TMI Blog2012 (3) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... CHANDRACHUD, J.) 1. This appeal by the Revenue arises from a decision of a Special Bench of the Income Tax Appellate Tribunal dated 16 July 2010. The Special Bench of the Tribunal was constituted to decide the following question of law Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him. The Special Bench answered the question referred in the affirmative and in favour of the assessee. 2. In the batch of appeals, a common question of law arises. We proceed to dispose of the appeal arising out of the decision of the Special Bench. The Court has, however, in the interest of fairness heard the counsel in the batch of appeals on the questions of law raised. The appeal by the Revenue raises the same question of law as was referred to the Tribunal as noted above. The appeal is admitted on the question formulated and taken up for hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The debt which was due and owing to the assessee from its clients on account of the non payment of the purchase price of the shares transacted did not form part of the profit and loss account and was, therefore, according to the Revenue not taken into account in computing the income of the assessee for the previous year. Consequently it was urged that the assessee would not be entitled to claim a deduction on account of bad debts for want of compliance with the provisions of Section 36(2)(i). Another limb of the submission is that, whereas brokerage is charged to the client when the order is executed, the stock broker, on the settlement day has to make good the payment for the purchase price of the shares transacted to the stock exchange irrespective of whether the payment is received from the client. Hence it has been submitted that brokerage and the debt towards the purchase price of shares arise at different points in time. Consequently, where the assessee credits only the brokerage to the profit and loss account, as in the present case, it cannot be postulated that the debt or any part thereof has been taken into account in computing the income of the assessee. In other word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause; Explanation: For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Clause (i) of sub-section (2) of Section 36 is to the following effect: (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; 7. Now, under Section 36(1)(vii), the amount of any bad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clients has been taxed in his hands as business income. In the present case, such brokerage has already been taxed in the hands of the assessee under the head business income and this being so, we are of the view that the condition prescribed in section 36(2)(i) has been satisfied and the write off of the debt representing amount receivable by the assessee from his clients against purchase of shares on their behalf must be held allowable as a bad debt. 9. One of the contentions which was urged on behalf of the Revenue was based on the value of the shares which are bound to remain with the assessee and which the assessee is entitled to sell and to adjust the sale consideration against the amount receivable from the client. That would have to be taken into account so as to arrive at the actual amount of the bad debt. The Tribunal has clarified that this issue would be considered when the appeal itself is taken up by the regular Bench in the light of the decision of the Special Bench. 10. The requirement which has been imposed by Parliament in Section 36(2)(i) is that a deduction on account of a bad debt can be allowed only where such debt or part thereof has been taken into ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as inhering in the transferee. For the purpose of present appeal, the judgment of the Supreme Court is of significance since it decides the issue as to whether the requirements of clause (i) of sub-section (2) of Section 36 would be fulfilled. The Supreme Court held as follows: ... It is true that Clause (i) of Sub-Section (2) of Section 36 declares that a deduction can be allowed only if the debt, or part thereof, has been taken into account in computing the income of the assessee of that previous year or an earlier previous year and that it has also been written off as irrecoverable in the accounts of the assessee for that previous year. In the present case, the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because it represented an accretion accruing during the earlier year on money owed to the assessee by the debtor. The item constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt, and that debt was taken into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment against those shares would not make it an investment by the assessee on his own behalf. As a matter of fact since the assessee had shown income in the books of account as income from brokerage, that showed that the transaction was entered into by the assessee on behalf of its clients and not on its own behalf. The Delhi High Court held as follows: ... 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 client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36 read with section 36(1)(vii) stand satisfied in this case. Hence, the question of law stands decided against the Revenue and in favour of the assessee. We are in respectful agreement with the view taken by the Delhi High Court. A Special Leave Petition CC 10928/2010 against the judgment of the Delhi High Court was dismissed by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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