ANIL P. GUDHKA, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 3599/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48961 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Assessee Lawyers: DHIRENDRA M SHAH
• Keywords: Question of law; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI R.S. SYAL, A.M. AND SHRI V. DURGA RAO, J.M. ITA NO. 3599/MUM/2010 ASSESSMENT YEAR: 2006-07 ANIL RS. GUDHKA, APPELLANT 101, E-5, SURSHA APARTMENT, JAIN MANDIR ROAD, SARVODAYA NAGAR, MULUND (W), MUMBAI 400 080. (PAN AAFPG-6716-L) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 4(1), AAYKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. APPELLANT BY : MR. DHIRENDRA M. SHAH RESPONDENT BY : MR. SHRAVAN KUMAR . ORDER PER V. DURGA RAO, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF CIT(A)- 8, MUMBAI, PASSED ON 23/02/2010 FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUND RAISED IN THIS APPEAL IS IN RESPECT O F DISALLOWANCE OF DEDUCTION OF BAD DEBTS WRITTEN OFF OF RS. 7,71,034/ -. 3. THE ASSESSEE HAD CLAIMED BAD DEBTS OF RS. 7,71,0 34/-. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAD NOT FU LFILLED THE CONDITIONS OF SECTION 36(1)(VII), 36(2) AND HAD VIO LATED THE PROVISIONS OF SEBI, THEREFORE, THE CLAIM OF THE ASSESSEE WAS N OT ALLOWABLE AS BUSINESS LOSS. ON APPEAL, CIT(A) CONFIRMED THE ACTI ON OF THE ASSESSING OFFICER BY FOLLOWING THE JUDGMENT OF HONBLE JURISD ICTIONAL HIGH COURT ITA NO. 3599/M/2010 ANIL R. GUDHKA. 2 IN THE CASE OF DIT VS. OMAN INTERNATIONAL BANK, 313 ITR 128 (BOM). AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE ITA T. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS CANVASSED THAT THE ISSUE UNDER DISPUTE IS COVERED BY THE DECI SION OF ITAT IN EARLIER ASSESSMENT YEARS FOR AY 2003-04, 2004-05 & 2005-06 IN ASSESSEES OWN CASE. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, HAS NOT CONTROVERTED THE SUBMISSION MADE BY THE ASS ESSEE. 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. WE FIND THAT SIMILAR ISSUE AROS E BEFORE THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2003-04, 2 004-05 & 2005- 06. IN AY 2005-06 THE ITAT VIDE ITA NO. 7214/MUM/08 ORDER DATED 20 TH AUGUST, 2010 FOLLOWING THE DECISION OF THE CO-ORDI NATE BENCH IN THE CASE OF DCIT VS. SHREYAS S. MORAKHIA, [2010] 6 TAXMAN 49 (MUM)(ITAT)/5 ITR(TRIBUNAL)1 ALLOWED THE BAD DEBTS CLAIM OF THE ASSESSEE. THE ITAT IN THE CASE OF SHREYAS S. MORAKH IA (SUPRA) HELD AS UNDER:- 29. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS STRONGLY RELIED ON THE DECISIONS OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DB (INDIA) SECURITIES LTD.(SUPRA) AND IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) STATING THAT THE SAME ARE DIRECTLY ON THE POINT IN ISSUE AND THERE B EING NO CONTRARY DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT OR ANY OTHER HIGH COURTS, THIS SPECIAL BENCH HAS TO FOLLOW THE SAME. WE HAVE CAREFULLY PERUSED THE SAID DECISIONS OF THE HONBLE DELHI HIGH COURT. IN THE CASE OF DB (INDIA) SECURITIES LTD.(SUPRA), THE ASSESSEE WAS A MEMBER OF DELHI STOCK EXCHANGE AND WAS CARRYING ON THE BUSINE SS OF SHARES AND STOCK BROKING. THE ASSESSEE HAD PURCHASED SHARES O N BEHALF OF HIS CLIENT FOR THE TOTAL VALUE OF RS. 1.06 CRORES AT AN AVERAGE PRICE OF RS. 55 PER SHARE. THE SAID CLIENT MADE A PAYMENT TO TH E EXTENT OF RS. 65 LACS ONLY TO THE ASSESSEE AND THE REMAINING AMOUNT OF RS. 41 LACS HAD REMAINED UNPAID. THE BROKERAGE INCOME EARNED BY TH E ASSESSEE IN RESPECT OF THE SAID TRANSACTION OF PURCHASE OF SHAR ES WAS DULY DECLARED IN ITS RETURN OF INCOME AND WAS ASSESSED AS WELL IN THE EARLIER YEAR. THE BALANCE AMOUNT OF RS. 41 LACS REMAINED UNPAID E VEN IN THE NEXT ITA NO. 3599/M/2010 ANIL R. GUDHKA. 3 YEAR ALSO APPARENTLY BECAUSE OF THE REASON THAT THE PRICE OF SHARES FELL FROM RS. 55 TO RS. 5 PER SHARE. IN THE RETURN OF I NCOME FILED FOR THE SAID YEAR, THE ASSESSE CLAIMED DEDUCTION OF RS. 41 LACS AS BAD DEBTS U/S 36(1)(VII). THE A.O. DISALLOWED THE CLAIM OF T HE ASSESSEE FOR THE SAID DEDUCTION WHICH WAS CONFIRMED BY THE LD. CIT(A ). ON FURTHER APPEAL BY THE ASSESSEE, THE TRIBUNAL, HOWEVER, ALLO WED THE SAID DEDUCTION AND WHEN THE MATTER REACHED TO THE HONBLE DELHI HIGH COURT, IT WAS SOUGHT TO BE CANVASSED ON BEHALF OF T HE REVENUE THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE FROM ITS CLIE NT AGAINST PURCHASE OF SHARES COULD NOT BE TREATED AS DEBT UNDER THE PROVISIONS OF SECTION 36(2) AND THEREFORE, THE QUESTION OF ALLOWI NG ANY DEDUCTION FOR THE SAID AMOUNT TREATING THE SAME AS BAD DEBT WOULD NOT ARISE. HONBLE DELHI HIGH COURT DID NOT FIND MERIT IN THIS C ONTENTION RAISED ON BEHALF OF THE REVENUE HOLDING THAT THERE WAS A VALI D TRANSACTION BETWEEN THE ASSESSEE AND HIS CLIENT AND SINCE THE A SSESSEE HAD TO MAKE PAYMENT ON BEHALF OF HIS CLIENT WHICH HE COULD NOT RECOVER TO THE EXTENT OF RS. 41 LACS, THE SAID SUM HAS TO BE TREAT ED AS HIS DEBT. IT WAS ALSO HELD THAT THE BROKERAGE WHICH WAS RECEIVED FOR THE SAID TRANSACTION WAS SHOWN AS INCOME BY THE ASSESSEE IN THE EARLIER YEARS AND THE SAME WAS TAXED AS SUCH BY THE ASSESSING AUT HORITY. IT WAS HELD THAT THE ASSESSEE THEREFORE WAS ENTITLED FOR D EDUCTION ON ACCOUNT OF BAD DEBT U/S 36(1)(VII) R.W.S. 36(2). A SIMILAR ISSUE AGAIN CAME UP FOR CONSIDERATION BEFORE THE HONBLE DELHI HIGH COU RT IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) WHEREIN THE QUES TION OF LAW WHICH AROSE FOR CONSIDERATION WAS WHETHER IN VIEW OF THE PROVISIONS OF SECTION 36(1)(VII), THE TOTAL DEBIT BALANCE INCLUDI NG THE CONSIDERATION COLLECTIBLE BY THE ASSESSEE COMPANY FOR THE SALE/PU RCHASE OF SHARES COULD BE CLAIMED BY THE ASSESSEE AS BAD DEBTS WHEN IT HAD ONLY CREDITED BROKERAGE IN THE P&L ACCOUNT AND IT WAS HE LD BY THE HONBLE DELHI HIGH COURT FOLLOWING, INTER ALIA, THE DECISIO N IN THE CASE OF CIT VS. DB (INDIA) SECURITIES LTD. THAT THE MONEY RECEI VABLE BY THE ASSESSEE AS SHARE BROKER FROM HIS CLIENTS AGAINST P URCHASE OF SHARES MADE ON THEIR BEHALF HAS TO BE TREATED AS DEBT A ND SINCE THE BROKERAGE PAYABLE BY THE CLIENT WAS A PART OF THAT DEBT AND THAT PART HAD BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF HIS I NCOME, THE CONDITIONS STIPULATED IN SECTION 36(1)(VII) AND 36( 2) STOOD SATISFIED AND THE ASSESSEE WAS ENTITLED FOR DEDUCTION IN RESPECT OF THE SAID AMOUNT SINCE IT HAD BECOME BAD. IN OUR OPINION, THE RATIO OF THESE DECISIONS OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS . DB (INDIA) SECURITIES LTD.(SUPRA) AND IN THE CASE OF CIT VS. B ONANZA PORTFOLIO LTD. (SUPRA) IS SQUARELY APPLICABLE TO THE ISSUE WHICH I S UNDER CONSIDERATION IN THE PRESENT CASE BEFORE THIS SPECIAL BENCH. 30. THE LEARNED D.R. HAS CONTENDED BEFORE US THAT T HE RULES AND REGULATIONS OF STOCK EXCHANGE GOVERNING RELATIONS B ETWEEN BROKER AND HIS CLIENTS AS WELL AS THE GUIDELINES ISSUED BY THE SEBI FROM TIME TO TIME PROTECTING THE INTEREST OF SHARE BROKER WERE N OT BROUGHT TO THE NOTICE OF THE HONBLE DELHI HIGH COURT IN THE CASES O F CIT VS. DB ITA NO. 3599/M/2010 ANIL R. GUDHKA. 4 (INDIA) SECURITIES LTD.(SUPRA) AND CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) AND THEIR LORDSHIPS THUS HAD NO OCCASION TO CONSIDER THE ISSUE IN THE LIGHT OF THE SAME. HOWEVER, AS ALREADY HELD BY US, THE SAID RULES AND REGULATIONS AS WELL AS GUIDELINES ARE NOT RELEVANT IN THE CONTEXT OF ISSUE REFERRED TO THIS SPECIAL BENCH WHI CH RAISES A SPECIFIC QUESTION OF LAW. WE HAVE ALREADY NOTED THAT THE FA CT WHICH IS NOT IN DISPUTE IS THAT THE ASSESSEE HAS ACTUALLY SUFFERED THE LOSS AS A RESULT OF THE AMOUNT IN QUESTION REPRESENTING DEBT BECOMING I RRECOVERABLE. IT IS THEREFORE NOT RELEVANT WHETHER SUCH LOSS HAS BEE N INCURRED BY THE ASSESSEE AS A RESULT OF NOT FOLLOWING THE RELEVANT RULES AND REGULATIONS AND GUIDELINES OR EVEN AFTER FOLLOWING THE SAME. A S OBSERVED BY US, THIS ASPECT MAY BE RELEVANT IN THE CONTEXT OF QUANT IFICATION OF SUCH LOSS. AS A MATTER OF FACT, ONE OF THE ARGUMENTS RA ISED ON BEHALF OF THE REVENUE IN THE CASE OF DB (INDIA) SECURITIES LTD. (SUPRA) WAS THAT THE ASSESSEE HAVING NOT SOLD THE SHARES TO ANYBODY ELSE IN THE MARKET, THE ASSESSEE COULD NOT CLAIM THE AMOUNT IN QUESTION AS BAD DEBT AND WHILE DEALING WITH THE SAME, IT WAS HELD BY THE HONBLE D ELHI HIGH COURT THAT THE SALE CONSIDERATION WHICH SUCH SHARES COULD FETC H IN THE MARKET NEEDS TO BE ADJUSTED AGAINST THE AMOUNT OF BAD DEBT CLAIMED BY THE ASSESSEE FOR ARRIVING AT THE ACTUAL FIGURE OF BAD DEBTS. 31. THE CONTENTION RAISED ON BEHALF OF THE REVENUE BASED ON THE SALE VALUE OF SHARES WHICH ARE BOUND TO REMAIN WITH THE ASSESSEE AND WHICH THE ASSESSEE IS ENTITLED TO SALE AND ADJUST T HE SALE CONSIDERATION THEREOF AGAINST THE AMOUNT RECEIVABLE FROM THE CLIE NT SO AS TO ARRIVE AT THE ACTUAL AMOUNT OF BAD DEBT THUS IS RELEVANT FOR QUANTIFYING THE ACTUAL AMOUNT OF BAD DEBT AND IT IS AT LIBERTY TO R AISE THE SAME, IF PERMISSIBLE, BEFORE THE DIVISION BENCH DURING THE C OURSE OF HEARING OF THE APPEAL. THE LD. D.R. HAS ALSO RAISED CERTAIN O THER DOUBTS OR DISPUTES IN THE WRITTEN SUBMISSIONS FILED BEFORE TH IS SPECIAL BENCH RELATING TO CERTAIN FACTUAL ASPECTS OF THE CASE. AL THOUGH, NO SUCH DOUBTS OR DISPUTES APPEAR TO HAVE BEEN RAISED EVEN BY THE A.O. IN THE ASSESSMENT ORDER, THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY AGREED THAT IF IT IS SO FELT BY THE DIVISION BENCH AFTER C ONSIDERING THE ARGUMENTS OF BOTH THE SIDES WHILE HEARING THE APPEA L OF THE ASSESSEE THAT THESE ASPECTS NEED VERIFICATION, THE ASSESSEE WILL HAVE NO OBJECTION FOR GETTING SUCH VERIFICATION DONE FROM T HE A.O. 32. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND T HE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE AMOUNT RECEIVABL E 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 RELEVA NT PREVIOUS YEAR OR ANY EARLIER YEAR, IT SATISFIES THE CONDITION STIPUL ATED IN SECTION 36(2)(I) ITA NO. 3599/M/2010 ANIL R. GUDHKA. 5 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 H IS BOOKS OF ACCOUNT AS IRRECOVERABLE. WE, THEREFORE, ANSWER THE QUESTI ON REFERRED TO THIS SPECIAL BENCH IN THE AFFIRMATIVE THAT IS IN FAVOUR OF THE ASSESSEE. 7. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIALL Y IDENTICAL TO THAT OF THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR AYS 2003- 04 TO 2005-06, WE RESPECTFULLY FOLLOWING THE DECISI ON OF THE ITAT IN THOSE YEARS AND IN THE LIGHT OF THAT WE SET ASIDE T HE ORDER OF THE CIT(A) AND ALLOW THE BAD DEBTS CLAIM OF RS. 7,71,03 4/-. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 27 TH MAY, 2011. SD/- SD/- (R.S. SYAL) (V. DU RGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 27 TH MAY, 2011 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, A BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV ITA NO. 3599/M/2010 ANIL R. GUDHKA. 6 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 12/05/11 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 13/05/11 SR.P.S/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.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER