SYSTEMATIX SHARES AND STOCKS INDIA LTD.,MUMBAI vs. ACIT, CHENNAI

आदेश / O R D E R

PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER:

i. The Ld.CIT(A) has erred in sustaining the order of the Ld.

AO who had disallowed the claim of bad debts amounting to Rs.1,56,47,105/- ii. The Ld.CIT(A) has erred in sustaining the order of the Ld.AO who had made addition of Rs. 2,23,019/- by invoking provisions of Section 14A read with Rule 8D of the Rules.

The assessee company had written off bad debts amounting to Rs.1,56,47,105/-. On query it was explained by the Ld.AR that the bad debts arose due to the following reasons:

1) Dues relating to non-payment of brokerage charges which was already booked as income.

2) Loss related to non-payment of cost of shares purchased on behalf of clients.

The Ld.AO relying on the decision of the Mumbai bench of the Tribunal in the case G.R. Pandiya Share Broking Ltd vs. ITO

(2008) reported in 26 SOT 431(Mum) questioned the Ld.AR as to why the bad debts with respect to non-payment of cost of shares should not be disallowed U/s.36(1)(vii) read with Sec 36(2) of the Act, since only the brokerage income has been taken into account for computing the total income of the assessee. The Ld.AR relied on the decision of the Hon’ble Mumbai High Court in the case CIT v. Shriyas S. Morakhia (2012) reported in 19 taxmann.com 64

(Bom), wherein it was held that the sale consideration of such shares should be reduced from the cost of shares purchased where payment has not been received and the balance shall be claimed as bad debts.

Thereafter the Ld.AO pointed out the following discrepancies:- i. The assessee had not provided a clear break-up of brokerage income and cost of the scripts against which payment was not received. ii. The break-up of bad debts relating to brokerage income and bad debts relating to purchase of shares against which payment was not received, was not produced. iii. Some of the parties against whom bad debts were claimed relating to purchase of shares against which payments were not received, gave contradictory statements viz.:- a) Shri P.S. Kathirvel against whom bad debts of Rs.29,193/- was written off stated that he did not have any knowledge about the share transaction made in his name. b) Shri R. Sivasankar against whom bad debts of Rs.12,061/- was written off stated that the assessee company had adjusted such loss from the salary of the employees who had allegedly traded in shares without the knowledge of the client. iv. Bad debts written off in the name of some of the parties such as M/s.Dhansri Investment Pvt Ltd, Dinesh Butura and M.R.Geetha, same PAN number was furnished. v. Bad debts written off in the name of Bichitra Behra for Rs.3,13,287/- did not appear to be genuine because it was revealed on investigation that he only worked as an office peon couple of years back in M/s. Mehta and Parida,

Chartered Accountants. He was still working as peon in another firm.

With the above findings, the Ld.AO observed that the genuineness of the claim of bad debts is not established and further relying on the case decided by the Hon’ble Punjab & Haryana High Court CIT v. Lal Woolen and Silk Mills Pvt. Ltd. (2009) reported in 183 taxman 145 wherein it was held that when debt has never been depicted as income of the assessee in its accounts, one of the essential conditions of section 36(2) of the Act is not met and thus the assessee would not be entitled to claim the deduction U/s.36(1)(vii) of the Act with respect to bad debts written off in the books of accounts. Accordingly the Ld.AO made an addition of Rs.1,56,47,105/- in the hands of the assessee disallowing the claim of bad debts.

4.1 On appeal, the Ld.CIT(A) agreeing with the findings of the Ld.AO sustained his order by observing as order:

“I have considered the submissions of the AR of the appellate carefully. I have also perused the copy of the statements recorded by the Assessing Officer. I find from the statements of the person Sri Sivasankar recorded u/s 131 of the IT Act that the parties have never invested in or associated with the assessee company. I have also perused the report in of the Inspector of Income tax wherein one Mr. Bichitra Behra has denied to have invested or associated with the assessee company. During the course of assessment proceedings, the AO had recorded statements of the few persons on test check basis and all of them have denied the relevant transaction. The AR of the appellant did not avail opportunity of cross examination of the persons before AO. At the time of assessment proceedings, the AR of the appellant kept silent without doubting the veracity of the contents of the replies given by the persons. Further, the AR of the appellant did not furnish any details of the break up of the bad debts in the brokerage income and cost of share components although same was required vided specific notice dated 08.03.2013. In view of the specific facts brought on by the AO, the plea of the AR of the appellant to cross examine the parties is rejected. I find that the plea of the AR of the appellant to cross examine the parties is only delaying tactic to mislead the revenue. No affidavit was also made by the parties denying the contents of the statements made before the AO. Under the circumstances, I fully agree with the view of the AO that the claim of bad debt made by the appellant is not genuine claim and hence all the grounds of appeal filed by the appellant on this issue are rejected.”

4.2 The Ld.AR submitted before us that the assessee had explained before the Ld.AO vide letter dated 01.03.2013 that the amount written off were outstanding in the books of the assessee for more than 3 years pertaining to either non receipt of brokerage towards purchase and sale of shares which was treated as income earlier or due to loss incurred on purchases/sale of shares on behalf of clients. The Ld A.R further submitted that in all there were 921 clients whose accounts are written off during the relevant assessment year in the case of the assessee. The Ld.AR further argued stating that the books of accounts including ledger copies, etc., were furnished before the Ld.AO with respect to the claim of bad debts related to brokerage charges and purchase of shares.

He further argued that, based on the statements of few clients who did not have good relationship with the assessee and who had defaulted payment to the assessee, the Ld.AO had arrived at the harsh decision of disallowing the entire claim of bad debts. It was therefore pleaded the claim of bad debt may be allowed and the addition made by the Ld.AR on this ground may be deleted. The Ld.DR on the other hand argued in support of the Revenue authorities.

4.3 We have heard the rival submissions and carefully perused the materials on record. From the facts of the case, it is apparent that the assessee who is a share broker had incurred loss on account of two counts:-

1) Non-payment of brokerage charges by the client of the assessees which was treated as income by the assessee on the earlier occasion.

2) Non-payment of purchase consideration of shares by the clients of the assessees.

On the first instance, by virtue of Section 36(1)(vii) r.w.s 36(2) of the Act, and the decision of the Hon’ble Apex Court in the case TRF Limited vs. CIT reported in 323 ITR 397 it is clear that the assessee is entitled to claim the amount of brokerage commission not received as bad debt, if the same was treated as income earlier and written off in the books of accounts during the relevant assessment year when the debt was considered as not receivable.

On the second instance, though the claim of bad debts with respect to non-receipt of purchase consideration of shares purchased on behalf of the clients, cannot be allowed as deduction U/s.36(1)(vii) r.w.r 36(2) of the Act, the actual loss incurred if any with respect to the purchase consideration of the shares against which payment from the clients are not recoverable less sale consideration of those shares, has to be allowed as loss incurred during the course of the business of the assessee U/s.28 of the Act. These aspects have been clearly dealt in the decision of the Hon’ble Bombay High Court in the case CIT vs. Shreyas S Morakhia (supra). Needless to mention that loss incurred by the assessee due to non-delivery of shares sold by the assessee on behalf of its clients also has to be treated as loss incurred by the assessee during the course of its business and the assessee would be entitled to claim deduction on account of the same. In the case of the assessee the Ld.AR had explained before the Ld.AO that the loss was either due to failure on the part of the clients of the assessee to make payment for the purchase of shares on behalf them by the assessee or due to failure on their part to deliver the shares traded by the assessee on behalf of the clients and further nonpayment of the brokerage charges which was booked as income by the assessee on mercantile basis. The Ld.AR had further clarified before the Ld.AO that while claiming such loss, due adjustment with respect to sale of shares had been taken into account and only the actual loss is claimed as deduction. Considering the above facts, it is evident that the decision of the Hon’ble Bombay High Court in the case of CIT vs. Shreyas S Morakhia (supra) will be applicable in the case of the assessee and the loss incurred by the assessee on the above transaction has to be allowed as deduction.

In the case of the assessee the grouse of the Ld.AO is that the assessee has not provided the details of such debtors. We fail to understand as to how the Ld.AO could state so when he has not made any findings on examining the books of accounts of the assessee. It is not the case of the Revenue that the assessee has not maintained books of accounts or produced the books of accounts before the Ld.A.O. All the books of accounts were very much available before the revenue. The ledger accounts maintained by the assessee will have the details of all the debtors.

The debts that are considered bad are also written off in the books of accounts and the same is not disputed. Further by examining those books of accounts of the assessee it can be easily verified whether the brokerage charges was booked as income on the earlier occasion and whether the assessee has incurred loss on the sale of shares purchased by it on behalf of its clients against whom payment has become irrecoverable/partly irrecoverable. The opening balances of those debtors are also verifiable. Since the Revenue has not rejected the books of accounts and found out any discrepancies with respect to the claim of the assessee, we are of the considered view that the disallowance of Rs.1,56,47,105/- in the hands of the assessee is not warranted only on the pretext of the lame finding of the Revenue that the details with respect to the claim of deduction is not provided. For the above stated reasons we hereby direct the Ld.AO to delete the addition of Rs.1,56,47,105/-.

During the course of scrutiny assessment it was observed by the Ld.AO that the assessee had made investment to the tune of Rs.1,25,80,877/- as on 31.03.2010, wherein it has received dividend income of Rs.2,70,892/-. The assessee had only disallowed Rs.5,418/- being the demat charge as expense incurred for earning exempt income. Since, the assessee had not taken into consideration of the other expenses involved for maintaining the investment of Rs.1,25,80,877/- which earned exempt dividend income the Ld.AO invoked the provisions of Sec.14A read with Rule 8D of the Act and thereby made disallowance of Rs.2,23,019/-. On appeal the Ld.CIT(A) confirmed the order of the Ld.AO by relying on various decisions of higher judiciary. We don’t find any infirmity in the decision of the Revenue authorities in this issue because the assessee has not convinced the Revenue authorities with respect to the expenses attributable for earning exempt income by apportioning all such expenses. Therefore the Revenue has no other option but to compute the disallowance in accordance with Rule 8D of the Rules. Moreover the Ld.AO has only invoked Rule 8D(iii) of the Rules and thereby computed the disallowance at Rs.62,904/-, on which we are of the view that no interference is necessary in the order of the Revenue authorities. However at the same time we find that the Ld.AO has stated in his order that the disallowance U/s.14A is to be made for Rs.2,23,019/- It appears there is a mistake in the order of the Ld.AO. Therefore we hereby correct the order of the Ld.AO by sustaining the addition at Rs.62,904/- towards disallowance U/s.14A r.w.r 8D of the Rules.

Order pronounced in the court on 11th May, 2017.