B.S. VASA, MUMBAI v. DCIT RG 4(1), MUMBAI

ITA 1949/MUM/2009 | 2004-2005
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 194919914 RSA 2009
Assessee PAN AAAPV8638B
Bench Mumbai
Appeal Number ITA 1949/MUM/2009
Duration Of Justice 2 year(s) 3 month(s) 30 day(s)
Appellant B.S. VASA, MUMBAI
Respondent DCIT RG 4(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 29-07-2011
Assessment Year 2004-2005
Appeal Filed On 30-03-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S.SYAL(A.M) AND SHRI N.V.VASUDEVA N(J.M) ITA NO.1949/M/2009(A.Y. 2004-05) SHRI B.S. VASA 213/215 JOLLY BHAVAN 10 NEW MARINE LINES MUMBAI 400 020. PAN:AAAPV 8638B (APPELLANT) VS. THE DCIT RG. 4(1) MUMBAI. (RESPONDENT) APPELLANT BY : SHRI V.P.KOTHARI RESPONDENT BY : SHRI SANJEEV JAIN DATE OF HEARING : 25/07/2011 DATE OF PRONOUNCEMENT : 29/07/2011 ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST ORDER D ATED 4/2/ 2009 OF CIT(A)-4 MUMBAI RELATING TO ASSESSMENT YEAR 2004-0 5. THE GROUND OF APPEAL OF THE ASSESSEE READS AS FOLLOWS: THE LEARNED CIT(APPEALS) HAS ERRED IN LAW IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE DISALLO WANCE OF RS. 16 55 210/- BEING BAD DEBT / TRADING LOSS U/S. 36(1 )(VII) OF THE INCOME TAX ACT 1961. 2. THE ASSESSEE IS AN INDIVIDUAL. HE IS AN ADVOCAT E BY PROFESSION. HE ALSO CARRIES ON THE BUSINESS AS NSE BROKER. THE AS SESSEE 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 W RITTEN OFF AS BAD AND DOUBTFUL ARE AS FOLLOWS: ITA NO.1949/M/2009(A.Y. 2004-05) 2 NAME OF THE PARTY AMOUNT (RS.) REASONS FOR NON PAY MENTS. CHETNA GOGRI 10 481.91 PARTY INCURRED HUGE LOSSES HENCE NOT ABLE TO MAKE PAYMENT IN A.Y 2000-2001. HARSH M. SHA 21 545.33 PARTY INCURRED HUGE LOSSES HENCE NOT ABLE TO MAKE PAYMENT IN A.Y2000-01 M.K.SHETH (HUF) 6 058.91 PARTY INCURRED HUGE LOS SES HENCE NOT ABLE TO MAKE PAYMENT IN A.Y2000-01 HRS INSIGHT INTERMEDIA PVT. LTD. 16 17 124.24 BSE MEMBER DEFAULTED IN 2001-02 TOTAL 16 55 210.00 3. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE DID NOT BRING ON RECORD ANYTHING TO SHOW THE WEAK FINANCIAL CAPACITY OF THE DEBTORS AND THE EFFORTS MADE BY THE ASSESSEE TO COLLECT THE DEBTS. IN SHOR T THE OBJECTION OF THE A.O WAS THAT THE ASSESSEE FAILED TO ESTABLISH THAT THE DEBTS WHICH WERE WRITTEN OFF AS BAD DEBTS HAD IN FACT BECOME BAD. IT WAS T HE SUBMISSION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT AFTER TH E AMENDMENT TO THE PROVISIONS OF SECTION 36(1)(VII) W.E.F. 1/4/1989 I T WAS NO LONGER NECESSARY FOR THE ASSESSEE TO CLAIM A DEDUCTION ON ACCOUNT OF BA D DEBTS THAT HE HAS TO ESTABLISH THAT THE DEBT HAS BECOME BAD AND UNRECOV ERABLE AND A MERE WRITE OFF IN THE BOOKS OF ACCOUNT AS BAD DEBTS WOUL D BE SUFFICIENT TO CLAIM THE DEDUCTION. THE ASSESSING OFFICER DID NOT AGREE WITH THE AFORESAID SUBMISSIONS OF THE ASSESSEE. 4. ANOTHER OBJECTION OF THE ASSESSING OFFICER WAS THAT THE ASSESSEE ACTS AS BROKER IN BUYING AND SELLING SECURITIES ON BEHALF O F ITS CLIENTS. ON THE SETTLEMENT DATE THE ASSESSEE HAS TO COLLECT DELIVE RY OF THE SHARES WHERE CLIENT HAS SOLD SHARES. HE HAS TO COLLECT THE AMOUN T 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 PURCHA SE OF SHARES THE ASSESSEE ITA NO.1949/M/2009(A.Y. 2004-05) 3 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 ASS ESSEE ACCOUNTS ONLY FOR BROKERAGE INCOME IN THE BOOKS OF ACCOUNT AND DOES N OT ACCOUNT FOR VALUE OF THE TRANSACTION OF SALE OR PURCHASE MADE ON BEHALF OF THE CLIENT. U/S. 36(1)(VII) READ WITH SEC.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 T HE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER THIS CONDITION WAS NOT SA TISFIED IN THE CASE OF THE ASSESSEE BECAUSE THE ASSESSEE ACCOUNTS ONLY FOR INC OME FROM BROKERAGE AND NOT THE VALUE OF SHARES SOLD OR PURCHASED ON BEHALF OF A CLIENT AND THEREFORE THE CONDITION MENTIONED IN SEC.36(2) WAS NOT SATISF IED AND THEREFORE THE CLAIM WAS REJECTED BY THE ASSESSING OFFICER. 5. ANOTHER OBJECTION OF THE ASSESSING OFFICER WAS T HAT AS PER THE SEBI REGULATION IT WAS THE DUTY OF THE ASSESSEE TO HAVE TAKEN SUFFICIENT MARGIN FROM ITS CUSTOMERS BEFORE ACTING AS BROKERS ON THEI R BEHALF. SINCE THE ASSESSEE VIOLATED THE SEBI REGULATIONS THE LOSS SUF FERED BY IT WOULD BE HIT BY THE PROHIBITION CONTAINED IN EXPLANATION TO SECTION 37(1) OF THE ACT. WITH REGARD TO THE ALTERNATIVE CLAIM OF THE ASSESSEE THA T THE LOSS IN QUESTION SHOULD BE ALLOWED AS A LOSS INCIDENTAL TO THE BUSIN ESS OF THE ASSESSEE UNDER SECTION 28 OF THE ACT THE ASSESSING OFFICER HAD HE LD THAT SUCH LOSS HAS NOT CRYSTALLIZED DURING THE PREVIOUS YEAR AND THEREFOR E THE CLAIM ON THIS BASIS CANNOT ALSO BE ALLOWED. ITA NO.1949/M/2009(A.Y. 2004-05) 4 6. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE ASSESSING OFFICER GIVING RISE TO THE PRESENT APPEAL S BY THE ASSESSEE BEFORE THE TRIBUNAL. 7. 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 (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. ITA NO.1949/M/2009(A.Y. 2004-05) 5 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. 11. 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: (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 ITA NO.1949/M/2009(A.Y. 2004-05) 6 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. 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. 8. WE HOLD FOLLOWING THE DECISION OF THE SPECIAL B ENCH REFERRED TO ABOVE THE AMOUNT RECEIVABLE BY THE ASSESSEE WHO IS A SHARE B ROKER 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 ITA NO.1949/M/2009(A.Y. 2004-05) 7 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. 9. IT HAS HOWEVER TO BE SEEN AS TO WHETHER THE COMM ISSION INCOME ACCRUING TO THE ASSESSEE AS A RESULT OF THE TRANSACTIONS DONE ON BE HALF OF THE CLIENT WHICH HAS RESULTED IN THE DEBT WHICH WAS WRITTEN OFF AS BAD WAS OFFER ED TO TAX. IT IS ALSO TO BE SEEN AS TO WHETHER THE ASSESSEE HAS TAKEN ANY MARGIN MONEY FRO M THE CUSTOMERS AND WHETHER THE MARGIN MONEY HAS BEEN ADJUSTED AND ONLY THE NET AMOUNT IS WRITTEN OFF AS BAD DEBTS. SIMILARLY IN CASES WHERE THERE WAS NO DELI VERY TAKEN BY THE CLIENT WHETHER THE ASSESSEE HAS SOLD THOSE SHARES AND ADJUSTED THE SAL E PROCEEDS AGAINST THE AMOUNTS DUE BY HIS CLIENTS HAS TO BE VERIFIED. THE ABOVE ASPE CTS WILL BE RELEVANT IN THE MATTER OF QUANTIFICATION OF THE AMOUNT TO BE ALLOWED AS DEDUC TION ON ACCOUNT OF BAD DEBTS WRITTEN OFF. THESE ASPECTS WERE ALSO CONSIDERED BY THE SPECIAL BENCH IN THE AFORESAID DECISION AND THE SPECIAL BENCH HAD DIRECTED THE DIV ISION BENCH TO EXAMINE THE CLAIM OF THE ASSESSEE AND THE STAND OF THE REVENUE ON THE ABOVE ASPECTS. THESE ASPECTS SHOULD BE LOOKED INTO BY THE AO AND FOR THIS LIMIT ED PURPOSE THE ISSUE IS REMANDED TO THE AO. 10. WITH REGARD TO THE APPLICABILITY OF EXPLANATIO N 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 U/S.36(1)(VII) OF TH E ACT. SEC.37(1) WOULD APPLY ONLY TO EXPENDITURE OTHER THAN THE ONE REFER RED TO IN SEC.30 TO 36 OF THE ACT. EVEN OTHERWISE THE VIOLATIONS REFERRED T O BY THE AO IN THE ORDER OF ASSESSMENT DO NOT AMOUNT TO AN OFFENCE OR SOMETHIN G PROHIBITED BY LAW. ITA NO.1949/M/2009(A.Y. 2004-05) 8 THOSE REGULATIONS ARE MEANT FOR PROTECTION OF INVES TORS RATHER THAN THE SHARE BROKER. BY NOT FOLLOWING THOSE REGULATIONS A BUSINESSMEN RUNS THE RISK OF LOSSES. BUT THAT CANNOT BE A GROUND TO SAY THAT THE BUSINESSMEN OUGHT TO HAVE AVOIDED THE LOSS AND ON THAT GROUND R EFUSE TO ALLOW THE CLAIM FOR DEDUCTION. NONE OF THE REASONS ASSIGNED BY THE REVENUE AUTHORITIES CAN HOLD GOOD FOR SUSTAINING THE IMPUGNED DISALLOWANCE. WE THEREFORE DIRECT THE AO TO ALLOW THE CLAIM FOR DEDUCTION AS MADE BY THE ASSESSEE AFTER VERIFICATION AS STATED IN THE EARLIER PART OF THIS ORDER.. 11. IN THE RESULT APPEAL IS ALLOWED FOR STATISTI CAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY 2011. SD/- SD/- (R.S.SYAL ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 29 TH JULY .2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.1949/M/2009(A.Y. 2004-05) 9 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 25/7/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 26/7/11 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