TaxTMI 
TaxTMI 
2010 (5) TMI 667
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under section 63 - Rs. 14,07,751. 2.On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer." 4. Whereas in assessee's appeal, following grounds are raised :- "1.On the facts and in the circumstances of the case, the assessment completed is not in accordance with law insofar as neither the assessment order nor the demand notice contains the break-up of total sum demanded Rs. 98,68,345. It deserves to be annulled. 2.Without prejudice, on facts and in the circumstances of the case, the CIT(A) has erred in holding that though the assessee is a stock broker deduction for bad debts of its clients is not allowable under section 36(1)(vii), read with section 36(2). 3.Without prejudice, on facts and in the circumstances of the case, the CIT(A) should have held that for a stock broker amounts not recovered from its clients, satisfy the condition laid down in section 36(2)(i) and, hence, they are allowable under section 36(1)(vii) of the Act. 4.Without prejudice, on facts and in the circumstances of the case, the CIT(A) has erred in upholding the disallowance of Rs. 1,31,36,427 out of total claim of R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd of Ahmedabad Stock Exchange is granted by Stock Exchange to carry on share transactions at its own in the exchange. 8. We have heard learned D.R. and ld. A.R. According to ld. D.R. as per the decision in CIT v. Techno Shares & Stocks Ltd. [2010] 323 ITR 69 (Bom.), depreciation will not be admissible on membership card of Stock Exchange. On the other hand ld. A.R. submitted that once membership card is acquired after 1-4-1998 then as per latest decision of ITAT Mumbai Bench in Kotak Securities Ltd. v. Addl. CIT [2008] 25 SOT 440 , depreciation on the membership card would be available. 9. After hearing the rival submissions, we are of the considered view that depreciation cannot be allowed on the membership card of Stock Exchange. However, the ITAT Mumbai Bench in the case of Kotak Securities Ltd. (supra) has allowed the claim holding it as intangible asset and that the card would fall within the parameter of section 32(1)(ii) of the Income-tax Act, 1961, it is also held to be a capital asset which confers the right to trade on the floor of the stock exchange, when acquired by the assessee, such right becomes an intangible asset. It has also been so held in Dy. CIT v. Khand....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ectual properties and, therefore, the expression 'licences' in section 32(1)(ii ) would take colour from those expressions and, accordingly, apply only to licences relating to intellectual properties. Construing the expression 'licences' in section 32(1)(ii) widely so as to apply to all types of licences relating to intangible assets would defeat the object of the Act, because, depreciation under section 32 is intended to a limited category of intangible assets and not to a wider category of intangible assets. Therefore, it is reasonable to construe that the expression 'licences' is used in section 32(1)(ii) to apply to licences relatable to intellectual properties only and not to all licences. The above reasoning is further fortified by the expression 'any other business or commercial rights of similar nature' used in section 32(1)(ii). The said expression clearly postulates that the business or commercial rights which are not similar to the categories specified in section 32(1)(ii) are not entitled to depreciation. In other words, the expression 'business or commercial rights of similar nature' clearly shows that all business or commercial rights are not entitled to depreciation.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that conditions laid down under section 36(2) are not satisfied as these debts were never incorporated for working out the profits of the assessee. He relied on the decision of ITAT Ahmedabad Bench in the case of ITO v. Ashokkumar Lalitkumar [1995] 53 ITD 326. Regarding trading loss the ld. CIT(A) held that it was on account of failure of the parties to settle the dues, etc., with the stock exchange. The assessee had to make the payment to Stock Exchange for avoiding himself being declared as a defaulter. If the clients on whose behalf the assessee makes the transaction through stock exchange fail to make the payment then it is the responsibility of the broker to clear the dues within the stipulated time. With this object in mind the assessee made the payment and claimed it as trading loss. In order to support the claim, assessee filed letters indicating under what circumstances, these amounts were written off. In many cases, assessee has taken legal actions. As the assessee has filed complete details with regard to loss suffered in respect of following parties, the ld. CIT(A) allowed part of the claim, as under : Sr. No. Name of the party Amount 1. Padmavati Consult....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp;where commission income earned was declared as income but debts outstanding against them could not be recovered then such non-recovered debts were allowed as business loss. The ld. A.R. then referred to the decision of Hon'ble Punjab & Haryana High Court in CIT v. Dayachand Hardial [1989] 177 ITR 461 where assessee, acting as selling agent sold goods on credit on behalf of clients on credit, but could not realize debt from them the amount not so realized was treated as business loss and as admissible deduction. He then referred to the decision of Hon'ble Delhi High Court in CIT v. D.S. Bist & Sons [2000] 243 ITR 179 where loss on account of non-recovery of business debt was allowed as a trading loss. 17. We have considered the rival submissions and perused the material on record. For claiming deduction under section 36(1)(vii) as bad debt one condition to be satisfied is that amount should be written off in the books of the assessee by debiting P & L account and secondly, such amount or part thereof should be taken into account for computing income of the previous year or any earlier year. There are divergent views as to whether debt recoverable from clients would be consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd that the conditions for allowability of the amount as bad debt as stipulated in section 36(1)(vii) and (2) were not satisfied. This was confirmed by the Commissioner (Appeals). The Tribunal held that the claim of bad debt should have been allowed by the Assessing Officer as conditions stipulated in section 36(1)(vii) and (2) had been satisfied. On appeal : Held, dismissing the appeal, that the money receivable from the client had to be treated as bad 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 the brokerage payable by the client was a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in section 36(1)(vii) and (2) stood satisfied." 19. In the case of share broker, the loss has been held allowable as bad debt even though only brokerage has been credited to P & L account. It has been so held by Ahmedabad Bench in Cannon Capital & Finance Ltd. v. Asstt. CIT [IT Appeal No. 1119/A/05 for assessment year 2001-02/IT Appeal No. 1 447/Ahd./05 D-Bench, dated 7-11-2008]. 20. In the latest judgment given by ITAT Mumbai Bench in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 28 if such debt has occurred during the course of the business. It is undisputed fact that in the present case, the amounts written off by the assessee were the dues of the clients with whom assessee had carried out business transaction of sale and purchase of shares. 22. A share broker as such never trades any shares on his own behalf. He is concerned only with the brokerage accrued on the transactions of sale and purchase carried out by him on behalf of his clients. When the transaction is completed, the share broker is entitled to the brokerage which is credited in the P & L account and debited to the clients' account. A share broker also stands guarantor to the Stock Exchange about the payment of the dues by his clients on purchase of shares through him. He also ensures delivery of script to the purchaser. The liability arise to the share broker for payment of the dues on behalf of the client on the date when transaction of sale or purchase of shares is finalized. The liability on account of non-delivery of the shares or bad delivery would arise on the date of the settlement of the dues. In case the client does not make the payment of the dues or delays the payment the bro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see writes off such debt then he would be entitled for deduction under section 36(1)(vii). Similar view has been taken by the Tribunal in G.R. Pandya Share Broking Ltd. v. ITO [2008] 26 SOT 431 (Mum.). Hon'ble Delhi High Court in D.B. (India) Securities Ltd. (supra) has also taken similar view. 23. Further, the transaction entered into by a share broker, i.e., clients can be find a parallel in the transactions carried out by commission agent. A commission agent either buys goods or sales the goods on behalf of the principals. When he acts as commission agent for sale of goods, he advances the amount to his principal and adjust the sale proceeds against such advances. When he acts as a commission agent for buying the goods he purchases the goods for supply to his principal from his funds. The principal is debited and when he is reimbursed by his principal of supply of his goods, then the principals are credited with the amount of reimbursement. The commission agent debits the principal by the amount of commission charged by him. Then the amount of commission alone is credited in the P & L account in the books of the commission agent. Thus, where amount recoverable from any princi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....they are not held as non-genuine, then non-recoverability of such debts would squarely be a trading loss. When after lapse of time certain clients are not traceable or that some of the clients have expired and their legal heirs refused to accept the liability then amount is clearly not recoverable. It would become a trading loss and, therefore, an allowable deduction. It is only in cases where debts have not occurred in normal course of business or transactions are found to be not genuine, then claim can be disallowed. Therefore, in absence of any material to this effect transactions done in the past in the normal course of business like any other business transactions should be treated as genuine and, therefore, on account of their non- recoverability, the claim of trading loss should be allowed as deduction. In view of this entire loss of Rs. 5,77,44,844 is allowable deduction under section 28 as business loss. As a result, the ground raised by the revenue is dismissed. Whereas the ground raised by the assessee in this regard is allowed. 27. The third ground in departmental appeal is about deleting the addition made by the Assessing Officer under section 68 in respect of unexp....