MAHAKOSH HOLDINGS PTIVATE LTD., MUMBAI v. ACIT 4(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI. BEFORE SHRI SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMB ER AND SHRI V.D. RAO JUDICIAL MEMBER. I.T.A. NO. 34 88/MUM/2007 ASSESSMENT YEAR : 1997-98 MAHAKOSH HOLDINGS PVT. LTD. AS STT. COMMISSIONER OF 202 HEMLOK APPT. VS. INCOMETAX 4(3) KILACHAND ROAD KANDIVALI (W) MUM BAI. MUMBAI. PAN : AAACM3739M APPELLANT RESPONDENT APPELLANT BY : SHRI H.S. RAHEJA. RESPONDENT BY : SMT. APARNA A GARWAL. O R D E R PER J. SUDHAKAR REDDY A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-XIV MUMBAI DATED 28-02-2 007 FOR THE ASSESSMENT YEAR 1997-98. 2. THE FACTS IN BRIEF ARE BROUGHT OUT AT PARA 4 OF THE CIT(APPEALS) ORDER. FOR THE SAKE OF CLARITY WE SU MMARISE THE FACTS AS FOLLOWS. 3. THE ASSESSEE COMPANY IS A MEMBER OF NATIONAL ST OCK EXCHANGE AND IS ENGAGED IN SHARE BROKING BUSINESS. AS A SYSTEM OF SHARE BROKING BUSINESS SOME PERCENTAGE OF BROKERAGE WHIC H IS CHARGED TO THE CLIENTS WAS PAID AS SUB BROKERAGE TO THE SUB BROKE RS WHO INTRODUCED THOSE CLIENTS. THE SUB BROKERS HAD THEIR OWN TRADIN G ACCOUNT WITH THE 2 ASSESSEE COMPANY. THE ISSUE IN THIS CASE IS THE ALL OWABILITY OF SUB BROKERAGE COMMISSION. THE AO IN THE FIRST ROUND OF ASSESSMENT PROCEEDINGS REQUESTED THE ASSESSEE TO PRODUCE THE P ARTIES FOR VERIFICATION AND AS THE SAME WAS NOT DONE IN THE ORIGINAL ASSES SMENT THE CLAIM OF THE ASSESSEE WAS DISALLOWED TO THE EXTENT OF RS.21 62 9 00/-. ON APPEAL THE FIRST APPELLATE AUTHORITY DELETED THE DISALLOWANCE. THE REVENUE CARRIED THE MATTER IN APPEAL. THE MUMBAI G-BENCH OF THE TRI BUNAL VIDE ITS ORDER DATED 13-9-2004 IN ITA NO. 4718/MUM/2000 RESTORED T HE MATTER BACK TO THE AO WITH A DIRECTION TO GIVE ANOTHER OPPORTUNITY TO THE ASSESSEE TO PRODUCE THE PARTIES. THE TRIBUNAL FURTHER DIRECTED THE AO TO ISSUE FRESH SUMMONS TO THESE PARTIES TO VERIFY THE GENUINENESS OF THE TRANSACTION. THE THIRD DIRECTION OF THE ITAT TO THE AO WAS TO CONSI DER THE ASSESSEES CLAIM FOR BAD DEBTS IN THE LIGHT OF THE LATEST DECI SION ON THE POINT. 3.1 ON THE ISSUE OF BAD DEBS THE ASSESSEES CLAIM WAS THAT THE CLIENTS INTRODUCED BY THE SUB BROKERS HAVE DEFAULTE D AND AMOUNTS WERE DUE FROM THEM AND AS THEY WERE CONSIDERED AS NOT RE COVERABLE THE ASSESSEE HAS WRITTEN OFF HUGE BAD DEBTS IN RESPECT OF MOST OF THESE PARTIES. WRITE OFF OF BAD DEBTS HAS BEEN ACCEPTED BY THE AO. THE ASSESSEES CONTENTION IS THAT SUB BROKERAGE PAYMENTS WERE NOT PAID IN CASH BUT WERE ADJUSTED AGAINST THE DUES COLLECTABLE FROM THE CLIE NTS INTRODUCED BY THE RESPECTIVE SUB BROKERS AND AS THE DUES RECOVERABLE FROM THE CLIENTS HAD BECOME BAD DEBTS THE DISALLOWANCE OF SUB BROKERAGE COMMISSION WOULD GO TO INCREASE THE QUANTUM OF BAD DEBT AND HAS TO B E ALLOWED AS SUCH. 3.2 THE AO IN THE SECOND ROUND OF ASSESSMENT PROCE EDINGS CAME TO A CONCLUSION AFTER DUE VERIFICATION THAT THE ASSESSEE HAS NOT PROVED THE IDENTITY OF THE SUB BROKERS. THE AO RECO RDS THAT VERIFICATIONS WERE DONE BOTH BY ISSUING SUMMONS AS WELL AS BY DEP UTING AN INSPECTOR 3 AND AS THE DISCREPANCY IS FOUND AND AS THE ASSESSEE EXPRESSED ITS INABILITY TO PRODUCE THE PARTIES THE CLAIM FOR SUB BROKERAGE COMMISSION IS TO BE DISALLOWED AS UNVERIFIABLE AND UNSUBSTANTIATED. ON THE ISSUE OF BAD DEBTS THE AO RECORDS THAT THE ASSESSEE HAS NOT FULFILLED ANY OF THE CONDITIONS AS PROVIDED U/S 36(2) AND U/S 36(1)(VII). 3.3 ON APPEAL THE FIRST APPELLATE AUTHORITY IN T HE SECOND ROUND OF APPELLATE PROCEEDINGS ALLOWED THE CLAIM OF THE ASSESSEE TO THE TUNE OF RS.9 51 851/-. THE BALANCE AMOUNT OF RS.12 03 149/- WAS REJECTED. THE CLAIM FOR BAD DEBTS WAS ALSO REJECTED. AGGRIEVED T HE ASSESSEE IS IN APPEAL. 4. WE HAVE HEARD MR. H.S. RAHEJA LEARNED COUNSEL FOR THE ASSESSEE AND SMT. APARNA AGARWAL LEARNED SR. AUTHO RISED REPRESENTATIVE ON BEHALF OF THE DEPARTMENT. MR. RAH EJA FILED A PAPER BOOK RUNNING INTO 137 PAGES. HE REITERATED THE CONT ENTIONS MADE BEFORE THE LOWER AUTHORITIES AND EMPHASIZED THE POINT THAT THE ASSESSEE HAD THROUGH A BOOK ENTRY DEBITED THE AMOUNT OF SUB BROK ER COMMISSION IN ITS BOOKS OF ACCOUNT AND CREDITED VARIOUS CLIENTS ACCO UNTS AS THE CLIENTS WERE TO PAY CERTAIN AMOUNTS TO THE ASSESSEE COMPANY . HE SUBMITS THAT AS THE CLIENTS HAD DEFAULTED THE BALANCE OUTSTANDING FROM THEM AFTER REDUCING THE SAME BY THE AMOUNT OF SUB BROKERAGE CO MMISSION ATTRIBUTABLE TO THE CLIENT WAS WRITTEN OFF IN THE BOOKS OF ACCOUNT AS BAD DEBT AND THE REVENUE HAS ACCEPTED IT. HE CONTENDED THAT IF THE REVENUE DISALLOWS THE SUB BROKER COMMISSION THE BALANCE IN THESE CLIENTS ACCOUNTS WHICH WERE WRITTEN OFF WOULD HAVE INCREAS ED BY THE AMOUNT OF SUB BROKERAGE COMMISSION DISALLOWED AND THE AMOUNT WRITTEN OFF WOULD BE AT A HIGHER FIGURE. 4 5. THE LEARNED DR MRS. APARNA AGARWAL ON THE OTH ER HAND OPPOSED THE CONTENTION AND SUBMITTED THAT SUB BROKE RAGE DISALLOWED CANNOT BE WRITTEN OFF AS A BAD DEBT AND IF THE ASSE SSEE WANTS TO CLAIM BAD DEBT ON ACCOUNT OF CLIENTS NOT MEETING THEIR OBLIGA TIONS ONE HAS TO WAIT FOR THE SPECIAL BENCH DECISION ON THE ASPECT. ON ALLOWABILITY OF SUB BROKERAGE COMMISSION SHE SUBMITS THAT THE IDENTITY OF THE SUB BROKERS HAS NOT BEEN PROVED AND THIS ISSUE IS NOT EVEN EMPH ASIZED BY THE LEARNED COUNSEL FOR THE ASSESSEE. SHE RELIED ON THE ORDERS OF THE AO AS WELL AS THE CIT(APPEALS) AND SUBMITTED THAT THEIR ORDERS SHOULD BE UPHELD. 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL O F THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS. 7. THE UNDISPUTED FACT IS THAT THE BROKERAGE IN QU ESTION IS ATTRIBUTABLE AND HAS BEEN DERIVED FROM TRANSACTIONS OF CERTAIN CLIENTS WHO HAVE ULTIMATELY DEFAULTED AND THE ASSESSEE HAD TO W RITE OFF THESE DUE AMOUNTS AS BAD DEBTS. AS THE AO HAS ALREADY ALLOWED THE CLAIM OF THE ASSESSEE FOR BAD DEBTS AND AS THE ISSUE OF THE ALL OWABILITY OF BAD DEBTS IN SUCH CIRCUMSTANCES IS NOT BEFORE THIS BENCH OF THE TRIBUNAL WE ARE OF THE HUMBLE OPINION THAT WE NEED NOT WAIT FOR THE OUTCOM E OF THE SPECIAL BENCH DECISION ON THIS ISSUE. THE ONLY ISSUE THAT I S BEFORE US IS WHETHER THE BAD DEBTS ALREADY ALLOWED BY THE AO HAS TO BE INCREASED BY THE SUB BROKERS COMMISSION FOR THE REASON THAT THESE ENTRI ES OF SUB BROKERAGE HAVE BEEN FOUND TO BE FALSE BY THE REVENUE AND THIS RESULTS IN INCREASE IN THE DUES FROM THOSE CLIENTS WHOSE ACCOUNTS HAVE BE EN ULTIMATELY WRITTEN OFF AS BAD DEBTS ON THE GROUND THAT THEY ARE NOT RE COVERABLE. IT IS APPARENT THAT THE AMOUNT OF BAD DEBTS WRITTEN OFF AS NOT REC OVERABLE FROM CLIENTS 5 WILL INCREASE BY THE AMOUNT OF SUB BROKERAGE COMMIS SION CREDITED TO THESE ACCOUNTS AS THE REVENUE HOLDS THAT THESE ENT RIES OF SUB BROKERAGE COMMISSION ARE INGENUINE AND HAVE TO BE WITHDRAWN. THUS IN OUR HUMBLE OPINION THERE IS MERIT IN THE SUBMISSION OF THE ASSESSEE AND THE QUANTUM OF BAD DEBT WRITTEN OFF SHOULD GO UPTO THE EXTENT OF REVERSAL OF ENTRIES OF SUB BROKERAGE COMMISSION WHICH HAVE TO B E DONE CONSEQUENT TO DISALLOWANCE OF THE COMMISSION. THUS WE DIRECT T HE AO TO DO THE NECESSARY EXERCISE OF REVERSING ALL THE ENTRIES PER TAINING TO SUB BROKERAGE COMMISSION WHICH HAVE CREDITED TO THE RESPECTIVE CL IENTS ACCOUNT TO THE EXTENT THAT SUCH SUB BROKERAGE COMMISSION IS HELD A S INGENUINE AND RECTIFIED THE QUANTUM OF BAD DEBT WRITTEN 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED ON THIS 27 TH DAY OF JANUARY 2010. SD/- SD/- (V.D. RAO) (J. SUDHAKAR REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER. MUMBAI DATED : 27 TH JANUARY 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR I-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR ITAT MUMBAI BENCHES.