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2009 (8) TMI 636

..... nce 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. - 269/09 - 27-8-2009 - SIKRI A. K. and VALMIKI J. MEHTA JJ. Judgment: A. K. Sikri J.- Admit. 2. The following question of law arises for 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 ? .....

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..... , or represents money lent in the ordinary course of the business of banking of money-lending which is carried on by the assessee. 7. The Assessing Officer in his assessment order has also reproduced the aforesaid provision and on that basis he observed that the following conditions for allowability of deduction of bad debt are to be satisfied: (i) If the assessee is not in the business of money-lending or banking, such debt should have been computed in the income of the assessee (offered for taxation) in the current previous year or earlier years. It means that the debt claims must have been a revenue receivable. (ii) If the assessee is in the business of money-lending or banking, such debt should have been money lent in the ordinary course of such business. 8. It is not in dispute that the assessee is in the business of share broking. The assessee has purchased 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 r .....

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..... e perused the records and considered the rival contentions carefully. The dispute raised is regarding claim of bad debt, which had been disallowed on the ground that the assessee had failed to establish that the debt had become bad during the year and also on the ground that the debt had not been taken into account in the computation of income of the earlier year. The issue whether the assessee is required to establish that the debt had become irrecoverable during the year even after the amendments with effect from April 1, 1989, had been recently considered by the hon ble High Court of Delhi in CIT v. Morgan Securities and Credits P. Ltd. [2007] 292 ITR 339 (Delhi), in which the hon ble High Court after considering the Circular No. 551 of the Central Board of Direct Taxes [1990] 183 ITR (St.) 7, noted that the amendments had been made with a view to ending litigation 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 (supr .....

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..... ent made by the assessee on behalf of his client was the payment for purchase/sale of shares and, therefore, non-realization is to be treated as bad debt or it was to be treated as investment. As mentioned above, the assessee is carrying on the business of shares and stock broking. He is a member of the National Stock Exchange. The shares were purchased by him on behalf of his clients. Merely because he made payments against those shares would not make it an investment by the assessee on his own behalf. We are of the opinion that the very basis of this argument is misconceived, namely, that the particular purchase should be treated as investment by the assessee only because he made the payment. As pointed out above, the assessee has shown the income in his books of account as income from the brokerage. That itself shows that in so far as the transaction in question 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 .....

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..... hased the aforesaid shares on behalf of the sub-broker and, in fact, paid the amount of Rs. 1,06,10,247. As against this amount, he received only a sum of Rs. 64 lakhs. The brokerage which was received in the aforesaid transaction was shown as income by the assessee in the previous year, which was taxed as such as well by the assessing authority. Under these circumstances, only because shares were not delivered for want of full payment, which was to be made by the sub-broker to the assessee, it cannot be said that there was no transaction between the parties. Once we proceed on the basis that there was a valid transaction between the assessee and the sub-broker and the assessee had to make payment on behalf of the sub-broker, which he could not recover to the extent of Rs. 41,37,881, that sum has to be treated as debt . 12. Following the aforesaid order we hold that the money receivable from the client has to be treated as debt and since it became bad, it was rightly considered as bad debt and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the .....

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