2015 (11) TMI 792 - AT - Income Tax

Tribunal grants deductions for bad debts and advances due to broker fraud under Income Tax Act

M/s. Summit Investments Ltd Versus J.C.I.T, Spl. Range-16, Kolkata

The tribunal allowed the appeal of the assessee, granting deductions for both the write-off of bad debts amounting to Rs. 11,62,253/- and bad advances ... 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 emanating out of this trade debts and hence the assessee is entitled for deduction u/s 36(1)(vii) read with section 36(2) of the Act.The assessee is entitled to claim deduction towards write off of bad debts 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. Bad advances written off - Held that:- Since the trade advance was made during the course 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. Issues Involved:1. Deduction on write-off of bad debts amounting to Rs. 11,62,253/- as irrecoverable amount from Broker.2. Deduction on write-off of bad advances amounting to Rs. 1,99,08,500/- as irrecoverable amount from Broker.Issue-wise Detailed Analysis:1. Deduction on Write-off of Bad Debts (Rs. 11,62,253/-):The assessee, a company trading in shares, sought to write off trade debts amounting to Rs. 11,62,253/- as irrecoverable. The income from these debts had been offered in earlier years, and the write-off was claimed under section 36(1)(vii) read with section 36(2) of the Income Tax Act. The claim was initially disallowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], leading to the present appeal.The tribunal reviewed the case in light of the directions from the Hon'ble Calcutta High Court, which remanded the matter to reconsider it based on the principles established in the case of Badridas Daga vs CIT. The High Court emphasized that losses resulting from misappropriation by an agent should be considered incidental to the business and deductible under section 10(1) of the Act.The tribunal found that the broker, Shri Pallav Sheth, was declared a defaulter and suspended by the Bombay Stock Exchange due to involvement in a securities scam. The sequence of events, including the attachment of his properties and the notice from the Bombay Stock Exchange, supported the assessee's claim that the debts were irrecoverable.The tribunal relied on several judicial precedents, including:- CIT Vs. Ramakrishna & Sons Ltd (326 ITR 315): The transaction was genuine, and the advances were made during the course of business, making the debt write-off allowable.- TRF Ltd Vs. CIT (323 ITR 397): Post-amendment, it is sufficient for the assessee to write off the debt in the accounts without establishing its irrecoverability.- CIT vs. Smt. Sushila Mallick (36 taxmann.com 537): The assessee's decision to write off the debt based on commercial wisdom is sufficient.The tribunal concluded that the assessee was entitled to the deduction for the write-off of bad debts amounting to Rs. 11,62,253/- and directed the AO to grant the deduction.2. Deduction on Write-off of Bad Advances (Rs. 1,99,08,500/-):The assessee advanced Rs. 2 crores to the broker under a portfolio management scheme. The broker's fraudulent activities and subsequent legal issues rendered Rs. 1,99,08,500/- irrecoverable, leading the assessee to write off the amount in its books.The tribunal noted that the broker's properties were attached, and he was declared insolvent. The assessee's efforts to recover the dues were futile, justifying the write-off. The tribunal referred to:- CIT vs Coates of India Ltd (232 ITR 324): The feasibility of recovery from the debtor was considered, supporting the write-off.- CIT vs Mysore Sugar Co. Ltd (46 ITR 649): Advances made during the course of business, if unrecoverable, are deductible as business losses.- Harshad J. Choksi vs CIT (25 taxmann.com 567): Even if a debt is not deductible as a bad debt under section 36(2), it can be allowed as a business loss if it is incidental to the business.The tribunal concluded that the assessee was entitled to the deduction for the write-off of bad advances amounting to Rs. 1,99,08,500/- and directed the AO to grant the deduction.Conclusion:The tribunal complied with the directions of the Hon'ble Calcutta High Court and allowed the appeal of the assessee, granting deductions for both the write-off of bad debts and bad advances. The order was pronounced in open court on 28/10/2015.