HTS SECUTIES P. TD, MUMBAI V. ITO 4(10(2), MUMBAI

ITA 5572/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0936 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 26-07-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 12-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MAHAPATRA
• Keywords: Business expenditure; Bad and doubtful debts
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H : MUMBAI BEFORE SHRI D.K. AGARWAL, (JM) AND SHRI A.L. GEHLO T ,(AM) ITA NO.5572/MUM/2009 ASSESSMENT YEAR : 2005-06 HTS SECURITIES PVT. LTD. C/O. GAWANDE CONSULTANTS PVT. LTD. 801-MAHALAXMI CHAMBERS 22, BHULABHAI DESAI ROAD MUMBAI-400 026. ..( APPELLANT ) P.A. NO. (AAACH 2781 C) VS. INCOME TAX OFFICER-4(1)(2) MUMBAI. ..( RESPONDENT ) APPELLANT BY : MS. AASIFA KHAN RESPONDENT BY : SHRI S. K. MAHAPATRA O R D E R PER D.K. AGARWAL (JM). THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 1.6.2009 PASSED BY THE LD. CIT(A) FOR THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE COM PANY IS A SHARE BROKER AND CORPORATE MEMBER OF THE STOCK EXCHANG E, MUMBAI AND IS ENGAGED IN THE BUSINESS OF STOCK AND SHARE BROKING. THE ITA NO.5572/M/09 A.Y:05-06 2 ASSESSEE COMPANY FILED RETURN DECLARING NIL INCOME. DURING THE COURSE OF ASSESSMENT IT WAS INTERALIA OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF ` 4,50,058/- TO THE P&L ACCOUNT UNDER THE HEAD BAD DEBTS WRITTEN OFF . THE ASSESSEE WAS ASKED TO FURNISH COMPLETE DETAILS AND TO JUSTIFY THE CLAI M U/S. 36(1)(VII) R.W.S.36(2) OF THE INCOME TAX ACT, 1961(THE ACT). IT WAS SUBMITTED BY THE ASSESSEE AS UNDER :- (EXTRACTED FROM PAR A 6.1 OF ASSESSMENT ORDER):- OUR CLIENT COMPANY HAD APPOINTED A SUB-BROKER SHRI ADIL K. MEDHORA PROP. OF M/S. FAIRGROW SHARES & SECURITIES OF 102/A LARAM CENTRE, BLOCK B, M.A. ROA D, ANDHERI (W), MUMBAI-400 058. DURING THE ORDINARY COURSE BUSINESS THE SUB-BROKER ENTERED INTO BUSINES S OF SHARE PURCHASE AND SALES WITH ONE OF HIS CLIENT, NA MELY SHRI ATAM DEV ARORA. DURING THEIR DEALING IN SHARE S SOME OF THE SHARES WERE NOT DELIVERED BY THE SUB-BR OKER SHRI ADIL K. MEDHORA TO THE SAID ATAM DEV ARORA IN THE YEAR 2001. TO TAKE THE DELIVERY OF SHARES THE SAID SHRI ATAM DEV ARORA FILED THE CLAIM FOR DELIVERY OF HIS SHARES BY THE SAID SUB-BROKER IN THE OFFICE OF THE STOCK EXCHANGE MUMBAI FOR ARBITRATION UNDER THEIR RULES, BY- LAWS AND REGULATION OF THE STOCK EXCHANGE, MUMBAI. THE ARBITRATORS PASSED AWARD UNDER REF.NO.206 OF 2003 D ATED 27 TH JANUARY, 2004. UNDER THE SAID AWARD THE SUB BROKE R WAS DIRECTED TO PAY RS.4,48,510/- TO HIS CLIENT SHR I ATAM DEV ARORA, BUT THE SAID SUB BROKER FAILED TO PAY TH E AMOUNT TO HIS CLIENT. THE LIABILITY OF THE AWARD A MOUNT THEREFORE PASSED ON TO OUR CLIENT COMPANY, AS OUR C LIENT COMPANY IS MAIN BROKER. AGAINST THIS LIABILITY OUR CLIENT COMPANY FILED AN APPEAL WITH APPELLATE AUTHORITY OF STOCK EXCHANGE, MUMBAI. THE SAID APPEAL WAS DISMISSED BY APPELLATE AWARD NO.16A OF 2004 DATED 7 TH AUGUST, 2004. AS PER THE TERMS AND CONDITION LAID DOWN BY THE BSE IF THE SUB BROKER FAILS TO DISCHARGE HIS LIABILITY TOW ARDS HIS CLIENTS THEN THE AMOUNT OF AWARD LIABILITY HAS TO B E PAID BY THE MAIN BROKER. THE STOCK EXCHANGE, MUMBAI PAI D RS.4,50,058/- BEING THE AWARD AMOUNT FROM THE DEPOS ITS ITA NO.5572/M/09 A.Y:05-06 3 MADE BY OUR CLIENT COMPANY WITH BANK VIDE THEIR LET TER NO.206/2003 AND 16A/2003/SK/PG/60 DATED 13 TH DECEMBER, 2004. WE ENCLOSE COPIES OF THE ORIGINAL AWARD, REJECTION OF THE APPEAL OF OUR CLIENT COMPANY AND LETTER DATE D 13 TH DECEMBER 2004 ADJUSTING THE AWARD AMOUNT FROM THE DEPOSITS. YOU WILL APPRECIATE FROM THE FOREGOING A ND THE EVIDENCE PRODUCED THAT THIS IS A GENUINE BAD DEBT A ND/OR BUSINESS EXPENDITURE AND NEEDS TO BE ALLOWED AS SUC H. HOWEVER, THE ASSESSING OFFICER OBSERVED THAT THE AMOUNT OF DEBT HAS NOT BEEN INCLUDED IN THE COMPUTATION OF INCOME AS REQU IRED U/S.36(2), HENCE, IT DOES NOT FALL UNDER THE AMBIT OF SEC.36(2), I T REMAINS OUTSIDE THE PURVIEW OF SEC.36(1)(VII), HENCE, NOT ALLOWABLE. HE FURTHER OBSERVED THAT THE ASSESSEE HAS ADMITTED THAT NO STEPS WERE TAKEN TO RECOVER THE SAID AMOUNT FROM THE SAID BROKER INASMUCH AS THE ASSESSEE IS OF THE OPINION THAT THE SAID AMOUNT IS LIKELY TO BE RECOVERED IN THE FUTURE, DISALLOWED THE AMOUNT OF BAD DEBTS AS BUSINESS LOSS U/S.28 ON THE GROUND THAT THE ASSESSEE HAD FAI LED TO ESTABLISH THAT THE LOSS IS IRRECOVERABLE AND CRYSTALLISED DURING THE PREVIOUS YEAR. ACCORDINGLY THE ASSESSING OFFICER ADDED THE SAME IN THE INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) W HILE OBSERVING THAT THE CLAIM OF BAD DEBTS IS NOT ALLOWABLE AS BUSINESS L OSS U/S.37 OR SEC. 28 IN VIEW OF THE FACT THAT THERE IS SPECIFIC PROVISIO NS OF DEDUCTION OF BAD DEBTS U/S.36(VII) R.W.S. 36(2) WHICH PREVAIL O VER THE GENERAL PROVISION, FOLLOWING THE DECISION OF HON'BLE JURISDICTION AL HIGH COURT IN DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) VS. OM AN INTERNATIONAL ITA NO.5572/M/09 A.Y:05-06 4 BANK, (2009) 313 ITR 128(BOM.) DELETED THE ADDITION OF AMOUNT OF BROKERAGE ` 936/- AND CONFIRMED THE ADDITION OF ` 4,49,122/-. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE ASSESSEE IS IN APPEAL BEFORE US CHALLENGING IN ALL THE GROUNDS THE SU STENANCE OF ADDITION OF ` 4,49,122/- . 4. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSE SSEE SUBMITS THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. SHRI SHREYAS S. MORAKHIA IN ITA NO.3374/MUM/2004 FOR THE ASSESSMENT YEA R 1998-99 ORDER DATED 16.7.2010 WHEREIN IT HAS BEEN HELD THA T THE ASSESSEE IS ENTITLED TO DEDUCTION U/S.36(1)(VII) R.W.S. SEC.36(2) OF THE ACT IN RESPECT OF THE AMOUNT WHICH COULD NOT BE RECOVERED FROM ITS CLIENTS IN RESPECT OF TRANSACTIONS EFFECTED BY HIM ON BEHALF OF HIS CLIENT APART FROM THE COMMISSION EARNED BY HIM. SHE ALSO PLACED ON R ECORD THE COPY OF THE SAID ORDER OF THE TRIBUNAL. 5. ON THE OTHER HAND THE LD. DR SUPPORTS THE ORDER OF THE ASSESSING OFFICER AND THE LD. CIT(A). ITA NO.5572/M/09 A.Y:05-06 5 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RI VAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIN D THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS NOT SHOWN THE AMOUNT OF BROKERAGE ARISING FROM SUCH TRANSACTION OR THE STOCK EXCHANGE, MUMBAI HAS NOT PA ID ` 4,50,058/- BEING THE AWARD AMOUNT FROM THE DEPOSITS M ADE BY ASSESSEE COMPANY WITH BANK VIDE LETTER DATED 13.12.2004 . 7. IN SHRI SHREYAS S. MORAKHIA (SUPRA), IT HAS BEEN HELD VIDE PARA-32 OF THE ORDER AS UNDER:- 32. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE, WE ARE OF THE VI EW THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE, WHO IS A SHARE BROKER, FROM HIS CLIENTS AGAINST THE TRANSACT IONS 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 STIPULATED IN SECTION 36(2)(I) AND THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 36(1)(VII) BY WAY OF BAD DEBTS AFT ER HAVING WRITTEN OF THE SAID DEBTS FROM HIS BOOKS OF ACCOUNT AS IRRECOVERABLE. WE, THEREFORE, ANSWER THE QUESTI ON REFERRED TO THIS SPECIAL BENCH IN THE AFFIRMATIVE T HAT IS IN FAVOUR OF THE ASSESSEE. ITA NO.5572/M/09 A.Y:05-06 6 8. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT ON RECORD BY THE REVENUE, WE RESPECTFULLY FOLLOWING THE ORDER O F THE SPECIAL BENCH OF THE TRIBUNAL SUPRA HOLD THAT THE AMOUNT OF ` 4,49,122/- IS ALLOWABLE TO THE ASSESSEE U/S.36(1)(VII) R.W.S.36(2) OF T HE ACT AND ACCORDINGLY WE DELETE THE DISALLOWANCE OF ` 4,49,122/- AND ALLOW THE GROUNDS RAISED BY THE ASSESSEE. 9. IN THE RESULT, ASSESSEE'S APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.7.2010 SD/- SD/- (A.L. GEHLOT) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUDIC IAL MEMBER MUMBAI, DATED: 30.7.2010. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.