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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
O R D E R PER MAHAVIR SINGH, JM:
This appeal by the Revenue is arising out of the order of CIT (A)-1, Mumbai passed in appeal No.CIT (A)-I/IT-84/2011-12 dated 07.11.2012. Assessment was framed by the Income Tax Officer Ward-1(1)(1), Mumbai for assessment year 2009-10 vide his order dated 01.12. 2011 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
The only issue in this appeal of the Revenue is against the order of the CIT (A) deleting the disallowance of bad debts made by the AO. For this, the Revenue has raised the following ground:-
1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of Rs.67,23,141/- claimed by the assessee as Bad Debts while such amount was not included in the taxable income earlier as mandated in section 36(1) (vii) r. w. s. 36(2)(i) of the I. T. Act, 1961”.
3. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed the claim of bad debts for the reason that no allowance of bad debts can be made if the debt has been written off is not considered as income in any of the previous years. According to the AO, the assessee as a broker receives commission from its clients for purchase and sales of shares on his behalf. According to the AO, at the end of settlement period, the broker raises the bill for the total amount due from/to the clients including brokerage.
According to him, this brokerage forms part of the turnover and only part is the debt, which is treated as income of the stock broker and the balance amount of bills raised by the broker is not treated as the turnover of the broker and is not credited to the profit & loss account. Accordingly, he made disallowance by holding that out of the total amount receivable from debtors, only amount of brokerage will be eligible for claim of bad debts u/s 36(1)(vii) read with section 36(2)(i) of the Act. Aggrieved against the action of the AO, the assessee preferred before the CIT (A), who allowed the claim of the assessee vide Para 5.5, 5.6 and 5.7 of his appellate order.
Before us, the learned Sr. DR heavily relied on the assessment order. On the other hand, the learned Counsel for the assessee argued that this issue whether the entire amount of bill raised has to be considered for the purpose of claim of bad debts or only part of income has to be considered, has been settled by the Hon’ble Bombay High Court in the case of CIT, Central II vs. Shreyas S. Morakhiya [342 ITR 285 (Bom.)] and also by the decision of the Hon’ble Delhi High Court in the case of CIT vs. Bonanza Portfolio [320 ITR 178 (Del.)]. Alternatively, she argued that in case the bad debts are not allowed, in that case this should be allowed as business loss in view of the decision of Hon’ble Bombay High Court in the case of Harsad J. Choksi v. CIT (2012) 349 ITR 250 (Bom).
We have gone through the facts of the case and limited issue for adjudication before us is that whether the entire turnover of the broker who deals in sales and purchases of shares or only the commission/brokerage part, due from/to clients and not realized, has to be considered for the claim of deduction as bad debts u/s 36(1)(vii) read with section 36(2)(i) of the Act. We find that the argument of Ld. DR that u/s 36(2) of the Act, no deduction on account of bad debts can be allowed unless such debts or part thereof has been taken into account in computing the income of the assessee is not convincing. It was also argued that as assessee had offered only brokerage income to tax but not the value of the shares purchased on behalf of the clients, the latter could not be allowed as a bad debts u/s 36(1) (vii) of the Act. We find from the provision of section 36(2) (i) of the Act is that a deduction on account of a bad debt can be allowed only where such debt or part thereof has been taken into account in computing income of assessee of previous year in which amount of debt is written off and debt of assessee comprised, inter alia, of value of shares transacted and brokerage payable by client on whose behalf transaction took place. The brokerage having been credited to profit and loss account of assessee, it was evident that a part of debt was taken into account in computing income of assessee for previous year and therefore, requirements of section 36(2) (i) of the Act were fulfilled. Therefore, in our view, the assessee was entitled to deduction claimed under section 36(1) (vii), read with section 36(2) of the Act. We are of the view that in order to satisfy the condition stipulated in section 36(2) (i) of the Act, 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. This principle applies to the share broker. The amount receivable on account of brokerage of share and once such brokerage is credited to the P&L a/c. and taken into account in computing this income, the condition stipulated in section 36(2) (i) of the Act is fulfilled. Whether the gross amount is reflected in the credit side of the P&L a/c or only the net amount is finally reflected as profit after deducting the corresponding expenses or only the net amount of brokerage received by the share broker is reflected in the credit side of the P&L a/c makes no difference because the ultimate effect is the same. We find that this issue is squarely covered by the Jurisdictional High Court in the case of Shreyas S. Morakhia(Supra) and also by the decision of the Delhi High Court in the case of Bonanza Portfolio(Supra).
We further find that on the facts of the case the alternative contention of the assessee that this can also be considered as business loss is acceptable as the question has been answered by the Hon’ble Bombay High Court in the case of Harsad J. Choksi (Supra). In view of the above decision of the Hon’ble Bombay High Court, We find that Hon’ble High Court has held that even if the deduction was not allowable as a bad debt, the assessee’s claim for deduction as a business loss is to be allowed. For arriving the conclusion Hon’ble High Court referred the ratio of Apex court in Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and Bombay High court judgment in CIT v. R.B. Rungta and Co. (1963) 50 ITR 233 (Bom.) and the facts of the case before us, we confirm the order of the CIT (A) deleting the disallowance.
In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 15/06/2016.