THE ACIT 12(1), MUMBAI v. M/S. MADHUKAR C. SHETH, MUMBAI

ITA 4963/MUM/2008 | 2004-2005
Pronouncement Date: 29-07-2011 | Result: Dismissed

Appeal Details

RSA Number 496319914 RSA 2008
Assessee PAN ANXPS1972P
Bench Mumbai
Appeal Number ITA 4963/MUM/2008
Duration Of Justice 2 year(s) 11 month(s) 23 day(s)
Appellant THE ACIT 12(1), MUMBAI
Respondent M/S. MADHUKAR C. SHETH, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 29-07-2011
Date Of Final Hearing 04-07-2011
Next Hearing Date 04-07-2011
Assessment Year 2004-2005
Appeal Filed On 06-08-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S. SYAL A.M. AND SHRI V. DURGA RAO J.M. ITA NO. 4963/MUM/2008 ASSESSMENT YEAR: 2004-05 ASSTT. COMMISSIONER OF INCOME-TAX-12(1) . APPELL ANT ROOM NO. 117 AAYAKAR BHAVAN M.K.MARG MUMBAI 400 020. VS. MADHUKAR C. SHETH RESPONDENT 603-604 ELIZABETH APARTMENTS B.S.M. ROAD ELPHINSTON(W) MUMBAI 400 013. (PAN ANXPS1972P) C.O. NO. 32/M/09 (IN ITA NO. 4963/MUM/2008 ASSESSMENT YEAR: 2004-05 MADHUKAR C. SHETH CROSS OBJECTOR 603-604 ELIZABETH APARTMENTS B.S.M. ROAD ELPHINSTON(W) MUMBAI 400 013. (PAN ANXPS1972P) VS. ASSTT. COMMISSIONER OF INCOME-TAX-12(1) . RESPON DENT ROOM NO. 117 AAYAKAR BHAVAN M.K.MARG MUMBAI 400 020. REVENUE BY : MR. SATBIR SINGH ASSESSEE BY : MR. VIJAY MEHTA ORDER PER V. DURGA RAO J.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF CIT(A)- XII MUMBAI PASSED ON 15/05/2008 FOR THE A SSESSMENT YEAR 2004-05. THE ASSESSEE HAS ALSO RAISED A C.O. AGAINS T THE SAID ORDER OF CIT(A). ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 2 2. THE GROUNDS RAISED BY THE REVENUE READ AS UNDER: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LD. CIT(A) HAS ERRED IN ALLOWING CLAIM OF BAD DEBT S OF RS. 2 41 85 780/- WITHOUT APPRECIATING THE FACT THAT AM OUNT OF BAD DEBTS WERE NEVER CREDITED TO PROFIT AND LOSS ACCOUN T AND THUS NEVER INCLUDED IN THE COMPUTATION OF INCOME OF PREV IOUS YEAR OR THE EARLIER YEARS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FUNDAMENTAL PR INCIPLE FOR ALLOWING THE CLAIM OF BAD DEBTS THAT THE DEBTS HAVE TO BE OWNED BY THE ASSESSEE TAXED IN THE EARLIER YEARS SO ALS O WHETHER THE DEBT HAS BECOME BAD IN THE YEAR UNDER CONSIDERATION . 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND(S) BE SET ASIDE AND THAT OF THE AO BE RESTOR ED. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E AO OBSERVED THAT THE ASSESSEE WAS A MEMBER OF BSE BUT DURING THIS YE AR HIS BSE CARD WAS INOPERATIVE/UNDER SUSPENSION. THEREFORE THERE WAS NO SHARE BROKING BUSINESS DURING THE YEAR. HE BASICALLY WAS AN INVESTOR WHO INVESTED IN SHARES ON LONG TERM AND SHORT TERM BASI S ON HIS OWN ACCOUNT. DURING THE YEAR UNDER CONSIDERATION SOME OF THE SHARES WERE PURCHASED AS INVESTMENTS FOR LONG TERM AND SOM E FOR SHORT TERM EARNED COMMISSION/BROKERAGE ON INVESTMENTS IN MUTUA L FUNDS. HE WAS ALSO DOING SHARE BROKING FOR HIS CLIENTS THROUG H OTHER BROKERS. THE ASSESSEE HAD CLAIMED THE BAD DEBTS OF RS. 2 41 85 781/- FOR WHICH THE ASESSSEE SUBMITTED THE NAMES OF THE PARTI ES AND THEIR ADDRESSES AMOUNTS OF BAD DEBTS DETAILS IN RESPECT OF RECOVERY PROCEEDINGS TAKEN LEDGER AC/S U/S 133(6) OF THE AC T WHICH WERE VERIFIED BY THE AO. WHEN THE AO QUESTIONED AS TO WH Y THE BAD SHOULD NOT BE DISALLOWED AS THE CLAIM DOES NOT REPRESENTS ASSESSEES OWN TRANSACTION BUT TRANSACTION DONE ON BEHALF OF HIS C LIENTS ON WHICH HE EARNS BROKERAGE THE ASSESSEE EXPLAINED THAT HE WAS MEMBER OF BSE BUT THE SAME WAS DEACTIVATE AND EVEN TODAY HIS CARD IS CLOSED DUE TO WHICH THERE IS NO SHARE BROKERAGE INCOME. THE BAD D EBTS CLAIMED BY THE ASSESSEE IS ALSO RELEVANT TO THAT PERIOD ONLY. ON VERIFICATION OF THE RECORD REVEALS THAT THE TURNOVER SHOWN BY THE ASSES SEE IS HIS CLIENTS ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 3 MONEY THEREFORE THERE IS NO QUESTION OF ALLOWING BAD DEBT OR ALLOWING THE SAME AS BUSINESS IN THE CASE OF THE ASSESSEE. T HE ASSESSEE MADE VARIOUS SUBMISSIONS BEFORE THE AO WITH FEW OF THE J UDGMENTS OF VARIOUS COURTS AND TRIBUNAL AND THEIR COMMENTS ON T HE BAD DEBTS CLAIMED WHICH WERE EXTRACTED BY THE AO IN HIS ORDE R AT PAGE 2 TO 6. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE AO REJECTED BAD CLAIM OF THE ASSESSEE BY HOLDING AS UNDER:- 4.6 THE ALLOWABILITY OF CLAIM U/S 36(1)(VII) IS FUR THER GOVERNED BY THE SECTION 36(2) OF THE ACT. SECTION 36(2) PROV IDES THAT UNLESS SUCH DEBT OR PART THEREOF HAVE BEEN TAKEN INTO ACCO UNT IN THE COMPUTATION OF INCOME OF PREVIOUS YEAR OR EARLIER P REVIOUS YEARS IT CANNOT BE ALLOWED AS BAD DEBT U/S 36(1)(VII). TH IS HAS SIGNIFICANT IMPLICATIONS IN THE CASE OF SHARES AND STOCKBROKERS. THE BROKER ACT AS AGENTS AND FACILITATE TRANSACTION S BETWEEN PRINCIPALS. IN THE CASE OF SHARE & STOCK BROKERS W HAT IS CREDITED TO PROFIT & LOSS ACCOUNT IS THE BROKERAGE INCOME AR ISING FROM THE PURCHASE OR SALE ON BEHALF OF THE CLIENTS. THE SHAR E & STOCK BROKER BUYS AND SELLS ON BEHALF OF CLIENT FROM THE STOCK EXCHANGE FOR WHICH IT EARNS BROKERAGE INCOME OF SAY 0.25% TO 2% OF PURCHASE/SALE VALUE. THE SHARE BROKER IS LIABLE TO TAX ON ITS BROKERAGE INCOME SUBJECT TO ALLOWANCE OF EXPENSES A ND OTHER INCOME. THE VALUE OF PURCHASE OR SALE ON BEHALF OF CLIENTS IS NOT CREDITED OR DEBITED TO PROFIT & LOSS ACCOUNT. THE C ONTENTION OF THE ASSESSEE THAT THE AMOUNT WRITTEN OFF IS PART OF THE WHOLE OF THE DEBT WHICH HAS BECOME BAD AND HENCE FULFILLS THE CO NDITION OF SECTION 36(2) IS NOT ACCEPTABLE. WHAT IS CONTEMPLAT ED U/S 36(2) IS PART OF ANY DEBT OR WHOLE OF THE DEBT WHICH HAS BEE N TAKEN INTO CONSIDERATION WHILE COMPUTING THE TOTAL INCOME CAN ONLY BE CONSIDERED FOR WRITE OFF AS BAD DEBT. IN THE INSTA NT CASE THE AMOUNT TAKEN INTO CONSIDERATION FOR COMPUTATION OF TOTAL INCOME IS ONLY BROKERAGE AMOUNT AND NOT THE VALUE OF SHARE S AND HENCE BAD DEBT CAN ONLY BE IN RESPECT OF BROKERAGE OR PAR T OF THE BROKERAGE WHICH REMAINED UNCOLLECTED. 4. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APP EAL BEFORE THE CIT(A). 5. BEFORE THE CIT(A) THE ASSESSEE FILED A DETAILED WRITTEN SUBMISSION ALONG WITH THE DETAILS OF GROSS DUES TH E ADJUSTMENTS MADE AGAINST THE MARGIN MONEY AND AUCTION OF SHARES AND FINALLY ONLY THE REMAINING BALANCE WAS CLAIMED AS BAD DEBTS. TH E ASSESSEE ALSO FURNISHED A COPY OF LIST OF ALL THE 44 PARTIES WHI CH WAS SUBMITTED ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 4 BEFORE THE AO TO SHOW THAT THE ASSESSEE HAS FOLLOW ED ALL THE PROVISIONS OF THE ACT BY ADJUSTING IN TOTAL THE G ROSS DUES OF RS. 9.73 CRORES FIRST AGAINST THE MARGIN MONEY AND THE AUCTI ON OF SHARES SALES PROCEEDS AMOUNTING TO RS. 7.31 CRORES AND THEREAFTE R ONLY THE NET BALANCE OF RS. 2.41 CRORES REMAINING WAS CLAIMED AS BAD DEBTS U/S 36(1)(VII) RWS 36(2) OF THE ACT. THEREFORE HE CONT ENDED THAT IT WAS NOT PROPER ON THE PART OF THE AO TO COMMENT THAT THE AS SESSEE HAS NOT FOLLOWED THE PROVISIONS OF THE ACT PROPERLY AND FUL LY. THE ASSESSEE RELIED UPON VARIOUS CASE LAWS IN SUPPORT OF HIS CAS E. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO BY OBSERVING AS UNDER:- 2.57 THE UNDERSIGNED HAS CAREFULLY PERUSED THROUGH THE RIVAL CONTENTIONS. IT IS NOTED THAT THE AO HAS DISALLOWED THE CLAIM OF THE BAD DEBTS ON CERTAIN SPECIFIC POINTS ONLY WHICH HAVE BEEN EXPLAINED IN DETAIL BY THE APPELLANT SUPPORTED BY V ARIOUS COURT/ITAT DECISIONS. THE AO HAS NOWHERE DOUBTED TH E IDENTITY OF PARTIES OR THE AMOUNTS OF THE GROSS DUES MARGIN MONEY PROVIDED FOR AND UTILIZED IN CASE OF DEFAULTS AND T HE ADJUSTMENT OF LOSSES BY THE AUCTION OF THE UNCLAIMED SHARES/SE CURITIES (PURCHASED BY THE APPELLANT SHARE BROKER AND NOT TA KEN BY THE CLIENTS). IT IS ALSO NOT DISPUTED BY THE AO THAT T HE APPELLANT HAD EARNED BROKERAGE INCOME ON THESE TRANSACTIONS AND T AKEN ALL POSSIBLE RECOVERY MEASURES LIKE FILING OF FIR ISSU E OF NOTICES OF RECOVERY U/S 138 OF THE NEGOTIABLE INSTRUMENTS ACT REFERRING TO ARBITRATIONS ETC. AND ONLY THEREAFTER SUCH CLAIMS WERE MADE. 6. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 7. THE LEARNED DR SUBMITTED THAT THE ASSESSEE HAS S TOPPED BROKERAGE BUSINESS BEFORE 2001 AND HE HAS NOT SUBMI TTED THE PARTIES FROM WHOM HE HAS TO RECEIVE PAYMENTS IN THE YEAR OF TRANSACTION NEITHER BEFORE THE AO NOR BEFORE THE CIT(A). HE TH EREFORE SUBMITTED THAT THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE AO. 8. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT ALL THE DETAILS IN RESPECT OF BROKER AGE INCOME TAKEN ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 5 INTO ACCOUNT AND ALL THE LEDGER ACCOUNTS DETAILS WE RE FILED BEFORE THE AO. 9. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY TH E SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF SHREYAS S. MORAKHIA 131 TT J (MUMBAI)(SB) 641WHEREIN T HE SPECIAL BENCH CONCLUDED THAT AMOUNT RECEIVABLE BY THE ASSESSEE SHARE BROKER ON ACCOUNT OF BROKERAGE IS A PART OF DEBT RE CEIVABLE BY HIM FROM HIS CLIENTS AGAINST PURCHASE OF SHARES ON THEIR BEH ALF AND ONCE SUCH BROKERAGE IS CREDITED TO HIS P&L A/C AND THE SAME I S TAKEN IN TO ACCOUNT IN COMPUTING HIS INCOME THE CONDITION STIPULATED I N S. 36(2)(I) GESTS SATISFIED AND THEREFORE THE WRITE OFF OF THE DEBT REPRESENTING THE IRRECOVERABLE AMOUNT RECEIVABLE FROM THE CLIENTS AG AINST PURCHASE OF SHARES ON THEIR BEHALF IS ALLOWABLE AS A BAD DEBT. WE FIND THAT WHILE DELETING THE DISALLOWANCE OF BAD DEBTS CLAIM OF THE ASSESSEE THE CIT(A) HELD THAT T HE AO HAS NOWHERE DOUBTED THE IDENTITY OF PARTIES O R THE AMOUNTS OF THE GROSS DUES MARGIN MONEY PROVIDED FOR AND UT ILIZED IN CASE OF DEFAULTS AND THE ADJUSTMENT OF LOSSES BY THE AUCTIO N OF THE UNCLAIMED SHARES/SECURITIES (PURCHASED BY THE APPELLANT SHARE BROKER AND NOT TAKEN BY THE CLIENTS). IT IS ALSO NOT DISPUTED BY THE AO THAT THE APPELLANT HAD EARNED BROKERAGE INCOME ON THESE TRAN SACTIONS AND TAKEN ALL POSSIBLE RECOVERY MEASURES LIKE FILING OF FIR ISSUE OF NOTICES OF RECOVERY U/S 138 OF THE NEGOTIABLE INSTRUMENTS A CT REFERRING TO ARBITRATIONS ETC. AND ONLY THEREAFTER SUCH CLAIMS WERE MADE. IN SO FAR AS THE VIOLATION OF SEBI GUIDELINES ARE CONCERN ED THE TRIBUNAL HAS CONSIDERED THE ISSUE IN THE CASE OF SHREYAS S. MORAKHIA (SUPRA) AND OBSERVED AT PAGES 22 & 23 OF ITS ORDER THAT WHERE THE ASSESSEE BROKER HAS ACTUALLY SUFFERED A LOSS AS A RESULT OF NON-RECOVERY OF THE AMOUNT RECEIVABLE FROM THE CLIENTS AGAINST PURC HASE OF SHARES ON THEIR BEHALF THE ALLOWABILITY THEREOF IS REQUIRED TO BE CONSIDERED IN ACCORDANCE WITH THE RELEVANT PROVISIO NS OF THE IT ACT AND IT IS IRRELEVANT WHETHER SUCH LOSS HAS BEEN SUFFERED BY ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 6 THE ASSESSEE AS A RESULT OF NOT FOLLOWING THE SAID RULES AND REGULATIONS AND GUIDELINES OR EVEN AFTER FOLLOWING THE SAME . IN VIEW OF THE SPECIAL BENCH DECISION OF ITAT IN THE C ASE OF SHREYAS S. MORAKHIA (SUPRA) WE DO NOT FIND ANY INFIRMITY IN T HE ORDER OF THE CIT(A) AND THEREFORE THE ORDER OF THE CIT(A) IS HEREBY UPHELD ON THIS CO UNT. ACCORDINGLY THE GROUND RAISED BY THE REVENUE IS DISMISSED. 10. IN THE RESULT APPEAL OF THE REVENUE IS DISMISS ED. 11. AS REGARDS GROUND NO. 1 IN THE C.O. FILED BY TH E ASSESSEE THE SAME IS IN SUPPORT OF THE ORDER OF THE CIT(A). SINC E WE HAVE UPHELD THE ORDER OF THE CIT(A) IN REVENUES APPEAL (SUPRA) THIS GROUND BECOMES INFRUCTUOUS AND THE SAME IS DISMISSED AS IN FRUCTUOUS. 12. AS REGARDS GROUND NO. 2 REGARDING DISALLOWANCE OF RS. 50 000/- U/S 14A THE LEARNED COUNSEL FOR THE ASSESSEE HAS N OT PRESSED THIS GROUND AT THE TIME OF HEARING BEFORE US THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 13. IN THE RESULT THE APPEAL OF THE REVENUE AND TH E C.O FILED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF JULY 2011. SD/- SD/- (R.S. SYAL) (V. D URGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI DATED: 29 TH JULY 2011 KV ITA NO. 4963/M/2008 & C.O. 32/M/09 MADHUKAR C. SHETH 7 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE B BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI.