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2009 (8) TMI 636

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..... r consideration: Whether in view of the provisions of section 36(1)(vii), the total debit balance including the consideration collectible by the assessee-company for the sale/purchase of shares can be claimed by the assessee as bad debts when the assessee-company had only credited brokerage in the profit and loss account ? 3. With the consent of the parties the matter is heard at this stage itself on the paper book filed. Learned counsel for both the parties have advanced their arguments in detail and we proceed to decide the question of law framed in the following manner. 4. In the Income-tax return filed by the assessee for the assessment year 200102 the assessee declared income of Rs. 33,25,404. This return was processed under section 143(1) of the Income-tax Act. Statutory notice under section 143(2) of the Act was given and the assessment was completed under section 143(3) of the year. During the assessment, the Assessing Officer found that the assessee had claimed bad debt in the sum of Rs. 50,30,491. According to the Assessing Officer, conditions for allowability of this amount as bad debt as stipulated in section 36(1)(vii) of the Income-tax Act read with section 36(2) ther .....

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..... the shares in question on behalf of one of his clients and against the purchase of the said shares, he had paid the money from his pocket. 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 aforesaid shares were purchased, the assessee during the year had written off the said sum as a bad debt. It is not disputed by the learned counsel for the Revenue that the aforesaid amount which could not be recovered had become bad. The twofold submissions were, however, as under: (i) It was not a debt . This flowed from the argument that since the assessee had made payments for purchase of the shares himself, it should have been treated as investment by the assessee and thus, no debt was to be recovered. (ii) The second submission, which is based upon the first one, was that the loss thereon should have been treated as capital loss. 9. On this premise, it is sought to be argued that the provisions of section 36(1)(vii) read with section 36(2) of the Act have not been satisfied. Before we proceed to deal with this con .....

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..... ation in relation to the practice that the assessee had to establish that the debt had become bad and held that there was no longer any burden on the assessee to establish that the debt had become bad. Therefore, the first limb of the issue raised in ground is covered by the judgment of the hon ble High Court of Delhi (supra). As for the second aspect as to whether payment made by the assessee on behalf of the clients as a broker for purchase/sale of shares could be considered to have been taken into account in the computation of income of earlier years, we find that this issue has also been considered by the Delhi Bench of the Tribunal in the case of Madhup Jain (supra) vide their order dated May 31, 2007 in I. T. A. No. 3950/Del/2004. In the said case, the Tribunal held that the brokerage payable by the clients is a part of the debt and since the part of the debt had been taken into account in the computation of income, the entire debt including the purchase/sale price paid by the assessee-broker has to be taken as considered in computation of income and the conditions prescribed in section 36(2)(i) were satisfied. The same view was taken by the Mumbai Bench of the Tribunal in th .....

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..... on is concerned, it was treated as a transaction of brokerage for purchase/sale of shares on behalf of his clients and it was not a transaction which was entered into by the assessee on his own behalf. This court had occasion to deal with a somewhat similar issue in Income-tax Appeal No. 415 of 2007 (reported as CIT v. D. B. (India) Securities [2009] 318 ITR 26 (Delhi) which appeal was decided against the Revenue by taking note of the following aspects (page 27): The admitted facts are that the assessee/respondent herein is a member of the Delhi Stock Exchange and is carrying on the business of shares and stock broking along with the allied activities such as broker/subbroker, underwriters to new issues of shares, debentures and securities of all kinds, brokers and fixed deposit of companies, trading in shares, investment consultants, etc. The assessee had purchased shares of M/s. Mannu Finlease Ltd. in January and February, 1996, on behalf of and on instructions from its sub-broker M/s. Glory Securities Ltd. Total value of these shares purchased by the assessee was Rs. 1,06,10,247 at an average price of Rs. 55 per share. The said sub-broker had made payment to the extent of Rs. 64 .....

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