2014 (5) TMI 348 - AT - Income Tax

Tribunal allows Assessee's bad debts claim under Income Tax Act, dismissing Revenue's appeal

The Tribunal upheld the Assessee's claim of bad debts amounting to Rs. 15,85,238, dismissing the Revenue's appeal. The Tribunal found the bad debts were ... Deleting the disallowance on account of bad debts – Held that:- Following DCIT Versus Shreyas S. Morakhia [2010 (7) TMI 455 - ITAT MUMBAI] and Commissioner of Income-tax Versus Bonanza Portfolio Ltd. [2009 (8) TMI 636 - DELHI HIGH COURT] - the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt - The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2) (i) and the assessee is entitled to deduction u/s 36(l)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable - Revenue could not bring any contrary binding decision in its support, nor could it controvert the finding of CIT(A) – Decided against Revenue. Issues:1. Disallowance of bad debts amounting to Rs. 15,85,238 made by the Assessing Officer.2. Applicability of Section 36(1)(vii) and Section 36(2) of the Income Tax Act, 1961 to the claim of bad debts by a share broker.3. Interpretation of the legal provisions regarding bad debts in the context of share broking business.Analysis:1. The appeal was filed by the Revenue against the order of CIT(A)-XVI for A.Y. 2008-09, challenging the deletion of the disallowance of bad debts amounting to Rs. 15,85,238 made by the Assessing Officer. The Assessee, a share broker, had claimed the bad debts as irrecoverable and written them off in its Profit and Loss account.2. The Assessing Officer disallowed the claim of bad debts, stating that the bad debts were not accounted for as income and hence not allowable under Section 36(2) of the Act. The CIT(A), relying on the decision of Hon'ble ITAT Special Bench in a similar case, allowed the appeal of the Assessee.3. During the proceedings, the Revenue argued for the disallowance based on previous tribunal decisions, while the Assessee supported the CIT(A)'s decision with references to relevant legal judgments. The Tribunal noted that the issue of bad debts in the context of share broking was previously addressed by the Special Bench and the Delhi High Court.4. The Tribunal found that the Assessee's claim of bad debts was justified as the debts were trading debts arising from share transactions, and the commission income formed part of the debt. Relying on the legal precedents, the Tribunal dismissed the Revenue's appeal, stating that no contrary binding decision was presented, and the decisions cited by the Revenue were distinguishable.5. The Tribunal upheld the order of CIT(A) based on the decisions of the Special Bench and the Delhi High Court, concluding that the Assessee was entitled to claim bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961. The appeal of the Revenue and the C.O. of the Assessee were both dismissed.This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the Tribunal's reasoning behind the decision, focusing on the interpretation of legal provisions and relevant precedents in the context of bad debts claimed by a share broker.