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TMI Blog2012 (3) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and final disposal with the consent of the counsel for the Revenue and the counsel for the assessee. 3. The Assessment Year to which the appeal pertains is 1998-99. The assessee is a share broker. A return of income was filed on 2 November 1998 declaring a total income of Rs.67,797/-. The assessee claimed a deduction of Rs.28.24 lacs representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf. The assessee claimed that the amount had become irrecoverable. The amount was claimed as a deduction after having been written off as irrecoverable from the books of account. The Assessing Officer disallowed the deduction holding that the business in respect of which the debts had arisen had ceased to exist in the year under consideration and also on the ground that no action was taken against the clients to recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase 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 words, the submission is that the debt due by the client to the stock broker on account of the value of the shares purchased is distinct from the debt due on account of the brokerage payable on the transaction in shares. 5. On the other hand, it has been urged on behalf of the assessee by Counsel that there is a fundamental fallacy in the contention of the Revenue that the conditions of Section 36(2)(i) are not satisfied only on the ground that only brokerage is shown as a credit in the profit and loss account. The words used in Section 36(2)(i) are "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". The assessee as a stock broker raises a bill reflecting (i) The rate, quantity and total value of the shares transacted; (ii) Security Transaction Tax; and (iii) Brokerage to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 debt or any part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year is to be allowed as a deduction in computing income under Section 28. This is subject to the provisions of sub-section (2). In view of the judgment of the Supreme Court in TRF Ltd. Vs. CIT 323 ITR 397, it is now a settled position in law that after 1 April 1989 it is not necessary for the assessee to establish that the debt has in fact become irrecoverable and it would be sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee. The essence of the controversy in the present appeal is whether the requirements of Section 36(2)(i) have been fulfilled. What clause (i) of sub-section (2) of Section 36 stipulates is that a deduction for a bad debt or part thereof shall not be allowed unless (a) the debt has been taken into account in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account in computing the income of the assessee of the previous year in which the amount of the debt is written off. The assessee is a stock broker who engages in transactions of sale and purchase of shares for his clients. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the Security Transaction Tax and the service tax. The brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Once that is so, it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee. The debt comprises, inter alia, of the value of the shares transacted and the brokerage payable by the client on whose behalf the transaction takes place. The brokerage as well as the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sented 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 account in computing the income of the assessee of the relevant previous year. It is the same assessee who has subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable in his accounts. It appears therefore that the conditions in both Sub-clauses (a) and (b) of Clause (i) of Sub-section (2) of Section 36 are satisfied in the present case, and the High Court as well as the Appellate Tribunal and the AAC are right in the view which they took." 12. The point to be emphasized from the above extract from the decision is that according to the Supreme Court, the debt was taken into account in the income of the assessee for Assessment Year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The Supreme Court noted that the transaction was a debt and that debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 on 30 July 2010. 14. The value of the shares transacted by the assessee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. The fact that the liability to pay the brokerage may arise, as contended by the Revenue, at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or as the case may be purchase of shares. Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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