2009 (8) TMI 636 - HC - Income Tax

Share broker allowed bad debt deduction on client receivables; entire debit balance qualifies under sections 36(1)(vii) and 36(2)

HC held that in a share broking business, amounts receivable from clients for purchase/sale of shares constitute a 'debt' for purposes of section ... Bad Debts - business of share broking - Whether in view of the provisions of section 36(1)(vii), the total debit balance including the consideration collectible by the assessee-company for the sale/purchase of shares can be claimed by the assessee as bad debts when the assessee-company had only credited brokerage in the profit and loss account ? - HELD THAT:- Merely because he made payments against those shares would not make it an investment by the assessee on his own behalf. We are of the opinion that the very basis of this argument is misconceived, namely, that the particular purchase should be treated as investment by the assessee only because he made the payment. As pointed out above, the assessee has shown the income in his books of account as income from the brokerage. That itself shows that in so far as the transaction in question is concerned, it was treated as a transaction of brokerage for purchase/sale of shares on behalf of his clients and it was not a transaction which was entered into by the assessee on his own behalf. We 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. Hence, question of law stands decided against the Revenue and in favour of the assessee. This appeal is accordingly dismissed. Issues: Whether, under Section 36(1)(vii) read with Section 36(2) of the Income-tax Act, 1961, the total debit balance including the consideration collectible by a broker for purchase/sale of shares (beyond brokerage credited in profit and loss account) can be claimed as a bad debt when the broker has only credited brokerage as income.Analysis: The Court examined whether amounts paid by the assessee-broker on behalf of clients constitute a 'debt' and whether the conditions in Section 36(2) are satisfied when brokerage has been taken to income. The Court followed the Delhi High Court decision in CIT v. Morgan Securities and Credits P. Ltd. and consistent Tribunal decisions which held that where brokerage (being part of the receivable) has been taken into account in computing income, the entire receivable including the purchase/sale consideration payable by the client is to be treated as debt. The Court rejected the Revenue's contention that payment by the broker makes the transaction an investment by the broker and that the shortfall is a capital loss, noting that the assessee treated the transaction as brokerage business and had declared brokerage as income; thus the unpaid balance is revenue receivable and became irrecoverable.Conclusion: The unpaid consideration payable by the client is a 'debt' and, having become irrecoverable, qualifies as a 'bad debt' under Section 36(1)(vii) read with Section 36(2). The question of law is decided against the Revenue and in favour of the assessee.