TMI Blog2010 (5) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... . 14,07,751. 2.On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer." 4. Whereas in assessee s appeal, following grounds are raised : "1.On the facts and in the circumstances of the case, the assessment completed is not in accordance with law insofar as neither the assessment order nor the demand notice contains the break-up of total sum demanded Rs. 98,68,345. It deserves to be annulled. 2.Without prejudice, on facts and in the circumstances of the case, the CIT(A) has erred in holding that though the assessee is a stock broker deduction for bad debts of its clients is not allowable under section 36(1)( vii ), read with section 36(2). 3.Without prejudice, on facts and in the circumstances of the case, the CIT(A) should have held that for a stock broker amounts not recovered from its clients, satisfy the condition laid down in section 36(2)( i ) and, hence, they are allowable under section 36(1)( vii ) of the Act. 4.Without prejudice, on facts and in the circumstances of the case, the CIT(A) has erred in upholding the disallowance of Rs. 1,31,36,427 out of total claim of Rs. 5,77,84,844 by pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dabad Stock Exchange is granted by Stock Exchange to carry on share transactions at its own in the exchange. 8. We have heard learned D.R. and ld. A.R. According to ld. D.R. as per the decision in CIT v. Techno Shares Stocks Ltd. [2010] 323 ITR 69 (Bom.), depreciation will not be admissible on membership card of Stock Exchange. On the other hand ld. A.R. submitted that once membership card is acquired after 1-4-1998 then as per latest decision of ITAT Mumbai Bench in Kotak Securities Ltd. v. Addl. CIT [2008] 25 SOT 440 , depreciation on the membership card would be available. 9. After hearing the rival submissions, we are of the considered view that depreciation cannot be allowed on the membership card of Stock Exchange. However, the ITAT Mumbai Bench in the case of Kotak Securities Ltd. ( supra ) has allowed the claim holding it as intangible asset and that the card would fall within the parameter of section 32(1)( ii ) of the Income-tax Act, 1961, it is also held to be a capital asset which confers the right to trade on the floor of the stock exchange, when acquired by the assessee, such right becomes an intangible asset. It has also been so held in Dy. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are all relatable to intellectual properties and, therefore, the expression licences in section 32(1)( ii ) would take colour from those expressions and, accordingly, apply only to licences relating to intellectual properties. Construing the expression licences in section 32(1)( ii ) widely so as to apply to all types of licences relating to intangible assets would defeat the object of the Act, because, depreciation under section 32 is intended to a limited category of intangible assets and not to a wider category of intangible assets. Therefore, it is reasonable to construe that the expression licences is used in section 32(1)( ii ) to apply to licences relatable to intellectual properties only and not to all licences. The above reasoning is further fortified by the expression any other business or commercial rights of similar nature used in section 32(1)( ii ). The said expression clearly postulates that the business or commercial rights which are not similar to the categories specified in section 32(1)( ii ) are not entitled to depreciation. In other words, the expression business or commercial rights of similar nature clearly shows that all business or commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he letters so received from the debtors was not established. He, accordingly, rejected the claim both under section 36(1)( vii ) and section 28. 13. The ld. CIT(A) held that conditions laid down under section 36(2) are not satisfied as these debts were never incorporated for working out the profits of the assessee. He relied on the decision of ITAT Ahmedabad Bench in the case of ITO v. Ashokkumar Lalitkumar [1995] 53 ITD 326. Regarding trading loss the ld. CIT(A) held that it was on account of failure of the parties to settle the dues, etc., with the stock exchange. The assessee had to make the payment to Stock Exchange for avoiding himself being declared as a defaulter. If the clients on whose behalf the assessee makes the transaction through stock exchange fail to make the payment then it is the responsibility of the broker to clear the dues within the stipulated time. With this object in mind the assessee made the payment and claimed it as trading loss. In order to support the claim, assessee filed letters indicating under what circumstances, these amounts were written off. In many cases, assessee has taken legal actions. As the assessee has filed complete details with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been taken into account in the P L account as income and, therefore, related debt should be considered as debt within the meaning of section 36(2). The ld. A.R. referred to the decision of Hon ble Gujarat High Court in CIT v. Abdul Razak Co. [1983] 136 ITR 825 where commission income earned was declared as income but debts outstanding against them could not be recovered then such non-recovered debts were allowed as business loss. The ld. A.R. then referred to the decision of Hon ble Punjab Haryana High Court in CIT v. Dayachand Hardial [1989] 177 ITR 461 where assessee, acting as selling agent sold goods on credit on behalf of clients on credit, but could not realize debt from them the amount not so realized was treated as business loss and as admissible deduction. He then referred to the decision of Hon ble Delhi High Court in CIT v. D.S. Bist Sons [2000] 243 ITR 179 where loss on account of non-recovery of business debt was allowed as a trading loss. 17. We have considered the rival submissions and perused the material on record. For claiming deduction under section 36(1)( vii ) as bad debt one condition to be satisfied is that amount should be writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 be recovered and became bad. The Assessing Officer disallowed the claim of bad debt on the ground that the conditions for allowability of the amount as bad debt as stipulated in section 36(1)( vii ) and (2) were not satisfied. This was confirmed by the Commissioner (Appeals). The Tribunal held that the claim of bad debt should have been allowed by the Assessing Officer as conditions stipulated in section 36(1)( vii ) and (2) had been satisfied. On appeal : Held, dismissing the appeal, that the money receivable from the client had to be treated as bad 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 the brokerage payable by the client was a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in section 36(1)( vii ) and (2) stood satisfied." 19. In the case of share broker, the loss has been held allowable as bad debt even though only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of litigation, etc., was bona fide and the plea of irrecoverability should be accepted. Therefore, the claim was allowable under section 28." 21. In view of the above, a loss occurred to the share broker on account of non-recovery of dues from the clients would be allowable as deduction under section 28 if such debt has occurred during the course of the business. It is undisputed fact that in the present case, the amounts written off by the assessee were the dues of the clients with whom assessee had carried out business transaction of sale and purchase of shares. 22. A share broker as such never trades any shares on his own behalf. He is concerned only with the brokerage accrued on the transactions of sale and purchase carried out by him on behalf of his clients. When the transaction is completed, the share broker is entitled to the brokerage which is credited in the P L account and debited to the clients account. A share broker also stands guarantor to the Stock Exchange about the payment of the dues by his clients on purchase of shares through him. He also ensures delivery of script to the purchaser. The liability arise to the share broker for payment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebited in client s account and for which deduction is claimed. Thus, where total debt debited in the account of the client is inclusive of brokerage then brokerage being part of the total debt having been taken into account in computing the income, would satisfy the provisions of section 36(2) and, therefore, when assessee writes off such debt then he would be entitled for deduction under section 36(1)( vii ). Similar view has been taken by the Tribunal in G.R. Pandya Share Broking Ltd. v. ITO [2008] 26 SOT 431 (Mum.). Hon ble Delhi High Court in D.B. (India) Securities Ltd. ( supra ) has also taken similar view. 23. Further, the transaction entered into by a share broker, i.e., clients can be find a parallel in the transactions carried out by commission agent. A commission agent either buys goods or sales the goods on behalf of the principals. When he acts as commission agent for sale of goods, he advances the amount to his principal and adjust the sale proceeds against such advances. When he acts as a commission agent for buying the goods he purchases the goods for supply to his principal from his funds. The principal is debited and when he is reimbursed by his princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction with the assessee or where-abouts of some parties was not given by the assessee. In our view disallowance of the claim of trading loss on this account will not be proper unless the finding about the non-genuineness of the transaction is given. Once the transactions are apparently carried out in the normal course of the business and they are not held as non-genuine, then non-recoverability of such debts would squarely be a trading loss. When after lapse of time certain clients are not traceable or that some of the clients have expired and their legal heirs refused to accept the liability then amount is clearly not recoverable. It would become a trading loss and, therefore, an allowable deduction. It is only in cases where debts have not occurred in normal course of business or transactions are found to be not genuine, then claim can be disallowed. Therefore, in absence of any material to this effect transactions done in the past in the normal course of business like any other business transactions should be treated as genuine and, therefore, on account of their non- recoverability, the claim of trading loss should be allowed as deduction. In view of this entire loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in the names of the creditors are explained. 31. Against this ld. A.R. submitted that whether money is paid by B.D. Vakil and D.C. Vakil or by Shri Ramesh N. Parikh, so far as the assessee is concerned, money is found explained as coming out of the accounts of these two persons. May be that Shri R.N. Parikh is using the account of these two persons as benami account but for that matter assessee cannot be penalized. 32. We have considered rival submissions and perused the material on record. In our considered view the logic given by ld. CIT(A) and by ld. A.R. in respect of this addition is not sound. The onus lying on the assessee to prove the nature and source of the credit is not discharged if the creditors in whose names amount is standing in the books of the assessee denied to have any knowledge of such credits. It is for the assessee to bring to the Assessing Officer, Shri R.N. Parikh and furnish necessary evidence that in fact, it was he who was using the accounts of the two persons and paying the money to the assessee on their behalf. It is not known whether Shri R.N. Parikh is a dummy for assessee or a dummy for B.D. Vakil or D.C. Vakil. Onus lying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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