claimed that the assessee tried to recover the amount but all efforts went in vain because in the month of February, 2007 there was a scam in the share market and Harish Chandra Biyani was made one of the accused of the parties to the scam for which action was initiated against him by SEBI, Company Law Board and civil as well as criminal proceedings by various persons for recovery of money. Shri Harish Chandra Biyani became absconder and not traceable since then. The assessee tried a lot to recover this money but could not and finally the assessee claimed the same as bad debt amounting to ₹ 22,11,812/-. Before the AO it was claimed that the same was bad debt and was allowable because it was related to business but the same has been disallowed by AO on the reason that the provisions of section 36(1)(vii) read with section 36(2) of the Act is not applicable in the facts of the case and, therefore, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 24.10.2000 from Shri Biyani it is seen that he has stated that I am hopeful of earning more in view of the booming share market pleased to give more returns to you . The reference in the loan document to give higher return indicates that the loan was, apart from earning interest, advanced with a view to have better relations with the broker leading to useful tips for stock. It has also been stated that the money advanced was also a deposit against the margin money for funding of share transaction of the appellant. Not only that, the appellant received shares with market value exceeding the money advanced from Shri Biyani as collateral and these were transferred to the appellant's demat account with liberty to deal in the same. This the loan appears to be given in course of business of share dealing and not as a personal loan. It can also not be called as pure investment to earn interest as it was not in nature of a normal deposit. Generally, if any prudent person were interested in making investment merely with a view to earn interest of 12% (not very high by standards of interest prevailing in F.Y.2000-01), he would invest his fund with safer avenues such as banks, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to allow the same accordingly. Aggrieved revenue came in appeal before us. 7. We have heard rival submissions and gone through facts and circumstances of the case. We find that the entry shown by the assessee in his books of account was advance made in the year 2000-01 by the end of December 2000 and also shares in lieu of payment were received as security, which were transferred to assessee's demat account. As there was a security scam in February, 2001, Shri Biyani became accused and untraceable (as the facts are noted above in para 6). Due to this fact the assessee has to write off this amount of ₹ 22,11,812/- and claimed the same as bad debt. The entry shown by the assessee may have been bad debt but the nomenclature is loss in relation to business and actually it is a loss incidental to the business. As the said party defaulted in payment of the interest and the loan amount given i.e. the principal, the assessee required him to repay the loan despite sending representatives and personal follow up he has not paid anything. The assessee has also filed a civil suit vide CS No.18 of 2004 before Hon'ble Calcutta High Court, which is still pending. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. And that is how it would be dealt with according to ordinary commercial principles of trading. Similarly, Hon'ble Supreme Court in the same case i.e. Badrinath Daga, supra has further referred to as under: At the same time, it should be emphasised that the loss for which a deduction could be made under section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Chettiar's AIR 1930 Mad 808 [FB] is no longer good law. The ratio of Daga's case [1958] 34 ITR 10 (SC) does not seem to have been correctly applied by the Punjab High Court in Ram Gopal Ram Sarup v. Commissioner of Income-tax [1963] 47 ITR 611. Now, we proceed to point out the persistently wrong application of the law laid down by this court by the Andhra Pradesh High Court in two earlier decisions followed in the decision under appeal also. They are : Commissioner of Income-tax v. Chakka Narayana [1961] 43 ITR 249 (AP) and Maduri Rajeswar v. Commissioner of Income-tax [1964] 51 ITR 213 (AP). In Chakka Narayana's case [1961] 43 ITR 249 (AP) the assessee, who was a dealer in cloth and Government securities, encashed Government securities worth about ₹ 20,000. He went to the Madras railway station for taking the cash to his place of business but lost the money on account of theft committed. The High Court referred to Badridas Daga's case [1958] 34 ITR 10 (SC), but yet distinguished it and preferred to follow the majority decision of the Full Bench of the Madras High Court in Ramaswami Chettiar's case AIR 1930 Mad 808 [FB], which, as we have already ..... X X X X Extracts X X X X X X X X Extracts X X X X
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