ACIT 4(3), MUMBAI V. KAYNET CAPITAL LTD, MUMBAI

ITA 8807/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3459 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 06-06-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 29-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI . . , ! ' #'' '$ , % ! & BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER . : 8807 / / 2011 A.Y. 2003-04 ITA NO. :8807/MUM/2011 (ASSESSMENT YEAR: 2003-04) THE DY. COMMISSIONER OF INCOME-TAX 4(3), 6 TH FLOOR, R. NO. 649, AAYAKAR BHAVAN, MUMBAI -400 020 VS M/S. KAYNET CAPITAL LTD., 10-B, 3 RD FLOOR, HAJI KASAM BLDG., 56, TAMARIND LANE, MUMBAI -400 001 .: PAN: AABCK 3032 E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANOJ KUMAR RESPONDENT BY : SHRI BHUPENDRA SHAH /DATE OF HEARING : 06-06-2013 !' / DATE OF PRONOUNCEMENT : 12-06-2013 * O R D E R #'' '$ , : PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE DEPARTMENT, AGAINST THE ORDER OF CIT(A) 9, MUMBAI, DATED 20.10.2011, WHEREIN, THE FOLLOWING GROUNDS H AVE BEEN RAISED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF BAD DE BTS AMOUNTING TO RS. 21,11,238/- ON ACCOUNT OF BAD DEBTS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW TO BE SET ASID E AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2. THE ONLY ISSUE IS WITH REGARD TO DISALLOWANCE OF BAD DE BTS OF RS. 21,11,238/-. 3. THE BRIEF FACTS ARE THAT THE ASSESSEE IS SHARE BROKE R AND A MEMBER OF BSE. IN THE INSTANT ASSESSMENT YEAR, THE ASSE SSEE CLAIMED $ . . . 8807 /%% / 2011 M/S. KAYNET CAPITAL LTD. ITA NO. 8807/MUM/2011 2 BAD DEBTS TO THE EXTENT OF RS. 21,11,238/- IN ITS BOOKS. A FTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE AO CONCLUDED, IN THE CASE OF MERCANTILE SYSTEM OF ACCOUNTING, A SALE IS TAXED AS AND WHEN IT IS EFFECTED WHEREAS THE MONEY AGAINST SALE WILL BE REALISED IN FUTURE. HOWEVER, THE DEBT AGAINST CREDIT SALE MAY OR MAY NOT BE REAL ISED IN THE FUTURE. THEREFORE, THE LEGISLATURE HAS ALLOWED THE CLAIM OF DEBT AS BA D DEBT IF NOT RECOVERED IN IHE FUTURE. !N THE HONEST JUDGMENT OF THE ASSESSEE, IF THE DEBT HAS BECOME BAD OR NOT WORTHY OF BEING RECOVERED, THE SAME CAN BE CLAI MED AS DEDUCTION. THEREFORE, PROVISIONS OF SEC. 36(1)(VII) START WITH THE WORD ANY BAD DEBT OR PART THEREOF AND IT DOES NOT START WITH THE TERM ANY DE BT OR PART THEREOF. THUS, THE FIRST REQUIREMENT UNDER THIS SECTION IS THAT DEBT C LAIMED AS IRRECOVERABLE SHOULD BE BAD AND NOT GOOD. THUS, THE ALLOWABILITY OF CLAI M ON ACCOUNT OF BAD DEBT PRO- SUPPOSES THE EXISTENCE OF DEBT BEING BAD IN NATURE. ONCE II IS PROVED OR ESTABLISHED THAT THE DEBT IS BAD IN NATURE, THE DIS CRETION LIES WITH THE ASSESSEE TO WRITE OFF IN THE BOOKS OF ACCOUNT IN ANY PREVIOU S YEAR. IF ONE LOOKS AT THE PROVISIONS OF SEC.36(1 )(VII) OF THE ACT, IT IS ABU NDANTLY CLEAR THAT THE WORD BAD HAD BEEN USED IN CONJUNCTION WITH THE WORD DEBT A ND THE LEGISLATURE HAS NOT USED THE WORD DEBT ONLY IN THE OPERATING SECTION. THEREFORE, IN ORDER TO TAKE RECOURSE TO SECTION 36(1)(VII) OF THE ACT BEFORE WR ITING IT OFF IN THE BOOKS OF ACCOUNTS, THE ASSESSING OFFICER HAS TO BE CONVINCED THAT THE DEBT HAS BECOME BAD IN THE CIRCULAR NO.55 1 DATED 23.1.1990, THE CE NTRAL BOARD OF DIRECT TAXES HAS EXPLAINED THE PROVISIONS OF DIRECT TAX LAWS (AM ENDMENT) ACT, 1987. THE RELEVANT AMENDMENT IS EXPLAINED IN PARA 6.6 OF THE CIRCULAR WHICH IS ALSO REPORTED 1183 ITR (STATUTES) PAGE 37. THE RELEVANT PORTION OF THE CIRCULAR READS AS UNDER: 6.6 AMENDMENTS TO SECTION 36(1) (VII) AND 36(2) TO RATIONALISE PROVISIONS REGARDING ALLOWABILITY OF BAD DEBTS. THE OLD PROVIS IONS OF CLAUSE (VII) OF SUBSECTION (1) READ WITH SUB-SECTION (2) OF THE SEC TION LAID DOWN CONDITIONS NECESSARY FOR ALLOWABILITY OF BAD DEBTS. IT WAS PROVIDED THAT THE DEBT MUST BE ESTABLISHED TO HAVE BECOME BAD IN THE PREVIOUS YEAR. THIS LED TO ENORMOUS LITIGATION ON THE QUESTION OF ALLOWABILITY OF BAD DEBT IN A PARTICULAR YEAR, BECAUSE THE BAD DEBT WAS NOT NECESSARILY ALLOWED BY THE ASSESSING OFFICER IN THE YEAR IN WHI CH THE SAME HAD BEEN WRITTEN OFF ON THE GROUND THAT THE DEBT WAS NO T ESTABLISHED TO HAVE BECOME BAD IN THAT YEAR. IN ORDER TO ELIMINATE THE DISPUTES IN THE MATTER OF DETERMINING THE YEAR IN WHICH A BAD DEBT CAN BE ALLOWED AND ALSO TO RATIONALISE THE PROVISIONS, THE AMENDING AC T, 1987, HAS AMENDED CLAUSE (VII) OF SUB-SECTION (1) AND CLAUSE (I) OF SUB-SECTION (2) OF THE SECTION TO PROVIDE THAT THE CLAIM FOR BAD DEBT WILL BE ALLOWED IN THE YEAR, IN WHICH SUCH A BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. AS PER THE ABOVE EXPLANATION, THE ABOVE AMENDMENT W AS BROUGHT IN ONLY TO ELIMINATE THE DISPUTE IN THE MATTER OF DETERMINING THE YEAR IN WHICH A BAD DEBT CAN BE ALLOWED. BEFORE THIS AMENDMENT THE ASSESSEE WAS TO PROVE THAT THE DEBT HAS BECOME BAD IN THE RELEVANT PREVIOUS YEAR. REQUIREMENT OF PROVING THAT THE DEBT HAS BECOME BAD THUS STAYS AS IT WAS EARLIE R. THE ALLOWABILITY OF CLAIM U/S. 36(1)(VII) IS FURTHE R GOVERNED BY THE SEC.36(2) OF THE I.T. ACT. SECTION 36(2) PROVIDES THAT UNLESS SU CH DEBT OR PART THEREOF HAVE BEEN INCLUDED IN THE COMPUTATION OF INCOME OF PREVI OUS YEAR OR EARLIER PREVIOUS YEARS IT CAN NOT BE ALLOWED AS BAD DEBT U/S. 36(I)( VII). THIS HAS SIGNIFICANT IMPLICATIONS IN THE CASES OF SHARES AND STOCKBROKER S. IHE BROKER ACT AS AGENTS AND FACILITATE TRANSACTIONS BETWEEN PRINCIPALS. IN THE CASE OF SHARE & STOCK BROKERS, WHAT IS CREDITED TO PROFIT & LOSS ACCOUNT IS THE BROKERAGE INCOME ARISING FROM THE PURCHASE OR SALE ON BEHALF OF THE CLIENTS. THE PART OF THE DEBIT BALANCE WHICH DOES NOT PERTAIN TO BROKERAGE AND PER TAINS TO VALUE OF SHARES $ . . . 8807 /%% / 2011 M/S. KAYNET CAPITAL LTD. ITA NO. 8807/MUM/2011 3 PURCHASED BY CLIENT IS NOT COVERED BY SEC. 36(2). T HUS, IN CASE THE CLIENT DOES NOT PAY, IN THE FUTURE, THIS DEBT CAN NOT PARTAKE T HE NATURE OF BAD DEBT ALLOWABLE U/S. 36(1)(VII) AS THIS AMOUNT OF DEBT HA S NOT BEEN INCLUDED IN THE COMPUTATION OF INCOME AS REQUIRED U/S.36(2). SINCE THE DEBT NOT COLLECTIBLE FROM THE CLIENT, DOES NOT FALL UNDER THE AMBIT OF SEC. 3 6(2). IT REMAIN OUTSIDE THE PURVIEW OF SEC.36( 1) (VII). IT IS, THUS, AMPLY CLEAR THAT AMOUNTS NOT RECOVERED OR TREATED AS NOT RECOVERABLE FROM CLIENTS IN THE CASES OF SHARE BROKERS CAN NOT BE ALLOWED U/S.36(1)(VII) AS BAD DEBT UNLESS THE DEBT IS ONLY IN RESPECT OF UN R ECOVERED BROKERAGE, WHICH IS WHAT IS CREDITED BY THE ASSESSEE IN THE P & L A/C. 4. AGGRIEVED, THE ASSESSEE APPROACHED THE CIT(A), BEFORE WHOM, THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS, REGARDING DISALLOWANCE OF CLAIM OF RS.21,1L,238/- AS BAD DEBTS, THE LA ARGUED THAT TRANSACTIONS WERE CARRIED OUT ON THE BSE BY THE APPELLANT TO CLIENT M/S CHORADIA ASSOCIATES ARID DU ES AMOUNTING TO RS.21,11,238/- REMAINED UNRECOVERABLE WHICH WERE UL TIMATELY WRITTEN OFF IN THE APPELLANTS BOOKS. THE SAID M/S CHORADIA ASSOCIATES, HAD BEEN TRADING WITH THE APPELLANT COMPANY SINCE JANUA RY 2000 AND WAS HAVING CONTINUOUS, SMOOTH BUSINESS CONNECTION WITH THE APPELLANT TILL MARCH 2001. IT HAS ALSO KEPT MARGIN MONEY OF RS.3,0 0,000/- WITH THE APPELLANT. THE CLIENT WAS REGISTERED AND WAS ABSOLU TELY REGULAR IN PAY- IN AND PAYOUT FOR ABOUT ONE YEAR. A COPY OF LEDGER ACCOUNT, EVIDENCING THE TRANSACTION AND REGULAR PAY-IN AND PAY-OUT ETC. , WAS FURNISHED BEFORE THE LAO. THE APPELLANT WROTE OFF THE DATE AF TER THE CHEQUE ISSUED BY THE SAID DEBTOR WAS DISHONORED BY THE BANK. THE MATTER WAS TAKEN UP WITH BSE FOR ARBITRATION. HOWEVER, CONSIDERING T HE FINANCIAL CRISES FACED BY THE CLIENT AND ALSO TO GET THE BEST OUT OF THE FINANCIAL CRISES FACED BY THE CLIENT, THE APPELLANT HAD TO SETTLE TH E SUM OF .43 LACS AND BALANCE LS.21,11,238/- HAD TO BE WRITTEN OF AS BALA NCE DESPITE BEST EFFORTS. IT WAS ARGUED THAT THE SAME WAS BAD DEBTS AND SHOULD BE ALLOWED U/S.36(1)(VII) OR U/S.28 AS BUSINESS LOSS. HE RELIED ON THE FOLLOWING DECISIONS IN THE CASE OF OMAN INTERNATION AL BANK 100 ITD 285(MUM) (SB) WHICH HAS SINCE BEEN APPROVED BY THE BOMBAY HIGH COURT. DCIT VS SHREYAS J MORAKHIA (2010) 6 TAXMAN 49 (MUM) (SB) CIT VS D B (INDIA) SECURITIES LTD (2009) 226 CTI (D EL) 466 CIT VS BONANZA PORTFOLIO LTD. (2009) 226 CTR 468 TRF LTD. VS. CIT (2010) 323 ITR 397 (SC) CIT VS. F M CHINOY & COMPANY PVT LTD. 74 ITR 780 (B OM). 5. THE CIT(A), AFTER CONSIDERING THE DETAILED REPLY AS REPRO DUCED HEREINABOVE, CONCLUDED, REGARDING DISALLOWANCE OF BAD DEBTS, THE SAME IS C OVERED IN FAVOUR OF THE APPELLANT BY THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF OMAN INTERNATIONAL BANK. THIS ISSUE IS ALSO IN FAVOUR OF THE APPELLANT BY THE DECISIONS IN THE CASE OF SHREYAS J MORAKHIA (2OLOXSUPRA) AND B B (INDIA) SEC URITIES LTD (2009)(SUPRA) AND T R F LTD VS CIT(2010) 323 ITR 39 7(SC). RESPECTFULLY FOLLOWING THE DECISION OF HONBLE BOMB AY HIGH COURT, HONBLE DELHI HIGH COURT AND HONBLE APEX CO URT, THE LAO IS DIRECTED TO DELETE THE DISALLOWANCE OF RS..2 1,11,238/- IN $ . . . 8807 /%% / 2011 M/S. KAYNET CAPITAL LTD. ITA NO. 8807/MUM/2011 4 RESPECT OF BAD DEBTS. GROUNDS OF APPEAL NO.4, IS TH EREFORE ALLOWED. 6. AGAINST THESE FINDINGS BY THE CIT(A), THE DEPART MENT IS IN APPEAL BEFORE THE ITAT. 7. THE DR RELIED ON THE ORDER OF THE AO, WHEREAS TH E AR RELIED ON THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE CASE OF THE ASSESSEE IS FULLY COVERED BY THE DECISIONS OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF SHEYAS D. MOHARIKA AND BY THE HONBLE SUPREME COURT OF IND IA IN THE CASE OF TRF LTD . (SUPRA). 8. WE HAVE CONSIDERED THE FACTS OF THE CASE, AS HAS BEEN REPRODUCED HERE ABOVE AND HAVE ALSO PERUSED THE CASES CITED BEFORE US, PRIMARILY THE CASE OF SHEYAS D. MOHARIKA & TRF LTD., WHICH THE CIT(A) HAS ALSO RELIED UPON. 9. SINCE THE ISSUE IS COVERED BY THE HONBLE JURISD ICTIONAL HIGH COURT AND BY THE HONBLE SUPREME COURT, WHICH RECOURSE HAS BE EN ADOPTED BY THE CIT(A), WE DO NOT FIND ANY REASON TO DEVIATE FROM T HE DECISION ARRIVED AT BY THE CIT(A), WHICH WE FULLY ENDORSE. 10. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. WHILE PARTING WITH THE INSTANT APPEAL, WE MUST EXPR ESS OUR DISPLEASURE AS TO WHY THE CONCERNED CIT(A) AUTHORIZED TO FILE THIS AP PEAL, WHERE THE ISSUE IMPUGNED IN THE APPEAL IS SQUARELY COVERED BY THE H IGHEST COURT OF THE COUNTRY. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2013. SD/- SD/- ( .. ) ( #'' '$ ) ! ! (P.M. JAGTAP) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 12 TH JUNE, 2013 / COPY TO:- $ . . . 8807 /%% / 2011 M/S. KAYNET CAPITAL LTD. ITA NO. 8807/MUM/2011 5 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) $ $ ( ( ) - 9 MUMBAI / THE CIT (A)-9, MUMBAI. 4) $ $ ( 4, MUMBAI / THE CIT4, MUMBAI, 5) *+, - . , $ - , %/ / THE D.R. A BENCH, MUMBAI. 6) ,0 1 COPY TO GUARD FILE. $23 / BY ORDER / / TRUE COPY / / [ 4 / 5 6 $ - , %/ DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *895 . . * CHAVAN, SR. PS