The ACIT, Circle-3, Ahmedabad V. Shri Hasmukhlal M.Chokshi,HUF, Ahmedabad

ITA 560/AHD/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8978 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-09-2009
• Assessment Year: 1996-1997
• Appeal Filed On: 06-03-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C PANDIT
• Assessee Lawyers: M K PATEL
• Keywords: Business expenditure; Share purchase agreement; Opportunity of being heard; Speculation loss; Bad and doubtful debts; Capital expenditure; Speculative transactions
• Section: 28; 15

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' [BEFORE SHRI R V EASWAR VICE-PRESIDENT] [AND SHRI P K BANSAL ACCOUNTANT MEMBER) ITA NO.560/AHD/2006 (ASSESSMENT YEAR: 1996-97) THE ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-3, AHMEDABAD V/S HASMUKHLAL M CHOKSHI HUF, 8, NILPAMA SOICIETY, INSIDE SAURASHTRA SOCIETY, PALDI, AHMEDABAD [APPELLANT] [RESPONDENT] APPELLANT BY :- SHRI M C PANDIT, SR. DR RESPONDENT BY:- SHRI M K PATEL O R D E R PER P K BANSAL (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A ) DATED 6 TH DECEMBER, 2005 BY TAKING THE FOLLOWING EFFECTIVE GR OUND OF APPEAL:- THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETI NG DISALLOWANCE OF RS.9,39,504/- MADE BY THE AO ON ACCOUNT OF BAD DEBT S / TRADING LOSS. 2 THE BRIEF FACTS OF THE CASE ARE THAT THE AO DISA LLOWED THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF VARIOU S AMOUNTS WRITTEN OFF WHICH WERE OUTSTANDING AGAINST VARIOUS PARTIES ON WHOSE BEHALF THE ASSESSEE HAD PURCHASED THE SHARES AS A STOCK BROKER AND THE ASSESSEE HAS TO INCUR THE LOSS BY TA KING THE DELIVERY OF THE SHARES AND SELLING THEM. THE TOTAL AMOUNTS FROM VARIOUS PARTIES WERE RS.9,39,507/- AS DETAILED IN T HE ASSESSMENT 2 ORDER. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE. WHEN THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A), THE CIT( A) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER:- I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE A ND I HAVE GONE THROUGH THE VARIOUS PAPERS FILED, IT IS SEEN THAT T HE APPELLANT IS CARRYING ON BUSINESS OF BUYING AND SELLING SHARES O N BEHALF OF ITS CLIENTS AND IN THAT PROCESS IT EARNS INCOME BY WAY OF BROKERAGE. THUS THE TRANSACTIONS ARE CARRIED OUT IN THE COURSE .F BUSINESS OF THE APPELLANT. HOWEVER, APPARENTLY THIS IS A CASE WHERE SALE AND PURCHASE IS NOT OF THE APPELLANT BUT HE IS WORKING AS AN AGE NT AND THESE AMOUNTS HAVE NEVER BEEN TAKEN TO THE PROFIT AND LOSS ACCOUN T OF THE APPELLANT. THEREFORE THESE ITEMS IN NO CASE CAN BE ALLOWED AS A BAD DEBT U/S. 36 AS HELD BY ITAT, AHMEDABAD IN THE CAST REPORTED AT 53 LTD PAGE 326. IN THIS CASE OF ASHOK K MAR LAHTKUMAR THE HONBLE 1 TAT HAS HELD THAT THE CLAIM MAY BE CONSIDERED AS A TRADING LOSS IF IT CAN BE PROVED THAT THE AMOUNT HAS BECOME IRRECOVERABLE. IN VIEW O F THIS, THE A.OS FINDING THAT THE CLAIM CANNOT BE ALLOWED AS BAD DEB T IS AS PER LAW. COMING TO THE CLAIM OF THE AMOUNT AS TRADING LOSS, IT HAS TO BE ESTABLISHED BY THE APPELLANT BY ADDUCING SUFFICIENT EVIDENCE THAT THE AMOUNT HAS BECOME IRRECOVERABLE AND THAT TOO IN THE YEAR WHEN IT IS CLAIMED THAT THE AMOUNT HAS BECOME IRRECOVERABLE. M ERELY WRITING OFF OF THE AMOUNT IN THE PROFIT AND LOSS ACCOUNT IS NO PROOF THAT IT HAS BECOME IRRECOVERABLE. THERE MAY BE A CASE WHERE THE AMOUNT MAY BE RECOVERED IN FUTURE OR MAY BECOME BAD AFTER PASSAGE OF SOME MORE TIME. MERELY BECAUSE THE ASSESSEE CHOOSES TO WRITE IT OFF WOULD NOT MEAN THAT THE AMOUNT HAS BECOME IRRECOVERABLE. UNLE SS SOMETHING IS SHOWN TO PROVE THAT THE AMOUNT HAS BECOME IRRECOVER ABLE, THE CLAIM OF TRADING LOSS CANNOT LE ALLOWED EVEN IF THE APPELLAN T CHOOSES TO WRITE IT OFF ON ITS OWN. THERE SHOULD BE REASONABLE REASONS TO SHOW THAT THERE IS NO HOPE OF RECOVERY OF THIS AMOUNT. 6.1 COMING TO THE FACTUAL ASPECTS OF THE CASE, I FI ND THAT SO FAR AS THE CLAIM IN RESPECT OF 5K. MOHTA AND S.S.R.G. MOBTA SP G. & WVG. MILLS P. LTD. IS CONCERNED, THESE AMOUNTS HAVE BEEN PAID AS PER ARBITRATION ORDER OF THE STOCK EXCHANGE AND ARE ALLOWABLE AS BU SINESS EXPENDITURE/BUSINESS LOSS IN NORMAL COURSE. IN FACT , THEY DO NOT 3 REPRESENT ANY BAD DEBT BUT CLEARLY REPRESENT AN EXP ENDITURE. THEREFORE, THESE AMOUNTS ARE DEARLY ALLOWABLE. 6.2 SO FAR AS OTHER AMOUNTS ARE CONCERNED, IT IS TO BE NOTED THAT DESPITE TAKING SUCH A LONG TIME, THE AO HAS NOT REFUTED ASS ESSEES CLAIM THAT AMOUNTS WERE IRRECOVERABLE. THE AD HAS NOT EVEN COM MENTED ON VARIOUS SENT TO HIM V,HI.H INCLUDED BANK ACCOUNT, L OAN ACCOUNT ETC. OF VARIOUS PARTIES AND COPIES OF PAPERS RELATED TO SUI TS FILED AGAINST SOME OF THEM. THUS, BASICALLY IT IS QUITE CLEAR THAT THE AMOUNTS WERE NOT RECOVERABLE. ALL THESE AMOUNTS HAVE ARISEN IN THE N ORMAL COURSE OF BUSINESS OF DEALING IN SHARES FOR THESE PERSONS. I HAVE ALSO GONE THROUGH THE COPY OF ACCOUNTS OF VARIOUS PARTIES AND IT IS NOTICED THAT APPELLANT HAD FILED STATEMENT DATED 18.2.2003 OF SH RI MEHIL C SHAH CLEARLY STATING THAT DUE TO HUGE LOSSES HE WAS NOT ABLE TO PAY ANY AMOUNT IN RESPECT OF HIS LIABILITY. TILL DATE NO PA YMENT HAS BEEN MADE. AT PRESENT THE PERSON IS DRAWING A MEAGER SALARY OF RSJ80T) PER MONTH. SIMILAR IS THE POSITION IN THE CASE OF SMT. PADMAVATI NAIK WHO HAS ALREADY CLOSED HER BUSINESS AND E EN HER PASSBO OK REFLECTS VERY MEAGER BALANCE AND TRANSACTIONS. IN CASE OF N/S RAK ESH INDUSTRIES, THE ASSESSEE HAS ALREADY FILED WHERE CERTAIN OTHER PART IES HAVE FILED CIVIL SUIT FOR RECOVERY BUT STILL NO AMOUNT HAS BEEN RECO VERED FROM THIS PARTY. IN CASE OF M.K. CONSULTANCY, THE AMOUNT WAS LYING UNRECOVERED AND THE PROPRIETOR HAS ALREADY EXPIRED. IN CASE OF M/S DADAKRUP INVESTMENTS, PROPRIETORS STATEMENT OF AFFAIRS WAS FILED WHICH WAS SENT TO THE AO, FROM WHICH IT IS APPARENT THAT HE WAS NO T IN A POSITION TO PAY ANY AMOUNT. THIS PERSON HAD LEFT THE CITY TO AV OID HIS CREDITORS. THE PROPRIETOR ALSO OBTAINED LOAN FROM DENA BANK TO START A NEW BUSINESS AND EVEN THAT REMBNED UNPAID. THE ABOVE PO SITION CLEARLY SHOWS THAT DESPITE THE BEST EFFORTS THE APPELLANT C OULD NOT RECOVER ANY AMOUNT FROM THESE PARTIES. THOUGH ALL THE PAPERS WE RE SENT TO THE AO, BUT HE HIS NOT MADE ANY COMMENT ON THESE ASPECTS AN D HAS MERELY STATED LEGAL REASONS AS TO WHY THE CLAIM WAS NOT AL LOWABLE EITHER AS A BAD DEBT OR AS A TRADING LOSS. AS DISCUSSED EARLIER , THE AMOUNT IS ALLOWABLE AS A BUSINESS LOSS AND IN VIEW OF THE FAC TUAL POSITION REGARDING FINANCIAL POSITION OF THE DEBTORS, IT IS APPARENT THAT THE CLAIM WAS ALLOWABLE AS A BUSINESS LOSS. ACCORDINGLY, DISA LLOWANCE OF RS.9,54,007/- MADE BY THE AO IS DELETED. 4 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y CONSIDERED THE SAME. WE NOTED THAT THIS ISSUE IS DU LY COVERED BY THE DECISION OF THE ITAT AHMEDABAD BENCH-A IN THE C ASE OF ACIT V H NYALCHAND FINANCIAL SERVICES LTD., AHMEDAB AD AND OTHERS [ITA NO.2631/AHD/2004 & OTHERS] IN WHICH VID E ORDER DATED 27-02-2009, THIS TRIBUNAL HAS HELD AS UNDER:- 8 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE T HROUGH VARIOUS CASE LAWS AS HAVE BEEN CITED BEFORE US. THE UNDISPU TED FACTS ARE THAT THE ASSESSEE HAS WRITTEN OFF THE FOLLOWING AMOUNTS DURING THE YEAR IN ITS P&L ACCOUNTS: SR. NO. NAME OF THE CLIENT AMOUNT WRITTEN OF TOTAL ACCOUNT -1 ACCOUNT -2 1 NANDI INVESTMENT 48,32,050 - 48,32,050 2 JIGNESH SHAH 10,71,470 - 10,71,470 3 UDAYBHAI BACHHUBHAI 68,57,595 21,07,897 89,65,492 4 LCC INVESTMENT 8,18,000 - 8,18,000 5 L K SATPATHI 75,000 - 75,000 6 GIRISH PATEL 1,45,235 - 1,45,235 TOTAL 1,37,99,350 21,07,897 1,58,62,518 THE ASSESSEE INITIALLY CLAIMED THE SAID SUM AS BAD DEBT U/S 36(1)(VII) AND SUBSEQUENTLY CLAIMED IT AS A LOSS INCIDENTAL TO THE BUSINESS ALLOWABLE U/S 28 OF THE ACT. THE AO DID NOT ALLOW T HE SAID DEDUCTION. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE U/S 28 OF THE ACT. THE REVENU E HAS CHALLENGED THE ACTION OF THE CIT(A) BEFORE US DELETING THE SAI D ADDITION ON ACCOUNT OF DISALLOWANCE OF THE CLAIM OF BAD DEBTS / TRADING LOSS. IN FACT, WE NOTED FROM THE ORDER OF THE CIT(A) THAT TH E CIT(A) DID NOT ALLOW THE CLAIM OF THE ASSESSEE AS BAD DEBTS BUT AL LOWED THE CLAIM OF THE ASSESSEE AS A TRADING LOSS, AS IS CLEAR FROM TH E PARAGRAPHS REPRODUCED HEREINABOVE UNDER THE BRIEF FACTS. THERE FORE, THE ONLY ISSUE 5 BEFORE US RELATES TO WHETHER THE SAID AMOUNT CAN BE ALLOWED U/S 28 OF THE ACT. THERE IS NO DISPUTE ON THE FACTS THAT THE ASSESSEE WAS ENGAGED IN A SHARE BROKING BUSINESS AND HAS BOUGHT AND SOLD THE SHARES DURING THE COURSE OF BUSINESS ON BEHALF OF ITS CLIENTS AND EARNED BROKERAGE THEREON. ON A QUERY FROM THE BENCH HOW THIS LOSS H AS ARISEN DURING THE YEAR, THE LEARNED AR VEHEMENTLY RELIED ON THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN LORD DAIRY FARM LTD. V CIT (1955) 27 ITR 700 (BOM) , WHEN THE STATE OF GUJARAT WAS UNDER THE JURISDICTION OF BOMBAY HIGH COURT AND POINTED OUT T HAT THIS DECISION IS HAVING BINDING FORCE ON THE TRIBUNAL AS AT THAT TIME THE BOMBAY HIGH COURT HAD THE JURISDICTION OVER AHMEDABAD. IN THIS JUDGMENT IT WAS HELD THAT IN THIS CASE IT IS IN EVIDENCE THAT THE ASSESSEE WROTE OFF THIS AMOUNT OF RS.32,000 IN THE YEAR OF ACCOUNT. THE ADV OCATE-GENERAL SAYS THAT THERE IS NO FINDING THAT THIS AMOUNT BECA ME IRRECOVERABLE IN THIS YEAR. WHEN A BUSINESSMAN WRITES OFF AN AMOUNT, THERE IS PRIMA FACIE EVIDENCE THAT THAT AMOUNT IS IRRECOVERABLE. U NDOUBTEDLY THE DEPARTMENT CAN REBUT THE PRIMA FACIE INFERENCE BY D RAWING ATTENTION TO CIRCUMSTANCES OR BY LEADING SOME EVIDENCE TO SUG GEST THAT THE POSITION TAKEN UP BY THE ASSESSEE WAS NOT CORRECT. IN THIS CASE THERE IS NO EVIDENCE WHATSOEVER ON THE RECORD EXCEPT THE FAC T THAT THE ASSESSEE WROTE OFF THIS AMOUNT IN THE YEAR OF ACCOUNT. IN TH E ABSENCE OF ANY EVIDENCE WE ARE ENTITLED TO PRESUME THAT THE AMOUNT BECAME IRRECOVERABLE WHEN THE ASSESSEE WROTE IT OFF IN ITS BOOKS OF ACCOUNT. THEREFORE, IN OUR OPINION, NOT ONLY IS THE ASSESSEE ENTITLED TO CLAIM THIS AMOUNT OF RS. I2G 000 AS A TRADING LOSS BUT IS ALSO ENTITLED TO CLAIM THIS AMOUNT IN THE ASSESSMENT YEAR, VIZ., 1Q47-48. (EMPHASIS SUPPLIED) ON THE BASIS OF THE SAID DECISION IT IS APPARENT TH AT WHEN A BUSINESSMAN WRITES OFF AN AMOUNT, THERE IS A PRIMA FACIE EVIDENCE THAT THE AMOUNT IS IRRECOVERABLE. THERE IS NO DISPUTE AB OUT THE FACT THAT THE ASSESSEE HAS WRITTEN OFF THE AMOUNT DURING THE YEAR , THEREFORE, THE AMOUNT HAS BECOME IRRECOVERABLE DURING THE YEAR AND THE LOSS HAS ARISEN DURING THE YEAR UNDER CONSIDERATION. THIS JU DGMENT IS BINDING ON US. THERE IS NO CONTRARY EVIDENCE BEING BROUGHT ON RECORD BY THE REVENUE THAT THE AMOUNT HAS NOT BECOME IRRECOVERABL E DURING THE YEAR. ON THIS BASIS WE ARE OF THE VIEW THAT THE LOS S HAS ARISEN DURING THE YEAR. 6 9 NOW THE QUESTION BEFORE US IS WHETHER THE ASSESS EE IS ENTITLED FOR THE DEDUCTION OF THE SAID LOSS OR NOT. THIS ISSUE IS DULY COVERED BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SOUTH GUJARAT SHARE & SHARE BROKERS LTD. V ITO [ITA NO.1502/AHD/2004], IN WHICH MY COLLEAGUE SHRI I S V ERMA, JUDICIAL MEMBER IS ONE OF THE MEMBERS. THE DECISION OF THE C OORDINATE BENCH IS BINDING ON US IN VIEW OF THE DECISION OF THE HON BLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGG. CO. V CIT (2002) 253 ITR 749 (GUJ) , IN WHICH IT HAS BEEN HELD THAT:- (II) THAT THE TRIBUNAL OF FACT HAD NO RIGHT TO CO ME TO A CONCLUSION CONTRARY TO THE ONE REACHED BY ANOTHER BENCH OF THE SAME TRIBUNAL FROM THE ONE TAKEN ON THE SAME FACTS. IF THE TRIBUN AL WANTED TO TAKE AN OPINION DIFFERENT FROM THE ONE TAKEN BY AN EARLIER BENCH, IT OUGHT TO PLACE THE MATTER BEFORE THE PRESIDENT OF THE TRIBU NAL SO THAT HE COULD HAVE THE CASE REFERRED TO A BENCH CONSISTING OF THR EE OR MORE MEMBERS FOR WHICH THERE WAS PROVISION IN THE INCOME-TAX ACT ITSELF. 10 WE HAVE ALSO GONE THROUGH THE DECISION OF THE I TAT AHMEDABAD BENCH IN THE CASE OF SOUTH GUJARAT SHARE & SHARE BROKERS LTD. V ITO [ITA NO.1502/AHD/2004]. WE FIND THAT IN THIS DECISION THE TRIBUNAL AFTER DISCUSSING THE DECISION S IN THE CASES OF CIT V ABDULLABHAI ABDULKADAR (1961) 41 ITR 545 (SC), BA DRIDAS DAGA V CIT (1958) 34 ITR 10 (SC), A V THOMAS & CO. LTD. V CIT (1963) 48 ITR 67, CIT V BIRLA BROTHERS (P) LTD. (1970) 77 ITR 751, MADAN GOPAL BAGLA V CIT (1956) 30 ITR 174, CIT V NAINITAL BANK LTD. (1965) 55 ITR 707, CIT V ABDUL RAZAK & CO. 136 ITR 825 (GUJ), CIT V W HOWRAH AND CO. (P) LTD. 194 ITR 345 (CAL), CIT V CRESCENT FILMS (P) LTD. 248 ITR 670 (MAD), MAHESH J PATEL V ACIT (2008) 297 ITR (AT) 74 (MUM) , HAS HELD AS UNDER: 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, FACT S AND CIRCUMSTANCES OF THE CASE AND DECISIONS RELIED UPON BY THE PARTIES AND ARE OF THE OPINION THAT IT WILL BE USEFUL FIRST TO CONSIDER THE VARIOUS DECISIONS RELIED UPON BY THE PARTIES AND, T HEREFORE, WE PROCEED TO CONSIDER THE SAME ONE BY ONE AS UNDER:- (I)DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CA SE OF THE CIT VS. M/S.EQUITORIAL PVT.LTD., (1974) TAX. 37(3) -82 - IN ITR NO.12 OF 1971 DECIDED ON 23/11/1973 (COPY ON RECORD). 7 (A) IN THIS CASE, FOLLOWING TWO QUESTIONS WERE REFE RRED (FIRST AT THE INSTANCE OF THE ASSESSEE AND SECOND AT THE INSTANCE OF THE REVENUE) BY THE TRIBUNAL FOR THE OPINION OF THE HON 'BLE HIGH COURT. (1) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, THE INITIATION OF RE-ASSESSMENT PROCEEDINGS UNDER S ECTION 147(B) OF THE INCOME-TAX ACT, 1961 WAS VALID? (2)WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE RESPONDENT WAS ENTITLED TO CLAIM THE DEDUCTION OF R S.1,78,523/- FROM ITS TOTAL INCOME? (B) SINCE THE ISSUE BEFORE US IN THE PRESENT APPEAL RELATES TO DEDUCTION OF BAD DEBT, WE CONSIDER IT JUSTIFIED ONL Y TO REFER TO THE FACTS AND THE DECISION OF THE HON'BLE HIGH COURT W ITH RESPECT TO QUESTION NO.(2) (SUPRA) ONLY. (C). THE FACTS RELATING TO THE QUESTION NO.2(SUPRA) , AS HAVE BEEN REVEALED FROM THE RECORDS, ARE THAT THE ASSESSEE-CO MPANY WAS CARRYING ON THE BUSINESS OF SALE AND PURCHASE OF EL ECTRICAL GOODS, COLOURS, ETC. AND ITS MAIN BELONGINGS WERE WITH M/S .R.K.DUNDAS (EASTERN) LIMITED, BOMBAY (HEREINAFTER REFERRED TO AS THE DUNDAS). THE ASSESSEE USED TO PURCHASE THE GOODS ON THE MERI TS MADE BY THE DUNDAS WHO IN TURN, USED TO PURCHASE THE GOOD S FROM THE PARENT COMPANY IN THE UNITED KINGDOM. FOR THE ASS ESSMENT YEAR 1964-65, THE ASSESSEE CLAIMED AN AMOUNT OF RS.1,78, 523/- AS BAD DEBT IN RESPECT OF DUNDAS AND THE INCOME TAX OFF ICER ALLOWED THE SAME. IN THE ASSESSMENT YEAR 1960-61, THE ASSESSE E HAD MADE A SIMILAR CLAIM OF BAD DEBT IN RESPECT OF LIABILITIES FROM DUNDAS THE INCOME TAX OFFICER HAD REJECTED THE CLAIM ON THE SI MPLE GROUND THAT THE CLAIM AT THAT STAGE WAS PREMATURE. THE ASSESSE E PREFERRED AN APPELLATE ASSISTANT COMMISSIONER WHO AGREED WITH TH E VIEW OF THE INCOME TAX OFFICER, AND ALSO RECORDED THE FINDING T HAT THE CLAIM WAS OF A CAPITAL NATURE AND WAS NOT ALLOWABLE EITHER U/ S.10(2)(XI) OF THE ACT OF 1922 OR U/S.10(2)(XV) OR U/S.10(1), SINCE IT WAS NOT A REVENUE LOSS, NOT A BAD DEBT NOR RELATED IN LAWS. THE ASSE SSMENT ORDER FOR ASST.YEAR 1964-65 WAS PASSED ON 30/11/1964, WHEREAS THE ORDER OF THE ASSESSMENT YEARS 1960-61, WHICH WAS THEN UNDER APPEAL WAS PASSED ON JULY 31, 1965. SUBSEQUENTLY, THE ASSESS MENT FOR ASST.YEAR 1964-65 WAS RE-OPENED US/.147(1)(B) OF TH E ACT AND ASSESSEES CLAIM OF DEDUCTION OF RS.1,78,523/- WAS WITHDRAWN. THE MATTER WAS TAKEN BY THE ASSESSEE FIRST BEFORE THE A PPELLATE ASSISTANT COMMISSIONER, BUT FAILED. THE ASSESSEE THEN TOOK THE MATTER 8 BEFORE THE TRIBUNAL, THE TRIBUNAL UPHELD THE INITIA TION OF PROCEEDINGS U/S.1471(1)(B) OF THE ACT. (D). AS ALREADY NOTED, THE ASSESSEES BUSINESS WAS PRINCIPALLY WITH THE DUNDAS AND WAS COMPLETELY RELYING ON THE IMPO RT LICENCES POSSESSED BY DUNDAS FOR IMPORTING GOODS IN WHICH THE ASSESSEE WAS DEALING IN INDIA. ON MAY 1, 1959, AN AGREEME NT WAS ENTERED INTO BETWEEN THE DUNDAS AND THE ASSESSEE, WHEREB Y THE ASSESSEE-COMPANY HAD AGREED TO ADVANCE THE SUM NOT EXCEEDING RS.2 LACS TO THE DUNDAS AND THE ADVANCES, WERE TO BE MADE AS AND WHEN REQUIRED BY THE DUNDAS. CLAUSE(2) OF THE AGREEMENT WERE AS UNDER:- SUCH MONEYS WILL BE UTILIZED BY DUNDAS PARTLY FOR LIQUIDATING SOME OF THEIR LIQUIDATED DEBTS AND PARTLY TO FINANCE THE FUTURE RUNNING OF THE BUSINESS . CLAUSE (6) OF THE AGREEMENT PROVIDED THAT DUNDAS SHOULD PAY TO THE ASSESSEE-COMPANY A SUM OF RS.20,000/- PER YEAR FOR THE SERVICE RENDERED BY THE ASSESSEE, AND IN ADDITION THE DUND AS WERE TO PAY COMPOUND INTEREST AT 9% PER ANNUM WITH SIX MONTHLY RESULTS. CLAUSE (8) PROVIDED THAT THE ASSESSEE-COMPANY HAD AGREED TO DO ITS UTMOST TO ASSIST AND IMPROVE THE BUSINESS SO TH AT THE DUNDAS COULD EARN PROFITS ON THEIR TRADING IN FUTURE.. CLAUSE(10) : APART FROM THE AMOUNT OF INTEREST AND THE SUM OF RS.20,000/- ALREADY REFERRED TO, PROVIDED THAT THE ASSESSEE WAS ALSO ENTITLED TO 25 % OF THE NET PROFIT SUBJECT TO A MIN IMUM OF RS.12,000/- PER YEAR EVEN IF THERE WAS NO PROFIT OR EVEN IF PRO FITS WERE INADEQUATE IN THAT PARTICULAR YEAR SO ON AND SO FORTH. SIMI LARLY, THERE WAS AN ANOTHER AGREEMENT DATED 19-10-1959, BY WAY OF CLAUS ES(3) (4) OF AGREEMENT OF 05/05/1959 WERE DELETED BY MUTUAL AGRE EMENT. THE FINANCIAL POSITION OF THE DUNDAS DETERIO RATED AND A WINDING UP APPLICATION AGAINST THE DUNDAS WERE PRESENTED IN THE HIGH COURT OF BOMBAY ON NOVEMBER 25-1959. ON FEBRUARY 19, 196 0 A PROVISIONAL LIQUIDATOR WAS APPOINTED. SINCE DUND AS WERE NOT IN A POSITION TO MEET THE CONDITIONS OF THE AGREEMENT, T HE ASSESSEE HAD CLAIMED A BAD DEBT OF RS.1,78,523/- IN ASSESSMENT Y EAR 1964-65 WHICH WAS DISALLOWED IN RE-ASSESSMENT PROCEEDINGS. THE TRIBUNAL 9 HAD, AFTER RELYING ON THE DECISION OF HON'BLE SUPRE ME COURT IN THE CASE OF INDORE MALWA UNITED MILLS LTD. VS. STATE OF MADHYA PRADESH (1965) 965 ITR 736] AND ON THE DECISION IN THE CASE OF BADRIDAS DAGA VS. COMMISSIONER OF INCOME-TAX (1958) [34 ITR 10] HELD THAT THE AMOUNT IN QUESTION WAS ALLOWABLE AS BAD DEBT U/ S.36(1)(VII). THE TRIBUNAL ALSO REFERRED TO THE DECISION IN CIT VS. N AINITAL BANK LTD (1965)[55 ITR 707] AND ULTIMATELY HELD THAT IT WAS A BAD DEBT. IN VIEW OF IT, THE TRIBUNAL DID NOT THINK IT NECESSARY TO DECIDE WHETHER THIS WAS A TRADING LOSS. THE HON'BLE HIGH COURT, AFTER CONSIDERING THE DECIS ION IN THE CASE OF CIT VS. ABDULLABHAI ABDULKADAR [1961](41 ITR 545)[S C], IN THE CASE OF BADRIDAS DAGA VS. CIT [1958](34 ITR 10)[SC], IN THE CASE OF A.V. THOMAS & CO., LTD. VS. CIT (1963)[48 ITR 67], IN TH E CASE OF CIT(CENTRAL)CALCUTTA VS. BIRLA BROTHERS (P) LTD. (1 970)[77 ITR 751], IN THE CASE OF MADAN GOPAL BAGLA VS. CIT (1956) [30 ITR 174] AND IN THE CASE OF CIT VS. NAINITAL BANK LTD (1965)(55 ITR 707), DECIDED THE QUESTION NO.2. (E) SO FAR AS ISSUE AS TO WHETHER THE AMOUNT IN QUESTION WAS ALLOWABLE AS BAD DEBT OR NOT, THE HON'BLE JURISDICT IONAL HIGH COURT CAME TO THE CONCLUSION THAT THE AMOUNT IN QUESTION COULD NOT BE HELD AS BAD DEBT AND, HENCE, NOT ALLOWABLE AS SUCH. THE RELEVANT PART AS APPEARING AT PAGE NO.90 OF THE REPORT [1974 TAXATIO N 37(3)-82] IS AS UNDER:- APPLYING THESE TESTS IT IS CLEAR TO US THAT THE CASE OF THE ASSESSEE IN THE INSTANT CASE REGARDING THE SAID AMOUNT OF RS.1,78,5 23 CANNOT BE SAID TO BE A BAD DEBT WITHIN THE MEANING OF SECTION 36(I)(VII) . APPLYING THE TEST OF ROWLATT J,, MENTIONED ABOVE, IT CANNOT BE SAID TO B E A DEBT THAT IT WOULD HAVE COME INTO THE BALANCE-SHEET AS A TRADING DEBT IN THE TRADE NOR CAN IT BE SAID THAT IF THIS DEBT HAD BEEN PAID BACK BY THE DUNDAS TO THE ASSESSEE COMPANY, IT WOULD HAVE COME IN TO SWELL THE PROFITS OF THIS PARTICULAR BUSINESS. THIS IS THE TEST WHICH APPEALED TO THE SUPREME COURT IN COMMISSIONER OF INCOME-TAX VS. ABDULABHAI ABDULKADA R (SUPRA) A. V. AND THOMAS & CO. LTD. V. COMMISSIONER OF INCOME-TAX (SUPRA). THIS AMOUNT OF RS. 1,78,523 IF RECOVERED COULD NEVE R HAVE RESULTED IN THE SWELLING OF THE PROFITS BUT WOULD HAVE MEAN REPAYM ENT OF THE MONEYS ADVANCED BY THE ASSESSEE COMPANY TO DUNDAS. THEREFO RE, IN OUR OPINION THE TRIBUNAL WAS NOT RIGHT IN HOLDING THAT THE AMOUNT OF RS.1,78,523 COULD BE TREATED AS A BAD DEBT COVERED BY SECTION 36(L)(VII) OF THE ACT OF 1961. WE MAY POINT OUT THAT TH E DECISIONS WHICH WERE RELIED UPON BY MR. KAJI, NAMELY, IN ESSEN PVT. LT D. V. COMMISSIONER OF INCOME-TAX, (1967) 65 I.T.R. 625 AND COMMISSIONER O F INCOME-TAX V. 10 MYSORE SUGAR CO. LTD., (1962) 46 I.T.R. 649 DO NOT LAY DOWN ANY TESTS DIFFERENT FROM THE TESTS WHICH WE HAVE CULLED OUT FROM THE DECISIONS ALREADY REFERRED TO. THE OTHER TWO DECISIONS OF THE BOMBAY HIGH COURT WHICH WERE ALSO RELIED UPON BY MR. KAJI, NAMELY, THE DECISIO N IN COMMISSIONER OF INCOME-TAX V. F.N. CHINOY & CO PVT. LTD., (1969) 74 I.T.R. 780 AND TJ. LALVANIV. COMMISSIONER OF INCOME-TAX. (1970) 78 I.T .R. 176 ARE NOT OF MUCH USE TO US IN DECIDING THE QUESTIONS BEFORE US IN THE LIGHT OF THE TESTS WHICH WE HAVE CULLED OUT FROM THE DIFFERENT DECISIO NS OF THE SUPREME COURT AS SET OUT IN THE EARLIER PART OF THIS JUDGMENT. (F) THE HON'BLE HIGH COURT THEN PROCEEDED TO CONSID ER THE QUESTION AS TO WHETHER THE AMOUNT IN QUESTION COULD BE ALLOWED AS TRADING LOSS U/S.28(1) OF THE ACT OR NOT AND AFTER APPLYING THE TESTS LAID DOWN IN THE CASE OF CIT VS. ABDULLABAHI ABDULK ADAS(SUPRA) AS WELL AS OTHER SUBSEQUENT CASES WHICH WE HAVE ALREA DY REFERRED TO IN THE EARLIER PART OF THIS ORDER, CAME TO THE CONCLUS ION THAT THOUGH THE AMOUNT IN QUESTION WAS NOT A BAD DEBT WITHIN THE ME ANING OF SECTION 36(1)(VII) OF THE ACT, BUT IT WAS A TRADING LOSS WI THIN THE MEANING OF SECTION 28(1) OF THE ACT AND CONSEQUENTLY, ANSWERED THE QUESTION NO.(2) IN FAVOUR OF ASSESSEE AND AGAINST THE REVENU E. THE RELEVANT PART OF THE ORDER AS CONTAINED AT PAGE NOS .90 & 91 READS AS UNDER:- ABDULKADAR (SUPRA) AND OTHER SUBSEQUENT CASES CAN IT BE SAID THAT THIS LOSS SPRANG DIRECTLY FROM AND WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE ? ON THE FACTS IN THE INSTANT CASE THE ' TRIBUNAL H AS FOUND IN ITS ORDER THAT THE ASSES-SEE COMPANY'S PRINCIPAL BUSINESS WAS WITH THE DUNDAS. IN PARAGRAPH -3 OF ITS ORDER THE TRIBUNAL HAS HELD THA T THE ASSESSEE WAS COMPLETELY RELYING ON IMPORT LICENCES POSSESSED BY THE DUNDAS FOR IMPORTING GOODS THAT WERE DEALT WITH BY THE ASSESSE E. MOREOVER, THERE WAS ONLY ONE ACCOUNT MAINTAINED BY THE ASSESSEE IN THE NAME OF DUNDAS IN RESPECT OF PURCHASE WHICH THEY WERE MAKING AND ALSO THE AMOUNTS ADVANCED IN PURSUANCE OF THE AGREEMENT OF MAY 1, 19 59. MOREOVER, UNDER THE CLAUSES OF THE AGREEMENT OF MAY 1, 1959, THE AS SESSEE COMPANY AGREED TO ADVANCE MONEYS TO THE EXTENT OF RS. 2 LAKHS TO T HE DUNDAS WITH A VIEW TO SEE THAT DUNDAS WERE ABLE TO PAY OFF THEIR OUTSTAND ING DEBTS AND THUS BE SOLVENT SO THAT THE COMPANY'S PRINCIPAL BU SINESS, NAMELY, DEALING IN GOODS IMPORTED UNDER THE IMPORT LICENCES ISSUED IN FAVOUR OF DUNDAS COULD BE CONTINUED AND BE MADE AVAILABLE TO THE ASSESSEE COMPANY. IN OUR OPINION TAKING TOO NARROW A VIEW OF THIS BUSINESS T RANSACTION WOULD NOT BE A PROPER APPROACH TO THE PROBLEM BEFORE US. IN COMMISSIONER OF INCOME-TAX V. NAINITAL BANK LTD., (SUPRA), AT PAGE 713, THE SUPREME COURT CRITICISED THE MAJORITY OF THE LEARNED JUDGES OF T HE SPECIAL BENCH OF MADRAS HIGH COURT IN RAMSWAMI CHETTIAR V. COMMISSI ONER OF INCOME-TAX 11 I.T.R. 55 MADRAS 904 FOR TAKING WHAT JUSTICE SUBBA RAO CONSIDERED TO BE TOO NARROW A VIEW OF THE PROBLEM. WITHOUT TAKIN G A NARROW VIEW OF THE PROBLEM BEFORE US AND CONSIDERING THE MATTER IN A B ROAD PERSPECTIVE, IT IS CLEAR TO US THAT LOOKING TO THE SPECIAL FACTS OF T HIS CASE, IT WAS ESSENTIAL FOR THE ASSESSEE COMPANY FOR ITS VERY SURVIVAL THAT IT SHOULD ADVANCE THESE MONEYS TO THE DUNDAS BECAUSE THE PRINCIPAL BUSINES S OF THE ASSESSEE COMPANY WAS WITH DUNDAS AND DUNDAS IN THEIR TURN W ERE IMPORTING GOODS FROM UNITED KINGDOM PRINCIPALS UNDER THE IM PORT LICENCES GRANTED BY THE GOVERNMENT. HENCE, IF THE ASSESSEE COMPANY W ANTED ITS BUSINESS TO CONTINUE IT WAS ESSENTIAL FOR IT TO SEE THAT THE DU NDAS ALSO SURVIVED AS A TRADING ORGANIZATION AND AS A BUSINESS ENTITY. I T WAS FOR THIS PURPOSE, THEREFORE, THAT WITH A VIEW TO SECURING ITS VERY SU RVIVAL THAT THE ASSESSEE COMPANY ADVANCED MONEYS TO THE DUNDAS AND THE AMOU NT OF RS. 1,78,523 REMAINED OUT STANDING IN CONNECTION WITH THESE ADVANCES. THEREFO RE, IT MUST BE HELD ON THE FACTS OF THIS CASE THAT THE DEBT OWE D BY THE DUNDAS TO THE ASSESSEE WAS A DEBT WHICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSESSEE COMPANY AND WAS INCIDENTAL TO IT. IT WAS NOT A DEBT MERELY CONNECTED WITH THE BUSINESS OF THE ASSESSEE. AS THE SUPREME COURT HAS POINTED OUT IN COMMISSIONER OF INCOME-TAX V. NAINITAL BANK LTD, (S UPRA), IN EACH CASE IT IS A QUESTION OF FACT TO BE DECIDED ON THE FACTS OF THE PARTICULAR CASE WHETHER A LOSS IS IDENTICAL TO THE OPERATION OF THE BUSINESS AND O N THE FACTS AND IN THE CIRCUMSTANCES OF THE PRESENT CASE THE INEVITABLE IN FERENCE IS THAT THE LOSS INCURRED BUSINESS TRANSACTION THE ASSESSEE COMPANY WAS A LOSS IDENTICAL TO THE OPERATION OF THE BUSINESS OF THE ASSESSEE AND SPRAN G DIRECTLY FROM THE CARRYING ON OF ITS BUSINESS. UNDER THESE CIRCUMSTANCES, APPL YING THE TESTS LAID DOWN BY THE SUPREME COURT IN THE CASES REFERRED TO HEREIN-A BOVE, IT MUST BE HELD THAT THOUGH THIS WAS NOT A WITHIN THE MEANING OF SECTION 36(1)(VII) OF THE ACT OF 1961, IT WAS A TRADING LOSS WITHIN THE MEANING OF SECTION 28(1) IN THE LIGHT OF THE TESTS LAID DOWN BY THE SUPREME CO URT IN BADRIDAS DAGA V. COMMISSIONER OF INCOME-TAX (SUPRA) AND COMMISSION ER OF INCOME-TAX V. ABDULLABHAI ABDULKADAR (SUPRA) AND OTHER C ASES REFERRED TO ABOVE. WE, THEREFORE, ANSWER THE QUESTIONS REFERRED TO US AS FOLLOWS : QUESTION (1) NOT PRESSED BY THE ASSESSEE AT WHOSE INSTANCE IT WAS REFERRED TO US. QUESTION (2) IN THE AFFIRMATIVE AND IN FAVOUR OF T HE ASSESSEE ON THE GROUND THAT IT WAS A TRADING LOSS. THE COMMISSIONER WILL PAY THE COSTS OF THIS REFEREN CE TO THE ASSESSEE. (II)DECISION OF HON'BLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. CIT VS. ABDUL RAZAK & CO. (136 ITR 825)[GUJ.]. 12 (A) THE BRIEF FACTS IN THIS CASE BEFORE THE HON'BLE HIGH COURT AS HAVE BEEN REVEALED FROM THE RECORDS WERE THAT THE ASSESSEE, M/S. ABDUL RAZAK & COMPANY OF DHORAJI, CARRIES ON BUSINE SS AS COMMISSION AGENTS AS WELL AS DEALERS IN GROCERY ART ICLES HAVING THEIR HEAD OFFICE AT DHORAJI AND BRANCHES AT BOMBAY, MANG ALORE, VERAVAL AND CHORVAD. IN THE COURSE OF ASSESSMENT FOR THE AS SESSMENT YEAR 1967-68, THE ASSESSEE, INTER ALIA, MADE A CLAIM BEF ORE THE ITO FOR BAD DEBT OF RS. 78,824 IN RESPECT OF THE AMOUNT DUE FROM M/S. MOHMAD PEER MOHMAD OF NASIK. THE ITO DISALLOWED THE CLAIM ON THE GROUND THAT THE IMPUGNED DEBT WAS NEITHER INCUR RED IN THE COURSE OF MONEY-LENDING NOR IN THE COURSE OF COMMISSION AG ENCY. THE ITO NOTED THAT THE BAD DEBT WAS WRITTEN OFF FROM THE BO MBAY BOOKS OF THE ASSESSEE-FIRM. THE MAIN SOURCE OF THE INCOME AT BOM BAY AROSE FROM THE COMMISSION AGENCY AND DEALINGS IN GROCERY ARTICLES. THE ITO ALSO REFERRED IN THAT CONNECTION TO THE COURSE OF BUSINESS OF COMMISSION AGENCY, WHERE THE ASSESSEE-FIRM HAD TO A DVANCE MONEY TO THE CONSTITUENTS AGAINST THE GOODS RECEIVE D FROM THEM FOR SALE ON COMMISSION BASIS AND THE ADVANCE FROM TIME TO TIME WERE ADJUSTED TOWARDS THE SALE PROCEEDS OF SUCH GOODS. T HE CONSTITUENTS WERE REQUIRED TO PAY INTEREST TO THE ASSESSEE ON SU CH ADVANCES. THE ITO ANALYSED THE INTEREST INCOME AND FOUND THAT OUT OF THE TOTAL INCOME FOR THE ASSESSMENT YEAR IN QUESTION OF RS. 2 ,39,345, 87 PER CENT. INTEREST WAS ATTRIBUTABLE TO ADVANCE IN THE C OURSE OF COMMISSION BUSINESS, 7 PER CENT. IN RESPECT OF FEES FROM THE VERAVAL BRANCH AND THE BALANCE WAS FROM TRADERS AND BANKERS . THE NET AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT ON AC COUNT OF INTEREST WAS TO THE TUNE OF RS. 30,288 AFTER ADJUSTING INTER EST RECEIPT OF RS. 2,39,345 AGAINST THE INTEREST PAYMENT OF RS. 2,69,6 34 BY THE ASSESSEE-FIRM. THE ITO, THEREFORE, CONCLUDED THAT T HE INTEREST EARNED BY THE ASSESSEE-FIRM WAS IN THE COURSE OF CO MMISSION AGENCY BUSINESS AND NOT FROM THE MONEY-LENDING BUSI NESS. THE ITO THEREAFTER PROCEEDED TO EXAMINE THE TWO SETS OF ACC OUNTS OF M/S. MOHMAD PEER MOHMAD OF NASIK IN THE TRADING BOOKS OF THE ASSESSEE-FIRM; ONE SET WAS-COMPRISING OF TRADING AC COUNTS AND ANOTHER WAS PERTAINING TO MONEY-LENDING ACCOUNT WHI CH WAS STYLED AS SARAFI ACCOUNT WITH THE SAID FIRM OF M/S. MOHMAD PEER MOHMAD OF NASIK. IT IS AN ADMITTED POSITION THAT THE TRADING ACCOUNT OF M/S. MOHMAD PEER MOHMAD OF NASIK FOR ASSESSMENT YEARS 19 63-64 TO 1967-68 WERE SETTLED. THE SECOND ACCOUNT WHICH WAS SARAN ACCOUNT DISCLOSED THAT AT THE FOOT OF EVERY ACCOUNTING YEAR THERE WAS A DEBIT BALANCE AND ESPECIALLY FOR THE ASSESSMENT YEAR 1967 -68 FOR WHICH THE RELEVANT PREVIOUS YEAR WAS THE ACCOUNTING YEAR ENDING ON 31ST JULY, 1966, THERE WAS A DEBIT BALANCE OF RS. 76,824 IN THAT ACCOUNT. IT SHOULD BE NOTED THAT AT THE END OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1965-66, THERE WAS A DEBIT BALANCE OF ONLY RS. 13 2,003 BUT IN THE COURSE OF THE ACCOUNTING YEAR WHIC H WAS THE RELEVANT PREVIOUS YEAR TO ASSESSMENT YEAR 1966-67, AN ADVANCE OF RS. 81,135 WAS MADE AGAINST WHICH AN AMOUNT OF RS. 10,505 WAS PAID IN THE SAID YEAR LEAVING A DEBIT BALANCE OF RS . 72,633 WHICH WAS CARRIED FORWARD TO THE NEXT ACCOUNTING YEAR WHICH W AS RELEVANT TO ASSESSMENT YEAR 1967-68. IT IS SAID THAT THE ASSESS EE HAD REMITTED A SUM OF RS. 62,000 IN THE ACCOUNTING YEAR RELEVANT T O THE ASSESSMENT YEAR 1966-67 TO M/S. GOKALDAS VIRJIBHAI OF SANGLI A T THE BEHEST OF M/S. MOHMAD PEER MOHMAD OF NASIK IN ORDER TO SAVE T HE SAID FIRM FROM THE CONSEQUENCES ARISING AS A RESULT OF THEIR INABILITY TO PAY TO THE SAID M/S. GOKALDAS VIRJIBHAI OF SANGLI. THE ITO , THEREFORE, HELD THAT THE DEBT WAS NOT A BAD DEBT WHICH COULD BE ALL OWED IN COMPUTING THE ASSESSEE'S TOTAL INCOME. THE ASSESSEE, THEREFORE, CARRIED THE MATTER IN APPE AL BEFORE THE AAC WHO UPHELD THE VIEW OF THE ITO THAT THE DEBT CO ULD NOT BE SAID TO BE ONE ARISING IN THE COURSE OF THE ASSESSEE'S B USINESS, BUT GRANTED A PARTIAL RELIEF BY REDUCING IT BY RS. 4,39 6, BEING THE AMOUNT OF INTEREST CHARGED IN THIS ACCOUNT WHICH THE ASSES SEE HAD NOT RECEIVED. THE ASSESSEE, THEREFORE, CARRIED THE MATTER IN FURT HER APPEAL BEFORE THE APPELLATE TRIBUNAL. THE TRIBUNAL ADDRESSED ITSE LF TO TWO QUESTIONS., FIRSTLY, WHETHER THE IMPUGNED DEBT COUL D BE SAID, TO BE A BAD DEBT AND ALLOWABLE UNDER S. 36(2) OF THE I.T. A CT, 1961, AND, SECONDLY, IN THE ALTERNATIVE, WHETHER THE IMPUGNED LOSS COULD BE SAID TO BE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. T HE TRIBUNAL WAS OF THE OPINION THAT HAVING REGARD TO THE FACT THAT THE ASSESSEE HAD BEEN ADVANCING VARIOUS AMOUNTS TO VARIOUS PARTIES ON SAR AFI ACCOUNTS AND EARNING INTEREST ON SUCH ADVANCES, THE SAID ACTIVIT Y COULD NOT BE SAID TO BE A PART OF THE COMMISSION AGENCY BUSINESS CARR IED ON BY THE ASSESSEE. THE TRIBUNAL ALSO EXAMINED THE PARTICULAR ADVANCES MADE BY THE ASSESSEE-FIRM TO M/S. MOHMAD PEER MOHMAD OF NASIK AND CONCLUDED THAT THESE ADVANCES COULD NOT BE SAID TO BE MADE IN THE ORDINARY COURSE OF BUSINESS OF MONEY-LENDING AND, T HEREFORE, THE ASSESSEE'S CLAIM FOR WRITING OFF THE BAD DEBT ARISI NG OUT OF THE MONEY-LENDING BUSINESS WAS NOT SUSTAINABLE. THE TRI BUNAL, THEREFORE, ADDRESSED ITSELF TO THE ALTERNATIVE QUES TION WHETHER THE AMOUNT OF LOSS COULD BE ALLOWED AS INCIDENTAL TO TH E BUSINESS UNDER S. 28 OF THE I.T. ACT, 1961. THE TRIBUNAL HAVING RE GARD TO THE FACT THAT THE ASSESSEE BAD ADMITTEDLY DEALINGS WITH M/S. MOHM AD PEER MOHMAD OF NASIK, AND, SINCE THERE WAS NO EVIDENCE T O SUGGEST THAT ANY PARTNER OF THE SAID DEBTOR-FIRM WAS RELATED TO THE PARTNER OF THE ASSESSEE-FIRM, HELD THAT THE IMPUGNED LOSS SHOULD B E ALLOWED AS DEDUCTION UNDER S. 28 OF THE SAID ACT, BECAUSE THE SAID M/S. 14 MOHMAD PEER MOHMAD OF NASIK HAD APPROACHED THE ASSE SSEE-FIRM TO PAY THE AMOUNT TO M/S GOKALDAS VIRJIBHAI OF SANG LI. AT THE INSTANCE OF THE REVENUE, THEREFORE, THE FOLLOWING Q UESTION IS REFERRED TO US FOR OUR OPINION: ' WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE IMPUG NED LOSS OF RS. 76,824 SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTI ON 28 OF THE INCOME-TAX ACT, 1961, AS LOSS INCIDENTAL TO THE ASS ESSEE'S BUSINESS?' THE ASSESSEE ALSO REQUESTED THE TRIBUNAL IN THE COU RSE OF ITS OPPOSITION FOR MAKING A REFERENCE AS PRAYED FOR BY THE REVENUE THAT IN CASE THE TRIBUNAL DECIDES TO REFER THE QUESTION AS PRAYED FOR BY THE REVENUE, THE FOLLOWING QUESTION SHOULD BE REFER RED TO THIS COURT FOR ITS OPINION. THE TRIBUNAL GRANTED THAT PRAYER O F THE ASSESSEE IN VIEW OF THE DECISION OF THIS COURT IN SMT. DHIRAJBE N R. AMIN V. CIT [1968] 70 ITR 194 AND HAS REFERRED THE SAME TO THIS COURT, WHICH IS AS UNDER: 'WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ADVANCE TO MOHMAD PEER MOHMAD WAS NOT IN THE ORDINARY COURSE O F MONEY- LENDING BUSINESS?. (B) IT WAS, IN VIEW OF THE ABOVE FACTS AND CIRCUMST ANCES OF THE CASE, THAT THE HON'BLE HIGH COURT LAID DOWN THE FOLLOWING PROPOSIT ION O LAW. IN VIEW OF THE WELL-ACCEPTED LEGAL PRINCIPLES WITH REGARD TO COMMISSION AGENCY, BY NECESSARY IMPLICATION, EITHER SHORT-TERM OR LONG-TE RM FINANCING IS AN INTEGRAL PART OF THE COMMISSION AGENCY BUSINESS. AS A COMMISSION AGE NT, ONE EITHER BUYS GOODS OR SELLS THE GOODS FOR ONE'S PRINCIPAL. WHEN HE ACTS A S A COMMISSION AGENT FOR SALES OF GOODS, HE ADVANCES THE AMOUNT TO HIS PRINCIPAL AND ADJUSTS THE SALE PROCEEDS AGAINST SUCH ADVANCES. WHEN HE ACTS AS A COMMISSION AGENT F OR BUYING THE GOODS, HE PURCHASES THE GOODS FOR SUPPLY TO HIS PRINCIPAL FRO M HIS FUNDS AND THEN HE IS REIMBURSED BY HIS PRINCIPAL ON SUPPLY OF SUCH GOODS . A COMMISSION AGENT, THEREFORE, HAS TO ADVANCE AMOUNTS FROM TIME TO TIME ACCORDING TO THE NATURE OF HIS BUSINESS. IT, MAY BE A SHORT-TERM ADVANCE IF HE IS A COMMISSION A GENT FOR THE PURCHASE OF THE GOODS OR IT MAY BE A LONG-TERM ADVANCE IF IT IS FOR THE SALE OF THE GOODS. (C) AFTER HAVING LAID DOWN THE AFORESAID PROPOSITIO N OF LAW/TESTS FOR ALLOWANCE OF THE DEDUCTION, IN THE CASE OF COMMISS ION AGENT, AS BAD DEBT OR TRADING LOSS, HELD THAT THE DEBT OWED BY M/ S.M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSE SSEE AND WAS ALLOWABLE AS BAD DEBT AND, CONSEQUENTLY, THEREFORE AS A TRADING LOSS 15 U/S.28(1) OF THE ACT AND THE RELEVANT PART (HEAD N OTES) READS AS UNDER:- ON THE FACTS, THAT THE TRIBUNAL HAD OVERLOOKED THE STATEMENTS OF THE ASSESSEE AND THE DEBTOR-FIRM WHERE IT HAD BEEN CLEARLY STATED THAT T HESE ADVANCES WERE ASKED FOR AND MADE IN FACT, HAVING REGARD TO THE COMMERCIAL RELAT IONS BETWEEN THE PARTIES AND THE COMMERCIAL RELATIONS WERE ADMITTEDLY OF PRINCIPAL A ND COMMISSION AGENTS. THE TRIBUNAL WAS NOT JUSTIFIED IN HOLDING THAT THE ADVA NCE TO M/S. M.P. WAS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE-FIRM. T HE DEBT OWED BY M/S. M.P. WAS ONE WHICH SPRANG DIRECTLY FROM THE BUSINESS OF THE ASSE SSEE AND WAS ALLOWABLE AS A BAD DEBT AND CONSEQUENTLY, THEREFORE, AS A TRADING LOSS UNDER S. 28(1). (III)DECISION OF HON'BLE CALCUTTA HIGH COURT IN TH E CASE OF CIT VS. W. HOWRAH AND CO.(P) LTD. (194 ITR 345)[CAL.] THE FACTS OF THE CASE AS WERE BEFORE THE HON'BLE H IGH COURT WERE THAT ONE OF THE ACTIVITIES OF THE ASSESSEE WAS ACT ING AS PRINCIPAL BROKER SUPPLY OF JUTE TO JUTE MILLS. THE ASSESSEE E NTERED INTO CONTRACTS WITH THE JUTE MILLS FOR THAT PURPOSE. UND ER SUCH CONTRACTS, THE ASSESSEE TO BEAR 50 PER CENT, OF THE LOSS ARISI NG TO THE JUTE MILLS ON ACCOUNT OF FAILURE OF SUPPLIES OF JUTE. THE ASS ESSEE CLAIMED DEDUCTION OF LOSS THE CONTRACTS AMOUNTING TO RS.72, 141/- IN THE ASSESSMENT YEAR 1961-62. THE INCOME-TAX OFFICER DI SALLOWED THE CLAIM BUT THE TRIBUNAL ALLOWED IT. ON REFERENCE, T HE HON'BLE HIGH COURT ALLOWED THE ASSESSEES CLAIM BY OBSERVING AS UNDER:- HAVING REGARD TO THE NATURE OF THE BUSINESS ACTIVI TIES OF THE ASSESSEE AND THE NATURE OF AGENCY BUSINESS, THE AMO UNT OF LOSS INCURRED DURING THE COURSE OF SUCH BUSINESS ACTIVIT IES MUST BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME FROM T HE ASSESSEES BUSINESS . (IV) DECISION OF HON'BLE MADRAS HIGH COURT IN THE C ASE OF CIT VS. CRESCENT FILMS (P.) LTD. (248 ITR 670)[MAD.]. (A) THE BRIEF FACTS OF THE CASE AS HAVE BEEN OBSERV ED FROM THE HEAD NOTES ARE AS UNDER:- THE ASSESSEE WHICH CARRIED ON THE BUSINESS OF DISTR IBUTION OF FILMS HAD PAID RS.7,50,000 TO THE PRODUCER FOR DISTRIBUTIO N RIGHTS FOR A FILM UNDER PRODUCTION. THE PRODUCER HAVING RUN INTO DIFFICULT Y AND FINDING HIMSELF IN A SITUATION WHERE HE WOULD BE UNABLE TO COMPLETE THE FILM REQUESTED THE ASSESSEE LEND HIM A SUM OF RS.1,10,000 WHICH SUM WAS TO BE DEALT WITH IN A MANNER DIFFERENT FROM THE MANNER IN WHICH THE SUM OF RS.7,50,000 PAID EARLIER AS CONSIDERATION FOR THE DISTRIBUTION RIGHTS OF THE FILM WAS TO BE TREATED. THESE SUMS WERE ULTIMATELY NOT REPAID TO T HE ASSESSEE AND THE 16 ASSESSEE CLAIMED THEM AS A TRADE LOSS. THE INCOME-T AX OFFICER REJECTED THE CLAIM BUT THE TRIBUNAL ALLOWED IT. (B) THE HON'BLE HIGH COURT IN VIEW OF ABOVE FACTS, LAID DOWN THE FOLLOWING PROPOSITION OF LAW/TESTS FOR ALLOWANCE OF DEDUCTION OF THE NATURE INVOLVED IN THIS CASE AND THE SAME, AS NOTED FROM THE HEAD NOTES, READ AS UNDER:- IN ANY BUSINESS CREDIT IS AN INDISPENSIBLE PART A ND ADVANCES OF A TEMPO- RARY NATURE WITH OR WITHOUT INTEREST ARE A COMMON I NCIDENT OF BUSINESS. IT IS NOT. NECESSARY THAT EVERY BUSINESS SHOULD REGISTER ITSELF UNDER THE MONEY LENDERS ACT AND MAKE A CLAIM IN RELATION TO ANY ADV ANCE MADE BY IT ONLY IN THE CAPACITY OF A PERSON CARRYING ON MONEY LENDI NG BUSINESS. IT IS ALSO NOT POSSIBLE TO AGREE WITH THE SUBMISSION THAT ANY MONEY SPENT TO SALVAGE THE CAPITAL WOULD AUTOMATICALLY RESULT IN IMPRESSIN G THE MONEY SO SPENT WITH THE CHARACTER OF CAPITAL EXPENDITURE. IF THE N ATURE OF THE EXPENDITURE OR THE NATURE OF THE TRANSACTION IS SUCH AS TO BE REGA RDED AS ONE IN THE REVENUE FIELD, IT CANNOT BE TREATED AS CAPITAL, MER ELY BECAUSE SUCH EXPENDITURE WAS INCURRED FOR THE PURPOSE OF SALVAGI NG THE CAPITAL. A DECISION IS TO BE REGARDED AS A PRECEDENT FOR ITS RATIO DECIDENDI AND NOT FOR THE FACTS IN RELATION TO WHICH SUCH RATIO WAS L AID DOWN. THE RATIO OF CIT V. COIMBATORE PICTURES (P.) LTD. [1973] 90 ITR 452 (MAD) IS THAT BEFORE A DEDUCTION CAN BE CLAIMED ON THE GROUND OF BUSINESS LOSS, THE LOSS SHOULD HAVE BEEN INCURRED IN THE COURSE OF BUSINESS, AND I T SHOULD BE IN THE NATURE OF REVENUE LOSS. (C) THE HON'BLE HIGH COURT, AFTER HAVING LAID DOWN THE AFORESAID PROPOSITION OF LAW/TESTS FOR ALLOWANCE OF DEDUCTIO NS OF THE NATURE INVOLVED THEREIN, ALLOWED THE ASSESSEES CLAIM AS T RADING LOSS AND THE RELEVANT PART AS NOTED FROM HEAD NOTES IS AS UN DER:- HELD, THAT IN THE INSTANT CASE, THE SUM OF RS 7,50 ,000 PAID BY THE DISTRIBUTOR WOULD HAVE BEEN LOST TO THE ASSESSEE, H AD THE PICTURE NOT BEEN COMPLETED. IN ORDER TO ENSURE THAT THE PICTURE WAS COMPLETED, THE ASSESSEE HAD AGREED TO LEND MONEY AND THAT LENDING WAS A SEPARATE TRANSACTION AND WAS NOT PART OF THE DISTRIBUTION AR RANGEMENT. THE MONEY SO LENT HAVING BECOME IRRECOVERABLE BY REASON OF TH E PICTURE FAILING AT THE BOX OFFICE AND THE PRODUCER BEING UNABLE TO REPAY H IS DEBTS, THE MONEY SO LOST TO THE ASSESSEE WAS RIGHTLY HELD BY THE COMMIS SIONER AND THE TRIBUNAL TO BE A TRADING LOSS. (V) DECISION OF ITAT MUMBAI BENCH IN THE CASE OF M AHESH J.PATEL VS. ASSTT.CIT (2008) [297 ITR (AT) 74 (MUMB AI)]. (A) THE FACTS RELATING TO THE ISSUE OF CLAIM OF BAD DEBTS WERE THAT THE ASSESSEE'S CLAIM OF DEDUCTION OF DEBTS OWED BY THREE PERSONS 17 WRITTEN OFF TO THE EXTENT OF RS.26,50,168 WAS NOT A LLOWED. ONE OF THESE DEBTS WAS OWED BY A PEON OF THE ASSESSEE WHOS E SERVICES HAD BEEN TERMINATED AS HE WAS FOUND TO HAVE STOLEN SOME SHARE CERTIFICATES, AND IT WAS DISALLOWED BECAUSE THE ASS ESSEE HAD NOT FILED A POLICE COMPLAINT. THE SECOND WAS OWED BY A WHO ALSO HAD BEEN A MEMBER OF THE DELHI STOCK EXCHANGE AND REGUL ARLY DEALING WITH THE ASSESSEE, BUT AFTER HIS DEATH, CERTAIN AMO UNTS COULD NOT BE RECOVERED FROM HIM. THE ASSESSING OFFICER DID NOT A LLOW THE DEDUCTION FOR WANT OF EVIDENCE THOUGH THE TRANSACTI ONS WITH A WERE DULY RECORDED IN THE BOOKS OF ACCOUNT OF THE ASSESS EE. THE THIRD DEBT WAS OWED BY A COMPANY D WHICH HAD BEEN NOTIFIE D BY THE SPECIAL COURT UNDER THE SPECIAL COURT (TRIAL OF OFF ENCES RELATING TO TRANSACTIONS IN SECURITIES) ORDINANCE, 1992. THE AS SESSING OFFICER DID NOT ALLOW THE ASSESSEE'S CLAIM ON THE GROUNDS T HAT EVEN AFTER D HAD BEEN NOTIFIED BY THE SPECIAL COURT, THE ASSESS EE CONTINUED TO HAVE TRANSACTIONS WITH IT, THAT THE ASSESSEE HAD BO TH LOAN AND TRADING ACCOUNTS, THAT THE AMOUNTS WRITTEN OFF HAD NOT BEEN OFFERED FOR TAX AS INCOME IN ANY OF THE PREVIOUS YEARS INCL UDING THE CURRENT YEAR AND THAT THE ASSESSEE'S CLAIM WAS PRE-MATURE U NTIL THE FINAL VERDICT OF THE SPECIAL COURT. THE ASSESSEE PURCHAS ED AND SOLD CERTAIN SHARES FOR A COMPANY L AND CLAIMED LOSS ON THOSE TRANSACTIONS. THE ASSESSING OFFICER FOUND THAT THOS E TRANSACTIONS WERE CARRIED OUT WITHOUT TAKING ACTUAL DELIVERY OF SHARES BY THE CLIENT, THAT THE ASSESSEE PAID THE DIFFERENCE OF SALE AND P URCHASE AMOUNTS TO L SEVERAL MONTHS BEFORE THE ACTUAL TRANSACTION A ND THAT SHOWED THAT ONLY PAPER ENTRIES HAD BEEN CREATED AND HOLDIN G THAT THOSE WERE NOT GENUINE TRANSACTIONS, DISALLOWED THE ASSESSEE'S LOSS ENTIRELY. SIMILARLY, THE ASSESSING OFFICER DISALLOWED LOSS ON CERTAIN TRANSACTIONS OF VARIOUS COMPANIES HOLDING THESE TRA NSACTIONS WERE NOT GENUINE AND ENTERED INTO THROUGH A BROKER FOR M ERE PAPER TRANSACTIONS. (B) IT WAS, IN VIEW OF THE ABOVE FACTS AND CIRCUMS TANCES OF THE CASE, THAT THE HON'BLE TRIBUNAL ALLOWED THE ASSESSEES CL AIM BY OBSERVING AS UNDER:- HELD, PER S. C. TIWARI (ACCOUNTANT MEMBER) AND T. K. SHARMA (JUDICIAL MEMBER) (I) THAT LOSS ARISING TO THE ASSESSEE IN TH E REVENUE FIELD ON ACCOUNT OF NON-RECOVERY OF BUSINESS DEBTS IS ALLOWA BLE AS DEDUCTION EVEN IF IT DOES NOT FALL IN THE CATEGORY OF SECTION 36(2 )(I). THE ASSESSING OFFICER WAS WRONG IN TAKING THE VIEW THAT THE ASSESSEE SHOU LD HAVE MADE A POLICE COMPLAINT IN ORDER TO BE ELIGIBLE FOR DEDUCTION. TH E DEBT DUE FROM THE PEON WAS TO E DEDUCTED. 18 (II) THAT AS THE ASSESSEE'S TRANSACTIONS WITH A WER E RECORDED IN THE BOOKS OF ACCOUNT AND ALL DETAILS PERTAINING TO THE DEBT I N QUESTION COULD BE FOUND THERE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN H OLDING THAT THERE WAS NO EVIDENCE AS TO BAD DEBT. IN THE ABSENCE OF ANY MATE RIAL TO THE CONTRARY, THE LESSEE'S CLAIM TO DEDUCTION COULD NOT BE REJECT ED. (III) THAT ALTHOUGH THE UNPAID PURCHASE PRICES OF S HARES OF D DID NOT FULFILL THE REQUIREMENT OF SECTION 36(2)(I) THE BAD DEBT OF SUCH NATURE WAS AN INTEGRAL PART OF THE BUSINESS THAT THE ASSESSEE CAR RIED ON. AS A BROKER, THE ASSESSEE WAS RESPONSIBLE FOR SATISFACTION OF THE DE BT OF THE SELLER IN THE EVENT OF THE PURCHASER DEFAULTING. THE LOSS HAD, T HEREFORE, ARISEN IN THE ORDINARY COURSE OF BUSINESS OF BROKERAGE. THE ASSES SEE WAS ENGAGED IN ADVANCING MONEY WITH A VIEW TO EARN INTEREST INCOME . THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1993-94, DID NOT C ONSTITUTE A PRECEDENT BECAUSE FULL FACTS OF LE ASSESSEE WERE NOT PRESENTE D BEFORE THE TRIBUNAL. ANY BUSINESS LOSS OF REVENUE NATURE INCURRED BY THE ASSESSEE ON ACCOUNT OF NON-RECOVERY OF DEBTS IS TO BE ALLOWED AS DEDUCT ION IF NOT AS A BAD DEBT UNDER SECTION 36(L)(VII) THEN AS BUSINESS LOSS UNDE R SECTION 28 OF THE ACT. TO ARGUE THAT LOSS ARISES ONLY WHEN THE DEBTOR COMP ANY IS COMPLETELY LIQUIDATED AND THE LAST PENNY AVAILABLE IS DISTRIBU TED IS UNFAIR AND UNREALISTIC. FOR ALL PRACTICAL PURPOSES, ONCE D WAS NOTIFIED BY THE SPECIAL COURT AND THE INCOME-TAX DEPARTMENT STAKED ITS CLAI M TO THE TUNE OF RS.183 CRORES THE ASSESSEE COULD TAKE INTO CONSIDER ATION THAT A BUSINESS LOSS HAD ARISEN. THE ASSESSEE WAS TO BE ALLOWED DED UCTION AS BUSINESS LOSS HAVING ARISEN TO THE ASSESSEE ON ACCOUNT OF TH E DEBT OWED BY D HAVING BECOME BAD AND IRRECOVERABLE. (IV) THAT THE ASSESSING OFFICER HAD NOT ESTABLISHED THAT THE BROKER WAS MERELY A NAME LENDER AND THE TRANSACTIONS IN QUESTI ON DID NOT TAKE PLACE. THE ALTERNATE CLAIM OF THE ASSESSEE THAT THE LOSSES BE ALLOWED AS SPECULATIVE TRANSACTIONS HAD BEEN KEPT ASIDE WITHOU T ADEQUATE MATERIAL. FROM THE FACT THAT THESE TRANSACTIONS WERE INCURRED WITHOUT ACTUAL DELIVERY THE ASSESSING OFFICER COULD NOT DRAW THE INFERENCE THAT THE TRANSACTIONS WERE NOT GENUINE. THE LOSS CLAIMED SHOULD BE TREATE D AS SPECULATIVE LOSS. THEREFORE, THE ISSUES WERE TO BE RESTORED TO THE FI LE OF THE ASSESSING OFFICER FOR EXAMINATION WHETHER APART FROM NON-DELI VERY OF SCRIPS THERE WAS MATERIAL TO HOLD THAT THE TRANSACTIONS WERE NOT GEN UINE. IF THE ONLY OBJECTION WAS THAT THE PARTY HAD NOT TAKEN ACTUAL D ELIVERY OF THE SHARES, THE LOSS HAD TO BE ALLOWED AT LEAST AS SPECULATIVE LOSS TO BE ADJUSTED AGAINST FUTURE SPECULATIVE PROFITS. 17.1 AFTER HAVING CONSIDERED THE AFORESAID DECISIO NS WITH UTMOST CARE, WE ARE OF THE OPINION THAT THE PROPOSITION OF LAW/TESTS LAID DOWN IN THE AFORESAID DECISIONS, IN OUR OPINION, ARE AS UNDER:- 19 (I) BEFORE DEDUCTION CAN BE CLAIMED ON THE GROUND OF TRADING BUSINESS LOSS, THE LOSS SHOULD HAVE BEEN INCURRED IN THE COURSE OF BUSINESS AND IT SHOULD BE IN THE NATURE OF REVENUE LOSS. (II)BEFORE THE DEDUCTION CAN BE CLAIMED ON THE GRO UND OF BUSINESS EXPENDITURE, THE EXPENDITURE SHOULD HAVE BEEN INCUR RED IN THE COURSE OF BUSINESS OR SHOULD BE SO INTIMATE TO THE CARRYING ON THE BUSINESS THAT WITHOUT INCURRING SUCH AN EXPENDITURE - EVEN IF IT IS ON CAPITAL ACCOUNTS; THE BUSINESS CANNOT BE CARRIED O N, I.E. THE EXPENDITURE MAY BE ON CAPITAL ACCOUNT OR REVENUE AC COUNT, BUT SHOULD BE INTEGRAL PART OF CARRYING ON OF THE BUSIN ESS AND SHOULD HAVE BEEN INCURRED FOR EARNING PROFIT. (III) BEFORE A DEDUCTION CAN BE CLAIMED AS A BAD D EBT, THE CONDITIONS STIPULATED IN SECTION 36(1)(VII) MAY BE SATISFIED. (IV) THE RATIO OF DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CIT VS. ABDUL RAZAK & CO. (136 ITR 825)[GUJ .]. AND OF BOMBAY TRIBUNAL IN THE CASE OF MAHESH J.PATEL VS. A SSTT.CIT (2008) [297 ITR (AT) 74 (MUMBAI)] IS THAT EVEN IF THE COND ITIONS FOR DEDUCTION OF THE SUM AS BAD DEBT ARE NOT SATISFIED, IT CAN STILL BE CONSIDERED FOR DEDUCTION AS BUSINESS/TRADING LOSS A ND CAN BE ALLOWED AS SUCH PROVIDED, THE SAME IS FOUND TO HAVE BEEN INCURRED DURING THE COURSE OF RUNNING OF ASSESSEES BUSINESS . 17.2. HAVING CONSIDERED THE RIVAL SUBMISSIONS, F ACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND AFORESAID DEC ISIONS, WE ARE OF THE OPINION THAT THERE BEING NO DISPUTE WITH RES PECT TO THE FACTS (I) THAT, THE ASSESSEE WAS CARRYING ON THE BUSINESS OF PURCHASE AND SALES OF SHARES FOR AND ON BEHALF OF VARIOUS CUSTOMERS, ORDERS FOR WHICH WERE RECEIVED THROUGH SUB-BROKERS, IN THE CAPACITY OF MEMBER OF STOCK EXCHANGE, I.E. IN THE CAPACITY OF SHARE BROKE R. (II) THAT, THE ASSESSEE HAD PURCHASED THE SHARES U NDER REFERENCE FOR AND ON BEHALF OF THE THIRD PARTIES IN VOLVED IN THE PRESENT CASE. (III) THAT, THE PURCHASES MADE WERE FOUND TO BE BAD DELIVERIES, I.E. THE SHARES SO PURCHASED WERE FOUND TO BE FORGED/FAKE/STOLEN. 20 (IV) THAT, THE SHARES INVOLVED IN THESE TRANSACTION S WERE AUCTIONED BY THE STOCK EXCHANGE AND ASSESSEE COULD RECOVER ONLY A PART OF ITS PURCHASE PRICE PAID. (V) THAT, HAD THE TRANSACTION BEEN COMPLETED IN THE NORMAL COURSE, THE ASSESSEE WOULD HAVE RECEIVED COMMISSIO N. (VI) THAT, AS PER THE SYSTEM PREVAILING IN THE MARK ET, THE ASSESSEE HAD TO MAKE PAYMENTS FOR SUCH PURCHASES, BEFORE RECEIVING THE AMOUNTS FROM THE FUTURE PURCHASERS, FROM ITS OWN POCKET. (VI) THAT, THE ASSESSEE HAD NOT RECEIVED THE AMOU NTS IN QUESTION FROM THE AFORESAID THREE PARTIES TILL DATE . 17.3. IN VIEW OF ABOVE FACTS AND CIRCUMSTANCES OF T HE CASE, WE, AFTER FOLLOWING THE DECISIONS OF HON'BLE HIGH COURT OF G UJARAT, HIGH COURT OF CALCUTTA, HON'BLE HIGH COURT OF MADRAS AND THE ORDER OF THE ITAT BOMBAY BENCH (SUPRA), ARE OF THE OPINION THAT THE TRANSACTIONS IN QUESTION HAVING BEEN CARRIED ON BY THE ASSESSEE IN NORMAL COURSE OF CARRYING ON ITS BUSINESS, THE NON-RECOVERY OF T HE AMOUNTS PAID BY IT FOR AND ON BEHALF OF ITS CUSTOMERS (PURCHASERS) AND THE DELIVERY HAVING BEEN FOUND TO BE BAD DELIVERIES, THE LOSS SU FFERED BY THE ASSESSEE WAS, A BAD DEBT AND, CONSEQUENTLY, WAS ALL OWABLE AS DEDUCTION ON ACCOUNT OF BAD DEBTS AS WELL AS AS TR ADING LOSS U/S.28(1) OF THE ACT AND, THEREFORE, WE ALLOW THE C LAIM UNDER APPEAL. 18. SO FAR AS ISSUE INVOLVED IN GROUND NO.(IV) IS C ONCERNED, THE CIT(APPEALS) HAS DECIDED THE SAME AS PER HIS FINDI NGS CONTAINED IN PARAGRAPH NOS.10.1 & 10.2 OF THE APPELLATE ORDER, W HICH ARE IN THE FOLLOWING TERMS:- 10.1. BEFORE ME, DURING THE APPELLATE PROCEEDIN GS, THE LD.AR MADE HIS SUBMISSIONS VIDE HIS REPLY DTD. 06.02.04 A ND 15.03.04, AND THE SAME HAVE BEEN EXAMINED. HE HAS ALSO FILED THE DETAILS SHOWING BREAKUP OF ITEMS OF PUNCHING LOSS AND DELIV ERY ERROR BUT COULD NOT JUSTIFY AS TO WHY THIS SHOULD BE ALLOWED. THE NSC HAS LAID DOWN CERTAIN RULES AND NORMS TO REGULATE THE SHARE TRADING BUSINESS AND ANY ONE WHO IS GOING TO FLOUT SUCH RULES AND RE GULATIONS THE PROVISIONS HAS BEEN ELABORATELY LAID DOWN TO IMPOSE A FINE OR PENALTY FOR INFRACTION OF SUCH RULES/REGULATIONS. THE HON 'BLE SUPREME COURT OF INDIA IN THE CASE OF SWADESHI CLOTH MILLS LTD V S. CIT, 233 ITR 199 (SC) HAS CLEARLY LAID DOWN THAT ANY PENALTY PAI D FOR INFRACTION OF LAW IS NOT A PERMISSIBLE DEDUCTION. 21 10.2. AFTER THE PERUSAL OF FINDINGS OF THE A.O, THE SUBMISSION MADE BY THE LD. AR AND ALSO BY RELYING UPON THE ABOVE RE FERRED JUDGEMENTS OF HON'BLE SUPREME COURT OF INDIA I REJE CT THE CONTENTION OF THE APPELLANT AND CONFIRM THE ADDITION AS MADE B Y THE A.O. IN THIS WAY, THIS GROUND OF APPEAL IS DISMISSED. 19. AFTER CAREFUL CONSIDERATION OF THE RIVAL SUBMIS SIONS AND THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS OBSERVE D THAT IT IS NOT CLEAR FROM THE FACTS ON RECORD AS TO WHETHER THE FACTS AN D CIRCUMSTANCES IN QUESTION WAS ON ACCOUNT OF ANY PENALTY OR DURING TH E COURSE OF BUSINESS OR ON ACCOUNT OF INTEREST WHICH HAS BEEN CONSIDERED TO BE COMPENSATORY IN NATURE. CONSEQUENTLY, WE, IN THE INTEREST OF JUSTICE, RESTORE THIS ISSUE BACK TO THE FILE OF ASSESSING OF FICER FOR FRESH DISPOSAL IN ACCORDANCE WITH LAW AND AFTER ALLOWING THE ASSESSEE A PROPER OPPORTUNITY OF BEING HEARD. 20. SO FAR AS ISSUE INVOLVED IN GROUND NO.(V) WHICH RELATES TO LEVY OF INTEREST U/S.234-B & 234-C IS CONCERNED, WE, AF TER HEARING THE PARTIES AND LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE DIRECT THE ASSESSING OFFICER TO ALLOW CONSEQUENTIAL RELIEF , IF ANY, WHILE GIVING EFFECT TO THE TRIBUNALS ORDER. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS T REATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE SUBSEQUENT DECISIONS AS HAS BEEN PLACED BEFORE US IN THE CASE OF PAARKAR SECURITIES V ITO [ITA NO.752/AHD/2004 & 340/AHD/2006, SOUTH GUJARAT SHARE & BROKER LTD. V ITO [ITA NO.1502/AHD/2004], INDIA INFOLINE SECURITIES ( P) LTD. V ACIT 25 SOT 123 (MUM), G R PANDYA SHARE BROKING L TD. V ITO 26 SOT 431 (MUM), ANGEL CAPITAL & DEBT MARKET LTD. V ACIT 118 TTJ 351 (MUM) AND CANNON CAPITAL & FINANCE LTD. V ACIT [ITA NO.1119/AHD/2005] , HAVE ALSO TAKEN SIMILAR VIEW AND NO CONTRARY VIEW HAS BEEN TA KEN THAT DEDUCTION U/S 28(1) IS NOT ALLOWABLE. IN VIEW OF TH E SAID SETTLED POSITION OF LAW AND NO CONTRARY DECISION IS BEING BROUGHT TO OUR KNOWLEDGE OR PLACED ON RECORD, WE AR E OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE ORDE R OF THE CIT(A) AND THE CIT(A), IN OUR OPINION, HAS RIGHTLY ALLOWED THE DEDUCTION TO THE ASSESSEE U/S 28(1) OF THE ACT. WE, THEREFORE, CONFIRM THE ORDER OF THE CIT(A). THUS, G ROUND NO.1 TAKEN BY THE REVENUE STANDS DISMISSED. 22 4 RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THIS TRIBUNAL, WE DISMISS THE APPEAL FILED BY THE REVENU E. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 18-09- 2009 SD/- SD/- (R V EASWAR) VICE-PRESIDENT (P K BANSAL) ACCOUNTANT MEMBER DATE : 18-09-2009 COPY OF THE ORDER FORWARDED TO : 1. HASMUKHLAL M CHOKSHI HUF, 8, NILPAMA SOICIETY, I NSIDE SAURASHTRA SOCIETY, PALDI, AHMEDABAD 2. THE ACIT, CIRCLE-3, AHMDABAD 3. CIT CONCERNED 4. CIT(A)-VII, AHMEDABAD 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABA