ITO 4(2)(2), MUMBAI V. SOVEREIGN NARIMAN BROKING P. LTD, NAVI MUMBAI

ITA 4201/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6339 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 18-11-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 08-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Keywords: Question of law; Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, A.M. AND SHRI V. DUR GA RAO, J.M. ITA NO. 4201/M/2009 ASSESSMENT YEAR: 2004-05 INCOME TAX OFFICER, APPELLANT 4(2)(2), ROOM NO. 644, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. VS. M/S SOVEREIGN NARIMAN BROKING PVT. LTD., RESP ONDENT 403, PERSE POLIS BLDG., SECTOR 17, VASHI, NEW MUMBAI. (PAN AAACF4139J) APPELLANT BY : MR. S.K. SINGH RESPONDENT BY : MR. BHUPENDRA SHAH . ORDER PER V. DURGA RAO, J.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF CIT(A)-IV, MUMBAI, PASSED ON 21/04/2009 FOR THE ASS ESSMENT YEAR 2004-05. 2. THE ONLY GROUND RAISED BY THE REVENUE IS AGAINST THE ACTION OF CIT(A) IN ALLOWING THE CLAIM OF BAD DEBTS OF ` . 34,69,338/-. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE WRITTEN OFF ` . 36,94,504/- AND THE AMOUNT WRITTEN BACK INCOME. ` . 68,54,639/-, THE DETAILS OF WHICH ARE AS UNDER:- ITA NO. 4201 /M/09 M/S SOVEREIGN NAVIMAN BROKING. 2 DEBITS DUE FROM MR. JITENDRA GOEL ` . 73,220/- VARIOUS CLEINTS ` . 12,80,859/- DEPOSITS & ADVANCES ` . 2,25,166/- `. 36,94,504/- ========= CREDITS DUE TO M/S NARIMAN FINVEST PVT. LTD. 37,19,444 M/S SOVEREIGN SECURITIES P.LTD.23,60,977 M/S SOVEREIGN GLOBAL FINANCE 7,53,536 OTHERS 20,682 `. 68,54,639/- ` . 31,60,135/- ========== 4. THIS APPEAL PERTAINS TO ORDER U/S 143(3) RWS 25 0 OF THE ACT DATED 25/08/08. WHILE GIVING EFFECT TO THE ORDER OF CIT(A) DATED 12/03/2008, THE AO HELD THAT THE IT IS ABUNDANTLY C LEAR THAT THE AMOUNT CIREDITED OF ` . 68,54,639/- IS INCOME U/S 41(1) AND AMOUNT CLAIMED OF ` . 34,69/338/- AS DEDUCTION AGAINST THE INCOME IS NE ITHER AN EXPENDITURE NOR A DEBT ALLOWABLE U/S 36(2)/37 O F THE ACT. HENCE, THE ASSESSEES CLAIM FOR SET OFF AND ALLOWANCE OF ` . 34,69,336/- IS NOT ALLOWABLE. ON APPEAL, THE CIT(A) HELD AS UNDER:- 1.9 THUS, IT MAY BE SEEN THAT THE AMOUNTS OF DEBTS WRITTEN OFF IS PART OF THE AMOUNT WRITTEN BACK. AT PAGE 5 OF TH E WRITTEN SUBMISSION, IT WAS EXPLAINED THAT THE AMOUNT WRITTE N BACK AS MENTIONED ABOVE WERE DIRECTLY RELATED TO THE AMOUNT S DUE. THUS, THE DEBTS WERE SHOWN AS PART OF THE INCOME DURING T HE YEAR ITSELF AND THE CONDITIONS OF SECTION 36(2) ARE SATISFIED. THE ALTERNATE CLAIM OF THE APPELLANT THAT THE AMOUNT OF ` . 33,87,064/- WERE DISCLOSED AS INCOME IN FORM OF BROKERAGE IS, THEREF ORE, BECOMES INFRUCTUOUS. THE AO IS DIRECTED TO ALLOW THE CLAIM OF BAD DEBT OF ` . 34,69,336/-. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE THE ITAT. 6. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITT ED THAT THE ISSUE UNDER CONSIDERATION IS COVERED BY THE SPECIAL BENCH DECISION OF ITAT MUMBAI BENCH IN IN THE CASE OF SHREYAS S. MORA KHIA, 5 ITA NO. 4201 /M/09 M/S SOVEREIGN NAVIMAN BROKING. 3 ITR(TRIBUNAL) 1 [ITA NO.3374/MUM./2004, VIDE ORDER DATED 16 TH JULY 2010]. ON THE OTHER HAND, THE LEARNED DR HAS FAIRL Y CONCEDED THE SUBMISSIONS OF THE ASSESSEE THAT THE ISSUE IS COVER ED AGAINST THE REVENUE BY THE SPECIAL BENCH DECISION OF ITAT CITED SUPRA. 7. AFTER HEARING THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSING THE RECORD, WE FIND THAT THIS ISSUE IS COV ERED BY THE SPECIAL BENCH DECISION OF ITAT IN THE CASE OF SHREYAS S. MO RAKHIA, 5 ITR(TRIBUNAL) 1 [ITA NO.3374/MUM./2004, VIDE ORDER DATED 16 TH JULY 2010] WHEREIN, THE TRIBUNAL HELD AS UNDER:- 29. AT THE TIME OF HEARING BEFORE US, THE LD. COUN SEL FOR THE ASSESSEE HAS STRONGLY RELIED ON THE DECISIONS OF HO NBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DB (INDIA) SECURI TIES LTD.(SUPRA) AND IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. ( SUPRA) STATING THAT THE SAME ARE DIRECTLY ON THE POINT IN ISSUE AN D THERE BEING NO CONTRARY DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT OR ANY OTHER HIGH COURTS, THIS SPECIAL BENCH HAS TO FO LLOW THE SAME. WE HAVE CAREFULLY PERUSED THE SAID DECISIONS OF THE HONBLE DELHI HIGH COURT. IN THE CASE OF DB (INDIA) SECURITIES L TD.(SUPRA), THE ASSESSEE WAS A MEMBER OF DELHI STOCK EXCHANGE AND W AS CARRYING ON THE BUSINESS OF SHARES AND STOCK BROKI NG. THE ASSESSEE HAD PURCHASED SHARES ON BEHALF OF HIS CLIE NT 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 THE EXTEN T OF RS. 65 LACS ONLY TO THE ASSESSEE AND THE REMAINING AMOUNT OF RS. 41 LACS HAD REMAINED UNPAID. THE BROKERAGE INCOME EAR NED BY THE ASSESSEE IN RESPECT OF THE SAID TRANSACTION OF PURC HASE OF SHARES WAS DULY DECLARED IN ITS RETURN OF INCOME AND WAS A SSESSED AS WELL IN THE EARLIER YEAR. THE BALANCE AMOUNT OF RS . 41 LACS REMAINED UNPAID EVEN IN THE NEXT YEAR ALSO APPARENT LY BECAUSE OF THE REASON THAT THE PRICE OF SHARES FELL FROM RS . 55 TO RS. 5 PER SHARE. IN THE RETURN OF INCOME FILED FOR THE SAID YEAR, THE ASSESSE CLAIMED DEDUCTION OF RS. 41 LACS AS BAD DEBTS U/S 3 6(1)(VII). THE A.O. DISALLOWED THE CLAIM OF THE ASSESSEE FOR THE S AID DEDUCTION WHICH WAS CONFIRMED BY THE LD. CIT(A). ON FURTHER A PPEAL BY THE ASSESSEE, THE TRIBUNAL, HOWEVER, ALLOWED THE SAID D EDUCTION AND WHEN THE MATTER REACHED TO THE HONBLE DELHI HIGH C OURT, IT WAS SOUGHT TO BE CANVASSED ON BEHALF OF THE REVENUE THA T THE AMOUNT RECEIVABLE BY THE ASSESSEE FROM ITS CLIENT AGAINST PURCHASE OF SHARES COULD NOT BE TREATED AS DEBT UNDER THE PRO VISIONS 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 F IND MERIT IN THIS CONTENTION RAISED ON BEHALF OF THE REVENUE HOL DING THAT THERE ITA NO. 4201 /M/09 M/S SOVEREIGN NAVIMAN BROKING. 4 WAS A VALID TRANSACTION BETWEEN THE ASSESSEE AND HI S CLIENT AND SINCE THE ASSESSEE 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 TREATED AS HIS DEBT. IT WAS ALSO H ELD THAT THE BROKERAGE WHICH WAS RECEIVED FOR THE SAID TRANSACTI ON WAS SHOWN AS INCOME BY THE ASSESSEE IN THE EARLIER YEAR S AND THE SAME WAS TAXED AS SUCH BY THE ASSESSING AUTHORITY. IT WAS HELD THAT THE ASSESSEE THEREFORE WAS ENTITLED FOR DEDUCT ION 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 COURT IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) WHEREIN THE QUESTION OF LAW WHICH AROSE FOR CONSIDERATION WAS W HETHER IN VIEW OF THE PROVISIONS OF SECTION 36(1)(VII), THE T OTAL DEBIT BALANCE INCLUDING THE CONSIDERATION COLLECTIBLE BY THE ASSE SSEE COMPANY FOR THE SALE/PURCHASE 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 HELD BY THE HONBLE DELHI HIGH C OURT FOLLOWING, INTER ALIA, THE DECISION IN THE CASE OF CIT VS. DB (INDIA) SECURITIES LTD. THAT THE MONEY RECEIVABLE BY THE AS SESSEE AS SHARE BROKER FROM HIS CLIENTS AGAINST PURCHASE OF S HARES MADE ON THEIR BEHALF HAS TO BE TREATED AS DEBT AND SINCE THE BROKERAGE PAYABLE BY THE CLIENT WAS A PART OF THAT DEBT AND T HAT PART HAD BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF HIS INCOM E, THE CONDITIONS STIPULATED IN SECTION 36(1)(VII) AND 36( 2) STOOD SATISFIED AND THE ASSESSEE WAS ENTITLED FOR DEDUCTI ON 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) A ND IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) IS SQUARE LY APPLICABLE TO THE ISSUE WHICH IS UNDER CONSIDERATION IN THE PRESE NT CASE BEFORE THIS SPECIAL BENCH. 30. THE LEARNED D.R. HAS CONTENDED BEFORE US THAT T HE RULES AND REGULATIONS OF STOCK EXCHANGE GOVERNING RELATIO NS BETWEEN BROKER AND HIS CLIENTS AS WELL AS THE GUIDELINES IS SUED BY THE SEBI FROM TIME TO TIME PROTECTING THE INTEREST OF S HARE BROKER WERE NOT BROUGHT TO THE NOTICE OF THE HONBLE DELHI HIGH COURT IN THE CASES OF CIT VS. DB (INDIA) SECURITIES LTD.(SUP RA) 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 REGULATIO NS AS WELL AS GUIDELINES ARE NOT RELEVANT IN THE CONTEXT OF ISSUE REFERRED TO THIS SPECIAL BENCH WHICH RAISES A SPECIFIC QUESTION OF L AW. WE HAVE ALREADY NOTED THAT THE FACT 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 IRRECOVERABL E. IT IS THEREFORE NOT RELEVANT WHETHER SUCH LOSS HAS BEEN I NCURRED BY THE ASSESSEE AS A RESULT OF NOT FOLLOWING THE RELEVANT RULES AND REGULATIONS AND GUIDELINES OR EVEN AFTER FOLLOWING THE SAME. AS OBSERVED BY US, THIS ASPECT MAY BE RELEVANT IN THE CONTEXT OF ITA NO. 4201 /M/09 M/S SOVEREIGN NAVIMAN BROKING. 5 QUANTIFICATION OF SUCH LOSS. AS A MATTER OF FACT, ONE OF THE ARGUMENTS RAISED ON BEHALF OF THE REVENUE IN THE CA SE OF DB (INDIA) SECURITIES LTD. (SUPRA) WAS THAT THE ASSESS EE 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 FETCH IN THE MARKET NEEDS TO BE ADJUSTED AGAINST THE AMOU NT OF BAD DEBT CLAIMED BY THE ASSESSEE FOR ARRIVING AT THE AC TUAL 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 THE SALE CONSIDERATION THEREOF AGAINST THE AMOUNT R ECEIVABLE FROM THE CLIENT SO AS TO ARRIVE AT THE ACTUAL AMOUN T OF BAD DEBT THUS IS RELEVANT FOR QUANTIFYING THE ACTUAL AMOUNT OF BAD DEBT AND IT IS AT LIBERTY TO RAISE THE SAME, IF PERMISSI BLE, BEFORE THE DIVISION BENCH DURING THE COURSE OF HEARING OF THE APPEAL. THE LD. D.R. HAS ALSO RAISED CERTAIN OTHER DOUBTS OR DI SPUTES IN THE WRITTEN SUBMISSIONS FILED BEFORE THIS SPECIAL BENCH RELATING TO CERTAIN FACTUAL ASPECTS OF THE CASE. ALTHOUGH, NO S UCH 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 CONSIDERING THE ARGUMENTS OF BOTH THE SIDES WHILE H EARING THE APPEAL OF THE ASSESSEE THAT THESE ASPECTS NEED VERI FICATION, THE ASSESSEE WILL HAVE NO OBJECTION FOR GETTING SUCH VE RIFICATION DONE FROM THE A.O. 32. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND T HE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOU NCEMENTS AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE, WHO IS A SHARE BROKER, FROM HIS CL IENTS AGAINST THE TRANSACTIONS OF PURCHASE OF SHARES ON THEIR BEH ALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKERAGE/COMMIS SION INCOME ARISING FROM SUCH TRANSACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH BROKERAGE/COMMISSI ON 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 AS SESSEE 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. ITA NO. 4201 /M/09 M/S SOVEREIGN NAVIMAN BROKING. 6 8. WE RESPECTFULLY FOLLOW THE SPECIAL BENCH DECISIO N OF ITAT CITED SUPRA AND IN THE LIGHT OF THAT WE UPHOLD THE ORDER OF CIT(A) IN DIRECTING TO ALLOW THE BAD DEBT CLAIM OF ` . 34,69,336/-. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF NOVEMBER, 2010. SD/- SD/- (J. SUDHAKAR REDDY) (V. DURGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED: 26 TH NOVEMBER, 2010 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, E BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. GPR/KV S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 18/11/10 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 19/11/10 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 26.11.10 SR.P.S./P .S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER