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2015 (11) TMI 792 - ITAT KOLKATA

2015 (11) TMI 792 - ITAT KOLKATA - TMI - Entitlement to deduction on write off of bad debts as irrecoverable amount from Broker and write off of bad advances as irrecoverable amount from Broker - Held that:- The assessee’s efforts to recover the dues from the Broker Shri.Pallav Sheth were in vain and the assessee treated the irrecoverable trade debts and decided to write off the same by crediting the concerned debtor’s account. It is not in dispute that the assessee had duly offered income emana .....

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rse of its business by the assessee, any loss on account of recoverability would automatically fall under the category of trade debt / receivable and hence is allowable as business loss. The assessee is entitled to claim deduction towards write off of bad advances and we have no hesitation in directing the Learned AO to grant deduction towards the same. Accordingly, the grounds raised by the assessee in this regard are allowed. - Decided in favour of assessee. - I.T.A No. 338/Kol/1999 - Dated:- .....

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Act, 1961 (hereinafter referred to as the Act ). 2. Shri.J.P.Khaitan, Senior Advocate, the Learned AR argued on behalf of the assessee and Shri.Sanjay Mukherjee, JCIT, the Learned DR argued on behalf of the revenue. 3. The brief background of this appeal is that the same has already been disposed off by this tribunal vide order dated 18.11.2002 dismissing the appeal of the assessee. Against this tribunal order, the assessee preferred further appeal to the Hon ble Calcutta High Court and the sam .....

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business such as banking or money-lending; b. as the business of the appellant consisted in lending moneys, realizing them and making fresh loans, a continuous operation on the bank account by the agent was incidental to the conduct of the business ; c. once it was established that the agent was in charge of the business, that he had authority to operate on the bank account and that he withdrew moneys in the purported exercise of that authority, his action was referable to this character as agen .....

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is not however to preclude the parties to cite other judgemetns, if they are so advised. Accordingly, this appeal has been restored back to the file of this tribunal to decide the issue as per the directions contained hereinabove. 4. The issues to be decided in this appeal is as to whether the assessee is entitled for deduction on write off of bad debts amounting to ₹ 11,62,253/- as irrecoverable amount from Broker and write off of bad advances amounting to ₹ 1,99,08,500/- as irreco .....

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wrote off the same by crediting the concerned debtor account in the books and claimed deduction for the same as bad debt in accordance with the provisions of section 36(1)(vii) read with section 36(2) of the Act. This claim was disallowed by the Learned AO which was upheld by the Learned CITA. Aggrieved, the revenue is in appeal before us on the following grounds:- a) Bad debts - ₹ 11,62,253/- For that the learned CIT(Appeals) was not justified in ignoring the provisions of the Income Tax .....

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irrecoverable from Broker of ₹ 11,62,253/- 4.2. We have heard the rival submissions and perused the materials available on record. The Learned AR filed the sequence of events before us about the conduct of the said broker and the difficulties underwent by him due to his fraudulent acts committed earlier. It is not in dispute that the broker Shri.Pallav Sheth was declared a defaulter and suspended by the Bombay Stock Exchange from entering the capital markets due to his involvement in secu .....

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e Special Court Act ). The said law was made because of large scale irregularities and malpractices indulged in by some brokers in collusion with the employees of various banks and financial institutions resulting in diversion of funds from the banks and financial institutions to the individual accounts of the brokers. The law was made to ensure the speedy recovery of the huge amount involved; ii) to punish the guilty and to restore confidence in and maintain the basic integrity and creditabilit .....

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al attachment order was modified on October 14, 1993 October 1992 Equity shares and debentures of various Indian companies were seized by the CBI from the reisidential and office premises of Pallav Sheth October 30, 1992 Last transaction between the assessee and Pallav Sheth March 31, 1993 Pallav Seth acknowledgted having received ₹ 2 crores from the assessee under portfolio management scheme. October 15, 1993 Notice issued by the Bombay Stock Exchange advising members not to deal in share .....

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spect of assets of Pallav Sheth [ para 4 of (2001) 7SCC 549 at page 555] March 30, 1995 Because of unlikely recovery, the Board of Directors of the assessee resolved to write off ₹ 11,62,253/- due from Pallav Sheth on account of normal share dealings conducted through him and ₹ 1,99,08,500/- advanced to him on account of portfolio management scheme. The amounts were accordingly. June 14, 1996 Having committed an act of insolvency on April22, 1996, Pallav Sheth filed Insolvency Petiti .....

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ion 36(2) of the Act. 4.4. We find that the reliance placed by the Learned AR on the following decisions squarely supports the case of the assessee:- • 326 ITR 315 (Mad) CIT Vs. Ramakrsihna & Sons Ltd Held, dismissing the appeal, that the transaction of the assessee of financing the subsidiary company was genuine and bonafide. The assessee paid further advances in its own interest with a view to recover the amount given earlier, to sustain a share and to avoid the guarantee being invoke .....

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had accumulated huge losses. The assessee also suffered a loss while selling the shares of the subsidiary company which resulted in the subsidiary company cesing to be the subsidiary of the assessee. Therefore, in the circumstances the money advanced by the assessee had become irrecoverable and was given during the course of the business. What was not paid by the subsidiary company was only the interest and there was no principal amount due at the time of advancing the amount thereafter. The ad .....

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s and they had become irreovcoverable as bad debts and hence the assessee was entitled to the benefit under section 36(1)(vii). The question as to whether a debt had become bad or not was a pure question of fact and, therefore, it could not be construed as a question of law. • 323 ITR 397(SC) TRF Ltd Vs. CIT BAD DEBT-LAW AFTER APRIL 1, 1989- ASSESSEE ONLY TO ESTABLISH THAT DEBT WAS WRITTEN OFF- NOT NECESSARY TO ESTABLISH THAT DEBT IN FACT HAD BECOME IRRECOVERABLE - INCOME-TAX ACT, 1961, s. .....

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n.com 537 (AAllahabad HC) CIT vs. Smt. Sushila Mallick- To treat a debt as a bad debt had to be a commercial or business decision of the assessee based on the relevant material in the possession of the assessee. Once the assessee records the debt as a bad debt in his books of account, that would prima facie establish that it was bad debt unless the Assessing Officer for good reasons holds otherwise. The writing off in the accounts had to be bonafide. Once that the case, the assessee was not call .....

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r, both the companies have disappeared from Lucknow without making any payment. [ Para 13]. In the light of the above discussion and by considering the totality of the facts and circumstances of the case, there was no reason to interfere with the impugned order passed by the Tribunal. [ Para 14] . • Dy.CIT vs. Oman International Bank Saog in ITA No.7431 (Mum) of 1997 dated 17.5.2006 for Asst Year 1994-95 passed by Mumbai Tribunal Special Bench Held the Direct Tax Laws (Amendment) Act, 1987 .....

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the previous year. In the postamended period it is sufficient if the bad debt or part thereof is written off as irrecoverably in the accounts of the assessee. The law has done away with the onerous obligation on the part of the assessee to establish that the debt has become bad in the previous year. Now the requirement is only the write off of such debt as irrecoverable in the accounts of the assessee. [para 31]. As explained by the CBDT Circular No.551 dt. 23-1-1990 the amendment has been brou .....

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ught to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions. Even after the amendment , if the assessee is again called upon to establish that the debt has become bad, the true spirit of the amendment is to avoid litigations and do away with all sorts of disputes regarding the allowability of bad debts as a deduction in computing the income of an assessee. The dispute regarding the year in which the debt has to be .....

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nd purpose of the amendment are manifest. The earlier rule of establishing that the debt has become bad is omitted from the provisions of law. Therefore, there is no occasion or provocation to consider whether the assessee has again to establish that the debt has become dad. In fact, there is no provocation at all to go to that extent of discussion because the amendment has omitted the expression debt which is established to have become a bad debt. When the amendment has been brought to cure a d .....

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ds raised by the assessee in this regard are allowed. 5. Bad advances written off - ₹ 1,99,08,500/- 5.1 The brief facts of this issue is that the assessee advanced a sum of ₹ 2 crores on 20.5.1992 to Broker Shri.Pallav Sheth under portfolio management scheme. The said broker is supposed to manage the trading portfolio of shares and securities on behalf of the assessee. The said advance was made to Shri.Pallav Sheth during the course of business of the assessee for the purpose of purc .....

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on the following grounds :- a) Bad Advance - ₹ 1,99,08,500/- For that the learned CIT(Appeals) was not justified in ignoring the provisions of the Income Tax Act in disallowing the said write off although there was no dispute that it had become bad. For that the learned CIT(Appeals) failed to appreciate that the appellant did not file any claim with the Special Court and therefore, irrespective of the outcome of its proceedings, the appellant would not be able to recover any amount. On the .....

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he said broker and the difficulties underwent by him due to his fraudulent acts committed earlier. It is not in dispute that the broker Shri.Pallav Sheth was declared a defaulter and suspended by the Bombay Stock Exchange from entering the capital markets due to his involvement in securities scam in the year 1992. We find that the aspect of irrecoverability of trade advances given during the course of business of the assessee is proved beyond doubt from the sequence of events in tabular form sta .....

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not to deal in shares attached by the Income Tax Department including those seized by CBI. We find that Shri.Pallav Sheth had submitted to a consent decree for a sum of ₹ 50 crores upon application by the Custodian appointed under the Special Court Act which was agreed to be paid in installments. But he paid only ₹ 2 crores and defaulted in the payment of further installments. The Learned AR placed the copy of the Hon ble Supreme Court judgement to prove these facts in the case of P .....

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f the Learned AR that till date not even a single penny could be realized by the assessee from said broker. We also find that the said broker Shri.Pallav Sheth had committed an act of insolvency on 22.4.1996 vide Insolvency Petition No. 49 of 1996 and declared insolvent by the competent authority. Though this act of insolvency had happened subsequent to the write off the trade debt and trade advance by the assessee, we hold that the subsequent conduct and negative development in the hands of the .....

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the assessee had indeed advanced monies to the broker under portfolio management scheme. 5.5. We also find that the decision of Hon ble Calcutta High Court relied by the Learned AR in the case of CIT vs Coates of India Ltd reported in 232 ITR 324 (Cal) fully supports the view of the assessee. The relevant extract is reproduced herein below:- Held, that what had been taken into consideration by the Commissioner of Income-tax (Appeals) and the Tribunal was the ability or feasibility of the recover .....

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ed on the decision of the Hon ble Supreme Court in the case of CIT vs Mysore Sugar Co. Ltd reported in (1962) 46 ITR 649 (SC) . The facts before the Hon ble Apex Court and decision rendered thereon is given below:- Facts: The assessee who carried on the manufacture of sugar used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and .....

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x Act. The question was whether the amount of ₹ 2,87,422 which was given represented a loss of capital or was a revenue expenditure: Held, that so far as the assessee company was concerned it was merely making a forward arrangement for the next year s crops and paying an amount in advance out of the price; there was no element of a capital investment in making the advance and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible. 5.7. We find that .....

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loss? • Whether, therefore, the amount of ₹ 44.98 lakhs could be considered as an allowable business loss? Held: • Section 28 imposes a charge on the profits or gains of business or profession. The expression 'Profits and gains of business or profession' is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires d .....

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if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. [Para 11] • .....

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