2023 (4) TMI 738 - AT - Income Tax

Tribunal rules in favor of assessee, allowing bad debt treatment for brokerage amounts

The Tribunal allowed the appeal, overturning the decisions of lower authorities and ruling in favor of the assessee. The Tribunal held that when a debt ... Addition of bad debts / debts written off u/s 37 - pre-condition to claim any amount of bad debts on revenue account - As per the AO, the amount has never been taken into account in computing the income of previous year in which such debt or part has become irrecoverable, so he disallowed the same - HELD THAT:- We note that assessee has credited brokerage into income and the total bad debt in this year includes brokerage and part of the amount of transaction owe to the assessee. We note that Hon’ble Delhi High Court in the case of CIT vs. Bonanza Portfolio Ltd. [2009 (8) TMI 636 - DELHI HIGH COURT] hold that the money receivable from the client has to be treated as “debt” and since it became bad, it was rightly considered as 'bad debt' and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36 read with section 36(1 )(vii) stand satisfied in this case. Thus when the debt included brokerage and amount receivable otherwise, Hon’ble High Court has expounded if the entire debt becomes bad the same is allowable as bad debt. Decide the issue in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a debit balance comprising amounts due from a client that includes brokerage (already credited to income) and sale/purchase consideration can be claimed as a bad debt under section 36(1)(vii) when the debt becomes irrecoverable. 2. Whether the pre-condition that the debt must have been taken into account in computing income (section 36(2) read with section 36(1)(vii)) is satisfied where only brokerage was credited to profit and loss and the total receivable (brokerage plus transaction amount) becomes irrecoverable. 3. Whether reliance on relevant territorial High Court authority (and higher court precedent) bearing on the above question was warranted and determinative. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 (treated together): Allowability of bad debt where total client debit includes brokerage already credited to income Legal framework: Section 36(1)(vii) permits deduction of bad debts; section 36(2) imposes the pre-condition that a debt must have been taken into account in computing income in the year in which it became irrecoverable. The contention engages whether the 'debt' for these purposes includes the entire debit balance of the client (brokerage plus transaction amounts) when only brokerage was separately credited to profit and loss. Precedent treatment: The Tribunal expressly followed the binding territorial High Court decision addressing the precise question of whether money receivable from a client, inclusive of brokerage, constitutes a 'debt' allowable as bad debt when it becomes irrecoverable. That High Court held that where the brokerage payable by the client forms part of the overall debt and that debt was taken into account in the computation of income, the conditions of section 36(2) read with section 36(1)(vii) are satisfied and such amount is allowable as a bad debt. Interpretation and reasoning: The Tribunal analysed the accounting treatment and facts: brokerage had been credited to income; the client's account nonetheless showed an overall debit balance comprising brokerage and transaction consideration; recovery efforts failed and the entire debit balance became irrecoverable. Applying the legal framework and the territorial High Court reasoning, the Tribunal concluded that the 'money receivable from the client' constitutes a single debt for the purposes of section 36(1)(vii). Where that combined debt becomes bad in the year, and components (such as brokerage) have been taken into account in computing income, the statutory pre-condition is satisfied and the entire bad debt is deductible. Ratio vs. Obiter: Ratio - where a client's aggregate debit balance (including brokerage already credited to profit) is irrecoverable, that aggregate amount constitutes a 'debt' under section 36(1)(vii) and is allowable as a bad debt if the components forming part of the debt have been taken into account in computing income, satisfying section 36(2). Any observations about broader categories of brokerage or different accounting treatments are obiter and confined to factual scenarios where the components have not been accounted for. Conclusions: The Tribunal set aside the disallowance and allowed the bad debt claim, holding that the conditions of section 36(1)(vii) and section 36(2) were met because brokerage was credited and the total receivable (including brokerage) became irrecoverable. Issue 3: Reliance on territorial High Court authority and alleged failure to give reasonable opportunity Legal framework: Appellate authorities are to apply binding territorial High Court precedent on questions of law; principles of natural justice require reasonable opportunity to be heard before adverse orders. Precedent treatment: The Tribunal relied on the relevant territorial High Court decision as directly on point and followed its legal conclusion. Interpretation and reasoning: The Tribunal noted that the assessee had relied upon the territorial High Court authority and that the accounting facts matched the factual matrix considered by that Court (i.e., brokerage credited and aggregate receivable becoming bad). The Tribunal, applying that precedent, reversed the authorities below. The record reflects hearing of parties before the Tribunal; the Tribunal did not sustain the ground alleging denial of reasonable opportunity, and proceeded to decide the substantive legal issue in accordance with binding precedent. Ratio vs. Obiter: Ratio - appellate application of binding territorial High Court precedent is appropriate where factual and legal matrices align. Observations about any procedural irregularity were not necessary to the decision and therefore obiter; the Tribunal resolved the appeal on substantive legal grounds. Conclusions: Reliance on the territorial High Court authority was warranted and determinative. The Tribunal found the authorities below erred in denying the deduction and, applying the precedent, allowed the appeal; no separate remedial reliance on procedural grievance was required to reach this outcome. Final disposition The Tribunal allowed the bad debt claim, holding that where the client's aggregate debit balance (including brokerage credited to income) becomes irrecoverable and the brokerage component was taken into account in computing income, the statutory requirements of section 36(1)(vii) read with section 36(2) are satisfied and the entire amount is deductible as a bad debt; the tribunal followed the relevant territorial High Court precedent and set aside the orders of the authorities below.