M/S ARIHANT FINCAP LTD. (NOW MERGED WITH ARIHANT CAPITAL MARKET LTD.),INDORE vs. THE ACIT 1(1), INDORE

आदेश /O R D E R PER KUL BHARAT, J.M. : Appeal by the assessee is directed against the order of

Ld. CIT(A)-I, Indore, pertaining to assessment year 2004-

05.

Ground Nos. 2 & 3 are not pressed. Hence, the same 2.

are dismissed as not pressed.

Ground no. 4 is of general nature and does not require 3.

any adjudication.

The only effective ground is ground no.1, which reads 4.

as under :-

“That the Ld. CIT(A) erred in confirming the disallowance of Rs. 3,78,440/- out of total expenses of Rs. 4,57,450/- being amount debited under the head error and omission by holding that the said expenditure cannot be treated as revenue expenditure and cannot be allowed as business expenditure. That on the facts and circumstances of the case, the said amount was rightly claimed as allowable expenditure by the appellant and the disallowance thereof is wrong. It

-: 3 :- Arihant Fincap Ltd., Indore is prayed that the said addition may very kindly be deleted.”

Briefly stated, the facts of the case are that the 5.

assessee is a member of National Stock Exchange. The

main source of income of assessee is Brokerage,

commission and Investment & Trading in Securities. The

assessee has claimed an amount of Rs. 4,57,450/- towards

Error & Omissions account in its profit and loss account.

The AO made query about the nature of account, in

response to which the assessee specifically submitted

before the AO as under :-

Letter dt. 30-11-06

"With respect to your query regarding Error & Omission

Account of Rs. 457450/-, it is submitted that the actual

amount of Error & Omission is Rs. 79010/- only and

the balance amount of Rs.378440/- is actually on

account of settlement which was inadvertently booked

by the assessee in this account. The brief history of the

-: 4 :- Arihant Fincap Ltd., Indore case was that a client ( Jagdish Jhawar ) of the

assessee was dealing in Future & Option Markets of

NSE. A perusal of the ledger and contract notes of the

client it will be seen that during the first half of

January the market was very volatile and the client

was suffering losses on the open position. When the

client was asked to furnish additional margin, he was

unable to do so. In order to restrict the loss the

assessee squared up the positions. Immediately on

square off of positions the market bounced back and

the client started nagging the assessee for loss of profit

and blamed the assessee for loss. The assessee on

looking at the future business prospects and in order to

retain the client and his friends had borne the loss to

the extent of Rs. 3,78,440/-.Since the loss is actually

in the nature of settlement the same may please be

allowed. As regards balance amount of Rs. 79010/-

-: 5 :- Arihant Fincap Ltd., Indore we have vide our earlier replies have filed the detailed

reply. ”

The AO found that the assessee was not able to 6.

furnish any details or evidence in respect of the

transactions wherein any profit/loss on wrong punching of

order by the terminal order was booked. The AO treated

the loss as speculative loss and the same was disallowed to

the extent it was not set off against the speculation income

of Rs. 65,463/- offered by the assessee. The net

disallowance was calculated at Rs. 3,91,987/- ( Rs. 457450

(-) 65463) on this income and added back to the total

income of the assessee. The assessee preferred an appeal

before the Ld. CIT(A). The Ld. CIT(A) out of total expenses of

Rs. 4,57,450/- disallowed the amount of Rs. 3,78,440/-

and confirmed the appeal, against which the assessee is in

further appeal before this Tribunal.

-: 6 :- Arihant Fincap Ltd., Indore The Ld. Counsel for the assessee reiterated the 7.

submissions as made before the Ld. CIT(A-I, which is

placed on record in the paper book at page 51-53. The

Third written submission is reproduced as under :-

THIRD WRITTEN SUBMISSION

Honour that the amount of Rs. 3,91,987/- claimed to

be for business purpose, but does it not amount to an

expenditure of capital in nature in view of the fact that the appellant's income is only from brokerage. In this

respect, it is most humbly reiterated that the amount

claimed by the appellant was incurred solely for business purposes which is allowable u/s 37. It may

be clarified that the appellant had claimed an amount

of Rs. 4,57,450/under the head error and omission,

which the learned AD disallowed treating the same as speculative loss and after allowing set off against the

share trading income (speculation income) of Rs.

-: 7 :- Arihant Fincap Ltd., Indore 65,643/disallowed the net loss of Rs. 3,91,987/-. The

major amount claimed by the appellant was Rs.

3,78,440/- which was a credit given to one of the

client namely Shri Jagdish Chand Jhawar on account

of settlement with him, as explained in detail in the

earlier two submissions. 2. It was also explained that the said client suffered

huge losses due to squaring off his existing position by

the appellant in January 2004 after which the said

client stopped trading with the appellant and was also

not making the payments of amounts due from him to

the appellant. The said client lodged a claim of Rs.

7,58,150/- with the appellant in January 2004 itself, which was settled for Rs. 3,78,440/- and credit was given to the client on 10th March 2004 after which the

client resumed trades and the appellant started

earning brokerage, which amounted to Rs. 4,70,363/-

in the immediately succeeding year, in addition to the

-: 8 :- Arihant Fincap Ltd., Indore brokerage earned during the impugned year. 3. As rightly observed by Your Honour that the brokerage

income is the major income of the appellant. However,

business claims cannot always be viewed within the

strict barometer of resulting income. Thus, at times

claims of amounts higher than the income earned in

respect there to, have to admitted in view of the

commercial expediency of such claims. It is also an

admitted and settled position that no one else can step

into the shoes of a businessman accept for himself, as

only he knows what decisions are required to be taken

at that particular time under those existing facts and

conditions and in the best interest of the business.

Though at times such business decision may prove to

be wrong, but there can be no denial that at times

business is nothing but an adventure in the nature of

trade. Such business decisions should not be viewed

with suspicion and should always be given due regard

-: 9 :- Arihant Fincap Ltd., Indore unless otherwise proved. In the instant case the

decision of settling accounts with the client was very

much a right decision in the interest of the business.

Had the appellant not settled the dispute with the said

client, it would have not only lost the business with

that client forever and also the resultant brokerage

income, but would have also faced litigation which

had its own cost and consequences.

allowed to share brokers, which claim comprises not

only of brokerage earned but also of other amounts

due from clients which may not have been routed

through profit and loss account. Such claims are

allowed for the simple reason that such losses occur in

the normal course of business and are incidental to the

core business of brokerage and also unavoidable.

Therefore claim of bad debts in the case of brokers has

always been treated as regular revenue expenditure

-: 10 :- Arihant Fincap Ltd., Indore and not a capital expenditure. The claim of bad debts has been regularly allowed even in the case of the

appellant in future years at the scrutiny assessment

stage itself. The present case before Your Honour, in

the alternate, can very be equated with the claim of bad debts.

In view of the above submission it is requested that the

claim of the appellant being that of a regular business

expenditure/loss and is not in the nature of capital expenditure/loss, neither in the nature of speculation

loss as held by the learned AO, the same may kindly

be allowed.”

The Ld. Counsel for the assessee contended that the 8.

assessee is a share broker registered with BSE and NSE.

The Ld. Counsel for the assessee took us through page 29

of the paper book, which was the letter addressed to AO

dated 30.11.2006, which is abstracted on page 2 of the

-: 11 :- Arihant Fincap Ltd., Indore assessment order that the assessee has incurred an

amount of Rs. 3,78,440/- on account of settlement with

one of its clients, Mr. Jagdish Jhawar. The said client was

suffering losses on its open position in the future and

option market and was not providing requisite margin to

the assessee. The assessee, therefore, squared off the

existing outstanding trades of the client in which the client

suffered losses. Later on the share market recovered and

the client started claiming the losses suffered by him from

the assessee. The assessee looking at the future business

prospects and in order to retain the client agreed to bear

the loss to the extent of Rs. 3,78,440/- and claimed the

same as expenditure. The AO disallowed the said loss

stating that no physical delivery of the shares was affected

and treated the same as speculative loss. The Ld. Counsel

for the assessee further contended that the Ld. CIT(A) has

also discussed the issue on page 18 to 22 of his order

-: 12 :- Arihant Fincap Ltd., Indore stating that during the course of appellate proceedings also

the assessee has filed a detailed explanation from where it

was seen that the existing position of the client Mr. Jagdish

Jhawar was squared off in January 2004 and to settle the

matter and maintain trade relationship the assessee agreed

to bear the loss on which settlement was agreed upon in

March 2004 and the amount was claimed as expenditure /

loss. The trades with this client were resumed from

15.03.2004. The assessee has earned brokerage from the

said client immediately in the next year of Rs. 3,29,492/-

in respect of F&O trade and brokerage of Rs. 1,40,870/- in

respect of share trading. Thus, the assessee contended

before the CIT(A) that as a result of settlement the said

client continued the said relationship and the assessee

was able to make good the loss suffered due to settlement

with the client. It was also stated that if the assessee had

not agreed to settle the issue the client would have stopped

-: 13 :- Arihant Fincap Ltd., Indore business and would have also created litigation which

would have cost the assessee with additional expense, time

and energy. The Ld. Counsel for the assessee contended

that the CIT(A) confirmed the disallowance by holding that

the transaction cannot be held to be revenue in nature.

The Ld. Counsel for the assessee further contended that

the loss borne by the assessee of Rs. 3,78,440/- was in the

nature of a business loss. The assessee has squared off the

trades of the client in which the client suffered losses. The

assessee settled the account with the client and agreed to

bear the losses to the extent of Rs. 3,78,440/-. After

settlement, the client resumed its transactions with the

assessee and the assessee earned substantial income from

the said client. Therefore, the business and commercial

expediency of making the settlement with the client and

agreeing to bear the loss to the extent of Rs. 3,78,440/- is

very well established on records. The Ld. Counsel for the

-: 14 :- Arihant Fincap Ltd., Indore assessee contended that the disallowance made by the AO

by treating the said loss as speculation loss and confirmed

by the CIT(A) is not justified. The same may please be

deleted.

The Ld. Departmental Representative supported the 9.

orders of the lower authorities.

submissions and have perused the material available on

record. We have also perused the orders of the lower

authorities. We find that the assessee is a share broker

registered with BSE and NSE. The assessee has incurred

Rs. 3,78,440/- on account of settlement with one of its

clients, Mr. Jagdish Jhawar. Mr. Jagdish Jhawar was

suffering losses and was not providing requisite margin to

the assessee. The assessee had to square off the existing

outstanding trades of the client in which the client suffered

losses. Since the assessee is in share business and looking

-: 15 :- Arihant Fincap Ltd., Indore to the future business prospects and in order to retain the

client agreed to bear the loss to the extent of Rs.

3,78,440/- and claimed the same as expenditure. We find

that the existing position of the client Mr. Jagdish Jhawar

was squared off in January 2004 and to settle the matter

and maintain trade relationship, the assessee had agreed

to bear the loss on which settlement was agreed upon in

March 2004 and the amount was claimed as

expenditure/loss. We also find that the trades with this

client were resumed from 15.03.2004 and the assessee had

earned brokerage from the said client immediately in the

next year amounting to Rs. 3,29,492/- in respect of F&O

trade and brokerage at Rs. 1,40,870/- in respect of share

trading. We find that due to the said relationship only the

assessee was able to make good the loss suffered due to

settlement with the client. We find that the ld. CIT(A)

confirmed the disallowance by holding that the transaction

-: 16 :- Arihant Fincap Ltd., Indore cannot be held to be revenue in nature. We, therefore, hold that the loss borne by the assessee of Rs. 3,78,440/- is in the nature of a business loss. We find that the business and commercial expediency of making the settlement with the client and agreeing to bear the loss to the extent of Rs. 3,78,440/- is very well established on records. We, therefore, delete the addition of Rs. 3,78,440/-. In the result, the appeal of the assessee is partly 11. allowed. The order pronounced in the open court on 29.06.2018.

Sd/- Sd/- (मनीष बोरड) (कुल भारत) लेखा सद�य �या�यक सद�य (KUL BHARAT) (MANISH BORAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Indore; �दनांक Dated : 29/06/2018 CPU*/SPS Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.

-: 17 :- Arihant Fincap Ltd., Indore By order Private Secretary/DDO, Indore