IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D,MUMBAI BEFORE SHRI N.V. VASUDEVAN (JM) & SHRI PRAMOD KUMA R (AM) I.T.A.NO.6316/MUM/2009 (A.Y. 2006-07) MR. REJI PHILIP, PROP. COSMOS AGENCIES, 306, 3 RD FLOOR, BNG HOUSE, D.N.ROAD, FORT,MUMBAI-400 001. PAN:AGZPP2135N. VS. ASST. COMMR. OF INCOME-TAX, CIR. 12(1), MUMBAI. APPELLANT RESPONDENT APPELLANT BY SHRI SANJIV M. SHAH. RESPONDENT BY SMT. A SHIMA GUPTA. O R D E R PER PRAMOD KUMAR, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS DIR ECTED AGAINST THE ORDER OF CIT(A) DATED 28-10-2009 IN THE MATTER OF ASSESSMENT U/S.143(3) OF THE I.T. ACT FOR THE ASSTT. YEAR 2006-07. 2. IN THE FIRST TWOS GROUNDS OF APPEAL, THE ASSESSE E HAS RAISED THE FOLLOWING GRIEVANCES : 1. AS PER FACTS AND CIRCUMSTANCES OF THE CASE TH E LEARNED OF COMMISSIONER OF APPEALS ERRED IN CONFIRMING AOS ORDER WITH REGA RDS TO CLAIM OF BAD DEBTS OF RS.34,78,006 DESPIE FULL FILING ALL CONDI TIONS LAID U/S.36(1)(VII). 2. WITHOUT PREJUDICE TO THE CLAIM OF BAD DEBTS AS PER FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED OF COMMISSION ER OF APPEALS ERRED IN NOT TREATING THE BAD DEBTS OF RS.34,78,006 AS BUSINESS LOSS U/S.37(1) OF IT ACT RELYING ON THE CASE ANANG TRADE VEST PVT LTD VS. ITO, ITAT A BENCH, MUMBAI. 3. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE A SSESSEE IS ENGAGED IN BUSINESS AS TRAVEL AGENTS. DURING THE COURSE OF SC RUTINY ASSESSMENT ITA 6316/M/09 REJI PHILIP. 2 PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE HAS CLA IMED BAD DEBTS AMOUNTING TO RS.34,78,006/-. THESE BAD DEBTS WERE DISALLOWED BY THE AO MAINLY ON THE GROUNDS THAT THE DEBTS HAVE NOT BEEN ESTABLISHED TO HAVE BECOME BAD AND THAT, IN ANY CASE, SINCE THE DEBTS ARE IN RESPECT OF TICK ETS ISSUED BY THE ASSESSEE, THE ONLY INCOME COMPONENT WHICH HAS BEEN CREDITED TO HI S ACCOUNTS IN THE PRECEDING YEARS IS WITH REGARD TO COMMISSION ON SUCH TICKETS. THE AO WAS OF THE VIEW THAT IN TERMS OF THE PROVISIONS OF SEC.36(2) WHICH GOVER N THE ALLOWABILITY OF CLAIM U/S.36(1)(VII), UNLESS SUCH DEBT OR PART THEREOF HA S BEEN INCLUDED IN THE COMPUTATION OF INCOME OF PREVIOUS YEAR OR EARLIER Y EARS, IT CANNOT BE ALLOWED AS BAD DEBT U/S. 36(1)(VII). THE AO NOTED THAT THE AM OUNT OF INCOME OFFERED TO TAX BY THE ASSESSEE IS COMMISSION RECEIVED FROM THE PUR CHASE OF TICKETS WHICH IS CALCULATED AT CERTAIN PERCENTAGE ON TOTAL TICKET V ALUE, WHEREAS THE AMOUNT WHICH HAS BEEN WRITTEN OFF AS BAD DEBTS IS THE ENTIRE AMO UNT OF TICKET VALUE. THE AO WAS OF THE VIEW THAT FOR THIS REASON, I.E., ONLY A COMPONENT OF THE AMOUNT OF BAD DEBT HAVING BEEN ACTUALLY OFFERED TO TAX IN THE PRE VIOUS OR PRECEDING YEARS, THE DEDUCTION OF ENTIRE BILLING AMOUNT IS NOT ADMISSIBL E. IT WAS IN THIS BACKDROP THAT THE CLAIM OF BAD DEBTS AMOUNTING TO RS.34,78,006/- WAS DECLINED BY THE AO. 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. WHILE THE CIT(A) DID AGREE WIT H THE ASSESSEE THAT WITH POST AMENDMENT IN SEC. 36(1)(VII) W.E.F. 1-4-1989 IT IS NO LONGER REQUIRED OF THE ASSESSEE TO ESTABLISH THAT THE DEBT HAS ACTUALLY BE COME BAD, THE CIT(A) UPHELD THE AOS OBJECTION ON THE GROUND THAT UNLESS THE AM OUNT WHICH IS CLAIMED AS BAD DEBT IS OFFERED AS INCOME IN THE PREVIOUS OR PRECED ING PREVIOUS YEARS, IN ENTIRETY, THE SAME CANNOT BE ALLOWED AS A DEDUCTION FOR BAD D EBTS. THE CIT(A) AGREED WITH THE AO THAT ONLY COMMISSION COMPONENT ON THE T RAVEL TICKETS HAS BEEN OFFERED TO TAX BY THE ASSESSEE AND THEREFORE THE EN TIRE COST OF TICKETS, EVEN IF IT IS ITA 6316/M/09 REJI PHILIP. 3 ACTUALLY WRITTEN OFF OR HAS BECOME UNRECOVERABLE, C ANNOT BE ALLOWED AS DEDUCTION. THE LD. CIT(A) ALSO REFERRED TO SEVERAL DECISIONS OF THE TRIBUNAL, SUCH AS, INDIA INFOLINE SECURITIES (P) LTD. VS. ACIT (20 08) 25 SOT 123 (MUM.), G.R. PANDYA SHARE BROKING LTD VS. ITO (2008) 26 SOT 431 & B.S. VASA VS. ITO (2008) 26 SOT 462 (MUM.), WHEREIN THE CO-ORDINATE BENCHES OF THE TRIBUNAL DISALLOWED DEDUCTION FOR BAD DEBTS IN RESPECT OF COST OF SHARE SCRIPS ON THE GROUND THAT ONLY COMMISSION EARNING WAS TAKEN INTO COMPUTATION OF IN COME, WHEREAS WHAT WAS CLAIMED AS DEDUCTION WAS ENTIRE VALUE OF SCRIPS. HE THUS UPHELD THE DISALLOWANCE MADE BY THE AO. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFORE US. 5. SHRI SHAH, LEARNED COUNSEL FOR THE ASSESSEE, SUB MITS THAT THE ISSUE IN APPEAL IS NOW SQUARELY COVERED BY THE SPECIAL BENCH DECISION IN THE CASE OF DCIT VS. SHREYAS S. MORAKHIA (41 ITR TRIB 1). IT IS SUBMITTED HAT THE RATIO OF THE SAID DECISION WILL SQUARELY APPLY IN THE PRESENT CA SE ALSO. THE LEARNED COUNSEL SUBMITTED THAT THE REASON FOR WHICH DISALLOWANCE HA S BEEN MADE IN THE CASE OF SHARE BROKERS IS MATERIALLY THE SAME AS IN THE PRES ENT CASE I.E. WHILE INCOME OFFERED IS IN RESPECT OF COMMISSION EARNED BY THE ASSESSEE, THE DEDUCTION CLAIMED FOR BAD DEBT IS IN RESPECT OF THE ENTIRE BI LLING AMOUNT. HE ALSO POINTS OUT THAT THE CIT(A) HAS HIMSELF FOUND PARITY IN THE CAS E OF SHARE BROKERS AND TRAVEL AGENTS. THE LD. COUNSEL ALSO INVITES OUR ATTENTION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT (3 23 ITR 397) WHEREIN THEIR LORDSHIPS HAVE HELD THAT A MERE WRITE OFF OF BAD DE BTS IS GOOD ENOUGH TO CLAIM DEDUCTION FOR DEBTS AND IT IS NO LONGER NECESSARY F OR THE ASSESSEE TO ESTABLISH THAT THE AMOUNT HAS ACTUALLY BECOME BAD. HE HAS THU S URGED TO DELETE THE IMPUGNED DISALLOWANCE AS THE VERY REASONS FOR WHICH THE DISALLOWANCE HAS BEEN MADE BY THE AO, AND SUSTAINED BY THE CIT(A), ARE NO LONGER GOOD LAW. ITA 6316/M/09 REJI PHILIP. 4 6. LEARNED D.R., ON THE OTHER HAND, SUBMITS THAT T HE CASES OF TRAVEL AGENTS AND STOCK BROKERS ARE NOT IN PARI MATERIA. SHE SUB MITS THAT WHILE STOCK BROKERS WORK UNDER REGULATORY CONTROL OF STOCK EXCHANGES AND THEREFORE TRANSACTIONS ENTERED INTO BY THE STOCK BROKERS ARE TO BE GIVEN C REDENCE AND ARE REQUIRED TO BE ACCEPTED AT FACE VALUE, IT IS NOT THE SAME SITUATIO N IN SO FAR AS THE TRAVEL AGENTS ARE CONCERNED. LEARNED D.R. FURTHER INVITES OUR AT TENTION TO VARIOUS CATEGORIES IN WHICH THE IMPUGNED BAD DEBTS HAVE BEEN CLASSIFIED B Y THE ASSESSEE HIMSELF. IN PARTICULAR, IT IS SUBMITTED THAT OUT OF RS.34,78,66 /-, THE BAD DEBTS OF RS.1,49,180/- ARE BECAUSE OF WRONG TICKETS TAKEN BY THE ASSESSEES STAFF, RS.1,24,599/- ARE BAD DEBTS ON ACCOUNT OF STAFF OF THE CLIENTS WHO PURCHASED THE TICKETS LEAVING THE ORGANIZATIONS WITHOUT PRIOR INT IMATION TO THE ASSESSEE, RS.11,95,135/- ARE BAD DEBTS AS THIS AMOUNT PERTAIN ED TO TICKETS ISSUED TO VARIOUS EXECUTIVES, WHO WERE INCIDENTAL IN MOBILIZI NG OF BUSINESS, WHO REFUSED TO PAY THIS AMOUNT ON THE GROUND THAT IT WAS A QUID PR O QUO OF THEIR GENERATING BUSINESS OF THE ASSESSEE, AND FINALLY RS.20,09,092/ - ON ACCOUNT OF DISCONTINUATION OF BUSINESS OR SHIFTING OF OPERATIO NS OR CLOSING DOWN OF BUSINESS DUE TO FINANCIAL CRISIS OF ASSESSEES CLIENTS. IT I S THUS POINTED OUT THAT WHAT HAVE BEEN FOUND AS BAD DEBTS ARE NOT REALLY BAD DEBTS IN ASMUCH AS THESE AMOUNTS REPRESENTED VOLUNTARY WAIVERS BY THE ASSESSEE. BASE D ON THESE ARGUMENTS AND RELYING UPON THE ORDER OF THE AO, THE LD. D.R. URGE S US TO SUSTAIN THE DISALLOWANCE AND DECLINE TO INTERFERE IN THE MATTER . 7. IN HIS REJOINDER, LEARNED COUNSEL FOR THE ASSESS EE SUBMITS THAT IN VIEW OF THE HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF T.R.F. LTD. (SUPRA), IT IS NO LONGER EVEN REQUIRED OF THE ASSESSEE TO DEMONSTRATE THAT AMOUNTS HAVE ACTUALLY BECOME BAD AND UNRECOVERABLE. LEARNED COUNSEL SUBM ITS THAT IT IS AN UNDISPUTED POSITION THAT AMOUNTS HAVE BEEN ACTUALLY WRITTEN OF F IN THE BOOKS OF ACCOUNT AND ITA 6316/M/09 REJI PHILIP. 5 THAT IS ALL WHICH IS NECESSARY TO CLAIM THE DEDUCTI ON OF BAD DEBTS. AS REGARDS THE NATURE OF BUSINESS OF TRAVEL AGENTS VIS-A-VIS THAT OF SHARE BROKERS, LEARNED COUNSEL SUBMITS THAT THE DISTINCTION AS HAS BEEN MADE OUT BY THE LEARNED D.R. IS DEVOID OF ANY MATERIAL DIFFERENCE WHICH GOVERNS THE ISSUE IN APPEAL BEFORE US. IT IS POINTED OUT THAT THE COMMON ELEMENT BETWEEN T HE BUSINESS OF THE TRAVEL AGENTS AND THE BUSINESS OF THE SHARE BROKERS IS THA T IN BOTH THE CASES WHILE THE CLIENT IS BILLED FOR THE ENTIRE AMOUNT OF SHARE OR TICKET, THE AMOUNT WHICH IS ACTUALLY TAKEN INTO THE COMPUTATION OF INCOME IS CO MMISSION EARNED ON THE SAME AND IT IS THIS FACTOR WHICH IS RELEVANT IN THE APPE AL BEFORE US. THERE IS THUS SIGNIFICANT SIMILARITY BETWEEN THE CASES OF STOCK B ROKERS AND TRAVEL AGENTS AND IT IS THIS SIMILARITY WHICH DEALS THE VERY ROOT CAUSE OF IMPUGNED DISALLOWANCE. WE ARE THUS ONCE AGAIN URGED TO DELETE THE IMPUGNED DI SALLOWANCE. 8. WE SEE MERITS IN THE PLEA OF THE ASSESSEE. AS LE ARNED COUNSELS ;RIGHTLY POINTS OUT, SIGNIFICANT SIMILARITY BETWEEN THE CASE S OF TRAVEL AGENTS AND STOCK BROKERS IS THAT WHILE ONLY A SMALL PART OF THEIR C LIENT BILLING GETS INTO THEIR INCOME, THE BAD DEBTS, AS AND WHEN ARISE, ARE IN RE SPECT OF THE ENTIRE BILLING AMOUNT. THE CLAIM OF BAD DEBTS HAS BEEN DECLINED BY THE AUTHORITIES BELOW ONLY ON THE GROUND THAT ENTIRE AMOUNT OF BILLING HAS NOT BEEN TAKEN IN COMPUTATION OF ASSESSEES INCOME, BUT ONLY A SMALL PART THEREOF CO NSTITUTES ASSESSEES INCOME. THIS PLEA HAS, HOWEVER, BEEN REJECTED BY THE SPECIA L BENCH IN THE CASE OF DCIT VS. SHREYAS S. MORAKHIA (SUPRA), WHEREIN IT HAS BEE N HELD THAT THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANS ACTIONS OF THE SHARE BROKER VERY MUCH FORMED PART OF THE DEBT, AND WHEN THE AMO UNT OF SUCH BROKERAGE/COMMISSION HAD BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEAR OR ANY E ARLIER YEAR, IT SATISFIED THE CONDITION STIPULATED IN SEC. 36(2). THE ASSESSEE WA S THUS HELD TO BE ENTITLED TO ITA 6316/M/09 REJI PHILIP. 6 DEDUCTION OF BAD DEBT. IN OUR CONSIDERED VIEW, THE SITUATION IN THE PRESENT CASE IS MATERIALLY SIMILAR INASMUCH AS AMOUNT CREDITED TO A SSESSEES INCOME IS ONLY FOR COMMISSION AND THE BAD DEBT CLAIMED IS FOR THE ENTI RE TICKET AMOUNT. IN THIS VIEW OF THE MATTER, RESPECTFULLY FOLLOWING SPECIAL BENCH DECISION IN SHREYAS S. MORAKHIAS CASE (SUPRA), WE REJECT THE OBJECTIONS S USTAINED BY THE CIT(A). AS REGARDS THE QUESTIONS OF AMOUNT HAVING ACTUALLY BEC OME PAID, AND REFERENCE STO THE CLASSIFICATION OF BAD DEBTS IN VARIOUS CATEGORI ES WHICH ALLEGEDLY SHOWS THAT THE AMOUNTS ARE STILL RECOVERABLE, WE FIND THAT TH IS ISSUE IS COVERED, IN FAVOUR OF THE ASSESSEE, BY HONBLE SUPREME COURTS JUDGMENT I N THE CASE OF TRF LTD. (SUPRA). IN VIEW OF THESE DISCUSSIONS, AS ALSO BEAR ING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE IMPUGNED DISALLOWANCE OF RS.34,78,006/-. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 9. GROUND NOS.1 & 2 ARE THUS ALLOWED IN THE TERMS I NDICATED ABOVE. 10. THAT LEAVE US WITH ASSESSEES GRIEVANCE AGAINST AD HOC DISALLOWANCE @ 10% ON ACCOUNT OF TELEPHONE EXPENSES, CONVEYANCE AN D TAVELLING EXPENSES AND STAFF WELFARE EXPENSES. ONE OF THE REASONS FOR THIS DISALLOWANCE IS THAT THE ASSESSEE IS NOT PAYING ANY FRINGE BENEFIT TAX, BUT IT HAS ALSO BEEN MENTIONED BY THE ASSESSING OFFICER THAT IN THE ABSENCE OF DETAIL S AND SUPPORTING EVIDENCES, PERSONAL EXPENSES CANNOT BE RULED OUT. THE CIT(A) HAS CONFIRMED THE DISALLOWANCE, AGGRIEVED BY WHICH ASSESSEE IS IN APP EAL BEFORE US. HOWEVER, LEARNED COUNSEL HAS ONLY ATTACKED THE OBSERVATIONS ABOUT FRINGE BENEFIT TAX, AND HAS NOT POINTED OUT AS TO WHY PERSONAL BENEFIT TO T HE ASSESSEE, WHO IS AN INDIVIDUAL, IS INCORRECT. LEARNED COUNSEL HAS ALSO NOT MADE ANY ATTEMPTS TO DEMONSTRATE WHETHER DETAILS WERE FURNISHED TO THE A SSESSING OFFICER, OR WHETHER THE ASSESSEES PERSONAL PHONE BILLS ARE PAID SEPARA TELY OR WHETHER ASSESSEE HAS A ITA 6316/M/09 REJI PHILIP. 7 SEPARATE CAR ETC. IN THESE CIRCUMSTANCES, WE SEE N O NEED TO INTERFERE IN THE CONCLUSION ARRIVED AT BY THE CIT(A) AND DECLINE TO DISTURB THE SAME. GRIEVANCE OF THE ASSESSEE IS REJECTED. 11. IN THE RESULT, APPEAL IS PARTLY ALLOWED IN TERM S INDICATED ABOVE. ORDER PRONOUNCED ON THE 24TH DAY OF NOVEMBER, 2010. SD/- SD/- (N.V. VASUDEVAN) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 24TH NOVEMBER , 2010. NG: COPY TO : 1. ASSESSEE. 2. DEPARTMENT. 3 CIT(A)-23,,MUMBAI. 4 CIT-XII,MUMBAI. 5.DR,D BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST .REGISTRAR, ITAT, MUMBAI. ITA 6316/M/09 REJI PHILIP. 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 23-11-2010 SR.PS/ 2 DRAFT PLACED BEFORE AUTHOR 23-11-2010 SR.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.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER