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2009 (8) TMI 636 - HC - Income TaxBad Debts- The assessee was in the business of share broking. The brokerage received by the assessee was shown as income in his books of account of the immediate previous year. Since the balance amount to the extent of Rs. 50, 30, 491 could not be received from the client on whose behalf the shares were purchased the assessee during the year wrote off the sum as bad debt. Admittedly the amount could not b recovered and became bad. The Assessing Officer disallowed the claim of bad debt on the ground that the conditions for the allowability of the amount as bad debt as stipulated in section 36(1)(vii) read with (2) were not satisfied. This was confirmed by Commissioner (Appeals). The Tribunal allow the claim. Held that- since the brokerage payable by the client was a part of the bed debt had been taken into account in the computation of the income the conditions stipulated in section 36(1)(vii) and (2) stood satisfied.
Issues Involved:
1. Whether the total debit balance including the consideration collectible by the assessee-company for the sale/purchase of shares can be claimed as bad debts under section 36(1)(vii) when only brokerage is credited in the profit and loss account. Issue-wise Detailed Analysis: 1. Conditions for Allowability of Bad Debt: The core issue revolves around the interpretation of section 36(1)(vii) and section 36(2) of the Income-tax Act. The Assessing Officer disallowed the bad debt claim of Rs. 50,30,491 on the grounds that the conditions stipulated in these sections were not satisfied. The Tribunal, however, allowed the claim, leading to the Revenue's appeal. 2. Relevant Provisions and Conditions: Section 36(1)(vii) allows deduction of any bad debt written off as irrecoverable in the accounts of the assessee for the previous year. Section 36(2)(i) restricts such deduction unless the debt has been taken into account in computing the income of the assessee for the previous year or an earlier year, or represents money lent in the ordinary course of business of banking or money-lending. 3. Assessing Officer's Observations: The Assessing Officer noted two primary conditions for the allowability of bad debt: - If the assessee is not in the business of money-lending or banking, the debt should have been computed in the income of the assessee in the current or earlier years. - If the assessee is in the business of money-lending or banking, the debt should have been money lent in the ordinary course of such business. 4. Nature of Assessee's Business and Transactions: The assessee, a share broker, purchased shares on behalf of a client and paid the money from his pocket. The brokerage received was shown as income. Since the balance amount of Rs. 50,30,491 could not be recovered, it was written off as a bad debt. The Revenue did not dispute that the amount had become bad but argued that it was not a "debt" and should be treated as an investment by the assessee, thus constituting a capital loss. 5. Tribunal's Findings: The Tribunal relied on the judgment of the Delhi High Court in CIT v. Morgan Securities and Credits P. Ltd. and other Tribunal decisions, concluding that: - The burden was no longer on the assessee to establish that the debt had become bad after the amendments effective from April 1, 1989. - The brokerage payable by clients is part of the debt, and since part of the debt was taken into account in the computation of income, the entire debt, including the purchase/sale price, should be considered in the computation of income. - The conditions prescribed in section 36(2)(i) were satisfied. 6. High Court's Analysis and Conclusion: The High Court affirmed the Tribunal's view, stating that the payment made by the assessee on behalf of the client for the purchase/sale of shares should not be treated as an investment. The transaction was a brokerage transaction, not an investment by the assessee. The court referenced a similar case (CIT v. D. B. (India) Securities) where it was held that money receivable from a client in such circumstances is to be treated as "debt" and, if it becomes bad, it is rightly considered as "bad debt." 7. Final Judgment: The High Court concluded that the conditions stipulated in section 36(1)(vii) and section 36(2) were satisfied. The money receivable from the client was rightly treated as "debt" and since it became bad, it was correctly claimed as "bad debt" by the assessee. Thus, the question of law was decided against the Revenue and in favor of the assessee, and the appeal was dismissed.
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