DCIT CEN CIR 3(3) CEN RG 3, MUMBAI vs. SHAREKHAN LTD, MUMBAI

36. (2).In his Ground the AO has objected to deleting the disallowance by the First Appellate Authority (FAA) by relying on the case of Shreyas S. Morakhia (342ITR385). 2.1.During the course of hearing before us, the Representatives of both the sides stated that identical issue was decided in favour of the assessee and against the AO by the Tribunal in its order dated 24.03.17 (ITA 5581/Mum/2015, AY 2009-10).We find that the Tribunal has dealt with the issue as under :- “2.First ground of appeal filed by the AO deals with deleting the addition, amounting to Rs. 5. 48 crore,made by him towards bad debts. During the assessment proceedings, the AO found that the assessee had made a claim of Rs.5,48,62,845/- under the head bad debts claiming that the amount was receivable from the clients in the course of the business carried out. It was further claimed that due to disputes with the clients amount in question was no more receivable and was written off as bad debts. However the AO was not convinced and held that the amount claimed as bad debt had never been taken into account for computing the income of the assessee, that same did not fulfill the conditions set forth in the section 36. (2) of the Act.Finally,he disallowed the claim made by the assessee. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA)and made elaborate submissions before him. After considering the submission of 5727/M/15(11-12) Sharekhan Ltd. the assessee and the assessment order, he referred to the case of Shreyas S Morakhiya(342 ITR 285) of the Honorable Bombay High Court and allowed the claim made by the assessee. 2.2. During the course of hearing before us, representatives of both the sides argued that while deciding the appeals for the two earlier assessment years i.e.2007-08(ITA/9065/Mum/2010- &ITA/1027/Mum/2011-AY.2007-08,dtd.15.05.2015) and 2008-09 (ITA.s.6350 and 6999/ Mum/2011-AY.2008-09,dtd.30/09/2016.),the Tribunal had decided the issue against the AO. We would like to reproduce the relevant portion of the order of the Tribunal for the AY. 2007 - 08(supra), and it reads as under: 6. Apropos ground No.1, the only grievance of the Revenue in this ground is that Ld. CIT(A) has erred in allowing relief on the basis of decision in the case of Shreyas S. Morakhia Special Bench (Mum) as the same is not accepted by the Department. Now it is the case of Ld. AR that Hon’ble Bombay High Court has upheld the said decision of Special Bench in the appeal filed by the Revenue and reference was made to the decision in the case of CIT vs. Shreyas S.Morarkia, 342 ITR 285(Bom). 6.1 Ld. AO disallowed a sum of Rs.1,18,82,970/-, Rs.90,035 and Rs.52,283/-,which were claimed as bad debts written off in the P&L account. Ld. CIT(A) allowed the same on the basis of Special Bench decision in the case of Shreyas S. Morarkhia (supra). Against the aforementioned decision of Special Bench, the Revenue took up the matter in further appeal before Hon’ble Bombay High Court and it was held that the value of the shares transacted by the assessee as stock broker on behalf of his clients was as much a part of the debt as was charged brokerage by the assessee on the transaction. The brokerage having been credited to the P&L account of the assessee, it was evident that a part of the debt was taken into account in computing the income of the assessee. The fact that the liability to pay brokerage may arise at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from same transaction involving the sale or, as the case, purchase of shares. Since both form a part of component of debt, the requirement of section 36(2)(i) are fulfilled, where a part thereof is taken into account in computing the income of the assessee. Therefore, it was held that assessee is entitled to deduction by way of bad debt under section 36(1)(viii) r.w.s. 36(2) in respect of amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients.