M/S. P.R.M. SECURITIES P. LTD, MUMBAI V. THE ITO WD 4(2)(1), MUMBAI

ITA 2997/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8236 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 01-02-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 02-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANADEENATH MISHRA
• Assessee Lawyers: SAMEER G DALAL
• Keywords: Speculation loss; Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, C, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI R K PANDA, ACCOUNTANT MEMBER I T A NO: 2997/MUM/2008 (ASSESSMENT YEAR: 2004-05) PRM SECURITIES PVT. LTD., MUMBAI APPELLANT (PAN: AAPCP6140P) VS INCOME TAX OFFICER, 4(2)(1), MUMBAI RESPONDENT APPELLANT BY: SHRI SAMEER G DALAL RESPONDENT BY: SHRI ANADEENATH MISHRA O R D E R R V EASWAR, PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE AND IT RELATES T O THE ASSESSMENT YEAR 2004-05. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS AS SHARE BROKER-CUM -SHARE DEALER. THE PRESENT APPEAL ARISES OUT OF THE ASSES SMENT ORDER PASSED ON 7 TH NOVEMBER 2006 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE FIRST GROUND RELATES TO THE DEDUCTION OF BAD DEBTS OF ` 11,62,500/-. THE NAME OF THE DEBTOR IS M/S GURU HO LDING PRIVATE LIMITED. BEFORE THE ASSESSING OFFICER IT WAS POINT ED OUT ON BEHALF OF THE ASSESSEE THAT THE ABOVE COMPANY WAS A STOCK BROKER REGISTERED WITH NSE AND IT ISSUED A CHEQUE TO THE A SSESSEE WHICH WAS DISHONOURED AND, THEREFORE, THE ASSESSEE PREFER RED A ITA NO: 2997/MUM/2008 2 COMPLAINT WITH THE NSE ON 19 TH MARCH 2002. A COMPROMISE WAS SUGGESTED BY THE NSE, UNDER WHICH THE COMPANY WAS T O PAY THE AMOUNT IN INSTALMENTS FROM 29 TH JUNE 2002 TO 30 TH JULY 2002. THIS WAS ALSO NOT ADHERED TO. THE COMPANY THEREAFTER IS SUED ANOTHER CHEQUE TO THE ASSESSEE, WHICH ALSO GOT DISHONOURED. THEREAFTER THE ASSESSEES ADVOCATES INITIATED LEGAL ACTION AGA INST THE COMPANY AND ITS DIRECTORS ON 1 ST OCTOBER 2002. THE ASSESSEE, IN THE MEANTIME, HAD COME TO KNOW FROM NEWSPAPER REPORTS THAT A SPECIAL COURT HAD ATTACHED THE PROPERTY OF THE DIRE CTORS OF THE DEBTOR COMPANY AND ALSO THAT THEY WERE INVOLVED IN MANIPUL ATION AND PRICE RIGGING BECAUSE OF WHICH SEBI HAD BARRED THEM FROM DOING BUSINESS. THE ASSESSEE ALSO LEARNED THAT THE DIREC TORS WERE ABSCONDING AND A PROCLAMATION HAD BEEN ISSUED IN TH E PRESS. IT WAS EXPLAINED THAT IN THESE CIRCUMSTANCES THE ASSES SEE TOOK A BONA FIDE DECISION TO WRITE OFF THE DEBT DUE FROM M /S GURU HOLDING PRIVATE LIMITED. IT WAS PLEADED THAT THE SAME BE A LLOWED AS A DEDUCTION. 3. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEE ALSO SUBMITTED THAT THE DEBT ALONG WITH INTEREST, T OGETHER AGGREGATING TO ` 15,32,841/- WAS RECOVERED IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2007-08 AND WAS SHO WN AS INCOME IN THAT YEAR. ACCORDINGLY THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF THE AMOUNTS RECEIVED FROM THE COMPAN Y. THE ASSESSEE WOULD APPEAR TO HAVE FURNISHED THE RELEVAN T DETAILS AND ALSO POINTED OUT THAT THE AFORESAID AMOUNT WAS RECE IVED IN MAY ITA NO: 2997/MUM/2008 3 2006 AND CREDITED TO THE PROFIT AND LOSS ACCOUNT FO R THE YEAR ENDED 31.03.2007. 4. THE ASSESSING OFFICER HOWEVER DID NOT ACCEPT THE ASSESSEES CLAIM. HE WAS OF THE VIEW THAT ONE OF T HE CONDITIONS OF SECTION 36(2) WAS NOT FULFILLED INASMUCH AS THE ASS ESSEE HAS NOT PROVED THAT THE DEBT HAD BEEN TAKEN INTO ACCOUNT IN THE COMPUTATION OF THE INCOME OF THE ASSESSEE FOR THE R ELEVANT PREVIOUS YEAR OR ANY EARLIER PREVIOUS YEARS. IN THIS VIEW O F THE MATTER HE DISALLOWED THE ASSESSEES CLAIM FOR BAD DEBTS. THE ASSESSEES ALTERNATIVE CLAIM FOR ALLOWING THE WRITE OFF AS A B USINESS LOSS WAS ALSO REJECTED. 5. THE ASSESSMENT ORDER HAVING BEEN CONFIRMED BY TH E CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUN AL. RELIANCE WAS PLACED ON BEHALF OF THE ASSESSEE ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TRF LIMITED VS. CIT (2010) 323 ITR 397 (SC) AND ALSO ON THE ORDER OF THE SPECIAL BENCH, MUMBAI IN THE CASE OF DCIT VS. SHREYAS S MORAKHIA (2010) 5 ITR (TRIB) 1. ON THE BASIS OF THESE JUDGMENTS IT WAS CONTENDED THAT ACCORDING TO SECTION 36(1)(VII) AS IT STANDS AFTER THE AMENDMENT WITH EF FECT FROM 01.04.1989, IT WAS NOT NECESSARY FOR THE ASSESSEE T O PROVE THAT THE DEBT BECAME BAD IN THE RELEVANT PREVIOUS YEAR AND T HAT IT WAS SUFFICIENT IF THE DEBT IS WRITTEN OFF IN THE ASSESS EES BOOKS OF ACCOUNT, WHICH CONDITION HAS BEEN SATISFIED IN THE PRESENT CASE. ON THE BASIS OF THE ORDER OF THE SPECIAL BENCH CITE D ABOVE, IT WAS CONTENDED THAT IF THE BROKERAGE INCOME RELATING TO TRANSACTIONS WITH M/S GURU HOLDING PRIVATE LIMITED HAD BEEN ASSESSED AS THE ITA NO: 2997/MUM/2008 4 ASSESSEES INCOME IN ANY OF THE EARLIER YEARS, THE CONDITION THAT THE DEBT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTI NG THE ASSESSEES INCOME IN THE RELEVANT PREVIOUS YEAR OR ANY EARLIER PREVIOUS YEARS ALSO STOOD SATISFIED. IT WAS SUBMIT TED THAT THIS ASPECT OF THE MATTER MAY, IF NECESSARY, BE SENT FOR VERIFICATION OF THE ASSESSING OFFICER WHILE UPHOLDING THE CLAIM IN PRIN CIPLE. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE SUBMITTED THAT THE WRITE OFF OF THE BAD DEBT IN THE RELEVANT PREVIOUS YEAR WAS NOT BONA FIDE AND REFLECTED AN ATTEMPT TO POSTPONE THE TAX LIABILITY OF THE ASSESSEE AND, THEREFORE, THE CLAIM SHOULD NOT BE ALLOWED. IT WAS ALSO POINTED OUT THAT THE VERY FAC T THAT THE DEBT WAS RECOVERED IN THE PREVIOUS YEAR RELEVANT TO THE ASSE SSMENT YEAR 2007-08 SHOWED THAT THE DEBT HAD NOT BECOME BAD AND THE ASSESSEES BELIEF THAT IT WAS IRRECOVERABLE WAS NOT HELD BONA FIDE. 7. ON A CAREFUL CONSIDERATION OF THE RIVAL CONTENTI ONS WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE SHOULD BE A CCEPTED. AS HELD BY THE SUPREME COURT IN THE JUDGMENT CITED SUP RA, AFTER THE CHANGE IN THE LAW WITH EFFECT FROM 01.04.1989, IT I S NOT NECESSARY FOR THE ASSESSEE TO PROVE BEFORE THE ASSESSING OFFI CER THAT THE DEBT BECAME BAD IN THE RELEVANT PREVIOUS YEAR. THE ONLY CONDITION NOW IS THAT THE DEBT SHOULD HAVE BEEN WRITTEN OFF IN TH E ASSESSEES BOOKS OF ACCOUNT AS A BAD DEBT. THAT THIS CONDITIO N IS SATISFIED IN THE PRESENT CASE ADMITS OF NO DOUBT AND EVEN THE DE PARTMENTAL AUTHORITIES HAVE ACCEPTED THE FACT. THE BONA FIDE OF THE WRITE OFF CANNOT ALSO BE DOUBTED BECAUSE THE ASSESSEE HAD POI NTED OUT THE CIRCUMSTANCES EXISTING IN THE RELEVANT PREVIOUS YEA R WHICH ITA NO: 2997/MUM/2008 5 COMPELLED IT TO WRITE OFF THE DEBT AS IRRECOVERABLE . WE HAVE ALREADY NARRATED THESE CIRCUMSTANCES IN THE EARLIER PART OF OUR ORDER. GIVEN THOSE CIRCUMSTANCES IT IS NOT POSSIBLE TO HOLD THAT THE ASSESSEES BELIEF THAT THE DEBT BECAME BAD WAS NOT HELD BONA F IDE. THE ASSESSEE ALSO HAS POINTED OUT BEFORE THE ASSESSING OFFICER THE CIRCUMSTANCES UNDER WHICH THE PRINCIPAL AMOUNT DUE FROM M/S GURU HOLDING PRIVATE LIMITED WAS RECOVERED ALONG WITH IN TEREST IN MAY 2006. IT APPEARS FROM THE ASSESSEES LETTER DATED 11 TH OCTOBER 2006 FILED BEFORE THE ASSESSING OFFICER (REPRODUCED IN PAGES 3 AND 4 OF THE ASSESSMENT ORDER) THAT THE SPECIAL METROPO LITAN MAGISTRATE, BEFORE WHOM THE ASSESSEE HAD FILED A COMPLAINT UNDE R SECTION 138 OF THE NEGOTIABLE INSTRUMENT ACT FOR DISHONOUR OF T HE CHEQUE ISSUED BY M/S GURU HOLDING PRIVATE LIMITED, INSISTED ON SE TTLING THE CASE BY DIRECTING THE COMPANY TO PAY THE FULL AMOUNT TO THE ASSESSEE OR FACE THE CONSEQUENCES. IN THE LIGHT OF THE DIRECTI ON, THE COMPANY SETTLED THE CASE UNDER MUTUAL CONSENT AND PAID UP T HE AMOUNT OF ` 15,32,841/- BY ISSUE OF CHEQUE ON ICICI BANK. THES E FACTS HAD BEEN POINTED OUT TO THE ASSESSING OFFICER IN THE AS SESSEES LETTER, TO WHICH THE COPY OF THE COURT ORDER WAS ALSO ENCLO SED. IT WAS IN THESE CIRCUMSTANCES THAT THE AMOUNT WAS RECOVERED B Y THE ASSESSEE AND THOSE CIRCUMSTANCES CAN IN NO WAY VITI ATE THE BONA FIDE BELIEF WHICH THE ASSESSEE CLAIMED TO HAVE HAD ABOUT THE RECOVERABILITY OF THE DEBT IN THE RELEVANT PREVIOUS YEAR. THE ORDER OF THE SPECIAL METROPOLITAN MAGISTRATE WAS A SUBSEQUEN T DEVELOPMENT. THUS BOTH THE CONDITIONS, NAMELY, THA T THE DEBT SHOULD HAVE BEEN WRITTEN OFF IN THE ASSESSEES BOOK S AS WELL AS THAT ITA NO: 2997/MUM/2008 6 IT SHOULD HAVE BEEN WRITTEN OFF BONA FIDE ARE SATIS FIED IN THE PRESENT CASE. THE ONLY ASPECT WHICH NEEDS VERIFICATION IS WHETHER THE BROKERAGE INCOME IN RESPECT OF THE SHARE DEALINGS T HROUGH M/S GURU HOLDING PRIVATE LIMITED HAD BEEN SHOWN AS THE ASSESSEES INCOME IN THE RELEVANT PREVIOUS YEAR OR IN ANY OF T HE EARLIER PREVIOUS YEARS. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE HAD FAIRLY STATED BEFORE US THAT THIS ASPECT MAY NEED VERIFICA TION BY THE ASSESSING OFFICER. WHILE THEREFORE UPHOLDING THE A SSESSEES GROUND IN PRINCIPLE, WE RESTORE THE ISSUE TO THE AS SESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFYING THIS FACTUAL ASPEC T IN THE LIGHT OF THE ORDER OF THE SPECIAL BENCH CITED SUPRA. 8. THE SECOND GROUND IS DIRECTED AGAINST THE ACTION OF THE ASSESSING OFFICER IN ALLOCATING ` 2,00,000/- ON ADHOC BASIS AS EXPENSES INCURRED TOWARDS EARNING SPECULATION INCOM E. THE DISALLOWANCE HAS BEEN MADE ON THE FOOTING THAT SOME EXPENSES WOULD HAVE BEEN INCURRED BY THE ASSESSEE TOWARDS TH E SPECULATION BUSINESS AND THOSE EXPENSES CANNOT BE ALLOWED AS A DEDUCTION. THE LEARNED REPRESENTATIVE FOR THE ASSESSEE DOES NO T DISPUTE THE APPLICABILITY OF SECTION 73 OF THE INCOME TAX ACT, 1961, OR THE POSITION THAT EVEN DELIVERY BASED TRANSACTIONS OF S HARES CAN BE TREATED AS SPECULATION BUSINESS. HOWEVER, HE RELIE S ON THE ORDER OF THE TRIBUNAL, MUMBAI BENCH, DATED 26 TH MARCH 2010 IN ITA NO: 4412/MUM/2003 IN THE CASE OF ACIT VS. M/S KNP SECUR ITIES PVT. LTD., IN WHICH AN IDENTICAL ISSUE WAS CONSIDERED AN D DECIDED IN FAVOUR OF THE ASSESSEE. A COPY OF THE ORDER HAS BE EN FILED BEFORE US. ONE OF THE GROUNDS IN THAT APPEAL FILED AT THE INSTANCE OF THE ITA NO: 2997/MUM/2008 7 DEPARTMENT WAS WHETHER THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF EXPENDITURE ALLOCATED TO THE SPECUL ATION LOSS SUFFERED BY THE ASSESSEE. THIS GROUND WAS CONSIDER ED BY THE TRIBUNAL IN PARA 7 OF ITS ORDER. IN THAT CASE THE CIT(A) HAD HELD THAT SECTION 73 OF THE ACT DOES NOT PROVIDE THAT EXPENDI TURE INCURRED BY THE ASSESSEE SHOULD BE ALLOCATED TOWARDS TRANSACTIO NS WHICH ARE CONSIDERED AS SPECULATION AND THAT ALL THAT THE SEC TION PROVIDED WAS THAT IN THE CASE OF A COMPANY WHOSE BUSINESS CONSIS TS OF PURCHASE AND SALE OF SHARES, THE SAID BUSINESS WOULD BE CONS IDERED AS SPECULATIVE BUSINESS AND ANY LOSS ARISING ON ACCOUN T OF THE SAID BUSINESS WOULD BE DEEMED TO BE SPECULATION LOSS AVA ILABLE FOR BEING SET OFF ONLY AGAINST SPECULATION PROFIT. THE TRIBUNAL APPROVED OF THE REASONING OF THE CIT(A) AND HELD THAT EVEN D ELIVERY BASED TRANSACTIONS WOULD FALL TO BE CONSIDERED ONLY UNDER SECTION 73 OF THE ACT, IN THE CASE OF AN ASSESSEE WHICH IS A COMPANY AND WHOSE MAIN OBJECT IS TO CARRY ON BUSINESS IN THE PURCHASE AND SALE OF SHARES. IT WAS HELD BY THE TRIBUNAL IN PARA 7 AS U NDER: - 7. BEFORE US THE LEARNED DR AND COUNS EL REITERATED RESPECTIVE SUBMISSIONS. WE HAVE CONSIDERED THE ISSUE. AS CORRECTLY HELD BY THE CIT(A), CONSIDERING SPECULATIVE NATURE OF TRANSACTIONS WILL COME ONLY WHEN A PARTICULAR TRANSACTION IS CONSIDERED AS SPECULATIVE IN NATURE UNDER SECTION 43(5). SO LONG AS THE ASSESSEE IS DEALING IN DELIVERY BASED TRANSACTIONS EXPLANATION TO SECTION 73 DOES NOT COME INTO OPERATION AS THERE ARE NO SPECULATIVE TRANSACTIONS TO BE CONSIDERED UNDER SECTION 43(5). THE ISSUE CAN ONLY BE CONSIDERED WITH REFERENCE TO SECTION 73 EXPLANATION. THAT PORTION OF SECTION WILL COME INTO PLAY AFTER CONSIDERING THE INCOME UNDER THE HEAD BUSINESS AS ALSO INCOME UNDER OTHER HEADS. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE ITA NO: 2997/MUM/2008 8 ALLOCATION OF EXPENDITURE AND SEGREGATION OF BUSINESS WILL COME INTO PICTURE ONLY WHEN THE ASSESSEE INDULGES IN SPECULATIVE NATURE OF TRANSACTIONS. ON THE FACTS OF THE CASE WE DO NOT SEE ANY REASON TO DIFFER FROM THE FINDINGS OF THE CIT(A). HIS ORDER IS CORRECT BOTH ON FACTS AS WELL AS ON LAW. ACCORDINGLY GROUND NOS. 2 & 3 ARE REJECTED. THE ASSESSEE HAS ALSO FILED A COPY OF THE WRITTEN S UBMISSIONS FILED BEFORE THE CIT(A) IN RESPECT OF THIS ISSUE AT PAGES 16 AND 17 OF THE PAPER BOOK. FROM THE WRITTEN SUBMISSIONS IT IS SEE N THAT DURING THE YEAR THE ASSESSEE HAD TRANSACTED BUSINESS OF OVER ` 25.00 CRORES ON WHICH BROKERAGE INCOME OF ` 4,95,358/- WAS EARNED, WHICH WAS APPROXIMATELY 0.20% OF THE TOTAL TRANSACTIONS. FOR TRANSACTING THE TURNOVER OF THIS MAGNITUDE THE ASSESSEE HAD TO INCU R SUBSTANTIAL ADMINISTRATIVE AND FINANCIAL EXPENSES TO COORDINATE WITH THE CLIENTS, FOLLOWING UP WITH THEM AND ENSURING THE PAYMENTS WE RE MADE IN TIME TO THE STOCK EXCHANGE. THE ASSESSEE ALSO HAD TO EMPLOY PERSONS ON REGULAR BASIS FOR ITS BUSINESS OPERATION S. IT HAD ALSO TO MAINTAIN ITS OFFICE. THE SHARE TRADING BUSINESS IS A SUBSIDIARY BUSINESS OF THE ASSESSEE WHICH WAS CARRIED ON QUITE APART FROM THE REGULAR BUSINESS OF SHARE BROKING. THE SHARE TRADI NG ON OWN ACCOUNT WAS STATED TO BE OF MUCH SMALLER VOLUME THA N THE SHARE BROKING BUSINESS. IT WAS THEREFORE PLEADED THAT NO EXPENSES CAN BE ALLOCATED TOWARDS EARNING OF THE SPECULATION INC OME. AN ALTERNATIVE PLEA WAS ALSO MADE IN THE WRITTEN SUBMI SSIONS THAT IN ANY CASE THE DISALLOWANCE OF ` 2,00,000/- IS ARBITRARY. 9. ON A CAREFUL CONSIDERATION OF THE FACTS AND THE RIVAL CONTENTIONS WE ARE OF THE VIEW THAT THE ISSUE IS SQ UARELY COVERED BY ITA NO: 2997/MUM/2008 9 THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT VS. M /S KNP SECURITIES PVT. LTD. CITED SUPRA. THE FACTS ARE THE SAME IN T HE PRESENT CASE ALSO. THEREFORE, RESPECTFULLY FOLLOWING THE SAID O RDER, WE REVERSE THE DECISION OF THE DEPARTMENTAL AUTHORITIES AND AL LOW THE GROUND. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH MARCH 2011. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI, DATED 11 TH MARCH 2011 SALDANHA COPY TO: 1. PRM SECURITIES PVT. LTD. 4, KHANDERAO WADI, KALBADEVI ROAD MUMBAI 400 002 2. ITO, 4(2)(1), MUMBAI 3. CIT-4, MUMBAI 4. CIT(A)-IV, MUMBAI 5. DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI