2012 (8) TMI 710 - HC - Income Tax

Stock broker wins Rs.44.98 lacs deduction as business loss despite bad debt disallowance under section 28

The Bombay HC held in favor of a stock and share broker who claimed deduction for Rs.44.98 lacs as business loss after disallowance of bad debt on vatav ... Disallowance of Bad debt on 'vatav kasar' - assessee is a stock and share broker - assessee contended that even if the deduction is not allowable as bad debts,the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business - Held that:- The expression “Profits and gains of business or profession” u/s 28 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 deducting expenses and losses incurred in carrying on business or profession. As decided in Badridas Daga Versus CIT [1958 (4) TMI 2 - SUPREME COURT] if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss - 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 - in favour of the assessee 1. ISSUES PRESENTED and CONSIDEREDThe core legal question referred to the High Court under Section 256(1) of the Income Tax Act, 1961 was whether the amount of Rs.44,98,210, which was disallowed as a deduction under Section 36(2) of the Act as bad debts, could nonetheless be considered an allowable business loss for the purpose of computing profits and gains from business under Section 28 of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether a sum disallowed as a bad debt deduction under Section 36(2) of the Income Tax Act can be claimed alternatively as a business loss under Section 28 of the Act.Relevant Legal Framework and Precedents: Section 36(2) of the Income Tax Act permits deduction for bad debts only if the debt amount had been offered to tax in an earlier year. Section 28 imposes tax on profits and gains of business or profession, allowing deduction of expenses and losses incidental to carrying on the business. The Supreme Court in Badridas Daga v. Commissioner of Income Tax held that profits and gains must be computed by deducting expenses and losses incurred in carrying on business, in line with accepted commercial practice. Additionally, this Court in Commissioner of Income Tax v. R.B. Rungta & Co. held that even if a debt is not allowable as a bad debt deduction, it may still be allowed as a revenue loss in computing business profits.Court's Interpretation and Reasoning: The Tribunal had held that once a claim is made under Section 36(2) for bad debts, the deduction can only be allowed if the conditions under that section are satisfied, and no alternative claim for deduction under any other provision, including as a business loss, is permissible. The Court, however, distinguished this position and emphasized that Section 28's scope is to tax net profits and gains, which necessarily involves allowing deductions for losses incidental to business operations. The Court noted that the Tribunal did not consider whether the loss could be allowed as a business loss on merits but proceeded on the premise that the claim for bad debts precluded any alternative deduction.Key Evidence and Findings: The assessee, a stock and share broker, sought to write off Rs.47.58 lacs as bad debts due to breach by members of the Bombay Stock Exchange. The Assessing Officer disallowed Rs.44.98 lacs on the ground that the condition precedent under Section 36(2) was not met. The Commissioner of Income Tax (Appeals) partially allowed Rs.2.60 lacs as business loss but disallowed the balance on various grounds including speculation loss and non-trading loss. The Tribunal upheld the disallowance of bad debts and rejected the alternative claim for business loss deduction.Application of Law to Facts: The Court held that the failure to satisfy the statutory conditions for claiming a bad debt deduction under Section 36(2) does not ipso facto bar the assessee from claiming the amount as a business loss under Section 28, provided the loss is incidental to the business. The Court referred to the principle that 'Profits and gains' means net profits and gains after deducting business expenses and losses, and that the list of deductions under Sections 30 to 43 is not exhaustive. Thus, an incidental loss related to business operations can be deducted even if it does not qualify as a bad debt.Treatment of Competing Arguments: The Revenue contended that the specific provision under Section 36 for bad debts is exhaustive and exclusive, barring alternative claims under other sections. It also argued that certain amounts were speculation losses or non-trading losses and thus not deductible. The Court refrained from expressing any opinion on whether the loss was a speculation loss or a trading loss, as the reference was limited to the narrow question of whether a disallowed bad debt could be alternatively claimed as a business loss. The Court declined to address the applicability of the precedent cited by the assessee concerning satisfaction of Section 36(2) conditions, as that issue was outside the scope of the reference.Conclusions: The Court concluded that the Tribunal erred in holding that once a claim is made under Section 36(2) for bad debts, no alternative claim for deduction as a business loss can be entertained. The Court held that the assessee is entitled to claim the amount as an allowable business loss under Section 28 if it is incidental to the business, notwithstanding the disallowance under Section 36(2).3. SIGNIFICANT HOLDINGS'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 deducting expenses and losses incurred in carrying on business or profession.''Even 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.''Even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under Section 10(1) of the Indian Income Tax Act, 1922.'Final determination: The question referred was answered in the affirmative, holding that an amount disallowed as a bad debt under Section 36(2) of the Income Tax Act can be considered as an allowable business loss under Section 28, subject to the loss being incidental to the business. The Court did not decide on the merits of whether the loss claimed was a business loss or speculation loss, limiting its opinion strictly to the legal permissibility of claiming the deduction alternatively.