ITO 13(1)(2), MUMBAI V. E STOCK INC., MUMBAI

ITA 3915/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49452 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 14-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHTAQUE AHMED
• Keywords: Bad and doubtful debts
• Section: 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, E BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A NO.3915/ MUM/2010 ASSESSMENT YEAR: 2006-07 INCOME TAX OFFICER 13(1)(2 .. APPELLANT 4 TH FLOOR, R.NO.419, M.K. ROAD, MUMBAI-20. VS M/S. E STOCK INC, ,. RESPONDEN T 94, NARAYAN DHURU STREET,. OFFICE NO.21, 2 ND FLOOR, MUMBAI-003. PA NO.AAAFE 9913 C APPEARANCES: L G K NAIN, FOR THE APPELLANT AKHTAQUE AHMED, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDICA TE IN THIS APPEAL IS, WHETHER OR NOT THE CIT(A) WAS JUSTIFIED IN UPHOLDING THE DI SALLOWANCE OF RS.34,77,903 ON ACCOUNT OF BAD DEBTS. THE ASSESSMENT YEAR INVOLVED IS 2006-2007 AND THE IMPUGNED CIT(A)S ORDER DATED 18.3.2010 WAS PASSED IN THE MA TTER OF ASSESSMENT UNDER SECTION 143 (3) OF THE I.T. ACT, 1961. 2. TO ADJUDICATE ON THIS APPEAL, ONLY A FEW MATERIA L FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE IS ENGAGED IN THE BUSINESS THAT OF SUB-BROKER IN SHARE MARKET. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE S HOWED BROKERAGE RECEIVED I.T.A NO.3915/ MUM/2010 M/S. E STOCK INC 2 AMOUNTING TO RS. 37,99,733 AND DECLARED A NET LOSS AT RS. 4,07,513. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED AN AM OUNT OF RS. 34,77,903 ON ACCOUNT OF BAD DEBTS. IN THE COURSE OF ASSESSMENT PROCEED INGS, WHEN THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SUBMIT DETAILS OF THESE DE BTORS, IT WAS SUBMITTED BY THE ASSESSEE THAT IN THIS LINE OF BUSINESS, RESPONSIBIL ITY OF COLLECTION OF OUTSTANDING AMOUNT FROM END CUSTOMER IS OF SUB-BROKER AND IN CA SE THE SAID PAYMENT IS DELAYED OR NOT PAID BY THE CUSTOMER, MAIN BROKER COLLECTS T HE SAME FROM THE SUB-BROKER. IN EFFECT THUS, THERE IS DIRECT RELATIONSHIP OF DEBTOR AND CREDITOR BETWEEN THE CUSTOMER AND THE SUB-BROKER BECAUSE THE CUSTOMER MAKES THE P AYMENT TO THE SUB-BROKER WHO IN TURN FORWARD THE SAME TO THE MAIN BROKER. I T WAS ALSO SUBMITTED THAT THE LOSS ON ACCOUNT OF NON-RECOVERY OF DUES FROM CLIENT IS TO BE BORNE BY THE SUB-BROKER. RELYING ON THE JUDGMENT OF AHMEDABAD ITAT IN THE CA SE OF ITO VS ASHOK KUMAR LALIT KUMAR, 35 ITD 326(AHD) AND IN THE LIGHT OF FA CTUAL SUBMISSIONS, THE ASSESSEE CLAIMED DEDUCTION IN RESPECT OF THE CLIENTS WHOSE O UTSTANDING HAD TO BE WRITTEN OFF. THE ASSESSEE ALSO FILED CONFIRMATION FROM M/S. MANG AL KESHAV SECURITIES LTD.,I.E. MAIN BROKER CONFIRMING THAT RESPECTIVE CUSTOMER WAS INTRODUCED TO THEM BY THE ASSESSEE AND THAT THE DEBIT BALANCE OF THE SAID CUS TOMER WAS ADJUSTED AGAINST THE BROKERAGE DUE TO THE ASSESSEE. THE ASSESSING OFFIC ER, HOWEVER, DECLINED THE CLAIM OF DEDUCTION BY OBSERVING THAT THERE WAS NO TRANSACTIO N IN THE BOOKS OF ACCOUNT OF THE ASSESSEE IN ASMUCH AS THE TRANSACTION WERE ENTERED INTO IN THE ACCOUNTS OF THE MAIN BROKER AND THERE WAS NO DEBTOR CREDITOR RELATIONSHI P BETWEEN THE ASSESSEE AND THE CUSTOMER WHOSE DEBIT BALANCE HAD TO BE WRITTEN OFF. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). IT WAS, INTER ALIA , SUBMITTED THAT IN TERMS OF SEBI GUIDELINES AND AGREEMENT WITH THE MAIN BROK ER ANY NON PAYMENT BY THE CLIENTS INTRODUCED BY THE SUB-BROKER ARE TO BE MADE GOOD BY THE SUB-BROKER. THE OUTSTANDING AMOUNT IS THUS OWED BY THE CLIENT TO TH E SUB BROKER WHO IN TURNS PAYS THE BROKER. IT WAS ALSO SUBMITTED THAT THE CRITERI A OF SECTION 36(2) WAS MET BECAUSE THE APPELLANT HAD SHOWN BROKERAGE IN ITS INCOME AND SUBSEQUENTLY LOSS DUE TO DEFAULT BY CLIENT IS BEING RECOVERED BY THE MAIN BR OKER OUT OF BROKERAGE DUES OF THE ASSESSEE. RELIANCE WAS PLACED ON THE JUDGMENT OF H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DB(INDIA) SECURITIES LTD., 226 CTR (DEL) 466 AND CIT VS. BONAZA I.T.A NO.3915/ MUM/2010 M/S. E STOCK INC 3 PORTFOLIO LIMITED, 29 DTR (DEL) 280. IT WAS ALSO S UBMITTED THAT THE AO HAS DECLINED TO ACCEPT THE DEBTOR CREDITOR RELATIONSHIP BETWEEN THE ASSESSEE AND MR KISHORE NAIK, I.E. DEFAULTING CUSTOMER BUT THEN HAD OVERLOO KED THE FAT THAT THE MAIN BROKER HAS DEBITED THE APPELLANT BY WAY OF JOURNAL ENTRY A ND THE APPELLANT HAS PASSED THE CORRESPONDING ENTRY IN THE BOOKS OF ACCOUNT BY CRED ITING IN THE MAIN BROKERS ACCOUNT AND SAME AMOUNT DEBITING IN THE DEFAULTING CUSTOMER CORRESPONDINGLY. IT WAS ALSO POINTED OUT THAT SINCE DEFAULTING CUSTOMER DID NOT MAKE PAYMENT, THE ASSESSEE HAD TO GO INTO ARBITRATION IN THE STOCK EX CHANGE, THE DETAILS OF WHICH WERE PLACED ON RECORD. THE CIT(A) ACCEPTED THESE CONTEN TIONS AND UPHELD THE CLAIM OF THE ASSESSEE. WHILE DOING SO, HE, INTER ALIA, OBSE RVED THAT WHEN THE APPELLANT HAS TO MAKE PAYMENT, WHICH COULD NOT BE RECOVERED THEN TO THAT EXTENT THE UN-RECOVERED AMOUNT IS TO BE TREATED AS A DEBT AND IN SUCH A CAS E, WHEN IT BECOMES BAD, THE WRITE OFF HAS TO BE ALLOWED. IT WAS ALSO NOTED BY THE CI T(A) THAT THE UNRECOVERED AMOUNT FROM DEFAULTING CUSTOMER WAS FINALLY RECOVERED BY T HE MAIN AGENT FROM BROKERAGE AMOUNT PAYABLE TO THE ASSESSEE. ACCORDINGLY, THE D ISALLOWANCE OF BAD DEBT WAS DELETED. 4. THE ASSESSING OFFICER IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 5. WHEN THIS CASE WAS CALLED ON FOR HERING, MRE AKH LAQUE AHMED, PARTNER OF THE ASSESSEE FIRM APPEARED BEFORE US AND SOUGHT ADJOURN MENT ON THE GROUND THAT THE ASSESSEE IS IN THE PROCESS OF APPOINTING A LEGAL CO UNSEL. HOWEVER, WE FIND THAT THE ISSUE APPEARS TO BE SQUARELY COVERED BY THE ITAT SP ECIAL BENCH DECISION IN THE CASE OF DCIT VS SHRI SHREYAS S. MORAKHIA, 131 TTJ 641 ( BOM)/ 5 ITR (TRIB) 1 AND WE DID ASK THE LEARNED DEPARTMENTAL REPRESENTATIVE AS TO W HAT HE HAS TO SAY ON THIS PROPOSITION. LEARNED DEPARTMENTAL REPRESENTATIVE V ERY FAIRLY ACCEPTS THAT SO FAR AS THE ISSUE IN APPEAL IS CONCERNED, IT IS INDEED COVE RED IN FAVOUR OF THE ASSESSEE BY THE AFORESAID SPECIAL BENCH DECISION IN PRINCIPLE BUT H E NONETHELESS VEHEMENTLY RELIES UPON THE ORDER OF THE ASSESSING OFFICER AND SUBMITS THAT THE DEBTOR CREDITOR RELATIONSHIP IN THE PRESENT CASE DOES NOT EXIST. I N VIEW OF THE FACT THAT THE ISSUE IS SQUARELY COVERED BY THE SPECIAL BENCH DECISION IN T HE CASE OF SHRI SHREYAS S. I.T.A NO.3915/ MUM/2010 M/S. E STOCK INC 4 MORAKHIA (SUPRA), WE ARE NOT INCLINED TO GRANT ADJO URNMENT AND WE PROCEED TO DISPOSE OF THE MATTER ON MERITS. 6. WE FIND THAT THE SPECIAL BENCH IN THE CASE OF SH REYAS S MORAKHIA (SUPRA) HAS, INTER ALIA, OBSERVED AS FOLLOWS: ..W E ARE OF THE VIEW THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE, WHO IS A SHARE BROKER, FROM HIS CLIENTS AGAINST THE TRA NSACTIONS 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 AMOUN T 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 OF THE SAID DEBTS FROM HIS BOOKS OF ACCOUNT AS IRRECOVERABLE. WE, THEREFORE, ANSWER THE QUESTION REFERRED TO THIS SPECIAL BENCH IN THE AFFIRMATIVE THAT IS IN FAVOUR OF THE ASSESSEE. 7. WE FIND THAT IT IS NOT IN DISPUTE THAT THE ASSES SEE HAD AN OBLIGATION TO COLLECT THE OUTSTANDING DUES FROM THE CUSTOMER AND HAND THE M OVER TO THE MAIN BROKER AND THAT THE CUSTOMERS WERE DIRECTLY ACCOUNTABLE TO THE SUB-BROKER. IN THESE CIRCUMSTANCES, IT CANNOT BE SAID THAT THE ASSESSEE DID NOT HAVE DEBTOR CREDITOR RELATIONSHIP WITH THE DEFAULTING CUSTOMER AND THAT THESE TRANSACTIONS WERE NOT ROUTED IN THE BOOKS OF ACCOUNT AS IS THE BUSINESS MODEL IN THE CASE OF SUB-BROKERS, THE SUB-BROKERS ARE ACCOUNTABLE TO MAIN BROKER WITH REGARD TO THE DUES RECOVERABLE FROM THE CUSTOMERS AND TO THAT EXTENT THE CUSTOMERS OWE THAT AMOUNT TO THE SUB- BROKER. ACCORDINGLY, THE INTERRELATIONSHIP BETWE EN THE SUB-BROKER AND THE CUSTOMERS CANNOT BE SIMPLE WISHED AWAY AND ONE CAN PROCEED ON THE BASIS THAT THE DUES ARE OWED BY THE END CUSTOMER DIRECTLY TO THE M AIN BROKER. IN ANY CASE, IT IS AN UNDISPUTED POSITION THAT THERE WERE ENTRIES IN ASSE SSEES BOOKS OF ACCOUNT WHEREBY DUES RECOVERABLE FROM THE CUSTOMERS WERE ACCOUNTED FOR BY THE ASSESSEE AND THE SAME WERE ADJUSTED AGAINST BROKERAGE PAYABLE BY THE MAIN BROKER. IT IS ALSO NOT IN I.T.A NO.3915/ MUM/2010 M/S. E STOCK INC 5 DISPUTE THAT THE BROKERAGE RECEIVED IN RESPECT OF T HE TRANSACTIONS, BECAUSE OF WHICH THE OUTSTANDING AMOUNTS WRITTEN OFF AROSE, FROM THE CUSTOMERS WERE DULY ACCOUNTED FOR BY THE ASSESSEE. IN THESE CIRCUMSTANCES AND RE SPECTFULLY FOLLOWING THE DECISION OF SPECIAL BENCH IN THE CASE OF SHREYAS S MORAKHIA( SUPRA) WE APPROVE AND CONFIRM THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLIN E TO INTERFERE. 8. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 15 TH JULY, 2011 SD/- (VIJAY PAL RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 15 TH JULY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),24, MUMBAI 4. COMMISSIONER OF INCOME TAX, 13, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI