M/S. SHAILESH MERCHANT STOCK BROKERS P LTD, MUMBAI V. THE ITO 4(2)(2), MUMBAI

ITA 2637/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49088 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 30-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 15-04-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G P TRIVDEI
• Assessee Lawyers: VISHWAS V MEHENDALE
• Keywords: Bad and doubtful debts; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M. JAGTAP, AM AND SHRI V. DURGA RAO , JM I.T.A.NO.2637/MUM/2008 ASSESSMENT YEAR: 2004-05 M/S. SHAILESH MERCHANT STOCK BROKERS P.LLTD., 24, B.D. RAJBAHADUR COMPOUND, AMBALAL DOSHI MARG, MUMBAI 23. PAN: AAACS 7967 H VS. THE INCOME - TAX OFFICER - 4(2)(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. 400 020. (APP ELLANT ) (RESPONDENT) APPELLANT BY : SHRI VISHWAS V. MEHENDALE RESPONDENT BY : SHRI G.P. TRIVDEI (DR) O R D E R PER P.M. JAGTAP, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS)-IV, MU MBAI, DATED 18 TH FEBRUARY, 2008. 2. THE FIRST COMMON ISSUE RAISED BY THE ASSESSEE IN GROUND NOS.1 & 2 OF THIS APPEAL RELATES TO THE DISALLOWANCE OF RS. 11,1 5,676/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A) ON ACCO UNT OF ASSESSEES CLAIM FOR BAD DEBTS WRITTEN OFF. 3. THE ASSESSEE, IN THE PRESENT CASE, IS A COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF SHARE BROKING AS A MEMBER OF BOMBAY ST OCK EXCHANGE. IT ALSO DEALS IN SHARES ON ITS OWN ACCOUNT. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 28.10.2004 DECLARI NG TOTAL INCOME AT NIL. IN THE PROFIT & LOSS ACCOUNT FILED ALONG WITH THE SAID RET URN, THE SUM OF RS. 11,06,638/- WAS DEBITED BY THE ASSESSEE ON ACCOUNT OF BAD DEBTS WRITTEN OFF. THE SAID BAD DEBTS WERE COMPRISING OF A SUM OF RS. 10,93,042/- R ECEIVABLE FROM M.B. BHANDHARI AGAINST TRANSACTION OF SHARES AND RS. 20,000/- PAID TO M/S. KOLA SECURITIES PVT. LTD. ITA NO.2637/M/2008 M/S. SHAILESH MERCHANT STOCK BROKERS P. LTD. 2 AS ADVANCE. THE REMAINING AMOUNT OF RS.2,634/- WAS IN RESPECT OF PETTY BALANCES RECEIVABLE FROM 20 PARTIES. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE CLAIM OF THE ASSESSEE FOR BAD DEBTS WRITTEN OFF WA S EXAMINED BY THE ASSESSING OFFICER. ON SUCH EXAMINATION, HE FOUND THAT THE AM OUNT RECEIVABLE BY THE ASSESSEE FROM M.B. BHANDHARI WAS EARLIER WRITTEN OF F IN ASSESSMENT YEAR 2001-02 BUT THE SAME WAS SUBSEQUENTLY WRITTEN BACK IN THE A SSESSMENT YEAR 2002-03 WHICH AGAIN WAS WRITTEN OFF IN THE YEAR UNDER CONSI DERATION. ACCORDING TO HIM, THESE FACTS OF THE CASE WERE SUFFICIENT TO SHOW THA T THE OTHER PARTY HAD NEVER ACKNOWLEDGED THE DEBT SHOWN BY THE ASSESSEE COMPANY IN ITS BOOKS OF ACCOUNT AND, THEREFORE, THE UNILATERALLY WRITING OFF AND WR ITING BACK BY THE ASSESSEE COULD NOT BE ALLOWED AS BAD DEBT. THE ASSESSING OFFICER ALSO HELD THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO ESTABLISH THAT THE S AID DEBT HAD ACTUALLY BECOME BAD IN THE YEAR UNDER CONSIDERATION. HE FURTHER HE LD THAT ONLY THE BROKERAGE INCOME OF THE RELEVANT TRANSACTION HAVING BEEN DECL ARED BY THE ASSESSEE AS ITS INCOME, ITS CLAIM FOR DEDUCTION ON ACCOUNT OF BAD D EBTS FOR THE ENTIRE AMOUNT WAS NOT ALLOWABLE UNDER SECTION 36(1)(VII) READ WITH SE CTION 36(2). ACCORDINGLY, THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF B AD DEBT WRITTEN OFF WAS DISALLOWED BY THE ASSESSING OFFICER. ON APPEAL, TH E LEARNED CIT(A) CONFIRMED THE SAID DISALLOWANCE MAINLY FOR THE SAME REASONS AS G IVEN BY THE ASSESSING OFFICER. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS EXPLAINED BY THE L EARNED COUNSEL FOR THE ASSESSEE, THE DEBT RECEIVABLE FROM M.B. BHANDHARI WRITTEN OF F AS BAD IN THE ASSESSMENT YEAR 2001-02 WAS WRITTEN BACK IN THE ASSESSMENT YEAR 200 2-03 AS SOME AMOUNT FROM THE SAID DEBTOR WAS RECOVERED IN THAT YEAR. AS A RE SULT OF THE SAID RECOVERY, THE ASSESSEE CONSIDERED THE SAID DEBT AS GOD AND ACCORD INGLY THE AMOUNT EARLIER WRITTEN OFF IN THE ASSESSMENT YEAR 2001-02 WAS WRIT TEN BACK IN THE ASSESSMENT YEAR 2002-03. IN OUR OPINION, THIS EXPLANATION OFF ERED BY THE LEARNED COUNSEL FOR ITA NO.2637/M/2008 M/S. SHAILESH MERCHANT STOCK BROKERS P. LTD. 3 THE ASSESSEE IS SUFFICIENT TO SHOW THAT THE WRITTE N OFF OF THE AMOUNT RECEIVIABLE FROM M.B. BHANDHARI IN THE ASSESSMENT YEAR 2001-02 AND WRITING BACK OF THE SAME AMOUNT IN THE ASSESSMENT YEAR 2002-03, WAS BONAFIDE AND THERE WAS NO JUSTIFIABLE REASON FOR THE AUTHORITIES BELOW TO DOUBT THE VERY EXISTENCE OF THE DEBT MERELY ON THE BASIS OF ACCOUNTING ENTRIES PASSED BY THE ASSES SEE WRITING OFF AND WRITING BACK THE SAID DEBT. ON THE CONTRARY, AS A RESULT OF WRIT ING BACK THE BAD DEBT EARLIER WRITTEN OFF, THE DEBT WAS RESTORED BY THE ASSESSEE COMPANY IN ITS BOOKS OF ACCOUNT AND THE EXISTENCE OF THE SAID DEBT WAS DULY ESTABLI SHED. AS REGARDS THE OTHER REASON GIVEN BY THE AUTHORITIES BELOW FOR DISALLOWI NG THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBT THAT THERE WAS FAI LURE ON THE PART OF THE ASSESSEE TO ESTABLISH THAT THE RELEVANT DEBT HAD AC TUALLY BECOME BAD IN THE YEAR UNDER CONSIDERATION, IT IS OBSERVED THAT THIS ISSU E NOW STANDS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT V. T.R.F. LTD. (2010) 323 ITR 397 (SC), WHEREIN IT IS HELD THAT EVERY ASS ESSEE PRIOR TO 1.4.1989 HAD TO ESTABLISH, AS A MATTER OF FACT, THAT THE DEBT ADVAN CED BY HIM HAD IN FACT BECOME IRRECOVERABLE. AS FURTHER HELD BY THE HONBLE SUPRE ME COURT, THIS POSITION, HOWEVER, GOT ALTERED BY THE DELETION OF THE WORD E STABLISHED WHICH EARLIER EXISTED IN SECTION 36(1)(VII). THE HONBLE SUPREME COURT HAS HELD THAT IT IS, THEREFORE, NOT NECESSARY FOR THE ASSESSEE WITH EFFE CT FROM 1.4.1989 TO ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRRECOVERABLE AND IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. AS REGARDS THE OTHER REASON GIVEN BY THE AUTHORITIES BELOW FOR DISALLOWI NG THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBT, THAT THE CONDITIO N U/S.36(2) WAS NOT SATISFIED, IT IS OBSERVED THAT THIS ISSUE NOW STANDS SQUARELY COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE I.T.A.T IN THE CASE OF DCIT V. SHREYAS S. MORAKHIA (131 TTJ 641 (BOM.), WHEREIN IT WAS HELD THAT THE AMOUNT REC EIVABLE BY THE ASSESSEE, WHO IS A SHARE BROKER, FROM ITS CLIENTS AGAINST THE TRA NSACTIONS OF PURCHASE OF SHARES ITA NO.2637/M/2008 M/S. SHAILESH MERCHANT STOCK BROKERS P. LTD. 4 ON THEIR BEHALF, CONSTITUTES DEBT WHICH IS A TRADIN G DEBT. IT WAS HELD THAT THE BROKERAGE/COMMISSION INCOME ARISING FROM THIS TRANS ACTION VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF THAT BROKER AGE/ 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) AND THE ASSESSEE IS ENTITLED TO DEDUCTION U/ S.36(1)(VII) BY WAY OF BAD DEBT AFTER HAVING WRITTEN OFF THE SAID DEBTS FROM HIS B OOKS OF ACCOUNT AS IRRECOVERABLE. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD.(SUPRA) AND THAT OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. SHREYAS S. MORAKHIA (SUPRA), WE SET ASIDE T HE IMPUGNED ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSI NG OFFICER TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF BAD DEBTS AF TER ASCERTAINING THE EXACT QUANTUM THEREOF TAKING INTO CONSIDERATION THE MARGI N MONEY OR THE VALUE OF SHARES, IF ANY, AVAILABLE WITH THE ASSESSEE AS SECU RITY. GROUND NOS.1 & 2 OF THE ASSESSEES APPEAL ARE ACCORDINGLY ALLOWED. 5. THE NEXT ISSUE RAISED BY THE ASSESSEE IN GROUND NO.3 RELATES TO THE DISALLOWANCE OF RS.1,84,595/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A) OUT OF FOREIGN TRAVEL EXPENSES. 6. FROM THE DETAILS OF TRAVELING EXPENSES FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT THE EXPENDITURE OF R S. 1,84,595/- WAS CLAIMED ON ACCOUNT OF FOREIGN TRAVEL UNDERTAKEN BY THE DIRECTO RS OF THE ASSESSEE-COMPANY TO MALAYSIA. IT WAS SUBMITTED ON BEHALF OF THE ASSESS EE BEFORE THE ASSESSING OFFICER THAT ONE OF THE DIRECTORS HAD GONE TO MALAYSIA IN T HE YEAR UNDER CONSIDERATION TO EXPLORE THE BUSINESS FROM NON-RESIDENT INDIANS AND FOREIGN INSTITUTIONAL INVESTORS. IT WAS FURTHER SUBMITTED THAT THE SAID DIRECTOR FEL L CRITICALLY SICK DURING HIS VISIT TO MALAYSIA AND OTHER DIRECTOR HAD TO RUSH TO GET HIM ADMITTED IN THE HOSPITAL. THIS SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER. ITA NO.2637/M/2008 M/S. SHAILESH MERCHANT STOCK BROKERS P. LTD. 5 ACCORDING TO HIM, GETTING BUSINESS FROM NON-RESIDEN T INDIANS AND FOREIGN INSTITUTIONAL INVESTORS WAS A NEW LINE OF BUSINESS ACTIVITY OF THE ASSESSEE AND THE EXPENDITURE INCURRED IN CONNECTION WITH THE SAID AC TIVITY WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS EXISTING BUSINES S. HE, THEREFORE DISALLOWED THE FOREIGN TRAVEL EXPENDITURE OF RS. 1,84,595/- INCURR ED BY THE ASSESSEE. ON APPEAL, THE LEARNED CIT(A) CONFIRMED THE SAID DISALLOWANCE ALTHOUGH ON A DIFFERENT GROUND THAT THERE WAS NO EVIDENCE PRODUCED BY THE ASSESSEE EITHER BEFORE THE ASSESSING OFFICER OR EVEN BEFORE HIM TO SUPPORT AND SUBSTANT IATE ITS CLAIM THAT FOREIGN TRAVEL EXPENSES IN QUESTION WERE ACTUALLY INCURRED FOR THE PURPOSE OF ITS BUSINESS. 7. WE HEAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH THE LEARNED C OUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE US THAT THE ASSESSEE WAS NEVER ASK ED EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED CIT(A) TO PRODUCE THE SUP PORTING DOCUMENTARY EVIDENCE, WE FIND IT DIFFICULT TO ACCEPT THE SAME KEEPING IN VIEW THAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH ON EVIDENCE THAT THE EXPENDIT URE CLAIMED BY IT ON FOREIGN TRAVEL WERE FOR THE PURPOSE OF ITS BUSINESS. IT WA S THUS THE ASSESSEE WHO SHOULD HAVE PRODUCED THE RELEVANT DOCUMENTARY EVIDENCE TO ESTABLISH THAT THE FOREIGN TOUR TO MALAYSIA WAS UNDERTAKEN BY ITS DIRECTORS FO R THE PURPOSE OF ITS BUSINESS. HAVING FAILED TO DO SO, THE ASSESSEE IN OUR OPINION HAS MISSED THE BUS AND WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMPUGNE D ORDER OF THE LEARNED CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING O FFICER ON ACCOUNT OF FOREIGN TRAVEL EXPENSES AS THE ASSESSEE HAS FAILED TO ESTAB LISH BUSINESS EXPEDIENCY OF THE FOREIGN TOUR UNDERTAKEN BY ITS DIRECTORS. GROUND NO .3 IS ACCORDINGLY DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 3RD DAY OF JUNE, 2011. SD. SD. (V. DURGA RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED THE 3 RD JUNE, 2011. ITA NO.2637/M/2008 M/S. SHAILESH MERCHANT STOCK BROKERS P. LTD. 6 KN COPY TO: 1. THE ASSESSEE 2. THE ITO-4(2)(2), MUMBAI 3. THE CIT-4, MUMBAI. 4. THE CIT(A)-IV, MUMBAI 5. THE DR E BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI