INCOME TAX ACT, 1961

--Business deduction under section 36(1)(vii)--Bad debtsMoney due from clients--The assessee was a share broker. A return of income was filed declaring a total income of Rs.67,797. The assessee claimed deduction of Rs.28.24 lacs representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf. The assessee claimed that the amount had become irrecoverable. The amount was claimed as a deduction after having been written off as irrecoverable from the books of account. AO disallowed the deduction holding that the business in respect of which the debts had arisen had ceased to exist in the year under consideration and also on the ground that no action was taken against the clients to recover the amounts due from them. In appeal, CIT(A) held that though the assessee had sold the membership card of the Mumbai Stock Exchange, he continued to carry on broking business as a sub-broker and hence the business of the assessee had not ceased to exist but continued during the year under consideration. CIT(A) held that the failure of the assessee to initiate recovery proceedings could not be a ground for denying a claim for bad debts under section 36(1)(vii). The claim of the assessee was accordingly allowed. An appeal was filed by the Revenue before the ITAT; the contention of the Revenue being that since the assessee had credited only the amount of the brokerage to the profit and loss account, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or of any earlier previous year. Hence according to the Revenue the condition stipulated in section 36(2) was not satisfied and the assessee was not entitled to claim a deduction in respect of the bad debts under section 36(1)(vii). Since there was a conflict of opinion among coordinate Benches of the Tribunal, a Special Bench was constituted which decided the issue in assessee's favour. Revenue submited that admittedly in the present case it was only the brokerage charged to the client of the assessee which was reflected on the credit side of the profit and loss account. The debt which was due and owing to the assessee from its clients on account of the non payment of the purchase price of the shares transacted did not form part of the profit and loss account and was, therefore, according to the Revenue not taken into account in computing the income of the assessee for the previous year. Consequently it was urged that the assessee would not be entitled to claim a deduction on account of bad debts for want of compliance with the provisions of section 36(2)(i). Held: The value of the shares transacted by the assessee as a stock broker on behalf of its client was as much a part of the debt as was the brokerage which was charged by the assessee on the transaction. The brokerage having been credited to the profit and loss 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 the brokerage may arise, as contended by the Revenue, 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 the very same transaction involving the sale or as the case may be purchase of shares. Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

Income Tax Act, 1961 Section 36(1)(vii)

Income Tax Act, 1961 Section 36(2)

IN THE BOMBAY HIGH COURT

D.Y. CHANDRACHUD & M.S. SANKLECHA, JJ.