ACIT 22, MUMBAI V. IDFC SSKI SECURITIES LTD, MUMBAI

ITA 8538/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83742 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 17-09-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK BATRA
• Keywords: Speculation loss; Bad and doubtful debts
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER ITA NO. 8538/MUM/2010 ASSESSMENT YEAR: 2007-08 ACIT CC-22 ROOM NO. 403, AAYAKAR BHAVAN MUMBAI VS. M/S. IDFC SSKI SECURITIES LTD. 803/804, TULSIANI CHAMBERS NARIMAN POINT, MUMBAI 400 021 (APPELLANT) (RESPONDENT) PERMANENT ACCOUNT NO. :- AAACK 1586 E ASSESSEE BY : SHRI HIRO RAI REVENUE BY : SHRI VIVEK BATRA DATE OF HEARING : 17 .09.2014 DATE OF PRONOUNCEMENT : 17.09.2014 O R D E R PER DR. S.T.M. PAVALAN, JM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD.CIT(A)-39, MUMBAI DATED 27.09.2010 FOR THE ASSES SMENT YEAR 2007-08. 2. IN GROUND NO. 1, THE REVENUE HAS AGITATED THE DE CISION OF THE LD.CIT(A) IN ALLOWING THE LOSS OF RS.2,36,36,821/- AS BUSINESS L OSS AS AGAINST THE DECISION OF THE AO DISALLOWING THE SAME AS SPECULATION LOSSES BY VI RTUE OF EXPLANATION TO SECTION 73 OF THE ACT. 2.1 BRIEFLY STATED, THE AO NOTICED THAT IN THE P/L ACCOUNT, THE ASSESSEE HAD DEBITED A SUM OF RS.2,36,36,821/- AS BUSINESS LOSS UNDER THE OVERALL HEAD OPERATING COST. IN SCHEDULE 12, THE ASSESSEE HAD STATED THAT THE BUSINESS LOSS REPRESENTED LOSS INCURRED IN NORMAL COURSE OF BUSINESS ON ACCOU NT OF ERRONEOUS EXECUTION OF TRADE ON BEHALF OF CLIENTS. HOWEVER, THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT EXPLANATION TO SECTION 73 OF THE ACT IS APPLICABLE TO THE CASE OF THE ASSESSEE. THE AO WAS OF VIEW THAT ONCE THE C LIENT HAS DISOWNED THE ITA NO. 8538/MUM/2010 M/S. IDFC SSKI SECURITIES LTD ASSESSMENT YEAR: 2007-08 2 TRANSACTION, THE ASSESSEE STEPS INTO THE SHOES OF T HE CLAIMS, IT WOULD THEN BE IN THE INTEREST OF THE ASSESSEE THAT THE TRANSACTION IS SQ UARED OFF AT THE EARLIEST AND THE LOSSES, IF ANY, ARE MINIMIZED. HOWEVER, IN THE INST ANT CASE NO DETAILS HAD BEEN PROVIDED TO INDICATE THAT THE ASSESSEE UNDERTOOK AN Y STEP TO MINIMIZE LOSSES OR THAT THE LOSSES HAD ARISEN ON ACCOUNT OF CIRCUMSTANCES B EYOND THE CONTROL OF THE ASSESSEE. ACCORDING TO THE AO THE FACTS IMPLY THAT THE ASSESSEE WAS WAITING FOR AN OPPORTUNE MOMENT TO SELL THE SHARES AND ENSURE THAT THE TRANSACTIONS RESULT IN PROFIT. ACCORDINGLY THE AO TREATED THIS LOSS AS SPE CULATION LOSS BY VIRTUE OF EXPLANATION 2 SECTION 73 OF THE ACT AND THEREBY CON CLUDED THAT THE ASSESSEE WAS NOT ENTITLED TO SET OFF OF SUCH LOSS AGAINST BUSINESS P ROFIT WHICH RESULTED IN THE DISALLOWANCE OF RS.2,36,36,231/-. ON APPEAL, THE LD .CIT(A), BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF PARKER SECURITIES LTD. VS. DCIT 102 TTJ (AHM) 235, DELETED THE IMPUGNED ADDITION MADE BY THE AO. AGGR IEVED BY THE IMPUGNED DECISION, THE REVENUE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 2.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS PERTINENT TO MENTION THAT THE TRIBUNAL IN THE ASSES SEES OWN CASE FOR THE A.Y. 2008- 09, IN ITA NO. 3756/MUM/2012, HAS HELD THAT SIMILAR LOSSES ARE TO BE TREATED AS IF IT IS INCURRED IN THE COURSE OF THE BUSINESS AND SHOUL D BE ALLOWED AS SUCH U/S 28 OF THE INCOME-TAX ACT. ALSO, SUCH LOSSES ACCRUED BY THE AS SESSEE ARE GOVERNED BY VARIOUS DECISIONS OF THE TRIBUNAL, WHERE CONSISTENT VIEW HA S BEEN TAKEN THAT THE LOSSES INCURRED BY THE SHARE BROKERS ON ACCOUNT OF CLIENTS DISOWNING TRANSACTION IS BUSINESS LOSS AND NOT SPECULATIVE LOSS. THEREFORE, WE DO NOT FIND ANY JUSTIFIABLE REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT(A) ON THI S COUNT AND THE SAME IS THEREFORE UPHELD. GROUND NO. 1 IS DISMISSED. 3. IN GROUND NO. 2, THE REVENUE HAS AGITATED THE DE CISION OF THE LD.CIT(A) DIRECTING THE AO TO ALLOW THE BAD DEBTS CLAIM OF TH E ASSESSEE IN RESPECT OF THE AMOUNTS WHICH COULD NOT BE RECOVERED FROM ITS CLIEN TS IN RESPECT OF THE TRANSACTION EFFECTED BY HIM ON BEHALF OF ITS CLIENTS. 3.1 BRIEFLY STATED, THE AO FOUND THAT IN THE P/L AC COUNT, THE OPERATING COST OF RS.13,75,95,918/- INCLUDED A BAD DEBT WRITTEN OFF A MOUNTING TO RS.10,80,786/-. IN THE COMPUTATION OF THE TOTAL INCOME, THE ASSESSEE H AD CLAIMED FURTHER DEDUCTION OF ITA NO. 8538/MUM/2010 M/S. IDFC SSKI SECURITIES LTD ASSESSMENT YEAR: 2007-08 3 RS.10,64,481/- AS BAD DEBTS WRITTEN OFF AND RS.16,4 1,110/- AS BALANCES WRITTEN. ACCORDING TO THE ASSESSEE, THE DEBTS HAD ARISEN ON ACCOUNT OF PAYMENTS THAT THE ASSESSEE WAS COMPELLED TO MAKE TEMPORARY PAY IN SET TLEMENT IN ORDER TO MEET THE REQUIREMENTS OF THE STOCK EXCHANGE AND AFTER THE AM ENDMENT TO SECTION 36(1)(VII) W.E.F. 01.04.1999, THE ASSESSEE IS NO LONGER REQUIR ED TO ESTABLISH THAT THE DEBTS HAD BECOME BAD. HOWEVER, THE SAID CONTENTION WAS NOT AC CEPTED BY THE AO AND ACCORDING TO THE AO, THE LIABILITY OF THE CLAIM U/S 36(1)(VII) IS GOVERNED BY SECTION 36(2) OF THE INCOME-TAX ACT. THE AO WAS OF THE VIEW THAT SECTION 36(2) PROVIDES THAT UNLESS SUCH DEBTS OR PART THEREOF HAD BEEN INC LUDED IN THE COMPUTATION OF INCOME OF THE PREVIOUS YEAR OR EARLIER YEAR, IT CAN NOT BE ALLOWED AS BAD DEBTS U/S 36(1)(VII). THE AO FURTHER OBSERVED THAT PART OF TH E DEBIT BALANCE WHICH DOES NOT PERTAIN TO BROKERAGE AND RELATES TO THE VALUE OF SH ARES PURCHASED BY THE CLIENTS IS NOT COVERED UNDER THE PROVISIONS OF SECTION 36(2). ACCORDINGLY, THE AO HELD THAT THE AMOUNTS NOT RECOVERED OR IRRECOVERABLE FROM CLIENTS CANNOT BE ALLOWED AS BAD DEBTS AS PER PROVISIONS OF SECTION 36(1)(VII) EXCEPT TO T HE EXTENT OF UNREALIZED BROKERAGE AND THUS, IF AT ALL THERE IS BAD DEBT, WHAT CAN BE ALLOWED IS ONLY UNREALIZED BROKERAGE. ACCORDINGLY, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE. ON APPEAL, THE LD.CIT(A), BY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. SHREYAS S. MORAKHIA (SB) MUM (2010) 5 ITR (TRIB) 1 (MUM), HELD THAT THE CLAIM OF THE ASSESSEE WAS ALLOWABLE AS BAD DEBT U/S 36(1)(VII) OF THE ACT. AGGRIEVED BY THE IMPUGNED DECISION, THE REVENUE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 3.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, WE ARE INCLINED TO ACCEPT THE REASONING OF THE LD.CIT(A) F OR PROVIDING THE RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SHREYAS S. MORAKHIA (SUPRA) WHEREIN IT HAS BEEN HELD THAT THE AMOUNT RECEIVABL E BY THE ASSESSEE WHO IS A SHARE BROKER FROM HIS CLIENTS AGAINST THE TRANSAC TION OF PURCHASE OF SHARES ON BEHALF OF THEIR BEHALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANS ACTION 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 ASSESS EE OF THE RELEVANT PREVIOUS YEAR ITA NO. 8538/MUM/2010 M/S. IDFC SSKI SECURITIES LTD ASSESSMENT YEAR: 2007-08 4 OR ANY EARLIER YEAR ITS SATISFIES THE CONDITION SPE CULATED IN SECTION 36(2)(1) AND THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 36(1)(VII) BY WAY OF BAD DEBTS AFTER HAVING WRITTEN OFF THE SAID DEBTS FROM HIS BOOKS OF ACCOUN T AS IRRECOVERABLE. IT IS ALSO RELEVANT TO STATE THAT THE SAID DECISION OF THE TRI BUNAL HAS BEEN CONFIRMED BY THE BOMBAY HIGH COURT IN CIT VS. SHREYAS S. MORAKHIA REPORTED 342 ITR 285 , WHEREIN IT HAS FURTHER BEEN HELD THAT THE VALUE OF SHARES TRAN SACTED BY THE ASSESSEE AS STOCK BROKER ON BEHALF OF ITS CLIENTS IS AS MUCH AS PART OF THE DEBT AS IS THE BROKERAGE WHICH IS CHARGED BY THE ASSESSEE ON THE TRANSACTION . THE BROKERAGE HAVING BEEN CREDITED TO THE P/L ACCOUNT OF THE ASSESSEE, IT IS EVIDENT THAT PART OF THE DEBT IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE A SSESSEE. THE FACT THAT THE LIABILITY TO PAY THE BROKERAGE MAY ARISE AS CONTEND ED BY THE REVENUE, AT A POINT IN TIME ANTERIOR TO THE LIABILITY TO PAY THE VALUE OF THE SHARES TRANSACTED WOULD NOT MAKE ANY MATERIAL DIFFERENCE TO THAT POSITION. BOTH CONSTITUTE PART OF THE DEBT WHICH ARISES FROM THE VERY SAME TRANSACTION INVOLVED IN T HE SALE OR AS THE CASE MAY BE PURCHASE OF SHARES. SINCE BOTH FORM A COMPONENT PAR T OF THE DEBT, THE REQUIREMENTS OF SECTION 36(2)(1) ARE FULFILLED WHERE A PART THER EOF IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE. CONSIDERING T HE SAID DECISION SQUARELY COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE, WE ARE OF THE VIEW THAT THERE IS NO JUSTIFIABLE REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT (A) ON THIS COUNT AND THEREFORE , GROUND NO. 2 IS DISMISSED. 4. IN GROUND NO.3, THE REVENUE HAS AGITATED THE DEC ISION OF THE LD.CIT(A) IN DIRECTING THE AO TO DISALLOW THE EXPENSES U/S 14A A S PER THE DIRECTION OF THE HONBLE HIGH COURT IN THE CASE OF M/S. GODREJ & BOYCE COMPANY LTD. VS. DCIT [(2010) 3 28 ITR 81 (BOM)] . 4.1 THE RELEVANT FACTS ARE THAT THE AO NOTED THAT T HE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.23,84,895/- AND CLAIMED THE S AME AS EXEMPT U/S 10(33). THE AO APPLIED THE PROVISION OF SECTION 14A READ WITH R ULE 8D AND WORKED OUT THE DISALLOWANCE AT RS.86,77,218/-. ON APPEAL, THE LD.C IT(A) DIRECTED THE AO TO DISALLOW THE EXPENSES U/S 14A AS PER THE DIRECTION OF THE HO NBLE HIGH COURT IN THE CASE OF M/S. GODREJ & BOYCE COMPANY LTD (SUPRA) . AGGRIEVED BY THE IMPUGNED DECISION THE REVENUE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. ITA NO. 8538/MUM/2010 M/S. IDFC SSKI SECURITIES LTD ASSESSMENT YEAR: 2007-08 5 4.1 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS NOTED THAT THE QUESTION OF MAKING DISALLOWANCE U/S 14A IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE LTD. MFG. CO. (SUPRA) HOLDING THAT THE PROVISIONS OF SECTION 14A ARE AP PLICABLE IN CIRCUMSTANCES AS ARE PREVAILING PRESENTLY AND THE D ISALLOWANCE HAS TO BE WORKED OUT BY THE AO ON SOME `REASONABLE BASIS AND NOT UNDER RULE 8D IN SO FAR AS THE ASSESSMENT YEARS PRIOR TO 2008-09 ARE CONCERNED. PR ESENTLY, WE ARE DEALING WITH THE A.Y. 2007-08. IN SUCH YEAR, OBVIOUSLY RULE 8D CANNO T BE APPLIED, BUT THE DISALLOWANCE IS REQUIRED TO BE WORKED OUT ON SOME R EASONABLE BASIS. AS THE LD.CIT(A) HAS CORRECTLY APPRECIATED THE POSITION OF LAW FOR DIRECTING THE AO FOR DECIDING THE QUANTUM OF DISALLOWANCE, AS PER THE AF ORE-NOTED JUDGMENT, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE REVENUE ON THIS ISSUE. MOREOVER, THE REVENUE, IN THE GROUND OF APPEAL HAS MENTIONED THAT THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF M/S. GODREJ BOYCE COMPANY LTD .(SUPRA) IS NOT ACCEPTED BY THE DEPARTMENT, WHICH IN OUR VIEW, IS NOT LEGALLY T ENABLE SO LONG AS THE DECISION IS NOT REVERSED BY THE HONBLE SUPREME COURT. THEREFOR E, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF THE LD.CIT(A) AND THEREFORE GROUND NO. 3 IS DISMISSED. 5. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF SEPTEMBER, 2014. SD/- SD/- (B.R. BASKARAN) (DR. S.T.M. PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 17.09.2014. *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR I BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.