Business expenditure: Bad debts: Section 36(1)(vii) and 36(2) of Income-tax Act, 1961: A.Y. 1998-99: Assessee share-broker: Nonrecovery of amount receivable from clients against purchase of shares: Non-recoverable amount is bad debt deductible u/s.36(1)(vii) r.w.s 36(2).

The assessee was a share-broker. For the A.Y. 1998-99, the assessee claimed deduction of Rs. 28.24 lakh representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf, u/s.36(1)(vii) claiming that the amount has become irrecoverable. The Assessing Officer disallowed the claim. The CIT(A) allowed the assessee’s claim. The Revenue filed appeal before the Tribunal and contended that since the assessee had credited only the amount of the brokerage to the P&L a/c, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or any earlier previous year and accordingly, the condition stipulated in section 36(2) was not satisfied. The Tribunal upheld the decision of the CIT(A).

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under: “

(i) Brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Brokerage as well as the value of the shares constitute a part of the debt due to the assessee, since both arise out of the same transaction.

(ii) Value of the shares transacted by the assessee as a stock-broker on behalf of his clients is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. Brokerage having been credited to the P&L a/c of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. 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.

(iii) The assessee was therefore entitled to deduction u/s.36(1)(vii) if the Act.”