TaxTMI 
TaxTMI 
1994 (12) TMI 106
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers of the Bombay Stock Exchange. These members were declared as defaulters. The detail of the loss is as under : (i) M/s. Nagordas Laljee Rs. 11,81,555.00 (ii) M/s. Sankalchand Damodardas Rs. 23,94,663.57 (iii) M/s. Jamnadas Sankalchand Rs. 9,21,991.50 (iv) Paid to Stock Exchange Rs. 2,60,040.00 (on account of squaring up on transaction of Nagardas Laljee and Brij Laxmi) ------------------------------- Rs. 47,58,250.00 --------------------------------- The abovesaid amount was debited in the book under the head 'Vatav Kasar' account. 3. The amount of Rs. 47,58,250 had been written off and the same was claimed as ' BAD DEBTS ' before the AO. The claim of the assessee was, therefore, examined by the AO on the touchstone of sec. 36(1)(vii) and sec. 37(2) of the Income-tax Act. It was found that conditions precedent for availing of the benefit of these sections did not exist in the facts and circumstances of the present case. It was observed that for allowing deduction in respect of any bad debt, written off as irrecoverable, the essential conditions under section 36(2) are that the debts should have become bad and must have been taken into account in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the profits and gains of that business, even if it does not fall within any of the sections (30 to 43C). To support this proposition Sri Dastur relied on the ratio laid down in the case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC). 7. Taking us to the background of the matter Shri Dastur submitted that this amount was debited under the head 'Vatav Kasar'. There was no possibility of the recovery of this amount from the defaulting members. Therefore, the amount was written off. The first set of loss occurred on account of badla transactions with M/s. Nagordas Laljee, 1,000 shares of A.C.C. and an amount of Rs. 11,81,555 became due on account of badla transaction. The value of ACC shares shot up from Rs. 550 to 1870 per share in a short span of two months. The debtor paid the first badla but could not keep up his promises in respect of subsequent badla dates. The transaction was found to be genuine. No doubt was casted in regard to the veracity of the transaction. The assessee did not get the badla amount on the subsequent settlement dates. Apropos, M/s. Sankalchand Damodardas and M/s. Jamnadas Sankalchand, the sums of Rs. 23,94,663.57 and Rs. 9,21,991.50 respectiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Stock Exchange sold the card of M/s. Nagordas Laljee for Rs. 55 lakhs. In regard to other defaulting members nothing happened as yet to the knowledge of the assessee. However, if any amount is realised, the same can be taxed under section 45(1) of the I.T. Act, 1961. Sri Dastur relied on some precedents also. 13. The next issue relates to the disallowance of Rs. 1,94,774. Sri Dastur submitted that this amount of Rs. 1,94,774 comprised of number of small amounts. There was no remission of the debt by the party concerned. Therefore, the " Write off " by the assessee could not be considered to be " cessation of liability ". Since the liability has not come to an end, the addition on this count is not correct. 14. The next issue relates to the disallowance of Rs. 5,57,584 on account of loss arising out of " Vandah transactions ". Sri Dastur submitted that these losses were in relation to transactions with parties of the value below Rs. 4,000 each. Therefore, complete details in regard to the parties names could not be furnished. On test check basis the transactions to the tune of Rs. 4,36,124 were found to be genuine. 15. Vandah transaction arise due to the following reasons....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the enabling conditions as prescribed u/s 36(2) are not being satisfied. In view of the same, the claim of the assessee was disallowed. Since, it was claimed as bad debt, the allowability was considered taking into consideration the applicability of sections 36(1)(vi) and 36(2) of the Act. Finding difficulty, in view of the prescription given in section 36(2), the assessee now intends to make a change in his stands. Therefore, the additional grounds for treating the bad debts as business loss were raised. The assessee was acting as a broker. He acted on behalf of the principals. Therefore, legally, he was not responsible to make good the loss. There is absolutely nothing on record to show that the assessee was forced to sell the ACC shares at a loss. This transaction was not reflected in the trading account. Therefore, no assumption or presumption can be drawn in relation to the veracity of the explanation offered by the assessee. This loss can at most be considered as capital loss or loss arising out of speculation business. It was further submitted that there is no provision in the Act under which such loss could be allowed. Admittedly the amount was claimed as a bad debt. There....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing in the name of the said party. 23. In regard to Shri Rupesh D. Sheth, it was submitted that the payment was made by mere adjustment. No books were maintained by Mr. Sheth. There was no sufficient evidence to prove the veracity of the transaction. 24. In regard to the disallowance out of travelling expenses and general staff welfare expenses, it was submitted that these amounts were disallowed for want of complete details. This ground was not pressed before the CIT(A). 25. We have heard the rival submissions in the light of the material placed before us and precedents relied upon. We have perused the records. We have also taken into consideration the Additional grounds raised before us. 26. At the outset, Sri Dastur fairly conceded that the conditions precedent as contemplated u/s 36(2) did not exist in the facts and circumstances of the present case. Therefore, the claim of bad debt as made by the assessee is not allowable as ' bad debt ', but it is allowable as a business loss. 27. True, claiming under a wrong provision does not debar the assessee to make a rightful claim, provided relevant details are furnished at the time of filing the return and if it is poss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is treated as a defaulter. Stock Exchange authorities take action against the defaulter. His card may be confiscated and auctioned in public to make good the loss due to breach. Article 191 of the Stock Exchange Bye-laws reads as under : " 191. The exchange does not recognise as parties to any bargain in the market any parties other than its own members and every member is directly and primarily liable to every other member with whom he effects a bargain for its due fulfilment in accordance with the Rules, Bye-laws and Regulations of the Exchange whether such bargain be for account of the member effecting it or for account of a principal. " 31. An item of loss incidental to carrying on of the business may be deducted in computing the profits of the business even if it does not fall within any of the sections. But this rule cannot be applied where the items of loss can be linked or associated with the provisions of the Statute. Sections 30 to 43(c) expressly provide what can be deducted in computing business income. If an expenditure comes within any of the enumerated clauses of allowances, it is mandatory on the part of the A. O. to consider the same under the appropriate pro....