RAJCHANDRA CAPITAL SERVICES P. LTD, MUMBAI V. ACIT CIR 4(2), MUMBAI

ITA 2254/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55325 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 14-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 22-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Assessee Lawyers: DR K SHIVRAM
• Keywords: Bad and doubtful debts
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD (A. M) ITA NO.2254/MUM/2010(A.Y. 2005-06) M/S. RAJCHANDRA CAPITAL SERVICES PVT.LTD., BILUEES MANSION, 2 ND FLOOR, NORTH SIDE, 261/263, D.N.ROAD, MUMBAI 400 001. PAN:AAACR 5526M (APPELLANT) VS. THE DCIT 4(2), MUMBAI. (RESPONDENT) APPELLANT BY : DR. K.SHIVRAM RESPONDENT BY : SHRI C.G.K.NAIR DATE OF HEARING : 14/09/2011 DATE OF PRONOUNCEMENT : /09/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 25/1/2010 OF CIT(A)-8, MUMBAI RELATING TO ASSESSMENT YEAR 200 5-06. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. THE LD. CIT(A) ERRED IN DISALLOWING THE BAD DEB T OF RS. 10,00,000/- OUT OF TOTAL RS.10,64,026/- ON THE GROUND THAT ONLY BROKERAGE OF RS. 64,026/- WAS INCLUDED IN THE COMPUTATION OF INCOME AND NOT THE TOTAL OF RS. 10,64,026/-- AND THUS HELD THAT CONDITIONS O F SECTION 36(2) ARE NOT FULFILLED. 2. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE F ACT THE DEBT IS INCIDENTAL TO BROKERAGE INCOME AND HENCE CONDITIONS OF SECTION 36(2) HAVE BEEN FULFILLED HENCE BAD DEBTS MAY BE ALLOWED. 3. WITHOUT PREJUDICE TO ABOVE, AS THE LOSS WAS INCU RRED IN THE ORDINARY COURSE OF BUSINESS, THE DEBT OF RS.10,00,000/- MAY BE ALLOWED AS BUSINESS LOSS. ITA NO.2254/MUM/2010(A.Y. 2005-06) 2 4. THE LEARNED CIT(A) CONTRADICTED HIMSELF BY STATI NG THAT SECTION 36(1)(VII) DOES NOT APPLY DUE TO PROVISIONS OF SECT ION 36(2) AND ON THE OTHER SIDE, NOT ALLOWING AS BUSINESS LOSS U/S. 28 / 37 BY STATING THAT SPECIFIC SECTION OVERRIDES GENERAL SECTION. HENCE, THE SAID LOSS MAY BE ALTERNATIVELY ALLOWED. 5. THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE AMOUNTS WERE WRITTEN OFF THIS YEAR AND HENCE THE LOSS HAD CRYSTA LLIZED DURING THE PREVIOUS YEAR, HENCE THE SAID LOSS MAY BE ALLOWED A S BUSINESS LOSS. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN TH E BUSINESS OF SHARE AND STOCK BROKING, INVESTMENT IN SHARES AND TRADING ON DELIVERY BASIS AS WELL AS INTRADAY BASIS. THE ASSESSEE CLAIMED AS DEDUCTION WHILE COMPUTING ITS INCOME A SUM OF RS.10,64,026/- UNDER THE HEAD BAD D EBTS. THE PARTICULARS OF THE DEBTS WRITTEN OFF AS BAD DEBTS AND DOUBTFUL ARE AS FOLLOWS: S.NO. NAME OF THE CLIENT AMOUNT IN (RS) 1. RUBAL COUNTER 14,684.00 2. MANISH LODAYA 44,359.00 3. VIPUL HIRALAL SHAH 4,982.72 4. M.R.SHAH & BROS. 10,00,000.00 TOTAL 10,64,026.00 THE AO WAS OF THE VIEW THAT THE ASSESSEE DID NOT ES TABLISH THAT THE DEBT IN QUESTION HAD BECOME BAD AND DOUBTFUL. THERE IS NO DISPUTE THAT THE DEBTS WHICH WERE WRITTEN OFF AS BAD DEBTS IN THE CASE OF THE DEBTOR EXCEPT M.R.SHAH AND BROTHERS WERE DEBTS DUE BY THE CLIENTS FOR WHOM THE ASSESSEE ACTED AS BROKER AND THE CLIENTS ULTIMATELY DID NOT PAY THE AMOUNTS DUE ON TRANSACTIONS DONE ON BEHALF OF THE CLIENTS. 3. IN THE CASE OF DEBTS DUE FROM M.R.SHAH & BROS., FACTS WERE THAT THE ASSESSEE HAD TAKEN OVER THE BUSINESS OF M/S. M.R. S HAH & BROS. (MEMBER OF BOMBAY STOCK EXCHANGE) AS A GOING CONCERN IN THE YE AR 1997-98. THE GOVERNMENT WANTED TO CORPORATISE THE SHARE BROKING BUSINESS IN THE COUNTRY AND HENCE A SPECIAL SCHEME WAS INTRODUCED I N THE FINANCE BILL OF ITA NO.2254/MUM/2010(A.Y. 2005-06) 3 1997 TO ENCOURAGE THE CORPORATISATION. ACCORDING T O THE SCHEME, THE BUSINESS OF ERSTWHILE PARTNERSHIP FIRM M/S. M.R. SH AH & BROS. WAS FULLY TAKEN OVER BY NEWLY CORPORATISED ENTITY RAJCHANDRA CAPITAL SERVICES PVT. LTD VIZ., THE ASSESSEE. ALL THE ASSETS AND LIABILITIES OF THE FIRM WERE TRANSFERRED TO THE COMPANY AND ACCORDINGLY THE PARTNERSHIP FIRM M/S. M.R. SHAH & BROS. STOPPED HIS BUSINESS ACTIVITY AND ALSO CEASED TO BE A MEMBER OF THE STOCK EXCHANGE. THE OUTSTANDING BALANCES AT THE TI ME OF TAKE OVER WAS RS.73,91,093/-. IN THE YEAR 2002-03, WE HAVE RECOV ERED OLD DEBIT BALANCE FROM CLIENT OF ERSTWHILE PARTNERSHIP FIRM M/S. M.R. SHAH & BROS. AND DEBIT BALANCE WAS REDUCED FROM RS. 73,91,093/- TO RS. 59 ,94,093/-. THE ASSESSEE RECEIVED FURTHER PAYMENT OF RS.49,94,093 I N FULL AND FINAL SETTLEMENT OF THE DUES OF RS.59,94,903 AND THUS THE BALANCE SUM OF RS.10 LACS WAS WRITTEN OFF AS BAD DEBTS. 4. THE ASSESSEE FURTHER SUBMITTED THAT ALL THE DEB TS HAVE BEEN GENERATED BY M/S. M.R.SHAH & BROS. IN THE NORMAL COURSE OF CARRY ING OUT THE BUSINESS OF STOCK BROKING. IT WAS ALSO POINTED OUT THAT M/S. M .R.SHAH & BROS. HAS EARNED SUBSTANTIAL BROKERAGE IN THE EARLIER YEARS O N THE TRANSACTION CARRIED OUT WITH THE PARTIES AND THE SAME HAS BEEN OFFERED FOR TAXATION IN THE RESPECTIVE YEARS. HOWEVER, DUE TO SOME DISPUTE OVE R PAYMENTS WITH SOME PARTIES THE DEBTS HAS ARISEN. THE ASSESSEE SUBMITT ED THAT SINCE IT HAS TAKEN OVER THE BUSINESS AS A GOING CONCERN ALONG WITH ITS ASSET AND LIABILITIES, THE DEBTS DUE TO M/S.M.R.SHAH & BROS. HAS BECOME THE D EBT OF THE ASSESSEE. THE ASSESSEE HAS MADE ALL EFFORTS INCLUDING LEGAL A CTION AGAINST THE DEBTORS TO RECOVER THE OUTSTANDING DEBIT BALANCE FROM VARIO US DEBTORS. THE ASSESSEE IN ORDER TO DEMONSTRATE ITS EFFORTS FOR THE RECOVER Y OF OLD OUTSTANDING DEBIT BALANCE OF ERSTWHILE FIRM M/S. M.R.SHAH & BROSIS AL SO FILED ONE LETTER OF THE DELHI STOCK EXCHANGE ASSOCIATION LTD. DATED 29.03.2 003 WHICH SHOWED THAT ONE OF THE PARTIES HAS GONE FOR THE ARBITRATION AN D THE ARBITRATION AWARD ITA NO.2254/MUM/2010(A.Y. 2005-06) 4 WAS IN FAVOUR OF THE ASSESSEE AND IT HAS RECEIVED AN AMOUNT FOR RS. 546,043/- FROM M/S. RAM NANDA & CO. IN THE AWARD, T HE MEMBER OF DSE. ANOTHER DEBTOR M/S. RAM NANDA & CO. DID NOT ACCEPT THE ARBITRATION AWARD AND HAS FURTHER PREFERRED AN APPEAL BEFORE THE HON BLE BOMBAY HIGH COURT AS WELL AS BEFORE THE HONBLE SUPREME COURT. THE A PPEAL OF M/S. RAM NANDA & CO. WAS REJECTED BY ALL THE FORUMS AND MATT ER WAS DECIDED IN THE FAOUR OF THE ASSESSEE. THE LETTER OF THE DELHI STO CK EXCHANGE ASSOCIATION WAS ALSO FILED. THE ASSESSEE SUBMITTED THAT AFTER MUCH PERSUASION IT HAD RECOVERED OLD DEBIT BALANCE FROM CLIENT OF ERSTWHIL E PARTNERSHIP FIRM M/S. M.R.SHAH & BROS. AND DEBIT BALANCE WAS REDUCED FROM RS. 73,91,093/- TO RS.10,00,000/-. HOWEVER, EVEN AFTER VARIOUS EFFORT S OF THE ASSESSEE, THE PARTIES ARE NOT READY TO PAY THEIR OLD OUTSTANDING DUES HENCE THE SAME HAS BEEN WRITTEN OFF AS BAD DEBTS IN THE BOOKS OF ACCOU NTS AND THE BAD DEBTS CLAIMED BY THE ASSESSEE IS REQUIRED TO BE ALLOWED. 5. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS IT W AS ALSO SUBMITTED THAT ASSESSEE HAD RECEIVED ALL THE ABOVE INCOME DUE TO T AKEOVER OF THE BUSINESS OF M/S. M.R.SHAH & BROS AND HENCE THE OUTSTANDING A MOUNT DUE WHICH WAS WRITTEN OFF AS BAD DEBTS WAS IN RELATION TO STOCK M ARKET TRANSACTIONS ONLY AND THE BROKERAGE EARNED ON EACH TRANSACTION WAS OF FERED FOR TAXATION. HENCE, IN THE ALTERNATIVE THE CLAIM FOR DEDUCTION O F RS.10 LACS HAS TO BE ALLOWED AS BUSINESS LOSS BEING LOSS INCIDENTAL TO T HE BUSINESS. 6. AS ALREADY STATED THE AO DID NOT ALLOW THE CLAI M OF THE ASSESSEE FOR DEDUCTION FOR THE REASON THAT THE ASSESSEE HAS NOT ESTABLISHED THAT THE DEBTS WHICH WERE WRITTEN OFF AS BAD DEBTS HAD IN FA CT BECOME BAD AND IRRECOVERABLE. THE AO ALSO HELD THAT AS A BROKER, THE ASSESSEE SHOULD HAVE NOT HAVE TRADED WITHOUT ADEQUATE SECURITY FROM THE CLIENTS AS REQUIRED BY THE RELEVANT SEBI RULES AND THEREFORE THE CLAIM FOR DEDUCTION WAS HIT BY THE ITA NO.2254/MUM/2010(A.Y. 2005-06) 5 PROVISIONS OF EXPLN TO SEC.37(1) OF THE ACT. THE A O ALSO HELD THAT SINCE THE ASSESSEE WAS OFFERING ONLY COMMISSION FROM THE TRAN SACTIONS TO TAX, THE VALUE OF THE TRANSACTION DONE ON BEHALF OF THE CLIE NT WAS NEVER SHOWN AS INCOME BY THE ASSESSEE AND THEREFORE THE CONDITION LAID DOWN IN SEC.36(2) OF THE ACT WAS NOT FULFILLED. 7. ON APPEAL BY THE ASSESSEE, THE CIT(A), CONFIRME D THE ORDER OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. WITH REG ARD 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. ITA NO.2254/MUM/2010(A.Y. 2005-06) 6 36.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION28(I) TO (VI) XXXX XXXX XXXX (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION(2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRREC OVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. IN TRF LIMITED VS. CIT 230 CTR 14 (SC), THE HONBLE SUPREME HOLD HAS HELD THAT AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. I T IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THE OBJECTION OF THE REVENUE AUTHORITIES THAT THE ASSESSEE SHOULD ESTABLISH THAT THE DEBT WRITTEN OFF AS BAD DEBT SHOULD BE ESTABLISHED TO HA VE BECOME BAD IS THEREFORE NOT SUSTAINABLE. 9. WITH REGARD TO THE OBJECTION THAT THE CONDITI ON 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 D EBTS IN RESPECT OF SHARES PURCHASED BY HIM FOR HIS CLIENTS. THE AO REJECTED T HE CLAIM THOUGH THE CIT (A) UPHELD IT. ON APPEAL BY THE REVENUE, THE MATTER WAS REFERRED TO THE SPECIAL BENCH. BEFORE THE SPECIAL BENCH, THE DEPART MENT ARGUED THAT U/S 36(2), NO DEDUCTION ON ACCOUNT OF BAD DEBT CAN BE A LLOWED UNLESS SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMP UTING THE INCOME OF THE ASSESSEE. IT WAS ARGUED THAT AS THE ASSESSEE HAD O FFERED 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 DEBT U/S 36(1) (VII). THE SPECIAL BENCH HELD REJECTING THE CLAIM OF THE DEPARTMENT: (I) IN VEERABHADRA RAO 155 ITR 152 THE SUPREME COUR T HELD IN THE CONTEXT OF A LOAN THAT IF THE INTEREST IS OFFERED T O TAX, THE LOAN HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE AND ITA NO.2254/MUM/2010(A.Y. 2005-06) 7 QUALIFIES FOR DEDUCTION U/S 36(1)(VII). THE EFFECT OF THE JUDGEMENT IS THAT IN ORDER TO SATISFY THE CONDITION STIPULATED I N S. 36(2)(I), IT IS NOT NECESSARY THAT THE ENTIRE AMOUNT OF DEBT HAS TO BE TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE AND IT WILL BE SUFFICIENT EVEN IF PART OF SUCH DEBT IS TAKEN INTO ACCOUNT IN COMPUTIN G THE INCOME OF THE ASSESSEE. THIS PRINCIPLE APPLIES TO A SHARE BROKER. THE AMOUNT RECEIVABLE ON ACCOUNT OF BROKERAGE IS A PART OF DEB T RECEIVABLE BY THE SHARE BROKER FROM HIS CLIENT AGAINST PURCHASE OF SH ARES AND ONCE SUCH BROKERAGE IS CREDITED TO THE P&L ACCOUNT AND TAKEN INTO ACCOUNT IN COMPUTING HIS INCOME, THE CONDITION STIPULATED IN S . 36(2)(I) GETS SATISFIED. WHETHER THE GROSS AMOUNT IS REFLECTED IN THE CREDIT SIDE OF THE P&L A/C OR ONLY THE NET AMOUNT IS FINALLY REFLE CTED AS PROFIT AFTER DEDUCTING THE CORRESPONDING EXPENSES OR ONLY THE NE T AMOUNT OF BROKERAGE RECEIVED BY THE SHARE BROKER IS REFLECTED IN THE CREDIT SIDE OF THE P&L ACCOUNT MAKES NO DIFFERENCE BECAUSE THE ULT IMATE 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 SHARES IS IRRELEVANT. IF THE BROKER CHOOSES NOT TO FOLLOW THE GUIDELINES, IT IS A DECISION TAKEN BY HIM AS A BUSINESSMAN HAVING REGAR D TO HIS BUSINESS RELATIONS WITH THE CLIENT. THE LOSS CANNOT BE EQUAT ED TO EXPENDITURE INCURRED BY THE ASSESSEE FOR ANY PURPOSE WHICH IS A N OFFENCE OR WHICH IS PROHIBITED BY LAW. (CIT VS. PRANLAL KESURDAS 49 ITR 931 (BOM) FOLLOWED WHERE BAD DEBTS ON ACCOUNT OF FORBIDDEN VA YADA 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 D IVISION BENCH. ITA NO.2254/MUM/2010(A.Y. 2005-06) 8 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. 10. THUS AS LAID DOWN BY THE SPECIAL BENCH REFERRED TO ABOVE THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE, WHO IS A SHARE BROKER, 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 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. 11. IN THE PRESENT CASE, AS FAR AS DEBTS DUE FROM M/S. M.R.SHAH & BROS. IS CONCERNED WE FIND THAT ASSESSEE HAS CLAIMED BEFO RE THE AO THAT DEBT IN QUESTION WAS THE DEBT OF THE ERSTWHILE FIRM M/S. M. R.SHAH & BROS. AND THE ASSESSEES TAKE OVER OF THEIR BUSINESS IT BECAME T HE DEBT DUE TO THE ASSESSEE. IT HAS FURTHER BEEN SUBMITTED THAT THE D EBTS IN QUESTION AROSE IN THE NORMAL COURSE OF BUSINESS OF STOCK BROKING CARR IED ON BY M/S. M.R.SHAH & BROS. AND THAT M/S.M.R.SHAH & BROS. EARNED BROKER AGE INCOME FROM THOSE TRANSACTIONS AND OFFERED THE SAME FOR TAXATIO N. NEITHER THE AO NOR THE CIT(A) HAS EXAMINED THIS ASPECT AND THEY PROCEEDED PURELY ON THE BASIS OF THE PROVISION OF SECTION 36(2) OF THE ACT. IN THES E CIRCUMSTANCES IT WOULD BE APPROPRIATE TO SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND REMAND THE ISSUE TO THE AO FOR THE LIMITED PURPOSE OF VERIFICA TION WHETHER THE DEBTS INCURRED BY M/S. M.R.SHAH & BROS. OF THE ABOVE ASPE CTS PLEADED BY THE ITA NO.2254/MUM/2010(A.Y. 2005-06) 9 ASSESSEE. IN RESPECT OF THE DEBTS DUE FROM OTHERS THE ADDITION SUSTAINED IS DELETED. 12. 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. 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. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 21 ST DAY OF SEPT., 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 21 ST SEPT.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RD BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.2254/MUM/2010(A.Y. 2005-06) 10 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 14/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 15/9/11 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