HARSHAD J. CHOKSI. vs. THE C.I.T. B.C. - VII.

JUDGMENT (PER M.S.SANKLECHA,J.) 1 By this reference under Section 256(1) of the Income Tax Act, 1961 ('the Act'), the Income Tax   Appellate   Tribunal   ('the   Tribunal')   has referred   the   following   question   of   law   for   the opinion of this court. “Whether on the facts and in the   circumstances   of   the   case,   the 'vatav kasar' of Rs.44,98,210/­ which was held to be not deductible as a bad debt   in   view   of   the   provisions   of Section 36(2) could be considered as SNC 1/11 ITR 43-97.doc CNR No : HCBM020019521997 Uploaded on - 21/08/2020 an allowable business loss?”

This   reference   has   been   made   at   the instance   of   the   assessee   and   arises   out   of   the order of the Tribunal dated 19.12.1994 in Income Tax   Appeal   No.1495/Bom/94   relating   to   the assessment year 1991­1992. 3 Briefly   the   facts   leading   to   this reference are as under: a) The assessee is a stock and share broker.  During the assessment year 1991­1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the Bombay Stock Exchange. The Assessing Officer on examination of the assessee's claim held that  the  assessee  was  not  entitled  to  claim the benefit of bad debts in respect of Rs.47.58 lacs, as   the   assessee   has   not   satisfied   the   condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year. SNC 2/11 ITR 43-97.doc Uploaded on - 21/08/2020 On Appeal, the Commissioner of Income Tax (Appeals)   upheld   the   finding   of   the   Assessing Officer to the extent of Rs.44.98 lacs after having allowed an  amount  of  Rs.2.60  lacs  as  a business loss.   He also held that the amount of Rs.11.81 lacs   was   a   speculation   loss   and   could   not   be allowed as a trading loss.  So far as, the balance amount   of   Rs.33.17   lacs   was   concerned   the Commissioner of Income Tax (Appeals) held that the same could not be considered as a trading loss. 5 On appeal before the Tribunal the assessee contended   that   even   if   the   deduction   is   not allowable as bad debts under Section 36(1)(vii) of the   Act,   the   aforesaid   amount   of   Rs.44.98   lacs should be allowed as a business loss in computing the   profits   and   gains   earned   in   carrying   on   a business.  The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.  Further, SNC 3/11 ITR 43-97.doc Uploaded on - 21/08/2020 it held that when there is a specific provision in the Act regarding allowability of bad debts as a deduction   and   relief   is   sought   thereunder,   the assessee   is   not   entitled   to   claim   relief   as   an allowable   expenditure/deduction   under   any   other provisions including the benefit of deduction as a business loss. 6 Mr.   Sanjeev   Shah,   Learned   Counsel appearing for the applicant submits as under: a) The   issue   arising   in   the   present reference   stands   concluded   by   the   order   of   this court in the matter of Commissioner of Income Tax v. Shreyas S. Morakhia dated 28th February, 2012 in Income Tax Appeal No. 89 of 2011. It has been held therein that even if a part of the bad debts has been taken into account while computing the income of the assessee, and offered for tax in a earlier year, the same would be sufficient satisfaction of Section 36(2) of the Act. b) In any view of the matter, even if the amount of Rs.44.98 lacs is not allowable as a SNC 4/11 ITR 43-97.doc Uploaded on - 21/08/2020 bad   debt,   the   same   should   be   considered   as   a allowable  business  loss  in  computing  the   profits and gains of business and profession under Section 28 of the Act. c) The Act does not provide that the deduction   available   from   the   total   receipts   to compute profit & gain of business are only those deductions which are listed in Section 30 to 43 of the Act. This is because according to him the list is not exhaustive.  It is his contentions that any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at the profits and gains of a business under Section 28 of the Act. In support thereof, he relies upon the decision of this court in the matter of Commissioner of Income Tax v. R.B. Rungta & co. reported in 50 IR page 233. 7 As   against   the   above,   Mr.   Suresh   Kumar appearing for the Revenue submits that: a) The decision of this court in the matter   of   Shreyas   S.   Morakhia   (Supra)   will   not SNC 5/11 ITR 43-97.doc Uploaded on - 21/08/2020 apply to the present facts, as in this case the loss arose on account of a fellow member of the stock exchange not honoring its commitment; b) The amount claimed as bad debts is specifically provided for under section 36 of the Act   and   in   such   cases   it   is   not   permissible   to apply any other section of the Act to determine the allowability of the same as a deduction; c) In   any   view   of   the   matter,   the Commissioner of Income Tax (Appeals) has come to a

conclusion that there was no trading loss to the extent of Rs. 33.17 lacs, as there was no trading done   in   respect   thereof   and   the   deduction   was

therefore not allowable.  So far as, deduction to the extent of Rs.11.81 lacs is concerned, the same is on account of speculation loss and hence, cannot be allowed as deduction from the general profits and gains earned by the assesee in respect of the other   income.   In   support   of   the   aforesaid submission,   he   invited   our   attention   to explanation (2) to Section 28 of the Act. SNC 6/11 ITR 43-97.doc Uploaded on - 21/08/2020 We have considered the submission. So far as, the submission  of  Mr.  Shah  for  the  assessee that the decision of this court in the matter of Shreyas   S.   Morakhia   (Supra)   covers   the   issue   is concerned, we are not expressing any opinion with regard to it as the same does not arise from the question   referred   to   us.   The   Tribunal   has considered that the amount of Rs.44.98 lacs is not deductible as bad debts in view of Section 36(2) of the Act and sought our opinion only on the question whether in such a case the assessee could claim a deduction   as   a   business   loss   to   arrive   at   his profits and gains from business. So far as, the submission of Mr. Suresh Kumar for the Revenue that the issue with regard to the  loss being a loss on account of speculation is concerned, we are not expressing any opinion on the same.   This for the reason that the issue framed for our opinion is whether, when the loss is not allowed as a bad debts can it be considered for the purposes of allowing the same as a business loss. In   this   case,   we   are   not   called   upon   to   decide SNC 7/11 ITR 43-97.doc Uploaded on - 21/08/2020 whether or not the loss claimed satisfied the test of the business loss but our opinion is on the more restricted issue namely whether such a loss could be   considered   as   a   allowable   business   loss. Therefore, we are not dealing with both the above issues. 9 Our   opinion   is   sought   on   the   issue, whether if an amount is held to be not deductible as a bad debt, in view of non compliance of the condition precedent as provided under Section 36(2) of   the   Act,   could   the   same   be   considered   as   a allowable business loss.  The Tribunal in its order dated   19.12.1994   has   not   considered   the   issue, whether or not a loss claimed by the assessee is allowable as a business loss on the basis of the evidence produced by the assessee.   The Tribunal proceeded on a premise that once a claim is made for deduction as bad debts, then the deduction can be granted only if the provision of Section 36 of the Act are satisfied  and  it  is not open  to an assessee to claim a deduction in the alternative SNC 8/11 ITR 43-97.doc Uploaded on - 21/08/2020 under any other provision of the Act.  In view of the above, we are not making any observation with regard   to   whether   the   claim   of   the   assessee   on merits is allowable as a business loss.   We are only  examining  the  issue  posed  for  us  viz.  that when   the   claim     made   for   bad   debts   is   not satisfied, could it be considered as a allowable business loss. 10 Section 28 of the Act imposes a charge on the   profits   or   gains   of   business   or   profession. The expression “Profits and gains of business or profession”   is   to   be   understood   in   its   ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount   earned   by   carrying   on   a   profession   or   a business   which   necessarily   requires   deducting expenses   and   losses   incurred   in   carrying   on business or profession.  The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 34 ITR page 10, has held that in assessing the amount of profits and gains liable to SNC 9/11 ITR 43-97.doc Uploaded on - 21/08/2020 tax,   one   must   necessarily   have   regard   to   the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. 11 On the basis of the aforesaid decisions, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss.  This is particularly so as there is no bar in claiming a loss as a business loss, if the   same   is   incidental   to   carrying   on   of   a business.    The  fact that  condition  of  bad  debts were   not   satisfied   by   the   assessee   would   not prevent him from claiming deduction as a  business loss incurred in the course of carrying on business as share broker. 12 In   fact   this   court   in   the   matter   of Commissioner  of Income  Tax  v.  R.B.  Rungta  & Co. (Supra) upheld the finding of the Tribunal that the loss   could   be   allowed   on   general   principles SNC 10/11 ITR 43-97.doc Uploaded on - 21/08/2020 governing computation of profits under Section 10 of   the   Indian   Income   Tax   Act,   1922   which   is similar/identical to Section 28 of the Act.   The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general   principle   of   law   that   all   expenditure incurred   in   carrying   on   the   business   must   be deducted to arrive at a profit cannot be extended. This submission was negatived by this court and it was held that even where the debt is not held to be allowable   as   bad   debts   yet   the   same   would   be allowable   as   a   deduction   as   a   revenue   loss   in computing   profits   of   the   business   under   Section 10(1) of the Indian Income Tax Act, 1922. 13 In view of the above, the question as referred to us is answered in the affirmative i.e. in   favour   of   the   assessee   and   against   the respondent.  No order as to costs. (M.S. SANKLECHA, J.) (S.J.VAZIFDAR, J.) SNC 11/11 ITR 43-97.doc Uploaded on - 21/08/2020 Powered by TCPDF (www.tcpdf.org)