THE ITO 4(2)(2), MUMBAI V. M/S. SONPANKHI SHARES & SECURITIES P. LTD, MUMBAI

ITA 5177/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56295 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 28-12-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 31-07-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Keywords: Business expenditure; Question of law; Bad and doubtful debts
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO. 5177/MUM./2007 (ASSESSMENT YEAR : 2004-05 ) INCOME TAX OFFICER WARD-4(2)(2), MUMBAI .. APPELLANT V/S M/S. SONPANKHI SHARES & SECURITIES PVT. LTD. 12, REYFREDA, SIR M.V. MARG CHAKALA, ANDHERI (EAST) MUMBAI 400 093 PAN AAFCS0822E .... RESPONDENT REVENUE BY : MR. V.V. SHASTRI ASSESSEE BY : NONE DATE OF HEARING 28.12.2011 DATE OF ORDER 28.12.2011 O R D E R PER J. SUDHAKAR REDDY, A.M. THIS APPEAL PREFERRED BY THE REVENUE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 4 TH MAY 2007, PASSED BY THE COMMISSIONER (APPEALS)- IV, MUMBAI, FOR ASSESSMENT YEAR 2004-05. 2. BEFORE US, WHEN THE CASE WAS CALLED FOR HEARING, NE ITHER THE ASSESSEE NOR ANY OF ITS AUTHORISED REPRESENTATIVES APPEARED BEFORE US. THERE IS NO M/S. SONPANKHI SHARES & SECURITIES P. LTD. ITA NO.5177/MUM./2007 2 APPLICATION SEEKING ADJOURNMENT EITHER. UNDER THESE CIRCUMSTANCES, THE BENCH WAS OF THE VIEW THAT THE REVENUES APPEAL CAN BE DISPOSED OFF IN THE ABSENCE OF THE RESPONDENT ASSESSEE. ACCORDINGLY, WE PROCEED TO DISPOSE OFF THESE APPEAL EX-PARTE, QUA THE RESPONDENT ASSESSEE AND AFTER HEARING THE LEARNED DEPARTMENTAL REPRESENTATIVE. 3. WE HAVE HEARD THE LEARNED DEPARTMENTAL REPRESENTATI VE, MR. V.V. SHASTRI, REPRESENTING THE REVENUE AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. 4. GROUNDS NO.1, 2 AND 3, ARE ON THE ISSUE OF ALLOWABI LITY OF BAD DEBTS UNDER SECTION 36(1)(VII) OF THE INCOME TAX ACT, 196 1 (FOR SHORT THE ACT ), WHEN THE ASSESSEE IS A SHARE BROKER. 5. ADMITTEDLY, THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE MUMBAI SPECIAL BENCH OF THE TRIBUNAL IN DCIT V/S SH REYAS S. MORAKHIA (2010) 5 ITR (TRIB.) 1 (MUM.)(SB), WHEREIN THE TRIB UNAL OBSERVED AS FOLLOWS:- 29. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS STRONGLY RELIED ON THE DECISIONS OF HO NBLE 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 O R ANY OTHER HIGH COURTS, THIS SPECIAL BENCH HAS TO FOLLOW THE SAME. WE HAVE CAREFULLY PERUSED THE SAID DECISIONS OF THE HONBLE DELHI HIG H 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 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 M/S. SONPANKHI SHARES & SECURITIES P. LTD. ITA NO.5177/MUM./2007 3 DEDUCTION AND WHEN THE MATTER REACHED TO THE HONBL E 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 CONTENTION 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 DECISI ON 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 OF CIT VS. DB (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, M/S. SONPANKHI SHARES & SECURITIES P. LTD. ITA NO.5177/MUM./2007 4 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) 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. 6. IT IS ALSO SETTLED IN LAW, AS HELD BY THE HONBLE S UPREME COURT IN THE CASE OF TRF LTD. VS CIT, (1010-TIOL-15-SC), THAT TH E BAD DEBTS ARE TO BE ALLOWED AS DEDUCTION IN THE YEAR IN WHICH THE BAD D EBTS ARE ACTUALLY WRITTEN. IN VIEW OF THESE BINDING JUDICIAL PRECEDENTS, WE DI SMISS THE GROUNDS RAISED BY THE REVENUE. M/S. SONPANKHI SHARES & SECURITIES P. LTD. ITA NO.5177/MUM./2007 5 7. GROUND NO.4, IS ON THE ISSUE OF DISALLOWANCE OF PEN ALTY PAID TO STOCK EXCHANGE OF ` 1,09,200. 8. AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE IS SUE IS COVERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE BY THE JU DGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S ANGLE CAPITAL & DEBIT MARKET LTD., JUDGMENT DATED 28 TH JULY 2011, WHEREIN THEIR LORDSHIPS, HELD AS FOLLOW S:- 3. AS REGARDS QUESTION (C) IS CONCERNED THE FINDIN G OF FACT RECORDED BY THE ITAT IS THAT THE AMOUNT PAID AS PENALTY WAS ON ACCOUNT OF IRREGULARITIES COMMITTED BY THE ASSESSEES CLIENTS. SUCH PAYMENTS WERE NOT ON ACCOUNT OF ANY INFRACTION OF LAW AND, H ENCE ALLOWABLE AS BUSINESS EXPENDITURE. IN SUCH A CASE, THE EXPLANATI ON TO SECTION 37 WOULD NOT APPLY. ACCORDINGLY, QUESTION (C) RAISED B Y THE REVENUE CANNOT BE ENTERTAINED. 9. KEEPING IN VIEW THE AFORESAID JUDGMENT OF THE HON'B LE JURISDICTIONAL HIGH COURT, WE DISMISS THE GROUND RAISED BY THE REV ENUE. 10. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.12.2011 SD/- B.R. MITTAL JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 28 TH DECEMBER 2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, E BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI