Important cases - income tax laws

Taxpayer not required to demonstrate that the debt has become bad debt once it is written off in the books of account: SC
http://taxguru.in/income-tax-case-laws/taxpayer-not-required-to-demonstrate-that-the-debt-has-become-bad-debt-once-it-is-written-off-in-the-books-of-account-sc.html
Supreme Court Ruling: After 1 April 1989 theTaxpayer is not required to demonstrate that the debt has become bad debt once it is written off in the books of account [TRF Ltd. v. CIT (2010-TIOL-15-SC-IT)]

Supreme Court Ruling:

In order to claim a bad debt as a deduction under section 36(1)(vii) of the Income tax Act(Act) it has been a long drawn controversy between the Taxpayer and the Revenue whether in addition to write-off the debt in thebooks of account, it is obligatory on theTaxpayer to establish that such debt has become a bad debt, especially after theamendment brought in by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1 April 1989.

This controversy has now been put to rest by the Supreme Court in the case of TRF Ltd. v. CIT wherein it has been held that after 1 April 1989 it is not necessary for the Taxpayer to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the Taxpayer.

Our View:

The Direct Tax Laws (Amendment) Act, 1987 substituted the words "any bad debt or part thereof" in place of "any debt, or part thereof, which is established to have become a bad debt in the previous year" in section 36(1)(vii) of the Act w.e.f. 1 April 1989. Subsequent to the above amendment the Central Board of Direct Taxes (CBDT) has issued Circular 551 dated 23 January 1990. The issue pertaining to bad debt is set out in para. 6.6. and the relevant portion reads as under :-

"In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee."

The Circular of the CBDT clearly spells out that the amendment is to eliminate the disputes in the matter of determining the year in which the bad debt is written off as irrecoverable. If we apply the Rule of interpretation as spelt out in Hyden's case, it would lead to an irresistible conclusion, that the Legislature by the amendment has sought to exclude the burden on the Taxpayer to prove that the debt is bad debtand leaves it to the commercial wisdom of the Taxpayer to treat the debt as bad, once it is written off as irrecoverable in the accounts of the Taxpayer. Inspite of this clear provision the Taxpayer was again called upon to establish that the debt has become bad debt.

The Supreme Court has now given a ruling in favour of the Taxpayer that it is not obligatory on theTaxpayer to prove whether the debt has become bad debt once such debt has been written off in thebooks of account. This is a welcome decision and would give a substantial relief to the Taxpayer. It seems that the judgement of the Rajasthan High Court in the case of Kashmir Trading Co. v. DCIT (291 ITR 228) is overruled, while judgements of High Courts in the case of DIT v. Oman International Bank (313 ITR 128)(Bom) and CIT v. Global Capital Ltd. (306 ITR 332) (Del) are approved.


Although the aforesaid judgement of the Supreme Court does not clearly spell out, we believe that after the amendment, though it is neither obligatory nor is there burden on the Taxpayer to prove that the debt written off by him is indeed a bad debt; the write-off needs to be bona fide and should be based on commercial wisdom or expediency.









Writing off the bad debt by itself is enough to claim deduction of bad debt u/s 36(2)
http://taxguru.in/income-tax/writing-bad-debt-claim-deduction-bad-debt-362.html
All Grow Finance And Investment Pvt Ltd Vs CIT (Delhi HC) – Only condition laid down in second part of sub-section 2 of Section 36 of the Act is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debt qualifying as bad debt in the first part of sub-section 2. We are of the view that revenue is not justified in holding that the amount of Rs.34,95,000/- was not allowable as bad debt under Section 36(1)(vii) read with Section 36(2) of the Act.

IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No. 682/2011

Judgment reserved on : 5th MAY, 2011
Judgment delivered on : 3rd JUNE, 2011

ALL GROW FINANCE AND INVESTMENT P. LTD.


Versus

COMMISSIONER OF INCOME TAX


M.L. MEHTA, J.
1. The assessee is in appeal before us against the impugned order dated 29th October, 2010 passed by the Income Tax Appellate Tribunal (in short „Tribunal‟) in respect of the assessment year 2000-01.
2. This appeal was admitted on the following question of law:
(i) Whether on the facts and circumstances of the case, the Tribunal was justified in holding that thebad debt amounting to Rs.34,95,000/- were not allowable under Section 36(1)(vii) read with Section 36(2) of the Act.

(ii) Whether on the facts and circumstances of the case, the Tribunal misdirected itself in holding that the conditions of Section 36(2) of the Act were not fulfilled in a case where the advance/debt itself was not shown as income in the profit and loss account."

3. The assessee is a non-banking financial company. It derives its income from interest on money lent to various parties as a part of its money lending business. On 16th April, 1999 it lent `60 lakhs to M/s Bhav Portfolio. After deducting opening credit balance of `3.10 lakhs, a sum of `56.90 lakhs became due to be recovered. However, this amount could not be recovered even after several requests, reminders and legal notice. Ultimately, `28.45 lakhs (50% of amount due) was written off in assessment year 2000-01. The balance amount was also written off in the year 2004-05 and the same stand allowed in the assessment made under Section 143(1) of the Income Tax Act (for short „the Act‟). Similarly, `6,50,000/- (being 50% of the amount due) was written off in the case of M/s Gallery in the relevant assessment year.
4. The Assessing Officer disallowed assessee‟s claim for baddebts holding that under Section 36(2), to write off any bad debt, same has to be included in the income for earlier years which was not done in the case of assessee.
5. The findings of the Assessing Officer were confirmed by both CIT(A) as well as Tribunal. The Tribunal also observed that the advances made by the assessee were without collateral security or any other type of security. Such non-compliance of safety measures in respect of security of debt shows that the advance was not made in the ordinary course of business. The Tribunal also observed that since the assessee failed to prove that the amount which has been advanced was ever shown as income in any of the previous years, therefore, conditions set out under Section 36(2) are not fulfilled.
6. The main contention of the learned counsel for the appellant/assessee is that writing off the bad debtby itself is enough to claim the deduction of bad debt under Section 36(2) of the Act. He submitted that this section does not require that the entire money lent, which has become irrecoverable, need to be shown as income in the case of a non-banking money lending business. He submitted that the only requirement is that the money should have been lent in the ordinary course of business in the hope of earning interest. On the other hand, learned counsel for the revenue submitted that the debt or part thereof was not shown as income in the previous year in which the amount of such debt or part thereof was written off and so conditions under sub– section (2) of section 36 are not fulfilled and therefore, the amount could not be taken as bad debt. The contention raised by both the learned counsel centered around the interpretation of sub-section 2(i) of section 36, which reads as under:-
"(2) In making any deduction for a bad debt or part thereof the following provisions shall apply-

[(i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money­lending which is carried on by the assessee;]"

(emphasis supplied)

7. Learned counsel for the appellant/assessee has tried to interpret the section in two parts. He submitted that the requirement of the first part of the section would not be applicable to the second part of the section which relates to money lent in the ordinary course of business of banking or money lending carried on by the assessee. The second part of the section, as pointed out, has been highlighted by us in the clause (i) of sub-section (2) which has been reproduced above.

8. For the time being, without going in to this interpretation of two parts of clause (i) of sub-section (2), it may be stated that the provision of section 36(1)(vii) read with section 36(2)(i) of the Act would come into play only if; firstly the amount of loan or part thereof which is claimed as deduction should be established to have become bad debt and secondly, the amount should have been shown to have become irrecoverable and written off from the accounts of the assessee or from the account in which the claim is made.
9. The division bench of our High Court in the case of CIT v. Morgan Securities and Credits (2007) 292 ITR 339, while interpreting section 36(1)(vii) and 36(2)(i) observed as under:-
5. A conjoint reading of Section 36(2) and Section 36(i)(vii) makes it clear that the assessed would be entitled to a deduction of the amount of any bad debt which has been written off as irrecoverable in its Accounts for the previous year. Any lingering doubt would vanish on a careful reading ofCircular Number 551 dated 23.1.1990, the relevant portion of which reads as follows:

6.6 The old provisions of Clause (vii) of Sub-section(1) read with Sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in the year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalize the provisions, the Amending Act, 1987 has amended Clause (vii) of Sub-section (1) and Clause (I) of Sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debthas been written off as irrecoverable in the accounts of the assessed.

6.7 Clauses (iii) and (iv) of Sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income Tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessed. These clauses have become redundant, as the bad debts are now being straightway allowed in the year of write off. The Amending Act , 1987 has, Therefore, amended these clauses to withdraw them after the assessment year 1988- 89.

7. It is our view that the Circular Number 551 leaves no scope for debate since it specifically notices the previous practice of having to establish that a debt had become bad in the previous year, which had generated enormous litigation on the question of allowability of bad debt in a particular year. TheCircular expressed the hope that this litigation would be eliminated by permitting a debt to be treated as a bad or recoverable no sooner it was written off in the books of the assessed concerned.

10. There is no dispute with regard to the above mentioned proposition of law as interpreted by the decision of our High Court in the case of Morgan Securities (supra). However, the present case relates to assessee which is undisputedly a NBFC and is in the business of money lending and has been making advances to different concerns, two of them being those to whom advances were made and which are claimed as bad debts as noted above. In the manner the learned counsel for the appellant has interpreted clause (i) of sub-section (2), he states that the second part of this clause starting from „or represents money lent … by the assessee‟ as highlighted by us deals with the different types of activities, not at all related to those with the first part of business activities. In other words, his submission was that in the case of advances/loans made by any concern doing the business of banking or money lending, it was not obligatory that such advances/loans or part thereof should be shown to have become irrecoverable and consequently written off in the accounts of the assessee in the previous year. This manner of interpretation was not acceptable to the learned counsel for the revenue who submitted that for claiming deduction of any amount as bad debt it was necessary to establish that the amount has become not only bad debt, but the same was also shown to have become irrecoverable and written off in the accounts of the assessee for the previous year. The interpretation of section 36(2) clause (i) came before the Division Bench of Madras High Court in the case of P.C.Dharmalinga Mudaliar v. Commissioner of Income Tax (1985) 152 ITR (Mad). Relying upon the famous judgment of Rowlatt J.,in Curtis v. J. & G. Oldfield Ltd. [1925] 9 TC 319, the Division Bench held as under:-

"The first limb of s. 36(2)(i)(a) of the present Act only incorporates Rowlatt J.'s principle; that limb exacts very clearly that no deduction shall be allowed for a bad debt, unless such debt has been taken into account in computing the income of the assessee for the previous year or for an earlier previous year. It is implicit in this express condition that the debt should have arisen in the course of carrying on his business. In the second limb of s. 36(2)(i)(a), this condition is not repeated, for the simple reason that the second limb deals with money-lending and banking business in which the money itself is regarded as a stock-in-trade and, therefore, the money lent would certainly come into the revenue account, and, hence, it was perhaps thought to be unnecessary to emphasise the obvious by saying that money lent in a money-lending or banking business must have been taken into account in the computation of money lending or banking business. The only requirement which was worthwhile to make mention of in a banking or money-lending business is that it must have been money lent in the course of the business of the assessee. Therefore, taking the provision in s. 36(2)(i)(a) as a whole, it is necessary in every case to find if a debt in a money-lending or banking business or a debt in a non­money-lending or a non-banking business must have been incurred in the course of the assessee's business. The second limb is that in the case of non-money-lending or non-banking business, a debt in order to be a bad debt must have been taken into account in the computation of the income of the assessee. This particular requirement takes care to exclude what may be called capital debts from qualifying for write-off as bad debts "

11. In the present case there is no dispute that the amounts of debts in question were advanced by the assessee in the ordinary course of money lending. The question for consideration would be as to whether the condition prescribed in the first limb for taking the debt into account while computing the income can be read in the second limb also and whether that can be done despite the construction of the second limb in the manner which is separated from the first limb by use of "comma" preceding the word "or" which clearly divides the provision in two parts, viz., (i) first part, dealing with non-money lending business; and (ii) second part, dealing with money lending business alone and the division is intended to ensure the fulfillment of conditions for allowance of bad debts peculiar to each limb concerned.

12. The controversy that has arisen from the order of the Tribunal is whether the amount of debt itself should be shown as income before the debt qualifies for claim as a bad debt. It is seen that the controversy before the Madras High Court in the case of P.C. Dharmalinga (supra) was whether money advanced to a transport company from cloth and yarn business be treated as money advanced in the ordinary course of cloth and yarn business. The Madras High Court‟s emphasis as required by the second part was that it may be admittedly in relation to money lending business that debt is advanced in ordinary course of business and if the debt is not advanced in the ordinary course of business, it would not qualify for deduction as a bad debt. Thus, according to Madras High Court itself money lent as part of money lending business being stock-in-trade automatically comes into revenue account. In other words, it need not be taken into account in computing the income as required in the first limb in relation to non-money lending business to prove that it is on revenue account. Madras High Court correctly emphasizes as required as per second limb that it should be found out in relation to money lending business that debt is advanced in the ordinary course of money lending business. If the debt is not advanced in the ordinary course of business, it would not qualify for deduction as a bad debt.

13. We are of the view that the only condition laid down in second part of sub-section 2 of Section 36 of the Act is that the amount should be advanced in the ordinary course of business which by itself proves its revenue nature and no further conditions are required to be satisfied which are only applicable with regard to debt qualifying as bad debt in the first part of sub-section 2 in the manner as interpreted above.
14.For the aforesaid reasons, we are in agreement with the submissions of learned counsel for the appellant/assessee as regards the interpretation of sub-section 2(i) of Section 36 and that being so, we are of the view the authorities below are not justified in holding that the amount of Rs.34,95,000/- was not allowable as bad debt under Section 36(1)(vii) read with Section 36(2) of the Act.
15. In view of this, the additional/alternative plea raised by the learned counsel for the appellant for allowing said deduction as business loss under Section 37 of the Act, does not require any consideration. In fact this additional ground was raised by the assessee before the CIT(A) which was disallowed, and for which the matter was remanded by the Tribunal. So, this ground does not require any further consideration in view of our findings in favour of the assessee as noted above.
16.Consequently, we answer the questions in favour of the assessee and against the revenue and allow the appeal of the assessee.
M.L.MEHTA (JUDGE)

A.K.SIKRI
(JUDGE)

JUNE 03, 2011





Claim of bad debts allowable even if debts are of the same year – ITAT Mumbai
http://taxguru.in/income-tax-case-laws/claim-bad-debts-allowable-debts-year-itat-mumbai.html
DCIT v. Rediff.com India Limited (ITAT Mumbai) - A.O. disallowed the claim of bad debts on the ground that the transactions pertain to the current year and the same was written off by the assessee in the same yearitself. According to the A.O. the bad debt claimed by the assessee has in fact not yet matured to claim it as bad and irrecoverable. We find the CIT(A) allowed the claim of bad debts on the ground that the assessee fulfilled the conditions of section 36(1)(vii) r.w.s. 36(2) of the Act. We find this issue has now been decided in favour of the assessee by the decision of Hon'ble Supreme Court in the caseof TRF Ltd. Vs. CIT 323 ITR 397 wherein it has been held that after the amendment of section 36(1)(vii) of the I.T. Act, 1961 w.e.f. April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. Since the assessee has written off the amount of bad debts in the books of account, therefore, in view of the decision cited above, we do not find any infirmity in theorder of the CIT(A) in allowing the claim bad debts written off.




Dy. Commissioner of Income tax Vs. M/s Rediff.Com India Pvt. Ltd.

ITAT MUMBAI

ITA No.905/Mum/2008

Assessment Year : 2002-03

M/s Rediff.Com India Pvt. Ltd., Vs. Dy. Commissioner of Income tax

ITA No. 1120/Mum/2008

Assessment Year : 2002-03

Dy. Commissioner of Income tax Vs. M/s Rediff.Com India Pvt. Ltd.,

ITA No.906/Mum/2008

Assessment Year : 2003-04

ORDER

PER BENCH.

ITA No. 905/Mum/2008 & ITA No. 1 120/Mum/2008 are cross appeals and are directed against the separate orders dated 14.11.2007 of the ld. CIT(A) – VII, Mumbai relating to A.Y. 2002-03. ITA No. 906/Mum/2008 filed by Revenue is directed against the order dated 14.11.2007 of the ld. CIT(A)- VII, Mumbai relating to A.Y. 2003-04. For the sake of convenience, these were heard together and are being disposed of by this common order.

ITA No. 1 120/Mum/20-08 (By the assessee for A.Y. 2002-03)

2. In ground No. 1, the assessee has challenged the order of CIT(A) in treating the software and product development expenses of 4,24,37,733/- as capital in nature as against revenue expenditure claimed by the assessee. In the alternate contention, the assessee has also raised a ground that in case the same is treated as capital in nature, depreciation is to be allowed @ 60% as against 25% held by the A.O. and upheld by the CIT(A).
3. Both the parties fairly agreed that the issue has to go back to the file of the A.O. for fresh adjudication in the light of the decision of Special Bench of ITAT in the case of Amway Enterprises vs. DCIT 301 ITR [AT] 1 (Del) (SB). In view of the above submission made by both the sides, we set aside the order ofCIT(A) and restore the matter to the file of the A.O. with a direction to decide the issue afresh in the light of the decision of the Special Bench of ITAT cited supra and in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Ground No. 1 of assessee's appeal is accordingly treated as allowed for statistical purpose.
4. In ground No. 2, the assessee has challenged the order of CIT(A) in confirming the addition of non-compete fee of 16,00,000/- paid to Foot Forward Communications Pvt. Limited.
5. Facts of the case, in brief, are that the A.O. during the course of assessment proceedings noted that during the year under consideration, the assessee has claimed non-compete expenses of 16 lacs after reducing the amortised amount claimed during the year 2000-01. On being questioned by the A.O. to explain and give the details of non-compete expenses of 19,59,667/-, the assessee filed certain details only. Subsequently, the A.O. asked the assessee to explain and justify the allowability of non-compete expenses and under which provisions these expenses have been claimed as allowable expenditure. However, no reply was filed by the assessee. From the details furnished by the assessee, the A.O. noted that the assessee company has entered into an agreement dated 30.06.2000 for a period of 4 years and the expenditure of 32 lacs is to be equally distributed in the 4 years. This being the second year, the A.o. held that only 8 lacs can be allowed and the balance amount of 16 lacs will be disallowed. He, accordingly, disallowed an amount of 16 lacs.
6. In appeal, the CIT(A) confirmed the action of the A.O. by holding that the fee has been paid to restrict the promoter to compete in the line of Internet portal, which is the main business of the assessee. Thepayment of 32 lacs paid as non-compete fee does lead to enduring benefit as by making the payment the company has obtained an advantage in terms of a better competitive positioning by eliminating one competitor amongst various others. Aggrieved by such order of the CIT(A), the assessee is in appeal before us.

6. The ld. Counsel for the assessee, at the outset, submitted that the Tribunal in assessee's own case in the preceding A.Y. has restored the matter to the file of the CIT(A) for passing a speaking order. Since the CIT(A) has not given any finding on the claim of the assessee that non-compete fee paid by the assessee to M/s Footforward Communications Pvt. Ltd. was a revenue expenditure and since during the impugned A.Y., the assessee has not at all claimed any expenditure in the P&L account, and, since the lower authorities have not decided the issue properly, therefore, the matter should go back to the A.O. or CIT(A) as the Bench decides, for fresh adjudication. The ld. D.R. fairly conceded that she has no objection if the matter is sent back to the file of A.O. or CIT(A) for fresh adjudication.

7. After hearing both the sides, we find merit in the submission of the ld. Counsel for the assessee that the matter should go back to the file of A.O. for fresh adjudication. Admittedly, the assessee has not claimed any expenditure on account of non-compete fee during the year since amortisation of miscellaneous expenditure of 1,87,15,371 / – claimed in the P&L account has been disallowed in the computation of total income. The A.O. shall decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee. Ground No. 2 of assessee's appeal is accordingly allowed for statistical purpose.
8. In ground No. 3 & 4, the assessee has challenged the order of CIT(A) in confirming the disallowance of 75,31,489/- and 6,43,07,700/- on the ground that the assessee had not deducted tax as required u/s 40(a)(i) of the Act.
9. At the outset, the ld. Counsel for the assessee submitted that the amount of 75,31,489/- has been paid towards legal and professional fees and editorial fees paid to residents of USA and UK. Similarly, thepayment of 6,43,07,700/- has been paid to Rediff.Com Inc. for obtaining certain services in connection with the North American edition of the Rediff.com.website. He submitted that before the A.O. no details could be filed because the Accounts Department of the assessee company was not well organised. Before the CIT(A), all details were filed but unfortunately the CIT(A) has not at all discussed the various submissions given by the assessee. He submitted that although the details were filed before the CIT(A), the assessee, as a precaution, has also filed application for admission of additional evidence since those details were not filed before the A.O. He submitted that the matter should be restored to the file of CIT(A) for fresh adjudication of the issue in the light of the documents filed before him and in the light of the decision of Hon'ble Supreme Court in the case of G.E. Technology Centre (P) Ltd. Vs. CIT & Another 327 ITR 456 (SC).

10. The ld. D.R., on the other hand, submitted that the decision in the case of G.E. Technology Centre (P) Ltd. (supra) is not applicable to the facts of the present case. Since the assessee has not filed the requisite details before the A.O., the A.O. disallowed the amount which has been upheld by the CIT(A). She submitted that the additional evidences should not be admitted at this stage since the assessee has not given any valid justification as to why those details could not be filed before the A.O.
11. We have considered the rival submission made by both the sides, perused the orders of A.O. and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the decision relied on by the ld. Counsel for the assessee. There is no dispute to the fact that the assessee has not filed any details before the A.O. for justifying non-deduction of tax on account of payment to residents of USA and UK. We find that although various details were furnished before the CIT(A), it is not clear from his order as to whether he has accepted or rejected those additional evidences filed before him. He has not at all considered the details filed before him. Therefore, in the interests of justice, we deem it proper to restore the above issues to the file of CIT(A) for fresh adjudication. The CIT(A) shall decide the issue in the light of the documents submitted by the assessee and in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Grounds of appeal No. 3 & 4 are accordingly allowed for statistical purpose.
12. In grounds of appeal No. 5(a) and 5(b) the assessee has challenged the order of CIT(A) in confirming the addition of 64,60,337/- made by the A.O. as prior period expenses.

13. Facts of the case, in brief, are that the A.O. during the course of assessment proceedings noted from the details furnished before him that the assessee has paid expenses pertaining to earlier year to the extent of 64,60,337/- and also received income relating to earlier year to the extent of 9,35,780/- and has debited the net amount of 55,24,557/- in the P&L account as prior period expenses. According to the A.O., the legal position is that income pertaining to earlier years is taxable on receipt basis u/s 41 of the Act but expenses pertaining to earlier year are not allowable as they are not pertaining to the year under consideration. He further noted that the assessee company has not filed any documentary proof in support of its claim that the prior period expenses actually crystallised during the year under consideration. Rejecting the various explanation given by the assessee and relying on a couple of decisions, the A.O. treated the receipt of 9,35,780/- as income of the year. He, however, disallowed the claim of 64,60,337/- and added to the total income of the assessee.



14. In appeal, the CIT(A) confirmed the addition made by the A.O. by holding as under:–

"The argument of the appellant fact of the case have been considered. In the assessment order it has been mentioned that the appellant has claimed the expenses pertaining to earlier year to the extent of 64,60,337/- and the appellant has also received income relating to earlier year to the extent of 9,35,780/- . The appellant has adjusted these two amounts, which has not been allowed by the A.O. The income pertaining to the earlier year is taxable u/s 41 of the Act. While the expenses incurred for the prior period is not allowable unless it is established that the liability to pay the amount actually crystallized during the year. The AO had provided the appellant an opportunity to explain the position. However, the appellant had not filed any documentary proof in support of its claim that the prior period expenses have crystallised during the year. Even during the appellate proceeding the appellant has mentioned a number of the case laws, however, no effort is made to produce any documentary evidence to show that the expenses actually crystallised during the year. Hence the disallowance made by the A.O. on this account is quite justified. The disallowance is, therefore confirmed."

15. Aggrieved by such order of the ld. CIT(A), the assessee is in appeal before us.

16. After hearing both the sides, we do not find any infirmity in the order of the CIT(A). It is the settled proposition of law that for claiming any expenditure as allowable deduction, the onus is always on the assessee to substantiate with evidence to the satisfaction of the A.O. that the same is genuine business expenditure. Undoubtedly, the assessee in the instant case has failed to justify the allowability of claim of prior period expenses of 64,60,337/- during the year before the A.O. & CIT(A) by showing that the expenditure has crystallised during the year. Even before us also the assessee could not substantiate that the expenses have crystallised during the year under consideration. Therefore, the addition of 64,60,337/- made by the A.O. and sustained by the CIT(A) is justified. We do not find much force in the submission of the ld. Counsel for the assessee that the same should have been netted off and the balance only could have been disallowed as a deduction during the relevant previous year. In our opinion, the addition of prior period income of 9,35,780/- is governed by provisions of section 4 1(1) whereas the allowability of prior period expenses of 64,60,337/- is governed by the provisions of section 37(1) of the Act. Further, the A.O. had also given a finding that the prior period expenses have not been incurred for earning the prior period income. Nothing has been brought on record to controvert the finding given by the A.O. In this view of the matter we do not find any infirmity in the order of the ld. CIT(A) and uphold the same. The grounds raised by the assessee are accordingly dismissed.

ITA 905/Mum/2008 (By the Revenue for A.Y. 2002-03)

17. Grounds of appeal No. 1 & 2 reads as under:-

"1. On the facts and in the circumstances of the case and in la, the CIT(A) erred in directing the Assessing Officer to verify whether `software usage expenses' of 68,45,718/- had been included in disallowance of `Software & Product Development expenses' of 4,24,37,733/- and if so, rectify the assessment order without appreciating the fact that under sec. 251(1) of the I.T. Act the CIT(A) himself ought to have verified and quantified the relief and ought to have given direction accordingly."

2. On the facts and in the circumstances of the case and in la, the CIT(A) erred in directing the Assessing Officer to verify whether `fixed assets' purchased by the assessee of 23,00,000/- has been already capitalised by the assessee as `Fixed assets' and if so, rectify the assessment order without appreciating the fact that under sec. 251(1)of the I.T. act the CIT(A) himself ought to have verified and quantified the relief and ought to have given direction accordingly."

18. As can be seen from the above grounds, the grievance of the Revenue is that the CIT(A) has no power u/s 251(1) to set aside the matter to the file of the A.O. for verification.
19. Both the sides have fairly agreed that although the CIT(A) has no power to set aside the issue, however, the Tribunal has the power to set aside the issue to the file of the A.O. for verification and adjudication of the issue in accordance with law. We, therefore, restore the above two issues to the file of the A.O. for verification and fresh adjudication in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal No. 1 & 2 are accordingly allowed for statistical purpose.
20. Grounds of appeal No. 3 reads as under:–

"On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the assessee's claim of bad debts of 3,54,984/- without appreciating the fact that bad debt pertained to the current year under consideration and the assessee could not fulfil the basic conditions laid down u/s 36(1)(vii) r.w.s. 3692) of the I.T. Act, 1961."

20.1 After hearing both the sides, we find the assessee company had debited bad debts written off amounting to 3,54,984/-. We find after going through the full details filed by the assessee, the A.O. disallowed the claim of bad debts on the ground that the transactions pertain to the current year and the same was written off by the assessee in the same year itself. According to the A.O. the bad debt claimed by the assessee has in fact not yet matured to claim it as bad and irrecoverable. We find the CIT(A) allowed the claim of bad debts on the ground that the assessee fulfilled the conditions of section 36(1)(vii) r.w.s. 36(2) of the Act. We find this issue has now been decided in favour of the assessee by the decision of Hon'ble Supreme Court in the case of TRF Ltd. Vs. CIT 323 ITR 397 wherein it has been held that after the amendment of section 36(1)(vii) of the I.T. Act, 1961 w.e.f. April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. Since the assessee has written off the amount of bad debts in the books of account, therefore, in view of the decision cited above, we do not find any infirmity in the order of the CIT(A) in allowing the claim bad debts written off. The ground raised by the Revenue is accordingly dismissed.

21. Grounds of appeal No. 4 being general in nature is dismissed.
ITA No. 9061Mum12009 (By the Revenue for A.Y. 2003-04)
22. The only ground raised by the Revenue reads as under:-
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to revised the depreciation on 33,57,040/- representing various software acquired by the assessee during the year under consideration @ 60% as against 25% allowed as per I.T. rules by the Assessing Officer without appreciating the fact that rate of 60% is effective only from A.Y. 2004-05."

23. After hearing both the sides, we are of the considered opinion that the issue has to go back to the file of the A.O. for fresh adjudication of the issue in the light of the ratio of the decision of the Special Bench of the Tribunal in the case of Amway Enterprises vs. DCIT reported in 301 ITR (AT) 1 (Del SB) Accordingly, we deem it proper to restore the issue to the file of the A.O. for fresh adjudication in the light of the decision cited above and in accordance with law after providing due opportunity of being heard to the assessee. The ground of appeal raised by the Revenue is accordingly allowed for statistical purpose.

24. In the result, the appeal in ITA No. 1 120/M/2008 for A.Y. 2002-03 is partly allowed for statistical purpose and appeals in ITA No. 905 & 906/Mum/2008 for A.Yrs. 2002-03 & 2003-04 are allowed for statistical purposes.

Order pronounced on this 25th day of May, 2011.









Bad debt – Amount receivable by a share broker from his clients against purchase of shares when not recovered can be allowed as bad debt
http://taxguru.in/income-tax-case-laws/bad-debt-amount-receivable-by-a-share-broker-from-his-clients-against-purchase-of-shares-when-not-recovered-can-be-allowed-as-bad-debt.html

SUMMARY OF THE CASE LAWS

The amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is trading debt; the brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the conditionstipulated in section 36(2)(i) and the assessee is entitled to deduction under section 36(1)(vii) by way of bad debts after having written off the said debts from his books of account as irrecoverable.


CASE LAWS DETAILS

DECIDED BY: ITAT MUMBAI BENCHES `B', SPECIAL BENCH , IN THE CASE OF: DCIT
v. Shreyas S. Morakhia, APPEAL NO: ITA No. 3374/Mum/2004, DECIDED ONJuly 16, 2010

RELEVANT PARAGRAPH

FACTS

The relevant facts of the case giving rise to the question which has been referred to the Special Bench are that the assessee is a share broker. The return of income for the year under consideration was filed by him on 2.11.1998 declaring total income of Rs. 67,797/-. In the said return, deduction of Rs. 28,24,296/- was claimed by the assessee on account of business loss. According to the assessee, the said amount represented the amount due to him by his clients on account of transactions of shares effected by him on their behalf. It was stated that the said amount has become irrecoverable and the same is claimed asdeduction after having written it off as irrecoverable from the books of account. The copies of ledger accounts of the concerned parties were filed by the assessee before the A.O. in support. According to the A.O., there was no other evidence filed by the assessee except the said copies of the ledger accounts to show that any action was taken against the concerned parties to recover the amounts due from them. He also noted that the Bombay Stock Exchange Card held by the assessee was already sold by him and the business in respect of which the debts in question had arisen was ceased to exist in theyear under consideration. He, therefore, disallowed the deduction claimed by the assessee on account of bad debts and made the addition of Rs. 28,34,096/- to the total income of the assessee.

The matter was carried before the ld. CIT(A) who found that even though the BSE Membership Card was already sold by the assessee, he continued to carry on the business as a sub-broker. He held that there being hardly any distinction between the business of share broker and sub-broker, the business of the assessee had not ceased to exist on transfer of BSE Membership Card but the same was continued during the year under consideration. He also held that the failure on the part of the assessee to initiate recovery proceedings against the concerned agents could not be a ground for denying the assessee's claim for bad debt u/s 36(1)(vii). Accordingly, the claim of the assessee for deduction on account of bad debt was allowed by the ld. CIT(A).

HELD

In order to claim deduction u/s 36(1)(vii), one of the conditions that is required to be satisfied as laid down u/s 36(2)(i) is that the debt claimed to be deductible as bad or part thereof has been taken into account in computing the income of the assessee of the relevant previous year or of any earlier previous year. The fundamental question that arises in this context which has been referred to this Special Bench is whether the said condition is satisfied in case of share broker where only the brokerage income is credited to the P&L account and not the value of purchase of shares made on behalf of the clients. The conditionstipulated in the first limb of clause (i) of sub-section (2) of section 36 is that no deduction on account ofbad debt or part thereof shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. As per the second limb of clause (i) of sub-section (2) of section 36, the said condition is not applicable where such debt represents money lent in the ordinary business of banking or money lending which is carried on by the assessee. In the present case, the debt in question undisputedly does not represent money lent in the ordinary course of banking or money lending business carried on by the assessee and therefore the second limb of clause (i) of sub-section (2) of section 36 is not relevant in the present case atleast at this stage. What we are concerned at this stage is whether the condition stipulated in the first limb of section 36(2)(i) is satisfied in the case of the assessee in as much as whether the debt representing amount receivable by the assessee as share broker from his clients against purchase of shares on their behalf or part thereof can be said to have been taken into account in computing the income of the assessee. The stand of the assessee in this regard is that the brokerage receivable by the assessee on the transactions of purchase of shares made on behalf of the clients is part of the debt receivable from the clients on account of the said transaction and the amount of brokerage having been taken into account in computing the income of the assessee, thecondition stipulated in the first limb of section 36(2)(i) stands satisfied.

It is worthwhile to note here that whether the gross amount is reflected in the credit side of the P&L account and only the net amount is finally reflected as profit after deducting the corresponding expenses or only the net amount say of brokerage received by the share broker is reflected in the credit side of the P&L account, the ultimate effect is one and the same and it is that the net amount gets included in the total income of the assessee chargeable to tax. It is just a different way of recording the relevant transactions in the books of account and their reflection finally in the P&L account. But in so far as the ultimate effect on the total income of the assessee is concerned, the same remains one and the same. It, therefore, cannot be said that such different treatment given in the books of account and reflection thereof in the P&L account is a material aspect having any bearing on the issue under consideration. Even in the case of loan transaction, what is reflected on the credit side of the P&L account of the assessee carrying on money lending or banking business is only the interest and not the loan amount as such. It therefore follows that even if accrual of brokerage income and accrual of debt against client in respect of share purchase are two different events which happen at two different times, brokerage income accrues to theshare broker as a result of transaction of purchase of shares on behalf of the clients and this nature of brokerage income indicates that it emerges from the transaction of purchase of shares by the assessee on behalf of his clients in the capacity of share broker. The amount receivable by the assessee on account of brokerage thus is a part of debt receivable by the share broker from his clients against purchase of shares and once such brokerage is credited to the P&L account of the broker and the same is taken into account in computing his income, the condition stipulated in section 36(2)(i) gets satisfied.

Keeping in view all the facts of the case and the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled todeduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books ofaccount as irrecoverable. We, therefore, answer the question referred to this Special Bench in the affirmative that is in favour of the assessee.

ORDER

PER P.M. JAGTAP, AM.

This Special Bench has been constituted u/s 255(3) of the Income Tax Act, 1961 to decide the following question which is arising out of the present appeal:-

"Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his client apart from the commission earned by him."

2. The relevant facts of the case giving rise to the question which has been referred to the Special Bench are that the assessee is a share broker. The return of income for the year under consideration was filed by him on 2.11.1998 declaring total income of Rs. 67,797/-. In the said return, deduction of Rs. 28,24,296/- was claimed by the assessee on account of business loss. According to the assessee, the said amount represented the amount due to him by his clients on account of transactions of shares effected by him on their behalf. It was stated that the said amount has become irrecoverable and the same is claimed as deduction after having written it off as irrecoverable from the books of account. The copies of ledger accounts of the concerned parties were filed by the assessee before the A.O. in support. According to the A.O., there was no other evidence filed by the assessee except the said copies of the ledger accounts to show that any action was taken against the concerned parties to recover the amounts due from them. He also noted that the Bombay Stock Exchange Card held by the assessee was already sold by him and the business in respect of which the debts in question had arisen was ceased to exist in the year under consideration. He, therefore, disallowed the deduction claimed by the assessee on account of bad debts and made the addition of Rs. 28,34,096/- to the total income of the assessee.

3. The matter was carried before the ld. CIT(A) who found that even though the BSE Membership Card was already sold by the assessee, he continued to carry on the business as a sub-broker. He held that there being hardly any distinction between the business of share broker and sub-broker, the business of the assessee had not ceased to exist on transfer of BSE Membership Card but the same was continued during the year under consideration. He also held that the failure on the part of the assessee to initiate recovery proceedings against the concerned agents could not be a ground for denying the assessee's claim for bad debt u/s 36(1)(vii). Accordingly, the claim of the assessee for deduction on account of bad debt was allowed by the ld. CIT(A).

4. Aggrieved by the order of the ld. CIT(A), the Revenue filed an appeal before the Tribunal and during the course of hearing of the said appeal before the Division Bench, it was sought to be contended on behalf of the Revenue that the assessee having credited only the brokerage amount to the P&L Account, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or even of any earlier previous year. It was contended that the condition stipulated in section 36(2) thus was not satisfied and the assessee was not entitled to claim deduction in respect of the said bad debts u/s 36(1)(vii). It was noted by the Division Bench that this stand of the Revenue was accepted by the co-ordinate Bench of the Tribunal in the case of India Infoline Securities Pvt. Ltd. Vs. A.C.I.T. 25 SOT 123 (Mum) and in the case of ACIT vs. B.N. Khandelwal 101 TTJ 717. It was also noted by the Division Bench that there was however a contrary view taken by the co-ordinate Bench in the cases of ACIT vs. Olympia Securities Ltd. (ITA No. 4053/Mum/02 dtd. 21.12.2006), ACIT vs. PRS Shares and Finance Ltd. (ITA 4280/Mum/07 dtd. 20.5.2008) and Shri Somen P. Sangani vs. ITO (ITA No. 3410/Mum/05 dtd. 5.6.08). It was held by the co-ordinate Benches in the said cases that the condition u/s 36(2) stands satisfied where the assessee has taken into consideration the brokerage income connected with the transaction effected by it on behalf of his clients. It was held that the claim of the assessee in respect of deduction on account of bad debts u/s 36(1)(vii) therefore cannot be denied on the ground that the amount of bad debts has not been taken into consideration for the purpose of computing his income of the relevant previous year or any earlier year. Keeping in view these contrary views expressed by the co-ordinate Benches on the issue, the question as indicated above was sought to be referred by the Division Bench to the Special Bench and accordingly this Special Bench has been constituted by Hon'ble President to decide the said question.

5. The ld. D.R., at the outset referred to the provisions of section 36(1)(vii) as amended by Finance Act 1987 w.e.f. 1.4.89 to point out that the deduction provided in section 36(1)(vii) on account of bad debts is subject to the fulfillment of condition as laid down in section 36(2). He contended that as per the provisions of section 36(2), no deduction on account of bad debt shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the relevant previous year or of any earlier previous year. He submitted that the meaning of words "taking into account in computing the income of the assessee" has to be understood in the right perspective. He contended that even though these words do not mean that the whole amount of bad debts claimed u/s 36(1)(vii) should have taxed as income, such amount atleast should have been reflected on the credit side of the P&L account so that the net amount after deducting the corresponding expenses is included in the total income of the assessee chargeable to tax. He contended that in the case of a share broker what is credited in the P&L account is only brokerage amount and not the value of shares purchased on behalf of the clients. He contended that the amount of such shares which has been claimed to be deductible as bad debts, therefore, cannot be considered to have been taken into account in computation of income of the assessee. According to him, the transactions of sale/purchase of shares actually do not belong to the share brokers but the same belong entirely to the clients and it is also not necessary that brokerage is always relatable to the value of share transaction. He submitted that it may in some cases be even the fixed periodical amount subject to SEBI and Stock Exchange guidelines. He contended that brokerage income therefore cannot be equated with the price of securities transacted and hence such price of securities cannot be said to have been taken into account in computation of income by virtue of brokerage being credited in the P&L account in the case of share broker.

6. The ld. D.R. also contended that in the case of the broker, the accrual of brokerage income and accrual of debt against client in respect of share purchase are two different events which happen at two different times. He submitted that the income on account of brokerage accrues to the broker the moment he conducts the transaction on behalf of his client, but the client does not become a debtor of the broker at this point of time. He submitted that it is only on the settlement day which is later in point of time that the client becomes debtor of the broker in case the former fails to pay the amount against purchase of shares and the broker has to make the said payment on behalf of the client. He contended that in such a situation also the broker has underlined security in the form of shares purchased against the amount receivable from client and there is hardly any possibility of the said debts becoming bad if the broker has ensured receipt of prescribed 20% margin money from the client. He contended that it cannot therefore be said that by virtue of brokerage being taken into account in computation of income that the value of purchase of shares on behalf of client has also been taken into account in the computation of income of the assessee who is broker. He contended that the debt representing the amount receivable by the broker against purchase of shares on behalf of clients is not taken to the credit of the P&L account of the broker as income and the condition stipulated in section 36(2) thus cannot be said to be satisfied.

7. The ld. D.R. once again referred to the provisions of section 36(2) and pointed out that there is only one specific exception provided from satisfying the condition stipulated therein and that is in respect of money lending/banking business. He submitted that as provided specifically in this context, the claim of the assessee engaged in money lending/banking business for bad debts is allowable in respect of amount which represents money lent in the ordinary course of business despite the fact that the said amount has not been taken into account for computing the income of the assessee engaged in money lending business of the relevant previous year or any earlier previous year. He contended that this exception, however, is provided only in respect of money lending/banking business and not in respect of any other business including the business of share broking. He contended that the legislature thus has restricted itself to provide only one exception and the same cannot be extended to share brokers. He contended that the debts representing value of purchase of shares made by the assessee as a broker on behalf of clients thus cannot be said to have been taken into account in computing the income of the assessee and there being no satisfaction of condition stipulated in section 36(2), no deduction on account of the said debts can be allowed u/s 36(1)(vii) even though the same have been written off as irrecoverable by the assessee from his books of account.

8. The learned D.R. also submitted that the modus operandi followed in the transactions of purchase and sale of shares and securities is qualitatively different than the one followed in trading of other commodities. He contended that the shares are dealt with by the "share traders" and not by "share brokers". He submitted that the role of the broker is limited in relation to such transactions and the actual traders of shares are his clients and not the share broker himself. He submitted that the transactions of trading in shares are governed by rules and regulations of stock exchange and the broker has a limited specified role in such transactions as prescribed by SEBI. He invited our attention to the relevant circular issued by SEBI in this context and took us through the various guidelines laid down therein to show the restrictions imposed on brokers and safeguards provided to protect the interest of the broker. He submitted that if the said guidelines are strictly followed, a broker would never put him in a situation where he has an irrecoverable debts from his clients and there will be no occasion for him to claim deduction on account of bad debts. He contended that only when the said guidelines are violated by a broker that he may have the risk of suffering loss as a result of bad debts and such loss would rise only when there is infraction of law laid down by SEBI under SEBI Act. He contended that this aspect therefore needs to be taken into consideration while examining the claim of the share broker for deduction on account of bad debts.

9. The ld. D.R. then took us through the various decisions of the Tribunal wherein a similar issue has been decided in favour of the Revenue. For instance, he pointed out that in the case of India Infoline Securities (P) Ltd. (supra), it is held by the Tribunal after analyzing the nature of share transactions and relationship between the share broker and his clients that the value of shares purchased by the brokers on behalf of the clients could not be said to have been taken into account in computing the income of the assessee and the deduction on account of bad debts representing the said value could not be allowed u/s 36(1)(vii) because the condition prescribed u/s 36(2)(i) was not fulfilled. He also invited our attention to the decision of the Tribunal in the case of B.S. Vasa vs. ITO 26 SOT 462 wherein a similar view as taken in the case of India Infoline Securities Pvt. Ltd. is expressed by the Tribunal.He contended that even in the case of Mahesh J. Patel vs. ACIT 109 ITD 35 (TM) the Tribunal has taken a similar view and the said decision being that of a Third Member has a force of a Special Bench.

10. As regards the decisions of the Tribunal wherein a view in favour of the assessee has been taken on the issue, the ld. D.R. contended that neither the peculiar nature of share transactions nor the relevant guidelines laid down by the SEBI have been taken into account by the Tribunal. He contended that similarly in the cases of D.B. (India) Securities Ltd. 318 ITR 26 and Bonanza Portfolio Ltd. 320 ITR 178, these relevant aspects were not brought to the notice of the Hon'ble Delhi High Court and Their Lordships thus had no occasion to consider the same while deciding the issue relating to satisfaction of condition prescribed u/s 36(2). He contended that the said decisions rendered by the Hon'ble Delhi High Court, in any case, are not the decisions of the Jurisdictional High Court and this Special Bench is not bound to follow the same as held by the Ahmedabad Bench of ITAT in the case of Kanel Oil & Export Industries Ltd. in ITA No. 2667/Ahd/02 dated 18.08.2009 especially because two vital aspects have not been taken into consideration. He contended that in several other decisions, a similar claim of the assessee being a share broker on account of bad debts representing amounts receivable from clients against purchase of shares has been allowed by the Tribunal as a business loss u/s 28 which by implication indicates that the same is held to be not allowable u/s 36(1)(vii). He relied on the decision of Hon'ble Supreme Court in the case of A.V. Thomas & Co. Ltd. Vs. CIT 48 ITR 67 (SC) wherein it was held in a similar context that a debt means something which is related to the business or results from it and it is an outstanding which if recovered would have swelled the profits. He contended that if this concept of debt explained by the Hon'ble Apex Court is taken into consideration, the amount receivable by the assessee as share broker from his clients against purchase of shares cannot be described as a debt and deduction u/s 36(1)(vii) cannot be allowed on account of bad debts.

11. In reply, the learned counsel for the assessee submitted that the fundamental issue involved for the consideration of the Special Bench relates to the satisfaction of condition prescribed in section 36(2) in the case of a broker where only the brokerage income is credited to the P&L account and not the value of purchase of shares made on behalf of the clients. Referring to the provisions of section 36(2), he submitted that the expression used therein is "taken into account in computing the income of the assessee". He contended that in the case of CIT vs. T. Veerabhadra Rao K. Koteshwar Rao & Co. 155 ITR 152 (SC), Hon'ble Supreme Court has explained the meaning of this expression by holding that when the interest income accrued on a debt was taxed in the hands of the assessee in the earlier year, the said debt was to be considered as taken into account in computing the income of the assessee. It was also held that interest was taxed as income because it represented an accretion accruing during the earlier year on money owed to the assessee by the debtor and the item constituted income because it represented interest on loan. It was held that the nature of the income indicated the transaction from which it is emerged and the said transaction constituting debt was taken into account in computing the income of the assessee of relevant previous year. The ld. Counsel for the assessee contended that the ratio laid down by the Hon'ble Apex Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co. is squarely applicable to the issue under consideration.

12. As regards the arguments of the ld. D.R. that only one exception is specifically provided from the satisfaction of condition u/s 36(2) in respect of money lending business, the ld. Counsel for the assessee contended that there is always a possibility in the case of money lending business that interest is not taken into account in computing the income of the assessee but still the amount of corresponding loan is claimed as bad debts. He contended that keeping in view such a possibility, exception has been provided in respect of money lending business and the same cannot be used to draw any adverse inference in relation to the claim of the assessee for deduction on account of bad debts in respect of any other business. He submitted that even in case of trading or manufacturing business, corresponding purchases and other expenses are claimed and after deducting the same from sales, what is effectively taken into account in computing the income of the assessee is only the net profit. He contended that if the department's stand is to be accepted, assessee will not be entitled to deduction on account of bad debts even in respect of trading or manufacturing business.

13. The ld. Counsel for the assessee strongly relied on the decision of Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and submitted that as held therein, the amount receivable by the assessee as a broker from his clients against purchase of shares made on their behalf represent his debts and the brokerage which was received in the said transactions having been shown as income by the assessee in the previous year and it was taxed as such by the assessing authority, he was entitled to deduction u/s 36(1)(vii) for the said debts after having written off the same as bad or irrecoverable. He also relied on the decision of Hon'ble Delhi High Court in another case CIT vs. Bonanza Portfolio Ltd. (supra) wherein it was held while dealing with a similar issue that the money receivable by the share broker from his clients against purchase of shares had 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. It was also held that 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 income of the assessee, the conditions stipulated in section 36 (1)(vii) and 36(2) stood satisfied.

14. The ld. Counsel for the assessee submitted that the issue involved for consideration of the Special Bench thus stands squarely covered in favour of the assessee by the aforesaid two decisions of Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and CIT vs. Bonanza Portfolio Ltd. (supra). He contended that the benefit of these decisions rendered subsequently by the Hon'ble Delhi High Court was not available to the Tribunal while deciding a similar issue in some of the cases against the assessee which have been relied upon by the ld. D.R. He also contended that even the decision of Hon'ble Supreme Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra), the ratio of which is squarely applicable to the issue under consideration, has not been taken into consideration by the Tribunal in the said cases while deciding the similar issue against the assessee. He also relied on the decision of Hon'ble Supreme Court in the case of A.V. Thomas & Co. Ltd. Vs. CIT 48 ITR 67 and that of Hon'ble Bombay High Court in the case of CIT Vs. Pranlal Kesurdas 49 ITR 931 and submitted that the said decisions of Hon'ble Apex Court and Hon'ble jurisdictional High Court also support the case of the assessee on the issue under consideration. He contended that the decisions rendered by the Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and CIT vs. Bonanza Portfolio Ltd. (supra) are directly applicable to the issue under consideration and there being no decision of Hon'ble jurisdictional High Court or any other High Courts cited by the ld. D.R. taking a contrary view in favour of the Revenue, the same are required to be followed by this Special Bench.

15. As regards the SEBI guidelines strongly relied upon by the ld. D.R., the learned counsel for the assessee submitted that the same are hardly relevant in deciding the issue under consideration. He submitted that the issue before this Special Bench is that when the assessee as a share broker suffers a loss as a result of amount receivable from his clients against purchase of shares becoming irrecoverable, whether he is entitled for deduction u/s 36(1)(vii) r.w.s. 36(2) or not. He submitted that whether such loss is suffered by the assessee as a result of not following the SEBI guidelines or even after following the said guidelines is not relevant in this context and what is relevant is whether he has actually suffered such loss or not. He has contended that this is not the case even of the A.O. that there was no loss actually suffered by the assessee on account of non-recovery of debt representing amount receivable by the assessee from his clients against purchase of shares.

16. As regards the submission of the ld. D.R. that it is not very clear either from the order of the A.O. or that of the ld. CIT(A) that the amount in question claimed as bad debts was written off by the assessee as irrecoverable from its books of account, the ld. Counsel for the assessee filed a copy of ledger account of one of the clients of the assessee to show that the amount receivable from the said party was written off from the books of account of the assessee as irrecoverable. He submitted that such copies of ledger account of all the concerned parties were filed by the assessee before the A.O. during the course of assessment proceedings to show that the amounts receivable from them were duly written off as irrecoverable.

17. As regards the other objection raised by the ld. D.R. as to whether the brokerage income in respect of transactions in question claimed as bad debts were actually offered by the assessee as its income in the year under consideration or any earlier years, the ld. Counsel for the assessee submitted that even the A.O. has not disputed this position in the assessment order. He submitted that if at all this matter is required to be verified, the assessee has no objection if it is got verified from the A.O.

18. We have considered the rival submissions and also perused the relevant material on record. We have also carefully gone through the various judicial pronouncements cited by the learned representatives of both the sides. The assessee in the present case is a share broker and during the year under consideration, he suffered a loss as a result of the amount receivable from his clients against purchase of shares made on their behalf becoming irrecoverable. The said amount is claimed to have been written off by the assessee as irrecoverable from its books of account and it is being claimed as deduction being bad debts written off u/s 36(1)(vii). In order to claim deduction u/s 36(1)(vii), one of the conditions that is required to be satisfied as laid down u/s 36(2)(i) is that the debt claimed to be deductible as bad or part thereof has been taken into account in computing the income of the assessee of the relevant previous year or of any earlier previous year. The fundamental question that arises in this context which has been referred to this Special Bench is whether the said condition is satisfied in case of share broker where only the brokerage income is credited to the P&L account and not the value of purchase of shares made on behalf of the clients. The condition stipulated in the first limb of clause (i) of sub-section (2) of section 36 is that no deduction on account of bad debt or part thereof shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. As per the second limb of clause (i) of sub-section (2) of section 36, the said condition is not applicable where such debt represents money lent in the ordinary business of banking or money lending which is carried on by the assessee. In the present case, the debt in question undisputedly does not represent money lent in the ordinary course of banking or money lending business carried on by the assessee and therefore the second limb of clause (i) of sub-section (2) of section 36 is not relevant in the present case atleast at this stage. We may, however, have to consider the same at appropriate stage while dealing with the arguments raised by the ld. D.R. referring to the said limb. What we are concerned at this stage is whether the condition stipulated in the first limb of section 36(2)(i) is satisfied in the case of the assessee in as much as whether the debt representing amount receivable by the assessee as share broker from his clients against purchase of shares on their behalf or part thereof can be said to have been taken into account in computing the income of the assessee. The stand of the assessee in this regard is that the brokerage receivable by the assessee on the transactions of purchase of shares made on behalf of the clients is part of the debt receivable from the clients on account of the said transaction and the amount of brokerage having been taken into account in computing the income of the assessee, the condition stipulated in the first limb of section 36(2)(i) stands satisfied. In support of this contention, reliance has been placed on behalf of the assessee, inter alia, on the decision of Hon'ble Supreme Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra).

19. In the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra), the assessee was a partnership firm which took over the business of earlier firm. All the liabilities of the predecessor firm passed to the assessee firm including a debt of Rs. 23,577/- due from Lakshmi Trading Co. to the predecessor firm. The total amount due in the account relating to Lakshmi Trading Co. was Rs. 40,549/- comprising outstanding amount of Rs. 29,200/-and interest thereon amounting to Rs. 11,349/-. The amount of interest was taxed in the hands of the assessee for A.Y. 1963-64. On 31st March 1965, the parties effected a settlement under which a sum of Rs. 25,500/- was accepted by the assessee in full settlement of the said debt. The balance of Rs. 15,100/- was written off as irrecoverable and claimed as deduction for A.Y. 1965-66 as bad debt. While disallowing the claim of the assessee for the said deduction, one of the grounds taken by the Revenue was that the requirement of clause (i) of sub-section (2) of section 36 was not satisfied and when the matter reached to the Hon'ble Supreme Court, it was held by the Hon'ble Apex Court in this context that the debt was taken into account in computing the income of the assessee for A.Y. 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. It was held that the interest was taxed as income because it represented accretion accrued during the earlier year on money owed to the assessee by the debtor and the item was considered as income because it represented interest on loan. It was held that the nature of the income indicated the transaction from which it emerged and the said transaction representing debt thus was taken into account in computing the income of the assessee of the relevant previous year. It was held that the condition stipulated in clause (i) of sub-section (2) of section 36 thus was duly satisfied. Hon'ble Supreme Court thus has clearly laid down that in order to satisfy the condition stipulated in section 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. At the time of hearing before us, even the ld. D.R. has not disputed this proposition clearly propounded by the Hon'ble Supreme Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra).

20. The ld. D.R. has contended that the ratio laid down in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra), however, is not applicable in the case of assessee who is a share broker. According to him, even though section 36(2)(i) does not require that the whole amount of bad debt claimed u/s 36(1)(vii) should have been taxed as income, such amount atleast should have been reflected on the credit side of the P&L account so that the net amount after deducting the corresponding expenses is included in the total income of the assessee chargeable to tax. He has contended that in the case of a share broker, only the brokerage amount is credited to the P&L account and not the value of shares purchased on behalf of the clients. He has also contended that the transaction of sale/purchase of shares actually belong to the clients of the share broker and it is not necessary that brokerage is always relatable to the value of share transactions. He has contended that even the accrual of brokerage income and accrual of debt against clients in respect of share purchases are two different events that happen at two different times. He has contended that the brokerage income thus cannot be treated as part of the debts receivable by the share broker from clients in respect of share purchases and it cannot be said that the assessee having assessed in respect of share brokerage income, the said debt or part thereof has been taken into account in computing his income.

21. We are unable to agree with the contentions raised by the learned D.R. while disputing the applicability of the ratio laid down by the Hon'ble Supreme Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra) to the case of the assessee who is a share broker. It is worthwhile to note here that whether the gross amount is reflected in the credit side of the P&L account and only the net amount is finally reflected as profit after deducting the corresponding expenses or only the net amount say of brokerage received by the share broker is reflected in the credit side of the P&L account, the ultimate effect is one and the same and it is that the net amount gets included in the total income of the assessee chargeable to tax. It is just a different way of recording the relevant transactions in the books of account and their reflection finally in the P&L account. But in so far as the ultimate effect on the total income of the assessee is concerned, the same remains one and the same. It, therefore, cannot be said that such different treatment given in the books of account and reflection thereof in the P&L account is a material aspect having any bearing on the issue under consideration. Even in the case of loan transaction, what is reflected on the credit side of the P&L account of the assessee carrying on money lending or banking business is only the interest and not the loan amount as such. Even as regards the contention of the ld. D.R. that the accrual of brokerage income and accrual of debt against client in respect of share purchase are two different events which happen at two different times, we find that similar is the situation in case of loan transactions effected by the assessee carrying on the business of money lending or banking wherein the client becomes debtor when the amount of loan is disbursed in his favour whereas income on account of interest accrues to the lender only after a specified period of interval as agreed between the parties. As held by the Hon'ble Supreme Court in the case of T. Veerabhadra Rao K. Koteshwar Rao & Co (supra), interest is taxed as income because it represents an accretion accruing during the relevant year on money owed to the assessee by the debtor and the nature of such income indicates the transaction from which it emerges. It therefore follows that even if accrual of brokerage income and accrual of debt against client in respect of share purchase are two different events which happen at two different times, brokerage income accrues to the share broker as a result of transaction of purchase of shares on behalf of the clients and this nature of brokerage income indicates that it emerges from the transaction of purchase of shares by the assessee on behalf of his clients in the capacity of share broker. The amount receivable by the assessee on account of brokerage thus is a part of debt receivable by the share broker from his clients against purchase of shares and once such brokerage is credited to the P&L account of the broker and the same is taken into account in computing his income, the condition stipulated in section 36(2)(i) gets satisfied.

22. The learned D.R. has laid great emphasis on the guidelines issued by SEBI to safeguard the interest of brokers in respect of amount receivable from the clients against purchase of shares. According to him, if the said guidelines are strictly followed, there will be hardly any occasion for the broker to suffer loss on account of the amount receivable from clients becoming irrecoverable. However, the issue under consideration presupposes a fact situation which as exists in the present case is that the assessee who is a share broker has actually suffered such a loss. In such a situation, whether such loss is suffered by the assessee as a result of not following the guidelines or even after following such guidelines is not going to change the fact that the assessee has suffered such loss. If the assessee broker has not followed such guidelines in a particular case, it is a decision taken by him as a businessman taking into consideration all the relevant facts and circumstances including his business relations with the concerned clients. This aspect, however, will not change the fact situation that the assessee has suffered a loss as a result of non-recovery of amounts receivable from clients against purchase of shares during the course of his business and the admissibility or otherwise of the said loss, in our opinion, is required to be considered in accordance with the relevant provisions of law governing the claim of bad debts. This aspect of the matter therefore cannot change the factum of loss suffered by the assessee although it may have some bearing on the quantum of such loss which is required to be arrived at after taking into consideration the corresponding shares which the assessee is entitled to sale and adjust the sale proceeds thereof against the amount receivable from clients against purchase of the said shares. The department, therefore, is at liberty to raise this issue before the Division Bench at the time of hearing of the appeal of the assessee if it is permissible to do so.

23. As regards the rules and regulations of stock exchange and guidelines issued by SEBI from time to time, we find that the same certainly govern the relationship between the broker and its clients. They also impose certain restrictions on brokers. However, as already observed by us, where the assessee broker has actually suffered a loss as a result of non-recovery of the amount receivable from his clients against purchase of shares on their behalf, the allowability thereof is required to be considered in accordance with the relevant provisions of the Income Tax Act and it is irrelevant whether such loss has been suffered by the assessee as a result of not following the said rules and regulations and guidelines or even after following the same. Moreover, even if it is assumed that such loss has been incurred by the assessee as a result of not following the rules and regulations and guidelines issued by the SEBI, the same cannot be equated to expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. The reliance of the ld. D.R. on the said rules and regulations of stock exchange and guidelines issued by SEBI thus is clearly misplaced and the arguments raised by him relying thereon cannot be accepted being devoid of merits. In the case of CIT vs. Pranlal Kesurdas 49 ITR 931, the claim of the assessee for bad debts was disallowed by the A.O. on the ground that the said debt was arising out of forbidden wayada transactions and was unenforceable. However, the Hon'ble Bombay High Court held that if the profits of a trade even though it may be illegal are to be taxed, the computation of the profits will have to be done in accordance with the mode prescribed by the statute. It was held that profits chargeable to tax have to be arrived in a commercial manner by deducting such expenses as in a commercial sense can be regarded as expenses of the business. It was held that computation of such profits permits the deduction of dues or debts due to the assessee in the course of the business which have become bad or irrecoverable.

24. Relying on the second limb of clause (i) of sub-section (2) of section 36, the ld. D.R. has contended that as provided therein, the claim bad debts of the assessee who is engaged in money lending/banking business is allowable in respect of debts which represent money lent in the ordinary course of business despite the fact that the said amount has not been taken into account in computing the income of the assessee engaged in money lending business. According to him, this exception, however, is provided specifically by the legislature in respect of money lending/banking business and the same cannot be extended to any other business including the business of share broking. In our opinion, the reason for providing such exception in section 36(2)(i) in respect of debt representing money lent in the ordinary course of business of banking or money lending is entirely different than what has been sought to be assigned by the ld. D.R.. As held by the Hon'ble Supreme Court in the case of Madan Gopal Bagla vs. CIT 30 ITR 174, a debt in order to fall within the provisions of section 36(1)(vii) must be one which can properly be called a trading debt i.e. a debt of a trade, the profits of which are being computed. Generally, in case of debt arising from the business of supply of goods or services, the criteria which can be applied to ascertain whether the said debt is a trading debt or not is to see whether the said debt or part thereof has been taken into account in computing the total income of the assessee. If the said condition gets satisfied and the debt or part thereof has already been taken into account while computing the income of the assessee, the debt can be regarded as a trading debt. In the case of money lending or banking business, the situation, however, is altogether different because the money itself constitutes stock in trade of the said business and any debt representing money lent in the ordinary course of banking or money lending business clearly constitutes the trading debt of that business. It is therefore not necessary to apply the test laid down in first limb of section 36(2)(i) to ascertain whether the debt representing money lent in the ordinary course of banking or money lending business is trading debt or not since the said debt going by the very nature of banking/money lending business itself is a trading debt. In our opinion, this is the rationale behind the exception provided in the second limb of section 36(2)(i) in respect of banking/money lending business and therefore no adverse inference on the basis of the said exception can be drawn against the assessee carrying on the business of share broking as sought by the ld. D.R.

25. At the time of hearing before us, the ld. D.R. has relied, inter alia, on the decisions of the tribunal in the case of India Infoline Securities (P) Ltd. Vs. ACIT (supra), Addl. CIT vs. B.N. Khandelwal (supra) and Mahesh J. Patel vs. ACIT 109 ITD 35 (TM) in support of the Revenue's case on the issue under consideration. A perusal of the said decisions shows that the issue was decided against the assessee and in favour of the Revenue by the Tribunal holding that the debt representing unpaid purchase price of shares did not fulfill the requirement of section 36(2)(i) because what the assessee offered to tax was only the brokerage income and the assessee was also not engaged in purchase and sale of shares. However, the decision of Hon'ble Supreme Court in the case of CIT vs. T. Veerabhadra Rao K. Koteshwar Rao & Co (supra), the ratio of which is squarely applicable in this context, was not brought to the notice of the Tribunal and the Tribunal thus had no occasion to consider the same. Even the benefit of the decisions subsequently rendered by the Hon'ble Delhi High Court in the case of in the case of CIT vs. DB (India) Securities Ltd.(supra) and CIT vs. Bonanza Portfolio Ltd. (supra) was not available to the Tribunal. As regards the Third Member decision of the Tribunal in the case of Mahesh J. Patel (supra), it is observed that this issue raised in ground no. 1 of the appeal was decided by Division Bench and there being no disagreement between the two Members of the Division Bench thereon, the same was not referred to Third Member at all. The decision on this issue thus was rendered in the case of Mahesh J. Patel by the Division Bench and not by the Third Member and the same therefore cannot be said to have a force of Special Bench decision as sought to be contended by the ld. D.R.

26. The ld. D.R. has also relied on the decision of Hon'ble Supreme Court in the case of A.V. Thomas & Co. Ltd. Vs. CIT (supra) in support of the Revenue's case. It is, however, observed that this decision actually supports the case of the assessee in so far as it explains the term `debt' used in the context of deduction on account of bad or doubtful debt so as to mean something which is related to business or results from it. It was held by the Hon'ble Supreme Court in this context that the debt to be a debt proper had to be one which if good would have swelled the taxable profits. As already discussed, these conditions get satisfied in the case of a share broker because the amount receivable by him from the clients against purchase of shares on their behalf is certainly related to its business of share broking and it results from such business. Moreover, the said debt if good would have swelled a taxable profit of the assessee broker in the form of brokerage income.

27. Here, we may also refer to the case of CIT vs. City Motor Service Ltd. 61 ITR 418 wherein Hon'ble Madras High court was concerned with section 10(2)(xi) of the 1922 Act. This section is the forerunner of section 36(2)(i) of the 1961 Act, but there was no condition that the debt should have been taken into account in computing the income of the assessee for the relevant assessment year or any earlier year. Despite this, Hon'ble Madras High Court held that such a condition must be read into the section. The relevant portion of the judgment in this context is extracted below from page 421 of the report:-

"………….the question is whether it is necessary for the assessee to show, in order that it may be eligible for the deduction under the first part of the clause, that the bad debt, if realized, would have gone to swell its profits. There is no express indication in the language of the first part of this clause that it should be such a debt. But it is obvious to us that, in the context of the section, the debt, in order to be deductible must be one which, when realized, would have gone to swell the profits…………. It is no doubt true that the amount lent as principal will not by itself swell the profits and what is meant is that it is taken into account in the context of computation of income…………."

28. Hon'ble Madras High Court thus read into section 10(2)(xi) of the 1922 Act, the condition that the debt should have been "taken into account" in computing the income of the assessee and after having done so, proceeded further to observe at page 425 as under:-

"Learned counsel appearing for the revenue contends that the requisite that the debt if realized should have gone to swell the profits of the business is not satisfied. We are unable to accept this contention. The fact that in the previous assessment years the revenue brought to charge the interest due from advances made by the assessee to Sungo Limited demonstrates that the debt did go to swell the business profits of the assessee. As we mentioned earlier, the interest so due to the assessee was treated by the revenue itself throughout as business income. It cannot, therefore, be pretended that the debt was not one which if realized would not have gone to swell the business profits of the assessee."

It would be clear from the above observations of Hon'ble Madras High Court that the condition that the debt should have been "taken into account" in computing the assessee's income stands satisfied since the interest in respect of the debt is assessed in the assessee's hands as business income. This is the meaning which has been attributed to the condition which has been read into the provisions of section 10(2)(xi) of the 1922 Act even though the express language of the provision did not prescribe such a condition. A fortiori, where section 36(2)(i) specifically prescribes such a condition, then it should be deemed to have been satisfied if the brokerage income from the transactions of purchase of shares by the assessee as a broker on behalf of his clients has been taxed in his hands as business income. In the present case, such brokerage has already been taxed in the hands of the assessee under the head business income and this being so, we are of the view that the condition prescribed in section 36(2)(i) has been satisfied and the write off of the debt representing amount receivable by the assessee from his clients against purchase of shares on their behalf must be held allowable as a bad debt.

29. At the time of hearing before us, the ld. Counsel for the assessee has strongly relied on the decisions of Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and in the case of CIT vs. Bonanza Portfolio Ltd. (supra) stating that the same are directly on the point in issue and there being no contrary decision of the Hon'ble jurisdictional High Court or any other High Courts, this Special Bench has to follow the same. We have carefully perused the said decisions of the Hon'ble Delhi High Court. In the case of DB (India) Securities Ltd.(supra), the assessee was a member of Delhi Stock Exchange and was carrying on the business of shares and stock broking. The assessee had purchased shares on behalf of his client for the total value of Rs. 1.06 crores at an average price of Rs. 55 per share. The said client made a payment to the extent of Rs. 65 lacs only to the assessee and the remaining amount of Rs. 41 lacs had remained unpaid. The brokerage income earned by the assessee in respect of the said transaction of purchase of shares was duly declared in its return of income and was assessed as well in the earlier year. The balance amount of Rs. 41 lacs remained unpaid even in the next year also apparently because of the reason that the price of shares fell from Rs. 55 to Rs. 5 per share. In the return of income filed for the said year, the assesse claimed deduction of Rs. 41 lacs as bad debts u/s 36(1)(vii). The A.O. disallowed the claim of the assessee for the said deduction which was confirmed by the ld. CIT(A). On further appeal by the assessee, the Tribunal, however, allowed the said deduction and when the matter reached to the Hon'ble Delhi High Court, it was sought to be canvassed on behalf of the Revenue that the amount receivable by the assessee from its client against purchase of shares could not be treated as "debt" under the provisions of section 36(2) and therefore, the question of allowing any deduction for the said amount treating the same as bad debt would not arise. Hon'ble Delhi High Court did not find merit in this contention raised on behalf of the Revenue holding that there was a valid transaction between the assessee and his client and since the assessee had to make payment on behalf of his client which he could not recover to the extent of Rs. 41 lacs, the said sum has to be treated as his "debt". It was also held that the brokerage which was received for the said transaction was shown as income by the assessee in the earlier years and the same was taxed as such by the assessing authority. It was held that the assessee therefore was entitled for deduction on account of bad debt u/s 36(1)(vii) r.w.s. 36(2). A similar issue again came up for consideration before the Hon'ble Delhi High Court in the case of CIT vs. Bonanza Portfolio Ltd. (supra) wherein the question of law which arose for consideration was 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 could be claimed by the assessee as bad debts when it had only credited brokerage in the P&L account and it was held by the Hon'ble Delhi High Court following, inter alia, the decision in the case of CIT vs. DB (India) Securities Ltd. that the money receivable by the assessee as share broker from his clients against purchase of shares made on their behalf has to be treated as "debt" and since the brokerage payable by the client was a part of that debt and that part had been taken into account in computation of his income, the conditions stipulated in section 36(1)(vii) and 36(2) stood satisfied and the assessee was entitled for deduction in respect of the said amount since it had become bad. In our opinion, the ratio of these decisions of the Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and in the case of CIT vs. Bonanza Portfolio Ltd. (supra) is squarely applicable to the issue which is under consideration in the present case before this Special Bench.

30. The learned D.R. has contended before us that the rules and regulations of stock exchange governing relations between broker and his clients as well as the guidelines issued by the SEBI from time to time protecting the interest of share broker were not brought to the notice of the Hon'ble Delhi High Court in the cases of CIT vs. DB (India) Securities Ltd.(supra) and CIT vs. Bonanza Portfolio Ltd. (supra) and Their Lordships thus had no occasion to consider the issue in the light of the same. However, as already held by us, the said rules and regulations as well as guidelines are not relevant in the context of issue referred to this special bench which raises a specific question of law. We have already noted that the fact which is not in dispute is that the assessee has actually suffered the loss as a result of the amount in question representing debt becoming irrecoverable. It is therefore not relevant whether such loss has been incurred by the assessee as a result of not following the relevant rules and regulations and guidelines or even after following the same. As observed by us, this aspect may be relevant in the context of quantification of such loss. As a matter of fact, one of the arguments raised on behalf of the Revenue in the case of DB (India) Securities Ltd. (supra) was that the assessee having not sold the shares to anybody else in the market, the assessee could not claim the amount in question as bad debt and while dealing with the same, it was held by the Hon'ble Delhi High Court that the sale consideration which such shares could fetch in the market needs to be adjusted against the amount of bad debt claimed by the assessee for arriving at the actual figure of "bad debts".

31. The contention raised on behalf of the Revenue based on the sale value of shares which are bound to remain with the assessee and which the assessee is entitled to sale and adjust the sale consideration thereof against the amount receivable from the client so as to arrive at the actual amount of bad debt thus is relevant for quantifying the actual amount of bad debt and it is at liberty to raise the same, if permissible, before the Division Bench during the course of hearing of the appeal. The ld. D.R. has also raised certain other doubts or disputes in the written submissions filed before this Special Bench relating to certain factual aspects of the case. Although, no such doubts or disputes appear to have been raised even by the A.O. in the assessment order, the ld. Counsel for the assessee has fairly agreed that if it is so felt by the Division Bench after considering the arguments of both the sides while hearing the appeal of the assessee that these aspects need verification, the assessee will have no objection for getting such verification done from the A.O.

32. Keeping in view all the facts of the case and the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. We, therefore, answer the question referred to this Special Bench in the affirmative that is in favour of the assessee.

33. The matter will now go before the regular Bench for disposing of the appeal keeping in view our decision rendered hereinabove.

34. Before parting, we may recapitulate that there are certain arguments which have been raised by the ld. D.R. for the first time before this Special Bench relating to quantification of the amount of bad debts and verification of some factual aspects. As already observed by us in this context, the Department is at liberty to raise these arguments, if it is permissible to do so, at the time of hearing of the regular appeal before the Division Bench, which shall consider the same in accordance with law.