The ACIT, Central Circle-1(3),, Ahmedabad v. Arth Stock Broking Pvt.Ltd., Ahmedabad

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI JM AND D.C.AGRAWAL A M ASSTT. CIT CEN.CIRCLE 1(3) AHMEDABAD. VS. ARTH STOCK BROKING (P) LTD. 804 ABHIJEET-1 MITHAKHALI CIRCLE NAVRANGPURA AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI ALOK JOHRI CIT DR. RESPONDENT BY:- NONE (WRITTEN SUBMISSION). O R D E R PER D.C. AGRAWAL ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUND :- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIR ECTING TO ALLOW THE DEDUCTION OF RS.11 61 252/- U/S 28 OF THE INCOME-TAX ACT 1961. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE IS A STO CK BROKER AND IT HAS ACTED AS SUB-BROKER FOR NSE AND BSE. DURING THE YEA R UNDER CONSIDERATION ASSESSEE CLAIMED EXPENSES OF RS.11 61 252/- AS BAD DEBT. THE AMOUNT WAS DUE FROM M/S KUMARPAL KANTILAL SECUR ITIES (P) LTD. WHICH HAD CARRIED OUT BUSINESS OF PURCHASE AND SALE OF SHARES THROUGH ASSESSEE COMPANY FROM 22.5.00. AT THE END OF FY 200 0-01 THERE WAS A DEBIT BALANCE OF RS.11 79 607.63. THERE WERE FURTHE R TRANSACTIONS DURING 2001-02 LEAVING THE DEBIT BALANCE OF RS.11 61 262/- . DURING THE FY ITA NO.173/AHD/2009 ASST. YEAR 2004-05 ITA NO.173/AHD/2009 ASST. YEAR 2004-05 2 2002-03 AND 2003-04 THE ASSESSEE CLAIMED THAT IT CO ULD NOT RECOVER ANY AMOUNT FROM THE SAID DEBTOR AND THEREFORE DURING THE YEAR UNDER CONSIDERATION THEY WERE WRITTEN OFF. THE ASSESSEE A LSO CLAIMED THE SAID AMOUNT AS TRADE LOSS AS ACCORDING TO HIM TRANSACTIO NS WITH M/S KUMARPAL KANTILAL SECURITIES (P) LTD. WERE DURING THE COURSE OF BUSINESS OF SHARE TRADING AND AS THAT PARTY COULD NOT MAKE THE PAYMEN T DUE TO HEAVY FINANCIAL LOSSES HAVE CLAIMED IT AS A TRADE LOSS. T HE ASSESSEE RELIED ON THE FOLLOWING JUDGMENTS :- (A) BOMBAY HIGH COURT DECISION IN LORDS DAIRY FARM LTD . VS. CIT 27 ITR 700;. (B) SUPREME COURT DECISION IN BADRIDAS DAGA VS. CIT 34 ITR 10; (C) MADRAS HIGH COURT DECISION IN DEVI FILMS (P) LTD. L TD. VS. CIT 75 ITR 301; (D) SUPREME COURT DECISION IN CIT VS. S.C. KOTHARI 82 I TR 794; (E) SUPREME COURT DECISION IN RAMCHANDAR SHIVNARAYAN VS . CIT 111 ITR 263 (SC). HOWEVER THE AO DID NOT ALLOW THE CLAIM OF THE ASSE SSEE AS BAD DEBT ON THE GROUND THAT AMOUNTS OF PURCHASE AND SALE OF SHA RES ARE NOT RECORDED IN THE PROFIT AND LOSS ACCOUNT PREPARED FOR HIS BRO KING BUSINESS THEREFORE CONDITION LAID DOWN UNDER SECTION 36(2) ARE NOT SAT ISFIED. THEREFORE EVEN IF IT IS WRITTEN OFF IT CANNOT BE ALLOWED AS BAD D EBT. IN RESPECT OF THE CLAIM THAT THIS AMOUNT SHOULD BE ALLOWED AS A TRADING LOS S THE LD. AO DENIED THE CLAIM ON THE GROUND THAT ASSESSEE HAS NOT DISCH ARGED THE BURDEN AS LAID-DOWN UNDER SECTION 28 OR UNDER SECTION 37(1). FURTHER SUCH AMOUNT IF RECOVERED CANNOT BE TAXED AS REMISSION OR CESSASIO N OF LIABILITY. 3. HOWEVER THE LD. CIT(A) DID NOT ALLOW THE CLAIM AS BAD DEBT BUT HE ALLOWED THE CLAIM AS TRADE LOSS ON THE GROUND THAT IT WAS INCURRED DURING THE COURSE OF BUSINESS. IN THIS REGARD LD. CIT(A) H AS OBSERVED AS UNDER :- 8. THE NEXT QUESTION FOR DETERMINATION AS TO WHETH ER SUCH A LOSS COULD BE CONSIDERED U/S 28 OF THE IT ACT. IN THIS REGARD THE COURTS HAVE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 3 CONSISTENTLY HELD THAT THE STATUTORY PROVISIONS REL ATING TO THE ALLOWANCE OF A BAD DEBT IS NOT EXHAUSTIVE. A DEBT BECOMES BAD FO R PURPOSES OF DEDUCTION IN THE COMPUTATION OF TOTAL INCOME IF FAC TS OBJECTIVELY CONSIDERED REASONABLY POINT TO AN INFERENCE THAT HA VING REGARD TO THE CIRCUMSTANCES OF THE DEBTOR IT HAS BECOME DIFFICUL T OR IMPOSSIBLE OF RECOVERY. WHETHER A DEBT IS OF SUCH A NATURE IS ALW AYS A QUESTION OF FACT WHICH HAS TO BE DETERMINED IN THE LIGHT OF THE EVID ENCE AND CIRCUMSTANCES OF EACH CASE. STILL THERE ARE CERTAIN WELL-KNOWN T YPES WHERE FINANCING IS USUALLY AN INTEGRAL PART OF ASSESSEES BUSINESS. FO R INSTANCE COMMISSION AGENTS EMPLOYED FOR SALE OF PRINCIPALS GOODS USUAL LY MAKE ADVANCES TO THE PRINCIPAL OR ANOTHER PERSON ON HIS BEHALF. IN S UCH CASE IF THE DEBT GETS BAD IT MAY SUCCESSFULLY BE CLAIMED AS A TRADI NG LOSS (CIT VS.ABDUL RAZAK & CO. (1982) 136 ITR 825 (GUJ) AND CIT VS. JW ALA PD. RADHA KISHAN (1977) 107 ITR 540 (ALL). THERE IS NO PRESUM PTION IN THE MATTER AND IT IS FOR THE ASSESSEE TO ESTABLISH IT. A TRADI NG LOSS HAS A WIDER CONNOTATION THAN A BAD DEBT. A BAD DEBT MAY ALSO BE A TRADING LOSS BUT A TRADING LOSS NEED NOT NECESSARILY BE A BAD DEBT. TH ERE MAY BE A BAD DEBT WHICH MAY NOT FALL WITHIN THE PURVIEW OF SECTION 36 (1)(VII) READ WITH SECTION 36(2) BUT MAY WELL BE REGARDED AS ONE ELIGI BLE TO DEDUCTION IN THE COMPUTATION OF THE NET PROFITS CHARGEABLE TO TAX BE CAUSE SUCH A BAD DEBT WILL HAVE TO BE TAKEN INTO ACCOUNT ON THE SIDE OF D EBIT WHICH WILL REDUCE THE NET PROFITS. BUT WHETHER ALLOWANCE CAN BE GIVEN IN THAT WAY MAY SOMETIMES DEPEND ON WHETHER THE OUTGOING OR WHAT IS REGARDED AS BAD DEBT RESULTING IN A LOSS IS ON THE CAPITAL OR REVE NUE ACCOUNT. MOST TRADING LOSSES INCURRED IN THE COURSE OF CARRYING O N THE BUSINESS IN A PARTICULAR YEAR WILL ALSO COME UNDER THAT CATEGORY AND WILL NATURALLY ENTER INTO COMPUTING THE NET TOTAL INCOME AS THE RE AL PROFITS CHARGEABLE TO TAX CANNOT BE ARRIVED AT WITHOUT SETTING OFF OF LEG ITIMATE TRADING LOSS (DEVI FILMS (P) LTD. VS. CIT (1970) 75 ITR 301 (MAD ). 9. IN THE PRESENT CASE THE UNCONTROVERTED FACTS ARE THAT THE APPELLANT IS A STOCK BROKER AND THEREFORE IT CANNOT COMMIT D EFAULT IN MAKING PAYMENTS TO THE STOCK EXCHANGE AS ALL THE TRANSACTI ONS ARE ENTERED THROUGH STOCK EXCHANGE. IF THE APPELLANT COMPANY CO MMITS DETAULTS IN MAKING PAYMENTS WITH THE STOCK EXCHANGE THEN THE APPELLANT MAY LOOSE ITS BUSINESS FOREVER AND ITS MEMBERSHIP MAY BE TERM INATED. IN SUCH SITUATION IN ORDER TO AVOID THE LOSS OF BUSINESS F OREVER IT HAS TO MAKE PAYMENT OF RS.11 61 252/- FROM ITS OWN RESOURCES. T HEREFORE IN ORDER TO PROTECT THE INTEREST IN BUSINESS THE APPELLANT HAS TO INCUR SUCH LOSS. THIS LOSS HAS BEEN INCURRED IN A NORMAL BUSINESS ACTIVIT Y AND IT IS ON REVENUE ACCOUNT. IN SUCH SITUATION THE DEDUCTION OF RS.11 61 252/- IS CLEARLY ALLOWABLE U/S 28 OF THE IT ACT. THE SAME IS DIRECTE D TO BE ALLOWED. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 4 10. I MAY ALSO MENTION THAT IN APPELLANTS CASE ON SIMILAR FACTS THE HONBLE ITAT HAS DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT COMPANY FOR ASST. YEAR 2000-01 VIDE ORDER NO.ITA NO.2319/AH D/2006 DATED 07.08.2009. 11. IN THE RESULT THE APPEAL IS TREATED AS ALLOWED . 4. THE ASSESSEE HAD FILED WRITTEN SUBMISSIONS WHERE IN IT HAS RELIED ON THE DECISION OF THE TRIBUNAL IN ITS OWN CASE FOR AS ST. YEAR 2001-02 WHEREIN UNDER SIMILAR CIRCUMSTANCES THE CLAIM OF TH E ASSESSEE AS BAD DEBT AS WELL AS TRADING LOSS HAS BEEN ALLOWED FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF H.NYALCHAND FINANCIAL SERVI CES LTD. AHMEDABAD IN ITA NO.2631/AHD/2004 AND OTHERS PRONOUNCED ON 2. 09.2009 FROM WHERE FOLLOWING QUOTE HAS BEEN REFERRED :- 8 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO G ONE THROUGH VARIOUS CASE LAWS AS HAVE BEEN CITED BEFORE US. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAS WRIT TEN OFF THE FOLLOWING AMOUNTS DURING THE YEAR IN ITS P&L ACCOUNTS: SR. NO. NAME OF THE CLIENT AMOUNT WRITTEN OF TOTAL ACCOUNT -1 ACCOUNT -2 1 NANDI INVESTMENT 48 32 050 - 48 32 050 2 JIGNESH SHAH 10 71 470 - 10 71 470 3 UDAYBHAI BACHHUBHAI 68 57 595 21 07 897 89 65 492 4 LCC INVESTMENT 8 18 000 - 8 18 000 5 L K SATPATHI 75 000 - 75 000 6 GIRISH PATEL 1 45 235 - 1 45 235 TOTAL 1 37 99 350 21 07 897 1 58 62 518 THE ASSESSEE INITIALLY CLAIMED THE SAID SUM AS BAD DEBT U/S 36(1)(VII) AND SUBSEQUENTLY CLAIMED IT AS A LOS S INCIDENTAL TO THE BUSINESS ALLOWABLE U/S 28 OF THE ACT. THE AO DID NOT ALLOW THE SAID DEDUCTION. WHEN THE MATTER WENT BEFORE THE CIT(A) THE CIT(A) ALLOWED T HE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 5 CLAIM OF THE ASSESSEE U/S 28 OF THE ACT. THE REVENU E HAS CHALLENGED THE ACTION OF THE CIT(A) BEFORE US DELET ING THE SAID ADDITION ON ACCOUNT OF DISALLOWANCE OF THE CLAIM OF BAD DEBTS / TRADING LOSS. IN FACT WE NOTED FROM THE ORDER OF THE CIT(A) THAT THE CIT(A) DID NOT ALLOW T HE CLAIM OF THE ASSESSEE AS BAD DEBTS BUT ALLOWED THE CLAIM OF THE ASSESSEE AS A TRADING LOSS AS IS CLEAR FROM THE PARAGRAPHS REPRODUCED HEREINABOVE UNDER THE BRIEF F ACTS. THEREFORE THE ONLY ISSUE BEFORE US RELATES TO WHET HER THE SAID AMOUNT CAN BE ALLOWED U/S 28 OF THE ACT. THERE IS NO DISPUTE ON THE FACTS THAT THE ASSESSEE WAS ENGAGED IN A SHARE BROKING BUSINESS AND HAS BOUGHT AND SOLD THE SHARES DURING THE COURSE OF BUSINESS ON BEHALF OF I TS CLIENTS AND EARNED BROKERAGE THEREON. ON A QUERY F ROM THE BENCH HOW THIS LOSS HAS ARISEN DURING THE YEAR THE LEARNED AR VEHEMENTLY RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN LORD DAIRY FARM LTD. V CIT (1955) 27 ITR 700 (BOM) WHEN THE STATE OF GUJARAT WAS UNDER THE JURISDICTION OF BOMBAY HIGH COURT AND POINTED OUT THAT THIS DECISION IS HAVING BINDING FO RCE ON THE TRIBUNAL AS AT THAT TIME THE BOMBAY HIGH COURT HAD THE JURISDICTION OVER AHMEDABAD. IN THIS JUDGMENT I T WAS HELD THAT IN THIS CASE IT IS IN EVIDENCE THAT THE ASSESSEE WROTE OFF THIS AMOUNT OF RS.32 000 IN THE YEAR OF ACCOUNT. THE ADV OCATE-GENERAL SAYS THAT THERE IS NO FINDING THAT THIS AMOUNT BECA ME IRRECOVERABLE IN THIS YEAR. WHEN A BUSINESSMAN WRITES OFF AN AMOU NT THERE IS PRIMA FACIE EVIDENCE THAT THAT AMOUNT IS IRRECOVERA BLE. UNDOUBTEDLY THE DEPARTMENT CAN REBUT THE PRIMA FACI E INFERENCE BY DRAWING ATTENTION TO CIRCUMSTANCES OR BY LEADING SO ME EVIDENCE TO SUGGEST THAT THE POSITION TAKEN UP BY THE ASSESSEE WAS NOT CORRECT. IN THIS CASE THERE IS NO EVIDENCE WHATSOEVER ON THE RECORD EXCEPT THE FACT THAT THE ASSESSEE WROTE OFF THIS AMOUNT IN THE YEAR OF ACCOUNT. IN THE ABSENCE OF ANY EVIDENCE WE ARE ENTI TLED TO PRESUME THAT THE AMOUNT BECAME IRRECOVERABLE WHEN THE ASSES SEE WROTE IT OFF IN ITS BOOKS OF ACCOUNT. THEREFORE IN OUR OPIN ION NOT ONLY IS THE ASSESSEE ENTITLED TO CLAIM THIS AMOUNT OF RS. I 2G 000 AS A TRADING LOSS BUT IS ALSO ENTITLED TO CLAIM THIS AMO UNT IN THE ASSESSMENT YEAR VIZ. 1Q47-48. (EMPHASIS SUPPLIED ) ON THE BASIS OF THE SAID DECISION IT IS APPARENT TH AT WHEN A BUSINESSMAN WRITES OFF AN AMOUNT THERE IS A PRIM A ITA NO.173/AHD/2009 ASST. YEAR 2004-05 6 FACIE EVIDENCE THAT THE AMOUNT IS IRRECOVERABLE. TH ERE IS NO DISPUTE ABOUT THE FACT THAT THE ASSESSEE HAS WRI TTEN OFF THE AMOUNT DURING THE YEAR THEREFORE THE AMOUNT H AS BECOME IRRECOVERABLE DURING THE YEAR AND THE LOSS H AS ARISEN DURING THE YEAR UNDER CONSIDERATION. THIS JUDGMENT IS BINDING ON US. THERE IS NO CONTRARY EVI DENCE BEING BROUGHT ON RECORD BY THE REVENUE THAT THE AMO UNT HAS NOT BECOME IRRECOVERABLE DURING THE YEAR. ON TH IS BASIS WE ARE OF THE VIEW THAT THE LOSS HAS ARISEN D URING THE YEAR. 9 NOW THE QUESTION BEFORE US IS WHETHER THE ASSESSEE IS ENTITLED FOR THE DEDUCTION OF THE SAID LOSS OR NOT. THIS ISSUE IS DULY COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SO UTH GUJARAT SHARE & SHARE BROKERS LTD. V ITO [ITA NO.1502/AHD/2004] IN WHICH MY COLLEAGUE SHRI I S VERMA JUDICIAL MEMBER IS ONE OF THE MEMBERS. THE DECISION OF THE COORDINATE BENCH IS BINDING ON US I N VIEW OF THE DECISION OF THE HONBLE GUJARAT HIGH COURT I N THE CASE OF SAYAJI IRON AND ENGG. CO. V CIT (2002) 253 ITR 749 (GUJ) IN WHICH IT HAS BEEN HELD THAT:- (II) THAT THE TRIBUNAL OF FACT HAD NO RIGHT TO CO ME TO A CONCLUSION CONTRARY TO THE ONE REACHED BY ANOTHER B ENCH OF THE SAME TRIBUNAL FROM THE ONE TAKEN ON THE SAME FACTS. IF THE TRIBUNAL WANTED TO TAKE AN OPINION DIFFERENT FROM THE ONE TA KEN BY AN EARLIER BENCH IT OUGHT TO PLACE THE MATTER BEFORE THE PRESIDENT OF THE TRIBUNAL SO THAT HE COULD HAVE THE CASE REFERR ED TO A BENCH CONSISTING OF THREE OR MORE MEMBERS FOR WHICH THERE WAS PROVISION IN THE INCOME-TAX ACT ITSELF. 10 WE HAVE ALSO GONE THROUGH THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF SOUTH GUJARAT SHARE & SHARE BROKERS LTD. V ITO [ITA NO.1502/AHD/2004]. WE FIND THAT IN THIS DECISION TH E TRIBUNAL AFTER DISCUSSING THE DECISIONS IN THE CASE S OF CIT V ABDULLABHAI ABDULKADAR (1961) 41 ITR 545 (SC) BADRIDAS DAGA V CIT (1958) 34 ITR 10 (SC) A V THOM AS & CO. LTD. V CIT (1963) 48 ITR 67 CIT V BIRLA BROT HERS (P) LTD. (1970) 77 ITR 751 MADAN GOPAL BAGLA V CIT (1956) 30 ITR 174 CIT V NAINITAL BANK LTD. (1965) 55 ITA NO.173/AHD/2009 ASST. YEAR 2004-05 7 ITR 707 CIT V ABDUL RAZAK & CO. 136 ITR 825 (GUJ) CIT V W HOWRAH AND CO. (P) LTD. 194 ITR 345 (CAL) CIT V CRESCENT FILMS (P) LTD. 248 ITR 670 (MAD) MAHESH J PATEL V ACIT (2008) 297 ITR (AT) 74 (MUM) HAS HELD AS UNDER: 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS FACT S AND CIRCUMSTANCES OF THE CASE AND DECISIONS RELIED UPON BY THE PARTIES AND ARE OF THE OPINION THAT IT WILL BE USEF UL FIRST TO CONSIDER THE VARIOUS DECISIONS RELIED UPON BY THE PARTIES AN D THEREFORE WE PROCEED TO CONSIDER THE SAME ONE BY ONE AS UNDER:- (I)DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CA SE OF THE CIT VS. M/S.EQUITORIAL PVT.LTD. (1974) TAX. 37(3) -82 - IN ITR NO.12 OF 1971 DECIDED ON 23/11/1973 (COPY ON RECORD ). (A) IN THIS CASE FOLLOWING TWO QUESTIONS WERE REFE RRED (FIRST AT THE INSTANCE OF THE ASSESSEE AND SECOND AT THE INST ANCE OF THE REVENUE) BY THE TRIBUNAL FOR THE OPINION OF THE HON 'BLE HIGH COURT. (1) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE THE INITIATION OF RE-ASSESSMENT PROCEEDINGS UNDER S ECTION 147(B) OF THE INCOME-TAX ACT 1961 WAS VALID? (2)WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE RESPONDENT WAS ENTITLED TO CLAIM THE DEDUCTION OF R S.1 78 523/- FROM ITS TOTAL INCOME? (B) SINCE THE ISSUE BEFORE US IN THE PRESENT APPEAL RELATES TO DEDUCTION OF BAD DEBT WE CONSIDER IT JUSTIFIED ONL Y TO REFER TO THE FACTS AND THE DECISION OF THE HON'BLE HIGH COURT W ITH RESPECT TO QUESTION NO.(2) (SUPRA) ONLY. (C). THE FACTS RELATING TO THE QUESTION NO.2(SUPRA) AS HAVE BEEN REVEALED FROM THE RECORDS ARE THAT THE ASSESS EE-COMPANY WAS CARRYING ON THE BUSINESS OF SALE AND PURCHASE O F ELECTRICAL GOODS COLOURS ETC. AND ITS MAIN BELONGINGS WERE W ITH M/S.R.K.DUNDAS (EASTERN) LIMITED BOMBAY (HEREINAFT ER REFERRED TO AS THE DUNDAS). THE ASSESSEE USED TO PURCHASE THE GOODS ON THE MERITS MADE BY THE DUNDAS WHO IN TURN USE D TO ITA NO.173/AHD/2009 ASST. YEAR 2004-05 8 PURCHASE THE GOODS FROM THE PARENT COMPANY IN THE U NITED KINGDOM. FOR THE ASSESSMENT YEAR 1964-65 THE ASS ESSEE CLAIMED AN AMOUNT OF RS.1 78 523/- AS BAD DEBT IN R ESPECT OF DUNDAS AND THE INCOME TAX OFFICER ALLOWED THE SA ME. IN THE ASSESSMENT YEAR 1960-61 THE ASSESSEE HAD MADE A SI MILAR CLAIM OF BAD DEBT IN RESPECT OF LIABILITIES FROM D UNDAS THE INCOME TAX OFFICER HAD REJECTED THE CLAIM ON THE SIMPLE GR OUND THAT THE CLAIM AT THAT STAGE WAS PREMATURE. THE ASSESSEE PR EFERRED AN APPELLATE ASSISTANT COMMISSIONER WHO AGREED WITH TH E VIEW OF THE INCOME TAX OFFICER AND ALSO RECORDED THE FINDI NG THAT THE CLAIM WAS OF A CAPITAL NATURE AND WAS NOT ALLOWABLE EITHER U/S.10(2)(XI) OF THE ACT OF 1922 OR U/S.10(2)(XV) O R U/S.10(1) SINCE IT WAS NOT A REVENUE LOSS NOT A BAD DEBT NOR RELAT ED IN LAWS. THE ASSESSMENT ORDER FOR ASST.YEAR 1964-65 WAS PASS ED ON 30/11/1964 WHEREAS THE ORDER OF THE ASSESSMENT YEA RS 1960-61 WHICH WAS THEN UNDER APPEAL WAS PASSED ON JULY 31 1965. SUBSEQUENTLY THE ASSESSMENT FOR ASST.YEAR 1964-65 WAS RE- OPENED US/.147(1)(B) OF THE ACT AND ASSESSEES CLAI M OF DEDUCTION OF RS.1 78 523/- WAS WITHDRAWN. THE MAT TER WAS TAKEN BY THE ASSESSEE FIRST BEFORE THE APPELLATE AS SISTANT COMMISSIONER BUT FAILED. THE ASSESSEE THEN TOOK THE MATTER BEFORE THE TRIBUNAL THE TRIBUNAL UPHELD THE INITIA TION OF PROCEEDINGS U/S.1471(1)(B) OF THE ACT. (D). AS ALREADY NOTED THE ASSESSEES BUSINESS WAS PRINCIPALLY WITH THE DUNDAS AND WAS COMPLETELY RELYING ON THE IMPORT LICENCES POSSESSED BY DUNDAS FOR IMPORTING GOODS IN WHICH THE ASSESSEE WAS DEALING IN INDIA. ON MAY 1 1959 A N AGREEMENT WAS ENTERED INTO BETWEEN THE DUNDAS AND THE ASSE SSEE WHEREBY THE ASSESSEE-COMPANY HAD AGREED TO ADVANCE THE SUM NOT EXCEEDING RS.2 LACS TO THE DUNDAS AND THE ADV ANCES WERE TO BE MADE AS AND WHEN REQUIRED BY THE DUNDAS. CLAUSE(2) OF THE AGREEMENT WERE AS UNDER:- SUCH MONEYS WILL BE UTILIZED BY DUNDAS PARTLY FOR LIQUIDATING SOME OF THEIR LIQUIDATED DEBTS AND PARTLY TO FINANC E THE FUTURE RUNNING OF THE BUSINESS . CLAUSE (6) OF THE AGREEMENT PROVIDED THAT DUNDAS SHOULD PAY TO THE ASSESSEE-COMPANY A SUM OF RS.20 000/- PER YEAR FOR THE SERVICE RENDERED BY THE ASSESSEE AND IN ADDITION T HE DUNDAS WERE TO PAY COMPOUND INTEREST AT 9% PER ANNUM WITH SIX MONTHLY RESULTS. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 9 CLAUSE (8) PROVIDED THAT THE ASSESSEE-COMPANY HAD AGREED TO DO ITS UTMOST TO ASSIST AND IMPROVE THE BUSINESS SO THAT THE DUNDAS COULD EARN PROFITS ON THEIR TRADING IN FU TURE.. CLAUSE(10) : APART FROM THE AMOUNT OF INTEREST AND THE SUM OF RS.20 000/- ALREADY REFERRED TO PROVIDED THAT THE ASSESSEE WAS ALSO ENTITLED TO 25 % OF THE NET PROFIT SUBJECT TO A MINIMUM OF RS.12 000/- PER YEAR EVEN IF THERE WAS NO PROFIT OR EVEN IF PROFITS WERE INADEQUATE IN THAT PARTICULAR YEAR SO ON AND S O FORTH. SIMILARLY THERE WAS AN ANOTHER AGREEMENT DATED 19- 10-1959 BY WAY OF CLAUSES(3) (4) OF AGREEMENT OF 05/05/1959 WE RE DELETED BY MUTUAL AGREEMENT. THE FINANCIAL POSITION OF THE DUNDAS DETERIO RATED AND A WINDING UP APPLICATION AGAINST THE DUNDAS WERE PR ESENTED IN THE HIGH COURT OF BOMBAY ON NOVEMBER 25-1959. ON FEBRU ARY 19 1960 A PROVISIONAL LIQUIDATOR WAS APPOINTED. SINC E DUNDAS WERE NOT IN A POSITION TO MEET THE CONDITIONS OF TH E AGREEMENT THE ASSESSEE HAD CLAIMED A BAD DEBT OF RS.1 78 523/ - IN ASSESSMENT YEAR 1964-65 WHICH WAS DISALLOWED IN RE- ASSESSMENT PROCEEDINGS. THE TRIBUNAL HAD AFTER RE LYING ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF IN DORE MALWA UNITED MILLS LTD. VS. STATE OF MADHYA PRADESH (1965 ) 965 ITR 736] AND ON THE DECISION IN THE CASE OF BADRIDAS DA GA VS. COMMISSIONER OF INCOME-TAX (1958) [34 ITR 10] HELD THAT THE AMOUNT IN QUESTION WAS ALLOWABLE AS BAD DEBT U/S.36 (1)(VII). THE TRIBUNAL ALSO REFERRED TO THE DECISION IN CIT VS. N AINITAL BANK LTD (1965)[55 ITR 707] AND ULTIMATELY HELD THAT IT WAS A BAD DEBT. IN VIEW OF IT THE TRIBUNAL DID NOT THINK IT NECESSARY TO DECIDE WHETHER THIS WAS A TRADING LOSS. THE HON'BLE HIGH COURT AFTER CONSIDERING THE DECIS ION IN THE CASE OF CIT VS. ABDULLABHAI ABDULKADAR [1961](41 I TR 545)[SC] IN THE CASE OF BADRIDAS DAGA VS. CIT [1958](34 ITR 10)[SC] IN THE CASE OF A.V. THOMAS & CO. LTD. VS. CIT (1963)[ 48 ITR 67] IN THE CASE OF CIT(CENTRAL)CALCUTTA VS. BIRLA BROTHERS (P) LTD. (1970)[77 ITR 751] IN THE CASE OF MADAN GOPAL BAGL A VS. CIT (1956) [30 ITR 174] AND IN THE CASE OF CIT VS. NAIN ITAL BANK LTD (1965)(55 ITR 707) DECIDED THE QUESTION NO.2. (E) SO FAR AS ISSUE AS TO WHETHER THE AMOUNT IN QUESTION WAS ALLOWABLE AS BAD DEBT OR NOT THE HON'BLE JURISDICT IONAL HIGH COURT CAME TO THE CONCLUSION THAT THE AMOUNT IN QUE STION COULD NOT BE HELD AS BAD DEBT AND HENCE NOT ALLOWABLE A S SUCH. THE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 10 RELEVANT PART AS APPEARING AT PAGE NO.90 OF THE REP ORT [1974 TAXATION 37(3)-82] IS AS UNDER:- APPLYING THESE TESTS IT IS CLEAR TO US THAT THE CASE OF THE ASSESSEE IN THE INSTANT CASE REGARDING THE SAID AMOUNT OF RS.1 78 523 CANNOT BE SAID TO BE A BAD DEBT WITHIN THE MEANING OF SECTION 36(I)(VII). APPLYING THE TEST OF ROWLATT J MENTIONED ABOVE I T CANNOT BE SAID TO BE A DEBT THAT IT WOULD HAVE COME INTO THE BALANCE-SH EET AS A TRADING DEBT IN THE TRADE NOR CAN IT BE SAID THAT IF THIS DEBT H AD BEEN PAID BACK BY THE DUNDAS TO THE ASSESSEE COMPANY IT WOULD HAVE COME IN TO SWELL THE PROFITS OF THIS PARTICULAR BUSINESS. THIS IS THE TEST WHICH APPEALED TO THE SUPREME COURT IN COMMISSIONER OF INCOME-TAX VS. ABDULABHAI ABDULKADAR (SUPRA) A. V. AND THOMAS & CO. LTD. V. COMMISSIONER OF INCOME-TAX (SUPRA). THIS AMOUNT OF RS. 1 78 523 IF RECOVERED COULD NEVER HAVE RESULTED IN THE SWELLING OF TH E PROFITS BUT WOULD HAVE MEAN REPAYMENT OF THE MONEYS ADVANCED BY THE ASSES SEE COMPANY TO DUNDAS. THEREFORE IN OUR OPINION THE TRIBUNAL WAS NOT RIGHT IN HOLDING THAT THE AMOUNT OF RS.1 78 523 COULD BE TREATED AS A BAD DEBT COVERED BY SECTION 36(L)(VII) OF THE ACT OF 1961. WE MAY POINT OUT THAT THE DECISIONS WHICH WERE RELIE D UPON BY MR. KAJI NAMELY IN ESSEN PVT. LTD. V. COMMISSIONER OF INCOM E-TAX (1967) 65 I.T.R. 625 AND COMMISSIONER OF INCOME-TAX V. MYSORE SUGAR CO. LTD. (1962) 46 I.T.R. 649 DO NOT LAY DOWN ANY TESTS DIFF ERENT FROM THE TESTS WHICH WE HAVE CULLED OUT FROM THE DECISIONS ALREAD Y REFERRED TO. THE OTHER TWO DECISIONS OF THE BOMBAY HIGH COURT WHICH WERE ALSO RELIED UPON BY MR. KAJI NAMELY THE DECISION IN COMMISS IONER OF INCOME-TAX V. F.N. CHINOY & CO PVT. LTD. (1969) 74 I.T.R. 7 80 AND TJ. LALVANIV. COMMISSIONER OF INCOME-TAX. (1970) 78 I.T.R. 176 ARE NOT OF MUCH USE TO US IN DECIDING THE QUESTIONS BEFORE US IN THE LI GHT OF THE TESTS WHICH WE HAVE CULLED OUT FROM THE DIFFERENT DECISIONS OF THE SUPREME COURT AS SET OUT IN THE EARLIER PART OF THIS JUDGMENT. (F) THE HON'BLE HIGH COURT THEN PROCEEDED TO CONSID ER THE QUESTION AS TO WHETHER THE AMOUNT IN QUESTION COULD BE ALLOWED AS TRADING LOSS U/S.28(1) OF THE ACT OR NOT AND AFT ER APPLYING THE TESTS LAID DOWN IN THE CASE OF CIT VS. ABDULLABAHI ABDULKADAS(SUPRA) AS WELL AS OTHER SUBSEQUENT CASE S WHICH WE HAVE ALREADY REFERRED TO IN THE EARLIER PART OF THI S ORDER CAME TO THE CONCLUSION THAT THOUGH THE AMOUNT IN QUESTION W AS NOT A BAD DEBT WITHIN THE MEANING OF SECTION 36(1)(VII) OF TH E ACT BUT IT WAS A TRADING LOSS WITHIN THE MEANING OF SECTION 28(1) OF THE ACT AND CONSEQUENTLY ANSWERED THE QUESTION NO.(2) IN FAVOU R OF ASSESSEE AND AGAINST THE REVENUE. THE RELEVANT PA RT OF THE ORDER AS CONTAINED AT PAGE NOS.90 & 91 READS AS UND ER:- ITA NO.173/AHD/2009 ASST. YEAR 2004-05 11 ABDULKADAR (SUPRA) AND OTHER SUBSEQUENT CASES CAN IT BE SAID THAT THIS LOSS SPRANG DIRECTLY FROM AND WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE ? ON THE FACTS IN THE INSTANT CASE THE ' T RIBUNAL HAS FOUND IN ITS ORDER THAT THE ASSES-SEE COMPANY'S PRINCIPAL BUSINE SS WAS WITH THE DUNDAS. IN PARAGRAPH -3 OF ITS ORDER THE TRIBUNAL H AS HELD THAT THE ASSESSEE WAS COMPLETELY RELYING ON IMPORT LICENCES POSSESSED BY THE DUNDAS FOR IMPORTING GOODS THAT WERE DEALT WITH BY THE ASSESSEE. MOREOVER THERE WAS ONLY ONE ACCOUNT MAINTAINED BY THE ASSESSEE IN THE NAME OF DUNDAS IN RESPECT OF PURCHASE WHICH THEY WE RE MAKING AND ALSO THE AMOUNTS ADVANCED IN PURSUANCE OF THE AGREE MENT OF MAY 1 1959. MOREOVER UNDER THE CLAUSES OF THE AGREEMENT OF MAY 1 1959 THE ASSESSEE COMPANY AGREED TO ADVANCE MONEYS TO THE EX TENT OF RS. 2 LAKHS TO THE DUNDAS WITH A VIEW TO SEE THAT DUNDAS WERE A BLE TO PAY OFF THEIR OUTSTANDING DEBTS AND THUS BE SOLVENT SO THAT TH E COMPANY'S PRINCIPAL BUSINESS NAMELY DEALING IN GOODS IMPO RTED UNDER THE IMPORT LICENCES ISSUED IN FAVOUR OF DUNDAS COULD B E CONTINUED AND BE MADE AVAILABLE TO THE ASSESSEE COMPANY. IN OUR OPI NION TAKING TOO NARROW A VIEW OF THIS BUSINESS TRANSACTION WOULD NO T BE A PROPER APPROACH TO THE PROBLEM BEFORE US. IN COMMISS IONER OF INCOME-TAX V. NAINITAL BANK LTD. (SUPRA) AT PAGE 713 THE S UPREME COURT CRITICISED THE MAJORITY OF THE LEARNED JUDGES OF T HE SPECIAL BENCH OF MADRAS HIGH COURT IN RAMSWAMI CHETTIAR V. COMMISSI ONER OF INCOME- TAX I.T.R. 55 MADRAS 904 FOR TAKING WHAT JUSTICE S UBBA RAO CONSIDERED TO BE TOO NARROW A VIEW OF THE PROBLEM. WITHOUT TAKING A NARROW VIEW OF THE PROBLEM BEFORE US AND CONSIDERING THE MATTER IN A BROAD PERSPECTIVE IT IS CLEAR TO US THAT LOOKING TO TH E SPECIAL FACTS OF THIS CASE IT WAS ESSENTIAL FOR THE ASSESSEE COMPANY FOR ITS VERY SURVIVAL THAT IT SHOULD ADVANCE THESE MONEYS TO THE DUNDAS BECAUS E THE PRINCIPAL BUSINESS OF THE ASSESSEE COMPANY WAS WITH DUNDAS AN D DUNDAS IN THEIR TURN WERE IMPORTING GOODS FROM UNITED KINGDOM PR INCIPALS UNDER THE IMPORT LICENCES GRANTED BY THE GOVERNMENT. HENCE I F THE ASSESSEE COMPANY WANTED ITS BUSINESS TO CONTINUE IT WAS ESSE NTIAL FOR IT TO SEE THAT THE DUNDAS ALSO SURVIVED AS A TRADING ORGANIZA TION AND AS A BUSINESS ENTITY. IT WAS FOR THIS PURPOSE THEREF ORE THAT WITH A VIEW TO SECURING ITS VERY SURVIVAL THAT THE ASSESSEE COMP ANY ADVANCED MONEYS TO THE DUNDAS AND THE AMOUNT OF RS. 1 78 523 REMA INED OUT STANDING IN CONNECTION WITH THESE ADVANCES. THEREFORE IT MU ST BE HELD ON THE FACTS OF THIS CASE THAT THE DEBT OWED BY THE DUNDAS TO THE A SSESSEE WAS A DEBT WHICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSESSEE COMPANY AND WAS INCIDENTAL TO IT. IT WAS NOT A DEBT MERELY CONNECTE D WITH THE BUSINESS OF THE ASSESSEE. AS THE SUPREME COURT HAS POINTED OUT IN COMMISSIONER O F INCOME-TAX V. NAINITAL BANK LTD (SUPRA) IN EACH C ASE IT IS A QUESTION OF FACT TO BE DECIDED ON THE FACTS OF THE PARTICULAR C ASE WHETHER A LOSS IS IDENTICAL TO THE OPERATION OF THE BUSINESS AND ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE PRESENT CASE THE INEVITABLE IN FERENCE IS THAT THE LOSS INCURRED BUSINESS TRANSACTION THE ASSESSEE COMPANY WAS A LOSS IDENTICAL TO THE OPERATION OF THE BUSINESS OF THE ASSESSEE AND S PRANG DIRECTLY FROM THE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 12 CARRYING ON OF ITS BUSINESS. UNDER THESE CIRCUMSTAN CES APPLYING THE TESTS LAID DOWN BY THE SUPREME COURT IN THE CASES REFERRE D TO HEREIN-ABOVE IT MUST BE HELD THAT THOUGH THIS WAS NOT A WITHIN THE MEANING OF SECTION 36(1)(VII) OF THE ACT OF 1961 IT WAS A TRADING LO SS WITHIN THE MEANING OF SECTION 28(1) IN THE LIGHT OF THE TESTS LAID DOWN BY THE SUPREME COURT IN BADRIDAS DAGA V. COMMISSIONER OF INCOME- TAX (SUPRA) AND COMMISSIONER OF INCOME-TAX V. ABDULLABHAI ABDUL KADAR (SUPRA) AND OTHER CASES REFERRED TO ABOVE. WE THEREFORE ANSWER THE QUESTIONS REFERRED TO US AS FOLLOWS : QUESTION (1) NOT PRESSED BY THE ASSESSEE AT WHOSE INSTANCE IT WAS REFERRED TO US. QUESTION (2) IN THE AFFIRMATIVE AND IN FAVOUR OF T HE ASSESSEE ON THE GROUND THAT IT WAS A TRADING LOSS. THE COMMISSIONER WILL PAY THE COSTS OF THIS REFEREN CE TO THE ASSESSEE. (II)DECISION OF HON'BLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. CIT VS. ABDUL RAZAK & CO. (136 ITR 825)[GUJ.]. (A) THE BRIEF FACTS IN THIS CASE BEFORE THE HON'BLE HIGH COURT AS HAVE BEEN REVEALED FROM THE RECORDS WERE THAT T HE ASSESSEE M/S. ABDUL RAZAK & COMPANY OF DHORAJI CARRIES ON B USINESS AS COMMISSION AGENTS AS WELL AS DEALERS IN GROCERY ART ICLES HAVING THEIR HEAD OFFICE AT DHORAJI AND BRANCHES AT BOMBAY MANGALORE VERAVAL AND CHORVAD. IN THE COURSE OF ASSESSMENT FO R THE ASSESSMENT YEAR 1967-68 THE ASSESSEE INTER ALIA MADE A CLAIM BEFORE THE ITO FOR BAD DEBT OF RS. 78 824 IN RESPEC T OF THE AMOUNT DUE FROM M/S. MOHMAD PEER MOHMAD OF NASIK. T HE ITO DISALLOWED THE CLAIM ON THE GROUND THAT THE IMPUGNE D DEBT WAS NEITHER INCURRED IN THE COURSE OF MONEY-LENDING NOR IN THE COURSE OF COMMISSION AGENCY. THE ITO NOTED THAT THE BAD DE BT WAS WRITTEN OFF FROM THE BOMBAY BOOKS OF THE ASSESSEE-F IRM. THE MAIN SOURCE OF THE INCOME AT BOMBAY AROSE FROM THE COMMI SSION AGENCY AND DEALINGS IN GROCERY ARTICLES. THE ITO AL SO REFERRED IN THAT CONNECTION TO THE COURSE OF BUSINESS OF COMMIS SION AGENCY WHERE THE ASSESSEE-FIRM HAD TO ADVANCE MONEY TO THE CONSTITUENTS AGAINST THE GOODS RECEIVED FROM THEM F OR SALE ON COMMISSION BASIS AND THE ADVANCE FROM TIME TO TIME WERE ADJUSTED TOWARDS THE SALE PROCEEDS OF SUCH GOODS. T HE CONSTITUENTS WERE REQUIRED TO PAY INTEREST TO THE A SSESSEE ON SUCH ADVANCES. THE ITO ANALYSED THE INTEREST INCOME AND FOUND THAT OUT OF THE TOTAL INCOME FOR THE ASSESSMENT YEA R IN QUESTION OF ITA NO.173/AHD/2009 ASST. YEAR 2004-05 13 RS. 2 39 345 87 PER CENT. INTEREST WAS ATTRIBUTABL E TO ADVANCE IN THE COURSE OF COMMISSION BUSINESS 7 PER CENT. IN R ESPECT OF FEES FROM THE VERAVAL BRANCH AND THE BALANCE WAS FROM TR ADERS AND BANKERS. THE NET AMOUNT DEBITED TO THE PROFIT AND L OSS ACCOUNT ON ACCOUNT OF INTEREST WAS TO THE TUNE OF RS. 30 288 A FTER ADJUSTING INTEREST RECEIPT OF RS. 2 39 345 AGAINST THE INTERE ST PAYMENT OF RS. 2 69 634 BY THE ASSESSEE-FIRM. THE ITO THEREFO RE CONCLUDED THAT THE INTEREST EARNED BY THE ASSESSEE-FIRM WAS I N THE COURSE OF COMMISSION AGENCY BUSINESS AND NOT FROM THE MONEY-L ENDING BUSINESS. THE ITO THEREAFTER PROCEEDED TO EXAMINE T HE TWO SETS OF ACCOUNTS OF M/S. MOHMAD PEER MOHMAD OF NASIK IN THE TRADING BOOKS OF THE ASSESSEE-FIRM; ONE SET WAS-COMPRISING OF TRADING ACCOUNTS AND ANOTHER WAS PERTAINING TO MONEY-LENDIN G ACCOUNT WHICH WAS STYLED AS SARAFI ACCOUNT WITH THE SAID FI RM OF M/S. MOHMAD PEER MOHMAD OF NASIK. IT IS AN ADMITTED POSI TION THAT THE TRADING ACCOUNT OF M/S. MOHMAD PEER MOHMAD OF N ASIK FOR ASSESSMENT YEARS 1963-64 TO 1967-68 WERE SETTLED. T HE SECOND ACCOUNT WHICH WAS SARAN ACCOUNT DISCLOSED THAT AT T HE FOOT OF EVERY ACCOUNTING YEAR THERE WAS A DEBIT BALANCE AND ESPECIALLY FOR THE ASSESSMENT YEAR 1967-68 FOR WHICH THE RELEV ANT PREVIOUS YEAR WAS THE ACCOUNTING YEAR ENDING ON 31ST JULY 1 966 THERE WAS A DEBIT BALANCE OF RS. 76 824 IN THAT ACCOUNT. IT SHOULD BE NOTED THAT AT THE END OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1965-66 THERE WAS A DEBIT BALANCE OF ONLY RS. 2 003 BUT IN THE COURSE OF THE ACCOUNTING YEAR WHIC H WAS THE RELEVANT PREVIOUS YEAR TO ASSESSMENT YEAR 1966-67 AN ADVANCE OF RS. 81 135 WAS MADE AGAINST WHICH AN AMOUNT OF R S. 10 505 WAS PAID IN THE SAID YEAR LEAVING A DEBIT BALANCE O F RS. 72 633 WHICH WAS CARRIED FORWARD TO THE NEXT ACCOUNTING YE AR WHICH WAS RELEVANT TO ASSESSMENT YEAR 1967-68. IT IS SAID THA T THE ASSESSEE HAD REMITTED A SUM OF RS. 62 000 IN THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 1966-67 TO M/S. GOKALDAS VIR JIBHAI OF SANGLI AT THE BEHEST OF M/S. MOHMAD PEER MOHMAD OF NASIK IN ORDER TO SAVE THE SAID FIRM FROM THE CONSEQUENCES A RISING AS A RESULT OF THEIR INABILITY TO PAY TO THE SAID M/S. G OKALDAS VIRJIBHAI OF SANGLI. THE ITO THEREFORE HELD THAT THE DEBT WAS NOT A BAD DEBT WHICH COULD BE ALLOWED IN COMPUTING THE ASSESSEE'S TOTAL INCOME. THE ASSESSEE THEREFORE CARRIED THE MATTER IN APPE AL BEFORE THE AAC WHO UPHELD THE VIEW OF THE ITO THAT THE DEBT CO ULD NOT BE SAID TO BE ONE ARISING IN THE COURSE OF THE ASSESSE E'S BUSINESS BUT GRANTED A PARTIAL RELIEF BY REDUCING IT BY RS. 4 396 BEING THE AMOUNT OF INTEREST CHARGED IN THIS ACCOUNT WHICH TH E ASSESSEE HAD NOT RECEIVED. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 14 THE ASSESSEE THEREFORE CARRIED THE MATTER IN FURT HER APPEAL BEFORE THE APPELLATE TRIBUNAL. THE TRIBUNAL ADDRESS ED ITSELF TO TWO QUESTIONS. FIRSTLY WHETHER THE IMPUGNED DEBT COULD BE SAID TO BE A BAD DEBT AND ALLOWABLE UNDER S. 36(2) OF TH E I.T. ACT 1961 AND SECONDLY IN THE ALTERNATIVE WHETHER TH E IMPUGNED LOSS COULD BE SAID TO BE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE TRIBUNAL WAS OF THE OPINION THAT HAVI NG REGARD TO THE FACT THAT THE ASSESSEE HAD BEEN ADVANCING VARIO US AMOUNTS TO VARIOUS PARTIES ON SARAFI ACCOUNTS AND EARNING I NTEREST ON SUCH ADVANCES THE SAID ACTIVITY COULD NOT BE SAID TO BE A PART OF THE COMMISSION AGENCY BUSINESS CARRIED ON BY THE ASSESS EE. THE TRIBUNAL ALSO EXAMINED THE PARTICULAR ADVANCES MADE BY THE ASSESSEE-FIRM TO M/S. MOHMAD PEER MOHMAD OF NASIK A ND CONCLUDED THAT THESE ADVANCES COULD NOT BE SAID TO BE MADE IN THE ORDINARY COURSE OF BUSINESS OF MONEY-LENDING AN D THEREFORE THE ASSESSEE'S CLAIM FOR WRITING OFF THE BAD DEBT A RISING OUT OF THE MONEY-LENDING BUSINESS WAS NOT SUSTAINABLE. THE TRI BUNAL THEREFORE ADDRESSED ITSELF TO THE ALTERNATIVE QUES TION WHETHER THE AMOUNT OF LOSS COULD BE ALLOWED AS INCIDENTAL TO TH E BUSINESS UNDER S. 28 OF THE I.T. ACT 1961. THE TRIBUNAL HAV ING REGARD TO THE FACT THAT THE ASSESSEE BAD ADMITTEDLY DEALINGS WITH M/S. MOHMAD PEER MOHMAD OF NASIK AND SINCE THERE WAS N O EVIDENCE TO SUGGEST THAT ANY PARTNER OF THE SAID DE BTOR-FIRM WAS RELATED TO THE PARTNER OF THE ASSESSEE-FIRM HELD T HAT THE IMPUGNED LOSS SHOULD BE ALLOWED AS DEDUCTION UNDER S. 28 OF THE SAID ACT BECAUSE THE SAID M/S. MOHMAD PEER MOHMAD OF NASIK HAD APPROACHED THE ASSESSEE-FIRM TO PAY THE AMOUNT TO M/S GOKALDAS VIRJIBHAI OF SANGLI. AT THE INSTANCE OF TH E REVENUE THEREFORE THE FOLLOWING QUESTION IS REFERRED TO US FOR OUR OPINION: ' WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE IMPUG NED LOSS OF RS. 76 824 SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTI ON 28 OF THE INCOME-TAX ACT 1961 AS LOSS INCIDENTAL TO THE ASS ESSEE'S BUSINESS?' THE ASSESSEE ALSO REQUESTED THE TRIBUNAL IN THE COU RSE OF ITS OPPOSITION FOR MAKING A REFERENCE AS PRAYED FOR BY THE REVENUE THAT IN CASE THE TRIBUNAL DECIDES TO REFER THE QUES TION AS PRAYED FOR BY THE REVENUE THE FOLLOWING QUESTION SHOULD B E REFERRED TO THIS COURT FOR ITS OPINION. THE TRIBUNAL GRANTED TH AT PRAYER OF THE ASSESSEE IN VIEW OF THE DECISION OF THIS COURT IN S MT. DHIRAJBEN R. AMIN V. CIT [1968] 70 ITR 194 AND HAS REFERRED THE SAME TO THIS COURT WHICH IS AS UNDER: ITA NO.173/AHD/2009 ASST. YEAR 2004-05 15 'WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ADVANCE TO MOHMAD PEER MOHMAD WAS NOT IN THE ORDINARY COURSE O F MONEY- LENDING BUSINESS?. (B) IT WAS IN VIEW OF THE ABOVE FACTS AND CIRCUMST ANCES OF THE CASE THAT THE HON'BLE HIGH COURT LAID DOWN THE FOLLOWING PRO POSITION O LAW. IN VIEW OF THE WELL-ACCEPTED LEGAL PRINCIPLES WITH REGARD TO COMMISSION AGENCY BY NECESSARY IMPLICATION EITHER SHORT-TERM OR LONG -TERM FINANCING IS AN INTEGRAL PART OF THE COMMISSION AGENCY BUSINESS. AS A COMMIS SION AGENT ONE EITHER BUYS GOODS OR SELLS THE GOODS FOR ONE'S PRINCIPAL. WHEN HE ACTS AS A COMMISSION AGENT FOR SALES OF GOODS HE ADVANCES THE AMOUNT TO HIS P RINCIPAL AND ADJUSTS THE SALE PROCEEDS AGAINST SUCH ADVANCES. WHEN HE ACTS AS A C OMMISSION AGENT FOR BUYING THE GOODS HE PURCHASES THE GOODS FOR SUPPLY TO HIS PRINCIPAL FROM HIS FUNDS AND THEN HE IS REIMBURSED BY HIS PRINCIPAL ON SUPPLY OF SUCH GOODS. A COMMISSION AGENT THEREFORE HAS TO ADVANCE AMOUNTS FROM TIME TO TIME ACCORDING TO THE NATURE OF HIS BUSINESS. IT MAY BE A SHORT-TERM ADV ANCE IF HE IS A COMMISSION AGENT FOR THE PURCHASE OF THE GOODS OR IT MAY BE A LONG-TERM ADVANCE IF IT IS FOR THE SALE OF THE GOODS. (C) AFTER HAVING LAID DOWN THE AFORESAID PROPOSITIO N OF LAW/TESTS FOR ALLOWANCE OF THE DEDUCTION IN THE CASE OF COM MISSION AGENT AS BAD DEBT OR TRADING LOSS HELD THAT THE DEBT OWE D BY M/S.M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSESSEE AND WAS ALLOWABLE AS BAD DEBT AND CONSEQUENTLY TH EREFORE AS A TRADING LOSS U/S.28(1) OF THE ACT AND THE RELEVANT PART (HEAD NOTES) READS AS UNDER:- ON THE FACTS THAT THE TRIBUNAL HAD OVERLOOKED THE STATEMENTS OF THE ASSESSEE AND THE DEBTOR-FIRM WHERE IT HAD BEEN CLEARLY STATED TH AT THESE ADVANCES WERE ASKED FOR AND MADE IN FACT HAVING REGARD TO THE COMMERCI AL RELATIONS BETWEEN THE PARTIES AND THE COMMERCIAL RELATIONS WERE ADMITTEDL Y OF PRINCIPAL AND COMMISSION AGENTS. THE TRIBUNAL WAS NOT JUSTIFIED I N HOLDING THAT THE ADVANCE TO M/S. M.P. WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE-FIRM. THE DEBT OWED BY M/S. M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINES S OF THE ASSESSEE AND WAS ALLOWABLE AS A BAD DEBT AND CONSEQ UENTLY THEREFORE AS A TRADING LOSS UNDER S. 28(1). (III)DECISION OF HON'BLE CALCUTTA HIGH COURT IN TH E CASE OF CIT VS. W. HOWRAH AND CO.(P) LTD. (194 ITR 345)[CAL .] THE FACTS OF THE CASE AS WERE BEFORE THE HON'BLE H IGH COURT WERE THAT ONE OF THE ACTIVITIES OF THE ASSESSEE WAS ACT ING AS PRINCIPAL BROKER SUPPLY OF JUTE TO JUTE MILLS. THE ASSESSEE E NTERED INTO CONTRACTS WITH THE JUTE MILLS FOR THAT PURPOSE. UND ER SUCH CONTRACTS THE ASSESSEE TO BEAR 50 PER CENT OF THE LOSS ARISING TO ITA NO.173/AHD/2009 ASST. YEAR 2004-05 16 THE JUTE MILLS ON ACCOUNT OF FAILURE OF SUPPLIES O F JUTE. THE ASSESSEE CLAIMED DEDUCTION OF LOSS THE CONTRACTS AM OUNTING TO RS.72 141/- IN THE ASSESSMENT YEAR 1961-62. THE I NCOME-TAX OFFICER DISALLOWED THE CLAIM BUT THE TRIBUNAL ALLOW ED IT. ON REFERENCE THE HON'BLE HIGH COURT ALLOWED THE ASSES SEES CLAIM BY OBSERVING AS UNDER:- HAVING REGARD TO THE NATURE OF THE BUSINESS ACTIVI TIES OF THE ASSESSEE AND THE NATURE OF AGENCY BUSINESS THE AMO UNT OF LOSS INCURRED DURING THE COURSE OF SUCH BUSINESS ACTIVIT IES MUST BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME FROM T HE ASSESSEES BUSINESS . (IV) DECISION OF HON'BLE MADRAS HIGH COURT IN THE C ASE OF CIT VS. CRESCENT FILMS (P.) LTD. (248 ITR 670)[MAD.]. (A) THE BRIEF FACTS OF THE CASE AS HAVE BEEN OBSERV ED FROM THE HEAD NOTES ARE AS UNDER:- THE ASSESSEE WHICH CARRIED ON THE BUSINESS OF DISTR IBUTION OF FILMS HAD PAID RS.7 50 000 TO THE PRODUCER FOR DISTRIB UTION RIGHTS FOR A FILM UNDER PRODUCTION. THE PRODUCER HAVING RUN INTO DIFFICULT Y AND FINDING HIMSELF IN A SITUATION WHERE HE WOULD BE UNABLE TO COMPLETE THE FILM REQUESTED THE ASSESSEE LEND HIM A SUM OF RS.1 10 000 WHICH SUM WAS TO BE DEALT WITH IN A MANNER DIFFERENT FROM THE MANNER IN WHICH THE SUM OF RS.7 50 000 PAID EARLIER AS CONSIDERATION FOR THE DISTRIBUTION RIGHTS OF THE FILM WAS TO BE TREATED. THESE SUMS WERE ULTIMAT ELY NOT REPAID TO THE ASSESSEE AND THE ASSESSEE CLAIMED THEM AS A TRA DE LOSS. THE INCOME-TAX OFFICER REJECTED THE CLAIM BUT THE TRIBU NAL ALLOWED IT. (B) THE HON'BLE HIGH COURT IN VIEW OF ABOVE FACTS LAID DOWN THE FOLLOWING PROPOSITION OF LAW/TESTS FOR ALLOWANC E OF DEDUCTION OF THE NATURE INVOLVED IN THIS CASE AND THE SAME AS N OTED FROM THE HEAD NOTES READ AS UNDER:- IN ANY BUSINESS CREDIT IS AN INDISPENSIBLE PART A ND ADVANCES OF A TEMPORARY NATURE WITH OR WITHOUT INTEREST ARE A COM MON INCIDENT OF BUSINESS. IT IS NOT. NECESSARY THAT EVERY BUSINESS SHOULD REGISTER ITSELF UNDER THE MONEY LENDERS ACT AND MAKE A CLAIM IN REL ATION TO ANY ADVANCE MADE BY IT ONLY IN THE CAPACITY OF A PERSON CARRYING ON MONEY LENDING BUSINESS. IT IS ALSO NOT POSSIBLE TO AGREE WITH THE SUBMISSION THAT ANY MONEY SPENT TO SALVAGE THE CAPITAL WOULD A UTOMATICALLY RESULT IN IMPRESSING THE MONEY SO SPENT WITH THE CHARACTER OF CAPITAL EXPENDITURE. IF THE NATURE OF THE EXPENDITURE OR TH E NATURE OF THE TRANSACTION IS SUCH AS TO BE REGARDED AS ONE IN THE REVENUE FIELD IT CANNOT BE TREATED AS CAPITAL MERELY BECAUSE SUCH E XPENDITURE WAS INCURRED FOR THE PURPOSE OF SALVAGING THE CAPITAL. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 17 A DECISION IS TO BE REGARDED AS A PRECEDENT FOR ITS RATIO DECIDENDI AND NOT FOR THE FACTS IN RELATION TO WHICH SUCH RATIO W AS LAID DOWN. THE RATIO OF CIT V. COIMBATORE PICTURES (P.) LTD. [1973] 90 I TR 452 (MAD) IS THAT BEFORE A DEDUCTION CAN BE CLAIMED ON THE GROUND OF BUSINESS LOSS THE LOSS SHOULD HAVE BEEN INCURRED IN THE COURSE OF BUS INESS AND IT SHOULD BE IN THE NATURE OF REVENUE LOSS. (C) THE HON'BLE HIGH COURT AFTER HAVING LAID DOWN THE AFORESAID PROPOSITION OF LAW/TESTS FOR ALLOWANCE O F DEDUCTIONS OF THE NATURE INVOLVED THEREIN ALLOWED THE ASSESSEES CLAIM AS TRADING LOSS AND THE RELEVANT PART AS NOTED FROM HE AD NOTES IS AS UNDER:- HELD THAT IN THE INSTANT CASE THE SUM OF RS 7 50 000 PAID BY THE DISTRIBUTOR WOULD HAVE BEEN LOST TO THE ASSESSEE H AD THE PICTURE NOT BEEN COMPLETED. IN ORDER TO ENSURE THAT THE PICTUR E WAS COMPLETED THE ASSESSEE HAD AGREED TO LEND MONEY AND THAT LEN DING WAS A SEPARATE TRANSACTION AND WAS NOT PART OF THE DISTRI BUTION ARRANGEMENT. THE MONEY SO LENT HAVING BECOME IRRECOVERABLE BY RE ASON OF THE PICTURE FAILING AT THE BOX OFFICE AND THE PRODUCER BEING UNABLE TO REPAY HIS DEBTS THE MONEY SO LOST TO THE ASSESSEE WAS RI GHTLY HELD BY THE COMMISSIONER AND THE TRIBUNAL TO BE A TRADING LOSS. (V) DECISION OF ITAT MUMBAI BENCH IN THE CASE OF M AHESH J.PATEL VS. ASSTT.CIT (2008) [297 ITR (AT) 74 (MUMB AI)]. (A) THE FACTS RELATING TO THE ISSUE OF CLAIM OF BAD DEBTS WERE THAT THE ASSESSEE'S CLAIM OF DEDUCTION OF DEBTS O WED BY THREE PERSONS WRITTEN OFF TO THE EXTENT OF RS.26 50 168 W AS NOT ALLOWED. ONE OF THESE DEBTS WAS OWED BY A PEON OF THE ASSESS EE WHOSE SERVICES HAD BEEN TERMINATED AS HE WAS FOUND TO HAV E STOLEN SOME SHARE CERTIFICATES AND IT WAS DISALLOWED BECA USE THE ASSESSEE HAD NOT FILED A POLICE COMPLAINT. THE SECO ND WAS OWED BY A WHO ALSO HAD BEEN A MEMBER OF THE DELHI STOCK EXCHANGE AND REGULARLY DEALING WITH THE ASSESSEE BUT AFTER HIS DEATH CERTAIN AMOUNTS COULD NOT BE RECOVERED FROM HIM. TH E ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION FOR WANT OF EVI DENCE THOUGH THE TRANSACTIONS WITH A WERE DULY RECORDED IN THE B OOKS OF ACCOUNT OF THE ASSESSEE. THE THIRD DEBT WAS OWED BY A COMPANY D WHICH HAD BEEN NOTIFIED BY THE SPECIAL COURT UNDE R THE SPECIAL COURT (TRIAL OF OFFENCES RELATING TO TRANSACTIONS I N SECURITIES) ORDINANCE 1992. THE ASSESSING OFFICER DID NOT ALLO W THE ASSESSEE'S CLAIM ON THE GROUNDS THAT EVEN AFTER D H AD BEEN NOTIFIED BY THE SPECIAL COURT THE ASSESSEE CONTIN UED TO HAVE TRANSACTIONS WITH IT THAT THE ASSESSEE HAD BOTH LO AN AND TRADING ACCOUNTS THAT THE AMOUNTS WRITTEN OFF HAD NOT BEEN OFFERED FOR TAX AS INCOME IN ANY OF THE PREVIOUS YEARS INCLUDING TH E CURRENT YEAR ITA NO.173/AHD/2009 ASST. YEAR 2004-05 18 AND THAT THE ASSESSEE'S CLAIM WAS PRE-MATURE UNTIL THE FINAL VERDICT OF THE SPECIAL COURT. THE ASSESSEE PURCHAS ED AND SOLD CERTAIN SHARES FOR A COMPANY L AND CLAIMED LOSS ON THOSE TRANSACTIONS. THE ASSESSING OFFICER FOUND THAT THOS E TRANSACTIONS WERE CARRIED OUT WITHOUT TAKING ACTUAL DELIVERY OF SHARES BY THE CLIENT THAT THE ASSESSEE PAID THE DIFFERENCE OF SA LE AND PURCHASE AMOUNTS TO L SEVERAL MONTHS BEFORE THE ACTUAL TRANS ACTION AND THAT SHOWED THAT ONLY PAPER ENTRIES HAD BEEN CREATE D AND HOLDING THAT THOSE WERE NOT GENUINE TRANSACTIONS DISALLOWE D THE ASSESSEE'S LOSS ENTIRELY. SIMILARLY THE ASSESSING OFFICER DISALLOWED LOSS ON CERTAIN TRANSACTIONS OF VARIOUS COMPANIES HOLDING THESE TRANSACTIONS WERE NOT GENUINE AND ENT ERED INTO THROUGH A BROKER FOR MERE PAPER TRANSACTIONS. (B) IT WAS IN VIEW OF THE ABOVE FACTS AND CIRCUMS TANCES OF THE CASE THAT THE HON'BLE TRIBUNAL ALLOWED THE ASSESSE ES CLAIM BY OBSERVING AS UNDER:- HELD PER S. C. TIWARI (ACCOUNTANT MEMBER) AND T. K. SHARMA (JUDICIAL MEMBER) (I) THAT LOSS ARISING TO THE ASSE SSEE IN THE REVENUE FIELD ON ACCOUNT OF NON-RECOVERY OF BUSINESS DEBTS IS ALLOWABLE AS DEDUCTION EVEN IF IT DOES NOT FALL IN THE CATEGORY OF SECTION 36(2)(I). THE ASSESSING OFFICER WAS WRONG IN TAKING THE VIEW THAT THE ASSESSEE SHOULD HAVE MADE A POLICE COMPLAINT IN ORDER TO BE ELIGIBLE FOR DEDUCTION. THE DEBT DUE FROM THE PEON WAS TO E DEDU CTED. (II) THAT AS THE ASSESSEE'S TRANSACTIONS WITH A WER E RECORDED IN THE BOOKS OF ACCOUNT AND ALL DETAILS PERTAINING TO THE DEBT IN QUESTION COULD BE FOUND THERE THE ASSESSING OFFICER WAS NOT JUSTI FIED IN HOLDING THAT THERE WAS NO EVIDENCE AS TO BAD DEBT. IN THE ABSENC E OF ANY MATERIAL TO THE CONTRARY THE LESSEE'S CLAIM TO DEDUCTION CO ULD NOT BE REJECTED. (III) THAT ALTHOUGH THE UNPAID PURCHASE PRICES OF S HARES OF D DID NOT FULFILL THE REQUIREMENT OF SECTION 36(2)(I) THE BAD DEBT OF SUCH NATURE WAS AN INTEGRAL PART OF THE BUSINESS THAT THE ASSES SEE CARRIED ON. AS A BROKER THE ASSESSEE WAS RESPONSIBLE FOR SATISFACTI ON OF THE DEBT OF THE SELLER IN THE EVENT OF THE PURCHASER DEFAULTING. T HE LOSS HAD THEREFORE ARISEN IN THE ORDINARY COURSE OF BUSINESS OF BROKER AGE. THE ASSESSEE WAS ENGAGED IN ADVANCING MONEY WITH A VIEW TO EARN INTEREST INCOME. THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1 993-94 DID NOT CONSTITUTE A PRECEDENT BECAUSE FULL FACTS OF LE ASS ESSEE WERE NOT PRESENTED BEFORE THE TRIBUNAL. ANY BUSINESS LOSS OF REVENUE NATURE INCURRED BY THE ASSESSEE ON ACCOUNT OF NON-RECOVERY OF DEBTS IS TO BE ALLOWED AS DEDUCTION IF NOT AS A BAD DEBT UNDER SEC TION 36(L)(VII) THEN AS BUSINESS LOSS UNDER SECTION 28 OF THE ACT. TO AR GUE THAT LOSS ARISES ONLY WHEN THE DEBTOR COMPANY IS COMPLETELY LIQUIDAT ED AND THE LAST PENNY AVAILABLE IS DISTRIBUTED IS UNFAIR AND UNREAL ISTIC. FOR ALL PRACTICAL PURPOSES ONCE D WAS NOTIFIED BY THE SPECIAL COURT AND THE INCOME-TAX DEPARTMENT STAKED ITS CLAIM TO THE TUNE OF RS.183 CRORES THE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 19 ASSESSEE COULD TAKE INTO CONSIDERATION THAT A BUSIN ESS LOSS HAD ARISEN. THE ASSESSEE WAS TO BE ALLOWED DEDUCTION AS BUSINES S LOSS HAVING ARISEN TO THE ASSESSEE ON ACCOUNT OF THE DEBT OWED BY D HAVING BECOME BAD AND IRRECOVERABLE. (IV) THAT THE ASSESSING OFFICER HAD NOT ESTABLISHED THAT THE BROKER WAS MERELY A NAME LENDER AND THE TRANSACTIONS IN QUESTI ON DID NOT TAKE PLACE. THE ALTERNATE CLAIM OF THE ASSESSEE THAT THE LOSSES BE ALLOWED AS SPECULATIVE TRANSACTIONS HAD BEEN KEPT ASIDE WIT HOUT ADEQUATE MATERIAL. FROM THE FACT THAT THESE TRANSACTIONS WER E INCURRED WITHOUT ACTUAL DELIVERY THE ASSESSING OFFICER COULD NOT DRA W THE INFERENCE THAT THE TRANSACTIONS WERE NOT GENUINE. THE LOSS CLAIMED SHOULD BE TREATED AS SPECULATIVE LOSS. THEREFORE THE ISSUES WERE TO BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATION WHETHER AP ART FROM NON- DELIVERY OF SCRIPS THERE WAS MATERIAL TO HOLD THAT THE TRANSACTIONS WERE NOT GENUINE. IF THE ONLY OBJECTION WAS THAT THE PAR TY HAD NOT TAKEN ACTUAL DELIVERY OF THE SHARES THE LOSS HAD TO BE A LLOWED AT LEAST AS SPECULATIVE LOSS TO BE ADJUSTED AGAINST FUTURE SPEC ULATIVE PROFITS. 17.1 AFTER HAVING CONSIDERED THE AFORESAID DECISIO NS WITH UTMOST CARE WE ARE OF THE OPINION THAT THE PROPOSITION OF LAW/TESTS LAID DOWN IN THE AFORESAID DECISIONS IN OUR OPINION AR E AS UNDER:- (I) BEFORE DEDUCTION CAN BE CLAIMED ON THE GROUND OF TRADING BUSINESS LOSS THE LOSS SHOULD HAVE BEEN INCURRED IN THE COURSE OF BUSINESS AND IT SHOULD BE IN THE NATURE OF REVEN UE LOSS. (II)BEFORE THE DEDUCTION CAN BE CLAIMED ON THE GRO UND OF BUSINESS EXPENDITURE THE EXPENDITURE SHOULD HAVE B EEN INCURRED IN THE COURSE OF BUSINESS OR SHOULD BE SO INTIMATE TO THE CARRYING ON THE BUSINESS THAT WITHOUT INCURRING SUCH AN EXPE NDITURE - EVEN IF IT IS ON CAPITAL ACCOUNTS; THE BUSINESS CANNOT BE CARRIED ON I.E. THE EXPENDITURE MAY BE ON CAPITAL ACCOUNT OR REVENU E ACCOUNT BUT SHOULD BE INTEGRAL PART OF CARRYING ON OF THE B USINESS AND SHOULD HAVE BEEN INCURRED FOR EARNING PROFIT. (III) BEFORE A DEDUCTION CAN BE CLAIMED AS A BAD D EBT THE CONDITIONS STIPULATED IN SECTION 36(1)(VII) MAY BE SATISFIED. (IV) THE RATIO OF DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CIT VS. ABDUL RAZAK & CO. (136 ITR 825)[GUJ.]. AND OF BOMBAY TRIBUNAL IN THE CASE OF MAHESH J.PATE L VS. ASSTT.CIT (2008) [297 ITR (AT) 74 (MUMBAI)] IS THAT EVEN IF THE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 20 CONDITIONS FOR DEDUCTION OF THE SUM AS BAD DEBT ARE NOT SATISFIED IT CAN STILL BE CONSIDERED FOR DEDUCTION AS BUSINES S/TRADING LOSS AND CAN BE ALLOWED AS SUCH PROVIDED THE SAME IS FO UND TO HAVE BEEN INCURRED DURING THE COURSE OF RUNNING OF ASSES SEES BUSINESS. 17.2. HAVING CONSIDERED THE RIVAL SUBMISSIONS F ACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND AFORESAID DEC ISIONS WE ARE OF THE OPINION THAT THERE BEING NO DISPUTE WITH RESPECT TO THE FACTS (I) THAT THE ASSESSEE WAS CARRYING ON THE BUSINESS OF PURCHASE AND SALES OF SHARES FOR AND ON BEHALF OF VARIOUS CUSTOMERS ORDERS FOR WHICH WERE RECEIVED THROUGH SUB-BROKERS IN THE CAPACITY OF MEMBER OF STOCK EXCHANGE I.E. IN THE CAPACITY OF SHARE BROKE R. (II) THAT THE ASSESSEE HAD PURCHASED THE SHARES U NDER REFERENCE FOR AND ON BEHALF OF THE THIRD PARTIES INVOLVED IN THE PRESENT CASE. (III) THAT THE PURCHASES MADE WERE FOUND TO BE BAD DELIVERIES I.E. THE SHARES SO PURCHASED WERE FOUND TO BE FORGED/FAKE/STOLEN. (IV) THAT THE SHARES INVOLVED IN THESE TRANSACTION S WERE AUCTIONED BY THE STOCK EXCHANGE AND ASSESSEE COULD RECOVER ONLY A PART OF ITS PURCHASE PRICE PA ID. (V) THAT HAD THE TRANSACTION BEEN COMPLETED IN THE NORMAL COURSE THE ASSESSEE WOULD HAVE RECEIVED COMMISSION. (VI) THAT AS PER THE SYSTEM PREVAILING IN THE MARK ET THE ASSESSEE HAD TO MAKE PAYMENTS FOR SUCH PURCHASES BEFORE RECEIVING THE AMOUNTS FROM THE FUTURE PURCHASERS FROM ITS OWN POCKET. (VI) THAT THE ASSESSEE HAD NOT RECEIVED THE AMOU NTS IN QUESTION FROM THE AFORESAID THREE PARTIES TILL DATE . 17.3. IN VIEW OF ABOVE FACTS AND CIRCUMSTANCES OF T HE CASE WE AFTER FOLLOWING THE DECISIONS OF HON'BLE HIGH COUR T OF GUJARAT HIGH COURT OF CALCUTTA HON'BLE HIGH COURT OF MADR AS AND THE ORDER OF THE ITAT BOMBAY BENCH (SUPRA) ARE OF THE OPINION THAT THE TRANSACTIONS IN QUESTION HAVING BEEN CARRIED ON BY THE ASSESSEE IN NORMAL COURSE OF CARRYING ON ITS BUS INESS THE NON- RECOVERY OF THE AMOUNTS PAID BY IT FOR AND ON BEHAL F OF ITS CUSTOMERS (PURCHASERS) AND THE DELIVERY HAVING BEEN FOUND TO BE ITA NO.173/AHD/2009 ASST. YEAR 2004-05 21 BAD DELIVERIES THE LOSS SUFFERED BY THE ASSESSEE W AS A BAD DEBT AND CONSEQUENTLY WAS ALLOWABLE AS DEDUCTION ON AC COUNT OF BAD DEBTS AS WELL AS AS TRADING LOSS U/S.28(1) OF THE ACT AND THEREFORE WE ALLOW THE CLAIM UNDER APPEAL. 5. THE LD. DR REFERRED TO THE WRITTEN SUBMISSION A ND THE ORDER OF THE TRIBUNAL AND POINTED OUT THAT IN ASST. YEAR 2001-02 IN THE CASE OF THE ASSESSEE THE TRIBUNAL HAS SIMPLY FOLLOWED THE DECIS ION OF THE TRIBUNAL IN THE CASE OF H. NYALCHAND FINANCIAL SERVICES LTD. TH E FACTS IN THE CASE OF H. NYALCHAND FINANCIAL SERVICES LTD. AND IN THE CAS E OF THE ASSESSEE ARE DIFFERENT. FIRSTLY H. NYALCHAND FINANCIAL SERVICES LTD. WAS A BROKER REGISTERED WITH STOCK EXCHANGE AND IT HAD PURCHASED CERTAIN SHARES FOR HIS CLIENTS. ON ACCOUNT OF BAD DELIVERY THE CLIENT REFUSED TO MAKE THE PAYMENT AND FOR SAVING HIS OWN REPUTATION H. NYALCH AND FINANCIAL SERVICES LTD. HAD TO MAKE THE PAYMENT THROUGH STOCK EXCHANGE AND THEREFORE THIS AMOUNT WAS CLAIMED AS TRADE LOSS AN D WAS SO ALLOWED BY THE TRIBUNAL IN H. NYALCHAND FINANCIAL SERVICES LTD . IN THE CASE OF THE ASSESSEE THE TRIBUNAL HAS FOLLOWED H. NYALCHAND FIN ANCIAL SERVICES LTD.S CASE WITHOUT REALLY DISTINGUISHING THE FACTU AL MATRIX. THE ASSESSEE IS ONLY A SUB-BROKER AND IT IS NOT REGISTERED WITH STOCK EXCHANGE. ITS CLIENT REFUSED TO MAKE THE PAYMENT ON ACCOUNT OF HE AVY LOSSES AND THEREFORE IT WAS CLAIMED AS TRADING LOSS. THOUGH W RITE OF A DEBT CAN BE CONSIDERED ONLY UNDER SECTION 36(1) BUT LD. CIT(A) HAS NOT ALLOWED THE CLAIM AS BAD DEBT AND ASSESSEE HAS NEITHER PREFERRE D ANY APPEAL NOR ANY CROSS-OBJECTION AGAINST THIS FINDING OF THE LD. CIT (A). THEREFORE THE CLAIM OF ASSESSEE CANNOT BE ALLOWED AS BAD DEBT. TH E CLAIM CAN ALSO NOT BE ALLOWED AS TRADING LOSS BECAUSE IT IS A CAPITAL LOSS. 6. IN THE WRITTEN SUBMISSION ASSESSEE HAS SUBMITTED THAT LOSS OF A SHARE BROKER BY WAY OF NON-RECOVERY OF DUES FROM IT S CLIENTS HAS BEEN ALLOWED AS BAD DEBT IN THE CASE DECIDED BY ITAT SPE CIAL BENCH MUMBAI ITA NO.173/AHD/2009 ASST. YEAR 2004-05 22 IN THE CASE OF DCIT RANGE 7(2) VS. SHREYAS B. MARAK HIA IN ITA NO.3374/MUM/2004 AS UNDER :- KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE WE ARE OF THE VIEW THAT THE AMOUNT RECEIVABLE BY TH E ASSESSEE WHO IS A SHARE BROKER FROM HIS CLIENTS AGAINST THE TRANSACT IONS OF PURCHASE OF SHARES ON THEIR BEHALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANS ACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH BROKERAGE/COMMISSION HAS BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEA R 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 OFF THE SAID DEBTS FROM HIS BOOKS OF ACCOUN TS AS IRRECOVERABLE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE ISSUE OF LOSS TO THE ASSESSEE AS BAD DEBT CANNOT BE DECIDED IN ITS FAVOUR BECAUSE ASSESS EE HAS NOT FILED ANY CROSS OBJECTION OR APPEAL AGAINST THE DECISION OF L D. CIT(A) WHEREIN THE CLAIM OF ASSESSEE AS BAD DEBT WAS DECIDED AGAINST H IM AS UNDER:- 6. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELL ANT. THE UNCONTROVERTED FACTS OF THE ISSUE INVOLVED ARE THAT DURING THE PREVIOUS YEAR UNDER CONSIDERATION THE APPELLANT COMPANY HAS WRITTEN OFF AN AMOUNT OF RS.11 61 252/- DUE FROM M/S KUMARPAL KANT ILAL SECURITIES (P) LTD. THE APPELLANT COMPANY HAS CLAIMED IT AS BAD DE BTS. M/S KUMARPAL KANTILAL SECURITIES (P) LTD. WAS PURCHASING SHARES THROUGH APPELLANT COMPANY. HOWEVER IT DID NOT MAKE PAYMENT OF RS.11 61 252/- TO THE APPELLANT COMPANY AND ULTIMATELY THE AFORESAID AMO UNT HAS BEEN WRITTEN OFF IN THE ACCOUNTS OF THE APPELLANT. 7. I AGREE WITH THE FINDINGS RECORDED BY THE AO THA T SUCH A LOSS IS NOT ALLOWABLE U/S 36(1)(VII) R.W.S. 36(2) OF THE IT ACT AS THE AMOUNT OF RS.11 61 252/- HAS NOT BEEN OFFERED TO TAX EITHER I N THE CURRENT YEAR OR IN EARLIER YEARS. AS SUCH THE CONDITION SPECIFIED U/S 36(2) OF THE IT ACT IS NOT SATISFIED. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 23 SO FAR AS CLAIM OF TRADING LOSS IS CONCERNED WE AR E OF THE CONSIDERED VIEW THAT A TRADING LOSS CANNOT BE CONFINED MERELY TO CERTAIN SPECIFIC FACTS AS GIVEN IN THE CASE OF H. NYALCHAND FINANCIAL SER VICES LTD.S CASE. FACTUAL MATRIX IN THAT CASE COULD BE ONLY ONE SET O F CIRCUMSTANCES WHERE LOSS TO THE ASSESSEE CAN BE TREATED AS TRADING LOSS . IN THE CASE OF SHARE BROKER OR EVEN IN THE CASE OF SUB-SHARE-BROKER THIS CANNOT BE THE ONLY CIRCUMSTANCE WHERE TRADING LOSS CAN OCCUR. WHAT IS NECESSARY IS TO SEE IS THAT LOSS IS OCCURRING DURING THE COURSE OF BUSINES S. ITAT (DELH) MINDA HUF LTD. VS. JCIT (2006) 285 ITR (AT) 88 (TAT) (DEL HI) FOLLOWING THE DECISION OF HON. GUJARAT HIGH COURT IN CIT VS. ABDU L RAZAK & CO. 136 ITR 825 (GUJ) AND HON. ALLAHABAD HIGH COURT IN CIT VS. JWALA PD. RADHA KISHAN (1977) 107 ITR 540 (ALL) HELD THAT WHE RE ADVANCES WERE GIVEN DURING THE COURSE OF BUSINESS FOR SUPPLY OF R AW MATERIALS AND AMOUNTS HAVE BEEN SPENT SINCE 1994 AND WERE WRITTEN OFF IN 1978 ON THE GROUND THAT PARTIES ARE NOT TRACEABLE AND AMOUNTS H AVE BECOME IRRECOVERABLE AND FULL DETAILS OF EACH ITEM WERE ON RECORD AND THEN CLAIM OF TRADING LOSS UNDER SECTION 37 IS ALLOWABLE AS AD VANCES WERE CONNECTED WITH BUSINESS ACTIVITIES OF THE ASSESSEE. EVEN WHER E AN AMOUNT AS ADVANCE IS GIVEN DURING THE COURSE OF BUSINESS UND ER AN AGREEMENT AND PART THEREOF IS NOT REALIZED THEN THAT PART WHICH COULD NOT BE REALIZED COULD BE ALLOWED AS TRADING LOSS AS INCIDENTAL TO B USINESS UNDER SECTION 28. IT HAS BEEN SO HELD BY HON. ANDHRA PRADESH HIGH COURT IN P. SATYANARAYANA VS. CIT (1979) 116 ITR 803 (A.P.). HO NBLE GUJARAT HIGH COURT IN CIT VS. MIHIR TEXTILE (1976) 104 ITR 167 ( GUJ) HELD THAT EVEN THOUGH A PARTICULAR ITEM OF EXPENDITURE MAY NOT FAL L WITHIN ANY ONE OF THE SPECIFIC SECTIONS PROVIDED FOR DEDUCTION FROM SECTI ON 28 ONWARDS WHILE CALCULATING THE PROFITS AND GAINS OF BUSINESS OR PR OFESSION BUT FROM THE COMMERCIAL POINT OF VIEW THAT ITEM OF EXPENDITURE H AS TO BE TAKEN INTO ACCOUNT WHILE MAKING UP THE PROFITS AND LOSS ACCOUN T AND THAT ITEM OF ITA NO.173/AHD/2009 ASST. YEAR 2004-05 24 EXPENDITURE MAY BE ALLOWED UNDER SECTION 28(1) BECA USE WHAT IS TO BE TAXED IS THE PROFIT AND GAINS AS UNDERSTOOD IN THE ORDINARY COMMERCIAL SENSE (PAGE 174 OF THE REPORT). HON. BOMBAY HIGH CO URT IN G G DANDEKAR MACHINE WORKS LTD. VS. CIT (1993) 202 ITR 161 (BOM) HAS HELD THAT LIST OF ALLOWANCES AND DEDUCTIONS UNDER S ECTIONS 29 TO 43C ARE NOT EXHAUSTIVE OF ALL ALLOWANCES WHICH COULD BE MAD E IN ASCERTAINING PROFITS OF A BUSINESS TAXABLE UNDER SECTION 28 OF T HE ACT. AN ITEM OF LOSS OR EXPENDITURE INCIDENTAL TO BUSINESS MAY BE DEDUCT ED IN COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROFESSION EVEN I F IT DOES NOT FALL UNDER ANY OF THESE SECTIONS. WHAT IS TO BE DECIDED IS WHE THER SUCH LOSS IS INCIDENTAL TO THE OPERATION OF THE BUSINESS. THIS Q UESTION EVIDENTLY HAS TO BE DECIDED ON THE FACTS OF EACH CASE HAVING REGARD TO THE NATURE OF THE BUSINESS AND THE OPERATION CARRIED ON BY THE ASSESS EE. 8. IN THE PRESENT CASE IT IS UNDISPUTED FACT THAT A SSESSEE HAD A BUSINESS TRANSACTION WITH M/S KUMARPAL KANTILAL SECURITIES ( P) LTD. AND IT IS ALSO AN ADMITTED FACT THAT CERTAIN AMOUNT OF COMMISSION/ INCOME HAS BEEN SHOWN IN THE PROFITS AND LOSS ACCOUNT IN EARLIER YE ARS THE REST OF THE AMOUNT WAS NOT FOUND RECOVERABLE AND HENCE WAS CLAI MED AS TRADING LOSS. IN VIEW OF ABOVE AUTHORITIES THE CLAIM OF THE ASSE SSEE IS ALLOWABLE. EVEN OTHERWISE UNDER SIMILAR SET OF CIRCUMSTANCES THE T RIBUNAL IN ASST. YEAR 2001-02 HAD ALLOWED THE CLAIM AS BUSINESS LOSS BY F OLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF H. NYALCHAND FINANC IAL SERVICES LTD. AS REFERRED TO ABOVE. AS A RESULT APPEAL FILED BY THE REVENUE IS DISMISSED. ITA NO.173/AHD/2009 ASST. YEAR 2004-05 25 9. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 11.2.11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD DATED : 11/2/11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD 1.DATE OF DICTATION 1/2/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 7/2/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..