TMI Blog2008 (7) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of e-broking through the website www.5paisa.com and the primary source of income is the brokerage. During the year the assessee has shown brokerage of Rs. 2,84,25,845 and taxable income of Rs. 23,61,591. The assessee declared a loss of Rs. 5,60,154 in the return of income filed on 28-10-2003 and revised the return on 13-1-2005 to loss of Rs. 10,40,157 While completing the assessment under section 143(3) of the Income-tax Act the Assessing Officer examined the claim of bad debts. The assessee claimed a provision of Rs. 30,00,000 for doubtful debts and a bad debt of Rs. 50,26,060. While the provision was written back the Assessing Officer analysed the claim of bad debt and had negated the claim stating that the assessee has not been following the regulations of SEBI and the loss which has allegedly suffered is on account of violation of rules and regulations framed by SEBI and therefore the claim of business loss could not be entertained. Further the Assessing Officer held that the assessee could not co-relate the money received from the client as pertaining to brokerage and also could not furnish the exact break-up of value of shares included therein with any evidence and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange and hence the debt arises against various clients. Once the clients stop trading the assessee has no option than to write off the amount after taking necessary steps to collect the amount. It was submitted that the assessee s transactions run into crores as the brokerage itself is more than Rs. 2.84 crores. It is also submitted that most of the transactions are done at a non-personal level. It was submitted that the assessee has written off the amounts in the books of account and these are to be allowed as bad debts under section 36(1)( vii )/as loss under section 28. It was further submitted that the assessee has furnished the necessary details before the Assessing Officer and also written off this amount in the books of account, which fact was acknowledged by the Assessing Officer itself. Conse-quently it was submitted that the loss of money in the broking transaction is to be allowed as a bad debt or as a loss. The learned A.R. also submitted that the grounds itself has given detailed submissions which are reiterated as : "that the Assessing Officer has failed to appreciate that such business debts which cannot be recovered must be treated as valid business losses in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the normal course of business. It is also a fact that the assessee has written off this amount in the books and also after making a provision of Rs. 30,00,000 in the books of account. The provision is, however, added back. The issue is whether the claim of bad debt of Rs. 50,26,060 can be considered as bad debt to be allowed under section 36(1)( vii )/or as business loss. Even though the Assessing Officer made out a case that the assessee has violated the SEBI guidelines and SEBI Act nowhere it is established that these transactions arise in clear violation of the SEBI guidelines. It was submitted that the assessee broker can buy shares/securities on behalf of the client when there is margin money of minimum 20 per cent of the price of securities. Generally it is a practice that the brokers enter into the purchase transactions online as and when there is a margin money to the extent of 20 per cent of the price and when the client does not own up the transaction by paying the balance amount, the assessee broker has to first remit it to the Stock Exchange at the end of each settlement. Consequently the debts arise in the broking transactions. The assessee submitted all the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance is not when the transaction is entered into, but at a later date when the settlement is due. Due to the nature of transactions undertaken by the broker, the advancement of funds is later, not when the brokerage income is earned. It cannot be considered that the debt or part thereof has been taken into account in computing the income of the assessee. The provisions of section 36(2) are as under : "36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply - ( i )no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;" From the above the provisions, it is clear that before any deduction for bad debt can be allowed, either of the following two mandatory conditions must he fulfilled by the assessee: ( a )the debt has been taken into account in computing the income of the assessee of the relevant previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on of money-lending business. In the present case, the assessee did not obtain any licence which is a legal requirement for carrying on money-lending business. There is no other evidence or material to show that the assessee was carrying on money-lending business. Merely because the assessee disclosed interest income as business income, it cannot be said that the assessee was carrying on money-lending business. The mandatory conditions of section 36(2) have to be fulfilled for a claim of bad debt to be allowed. These conditions have not been fulfilled by the assessee and, therefore, the CIT(A) was not justified in deleting the addition made by the Assessing Officer by disallowing the assessee s claim for deduction of bad debt amounting to Rs. 35,15,347. In the absence of money-lending licence, debts on account of non- recovery of loans during share business cannot be allowed as deduction." 10. Further, in the case of Mahesh J. Patel v. Asstt. CIT [2007] 109 ITD 35 (Mum.) (TM) similar view is also expressed that the unpaid purchase price of shares do not fulfil the requirement of section 36(2)( i ) because what the assessee offered to tax was brokerage income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, the assessees claim for the said loss as business loss is not acceptable because the said loss has not crystallized during the relevant previous year and admittedly in earlier previous years. Further, the assessee has not furnished any chronological details in respect of the respective bad debt claim and any supporting evidence regarding the efforts made for the recovery of the said amount from the respective clients. Accordingly, the assessee s claim that the debts totally amounting to Rs. 50,26,060 has become bad in nature is not acceptable either as a bad debt or as a business loss. The addition on this ground is Rs. 50,26,060." 13. The learned CIT(A) in his order also considered this issue as under: "Further without prejudice to the above and only in the alternative there is no evidence on record to establish that the loss if any had indeed occurred during the year under consideration. In view of the above discussion the stand of the Assessing Officer is upheld and accordingly the disallowance of Rs. 50,26,060 is sustained." 14. The parameters for allowing the loss under section 28 are entirely different from that of a bad debt under section 36(1)( vii ). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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