M/S. PRASAM TRADING AND FINANACE PVT. LTD, MUMBAI v. THE DCIT 8(2), MUMBAI

ITA 1870/MUM/2008 | 2005-2006
Pronouncement Date: 16-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 187019914 RSA 2008
Assessee PAN AAACP2326B
Bench Mumbai
Appeal Number ITA 1870/MUM/2008
Duration Of Justice 3 year(s) 2 day(s)
Appellant M/S. PRASAM TRADING AND FINANACE PVT. LTD, MUMBAI
Respondent THE DCIT 8(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 16-03-2011
Date Of Final Hearing 10-03-2011
Next Hearing Date 10-03-2011
Assessment Year 2005-2006
Appeal Filed On 14-03-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI RAJENDRA SIN GH (A.M) ITA NO.1870/MUM/2008(A.Y. 2005-06) PRASAM TRADING AND FINANCE PVT. LTD. 103 SPAN LAND MARK BUILDING ANDHERI KURLA ROAD CHAKALA ANDHERI-EAST MUMBAI -93 PAN:AAACP 2326B (APPELLANT) VS. THE DCIT 8(2) AAYKAR BHAVAN MK ROAD MUMBAI -20. (RESPONDENT) APPELLANT BY : SHRI VIPUL B. JOSHI RESPONDENT BY : SHRI O.P. SHARMA ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE RDATED 29/2/2008 OF CIT(A)-8 MUMBAI RELATING TO ASSESSMENT YEAR 200 5-06. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SHARE TRADING AND SHARE BROKING. GROUND NO.1 RAISED BY THE ASSES SEE IN THIS APPEAL IS REGARDING THE DISALLOWANCE MADE UNDER SECTION 14AOF THE INCOME TAX ACT 1961 (THE ACT) BY THE AO WHICH WAS CONFIRMED BY THE CIT(A). THE SAME WAS NOT PRESSED AND THE SAME IS DISMISSED AS NOT PRESSE D. 3. IN GROUND NO.2 THE ASSESSEE HAS CHALLENGED THE A CTION OF THE CIT(A) CONFIRMING THE ORDER OF THE AO WHEREBY THE AO DISAL LOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS OF A SUM OF RS.1 95 86 224/. AS ALREADY STATED THE ASSESSEE IS IN THE BUSINESS OF SHARE BROKING AND SHARE TRADING. IN RESPECT OF TRANSACTION CARRIED OUT ON BEHALF OF THE CLIENTS VIZ. ITA NO.1870/MUM/2008(A.Y. 2005-06) 2 TRANSACTIONS OF PURCHASE ON BEHALF OF ONE M/S.ROOP SHREE FINVEST LTD. WHO WAS A SUB BROKER OF BSE AND NSE THERE WERE OUTSTAN DING IN THE CLIENTS ACCOUNT WHICH HE REFUSED TO HONOUR AND WHICH WAS WRITTEN OFF AND CLAIMED AS BAD DEBTS BECAUSE THEY WERE IRRECOVERA BLE DESPITE ISSUE OF LEGAL NOTICES. THE AO DISALLOWED THE CLAIM OF THE ASSES SEE FOR THE REASON THAT THE DEBT IN QUESTION HAS NOT BEEN ESTABLISHED TO HAVE B ECOME BAD AND THAT A MERE WRITE OFF AS BAD DEBTS WOULD NOT BE SUFFICIENT . THE OTHER REASONS ASSIGNED BY THE AO WAS THAT THE AMOUNT WRITTEN OFF AS BAD DEBT WAS NOT OFFERED AS INCOME BY THE ASSESSEE IN THE EARLIER AS SESSMENT YEAR. IN OTHER WORDS THE CONDITION MENTIONED IN SEC.36(2) OF THE A CT WAS NOT SATISFIED. THE CIT(A) CONFIRMED THE ORDER OF THE AO HENCE THE ABO VE GROUND OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. WITH REGA RD TO THE OBJECTION OF THE REVENUE THAT THE DEBT IN QUESTION HAS NOT BEEN ESTA BLISHED TO HAVE BECOME BAD WE ARE OF THE VIEW THAT THE LAW IN THIS REGARD IS BY NOW WELL SETTLED. PRIOR TO 1STAPRIL 1989 EVERY ASSESSEE HAD TO ESTA BLISH 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 AC T 1961 [`ACT' FOR SHORT]. FOR THE SAKE OF CLARITY WE RE-PRODUCE HEREIN BELOW PRO VISIONS OF SECTION 36(1)(VII) OF THE ACT BOTH PRIOR TO 1ST APRIL 1989 AND POST- 1ST APRIL 1989: PRE- 1 S T APRIL 1989 : OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N IN COMPUTING THE INCOME REFERRED TO IN SECTION 28(I) TO (VI) XXXX XXXX XXXX ITA NO.1870/MUM/2008(A.Y. 2005-06) 3 (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- 1 S T APRIL 1989: OTHER DEDUCTIONS. 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N IN COMPUTING THE INCOME REFERRED TO IN SECTION28(I) TO (VI) XXXX XXXX XXXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION(2) THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRREC OVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. IN TRF LIMITED VS. CIT 230 CTR 14 (SC) THE HONBLE SUPREME HOLD HAS HELD THAT AFTER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRRECOVERABLE. I T IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THE OBJECTION OF THE REVENUE AUTHORITIES THAT THE ASSESSEE SHOULD ESTABLISH THAT THE DEBT WRITTEN OFF AS BAD DEBT SHOULD BE ESTABLISHED TO HA VE BECOME BAD IS THEREFORE NOT SUSTAINABLE. 5. WITH REGARD TO THE OBJECTION THAT THE CONDITION U/S .36(2) WAS NOT FULFILLED WE FIND THAT ISSUE WAS DECIDED BY THE SP ECIAL BENCH ITAT IN THE CASE OF DCIT VS. SHREYAS S. MORAKHIA (ITAT MUMBAI SPECIAL B ENCH) . IN THAT CASE THE ASSESSEE A BROKER CLAIMED DEDUCTION FOR BAD DEBTS IN RESPECT OF SHARES PURCHASED BY HIM FOR HIS CLIENTS. THE AO REJ ECTED THE CLAIM THOUGH THE CIT (A) UPHELD IT. ON APPEAL BY THE REVENUE TH E MATTER WAS REFERRED TO THE SPECIAL BENCH. BEFORE THE SPECIAL BENCH THE DE PARTMENT 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 THAT AS THE ASSESSEE H AD 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 D EBT U/S 36(1)(VII). THE SPECIAL BENCH HELD REJECTING THE CLAIM OF THE DEPAR TMENT: ITA NO.1870/MUM/2008(A.Y. 2005-06) 4 (I) IN VEERABHADRA RAO 155 ITR 152 THE SUPREME COUR T 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 AN D QUALIFIES FOR DEDUCTION U/S 36(1)(VII). THE EFFECT OF THE JUDGEME NT IS THAT IN ORDER TO SATISFY THE CONDITION STIPULATED IN S. 36(2)(I) IT IS NOT NECESSARY THAT THE ENTIRE AMOUNT OF DEBT HAS TO BE TAKEN INTO ACCOUNT IN COMP UTING THE INCOME OF THE ASSESSEE AND IT WILL BE SUFFICIENT EVEN IF PART OF SUCH DEBT IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE. TH IS PRINCIPLE APPLIES TO A SHARE BROKER. THE AMOUNT RECEIVABLE ON ACCOUNT OF B ROKERAGE IS A PART OF DEBT RECEIVABLE BY THE SHARE BROKER FROM HIS CLIENT AGAINST PURCHASE OF SHARES AND ONCE SUCH BROKERAGE IS CREDITED TO THE P &L ACCOUNT AND TAKEN INTO ACCOUNT IN COMPUTING HIS INCOME THE CONDITION STIPULATED IN S. 36(2)(I) GETS SATISFIED. WHETHER THE GROSS AMOUNT IS REFLECT ED IN THE CREDIT SIDE OF THE P&L A/C OR ONLY THE NET AMOUNT IS FINALLY REFLECTED AS PROFIT AFTER DEDUCTING THE CORRESPONDING EXPENSES OR ONLY THE NET AMOUNT O F BROKERAGE RECEIVED BY THE SHARE BROKER IS REFLECTED IN THE CREDIT SIDE OF THE P&L ACCOUNT MAKES NO DIFFERENCE BECAUSE THE ULTIMATE EFFECT IS THE SAME; (II) THE ARGUMENT THAT THE LOSS WAS SUFFERED OWING TO BREACH OF SEBI GUIDELINES FRAMED TO SAFEGUARD THE INTEREST OF BROK ERS IN RESPECT OF AMOUNT RECEIVABLE FROM THE CLIENTS AGAINST PURCHASE OF SHA RES 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 T HE 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 V ALUE OF THE SHARES REMAINING WITH THE ASSESSEE SHOULD BE ADJUSTED AGAI NST THE AMOUNT RECEIVABLE FROM THE CLIENT SO AS TO ARRIVE AT THE A CTUAL AMOUNT OF BAD DEBT SHOULD BE RAISED IF PERMISSIBLE BEFORE THE DIVISI ON BENCH. ITA NO.1870/MUM/2008(A.Y. 2005-06) 5 THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DB (INDIA) SECURITIES 318 ITR 26 (DEL) & BONANZA PORTFOLIO 320 ITR 178 (DEL) WAS FOLLOWED. 6. WE HOLD FOLLOWING THE DECISION OF THE SPECIAL B ENCH REFERRED TO ABOVE THE AMOUNT RECEIVABLE BY THE ASSESSEE WHO IS A SHA RE BROKER FROM HIS CLIENTS AGAINST THE TRANSACTIONS OF PURCHASE OF SHA RES ON THEIR BEHALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKE RAGE/COMMISSION INCOME ARISING FROM SUCH TRANSACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH BROKERAGE/COMMISSION HAS BE EN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEAR OR ANY EARLIER YEAR IT SATISFIES THE CONDITIO N 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 BOO KS OF ACCOUNT AS IRRECOVERABLE. 7. IT HAS HOWEVER TO BE SEEN AS TO WHETHER THE COMM ISSION INCOME ACCRUING TO THE ASSESSEE AS A RESULT OF THE TRANSAC TIONS DONE ON BEHALF OF THE CLIENT WHICH HAS RESULTED IN THE DEBT WHICH WAS WRI TTEN OFF AS BAD WAS OFFERED TO TAX. IT IS ALSO TO BE SEEN AS TO WHETHE R THE ASSESSEE HAS TAKEN ANY MARGIN MONEY FROM THE CUSTOMERS AND WHETHER THE MAR GIN MONEY HAS BEEN ADJUSTED AND ONLY THE NET AMOUNT IS WRITTEN OFF AS BAD DEBTS. SIMILARLY IN CASES WHERE THERE WAS NO DELIVERY TAKEN BY THE CLIE NT WHETHER THE ASSESSEE HAS SOLD THOSE SHARES AND ADJUSTED THE SALE PROCEED S AGAINST THE AMOUNTS DUE BY HIS CLIENTS HAS TO BE VERIFIED. THE ABOVE ASPECTS WILL BE RELEVANT IN THE MATTER OF QUANTIFICATION OF THE AMOUNT TO BE AL LOWED AS DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF. THESE ASPECTS WE RE ALSO CONSIDERED BY THE SPECIAL BENCH IN THE AFORESAID DECISION AND THE SPE CIAL BENCH HAD DIRECTED ITA NO.1870/MUM/2008(A.Y. 2005-06) 6 THE DIVISION BENCH TO EXAMINE THE CLAIM OF THE ASSE SSEE AND THE STAND OF THE AO ON THE ABOVE ASPECTS. WE THEREFORE DIRECT THE AO TO VERIFY THE ABOVE ASPECTS AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND ALLOW THE CLAIM FOR DEDUCTION IN ACCORDANCE WITH THE DECI SION OF THE SPECIAL BENCH REFERRED TO ABOVE. 16. IN THE RESULT THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 1 6 TH DAY OF MARCH 2011. SD/- SD/- (RAJENDRA SINGH) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. MARCH.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RC BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.1870/MUM/2008(A.Y. 2005-06) 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 10/3/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 11/3/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER