Income-tax Act, 1961 — S. 36(1)(vii), S. 36(2) — If brokerage
is offered to tax, a sharebroker is entitled to deduction by way of bad debts
u/s. 36(1)(vii) r.w. S. 36(2) in respect of the amount which could not be
recovered from its clients in respect of transactions effected by him on behalf
of his client, apart from brokerage earned by him.
Facts :
During the assessment years under consideration the assessee
in its return of income claimed deduction of Rs.28,24,296 on account of amount
due to the assessee by his clients on account of transactions of shares effected
by him on their behalf. It was contended that the amount has become
irrecoverable and the same has been claimed as deduction after having written it
off from the books of account. Copies of ledger accounts were filed.
The Assessing Officer (AO) disallowed the claim of the
assessee on the ground that there was no other evidence filed by the assessee
except copies of ledger account to show that any action was taken against the
concerned parties to recover the amounts due from them. He also noted that the
Bombay Stock Exchange Card held by the assessee was already sold by him and the
business in respect of which the debt in question had arisen had ceased to exist
in the year under consideration.
Aggrieved the assessee preferred an appeal to the CIT(A) who
noted that the assessee had carried on business as a sub-broker and there was
hardly any difference between the business of share-broker and sub-broker. He
held that the business of the assessee had not ceased to exist on transfer of
membership card but the same continued during the year under consideration. He
also held that failure on the part of assessee to initiate recovery proceedings
could not be a ground for denying the assessee’s claim for bad debt u/s.
36(1)(vii). Accordingly, he allowed the claim of the assessee for deduction on
account of bad debt.
Aggrieved, the Department preferred an appeal to the
Tribunal. In view of the conflicting decisions on the subject, the following
question was sought to be referred by the Division Bench to the Special Bench.
The President constituted a Special Bench to consider the following question :
“Whether on the facts and circumstances of the case and in
law, the assessee, who is a share-broker, is entitled to deduction by way of bad
debts u/s.36(1)(vii) read with S. 36(2) of the Income-tax Act, 1961 in respect
of the amount which could not be recovered from its clients in respect of
transactions effected by him on behalf of his client, apart from the commission
earned by him.”
Held :
The Special Bench having noted that in order to claim
deduction u/s.36(1)(vii), one of the conditions that is required to be satisfied
as laid down u/s.36(2)(i) is that the debt claimed to be deductible as bad or
part thereof has been taken into account in computing the income of the assessee
of the relevant previous year or of any earlier previous year, observed that the
fundamental question is whether the said condition is satisfied in case of
share-broker where only the brokerage income is credited to the P & L account
and not the value of purchase of shares made on behalf of the clients. The SB
noted that the Supreme Court has in the case of T. Veerabhadra Rao K. Koteshwar
Rao & Co. (155 ITTR 152), in the context of loan given on interest, has held
that the debt was taken into account in computing the income of the assessee
when the interest income accruing thereon was taxed in the hands of the assessee.
It noted that the Supreme Court has clearly laid down that in order to satisfy
the condition stipulated in S. 36(2)(i), 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. Applying this principle to the
share-broker, it was held that the amount receivable by the assessee on account
of brokerage is thus a part of debt receivable by the share-broker from his
clients against purchase of shares and once such brokerage is credited to P & L
account of the broker and the same is taken into account in computing his
income, the condition stipulated in S. 36(2)(i) gets satisfied.
The argument that the loss was suffered owing to breach of
SEBI guidelines framed to safeguard the interest of brokers the SB held that
when a share-broker has actually suffered a loss, whether such loss is suffered
by assessee as a result of not following the guidelines or even after following
such guidelines, is not going to change the fact that assessee has suffered such
loss. If the assessee broker has not followed such guidelines in a particular
case, it is a decision taken by him as a businessman taking into consideration
all the relevant facts and circumstances including his business relations with
the concerned clients. Even if it is assumed that such loss has been incurred by
the assessee as a result of not following the rules and regulations and
guidelines issued by the SEBI, the same cannot be equated to expenditure
incurred by the assessee for any purpose which is an offence or which is
prohibited by law.
The contention of the Revenue that the sale value of shares
remaining with the assessee should be adjusted against the amount receivable
from the client so as to arrive at the actual amount of bad debt should be
raised, if permissible, before the Division Bench.
The Special Bench held that the assessee, who is a
share-broker, is entitled to deduction by way of bad debts u/s.36(1)(vii) r.w.
S. 36(2) of the Income-tax Act, 1961 in respect of the amount which could not be
recovered from its clients in respect of transactions effected by him on behalf
of his client, apart from the commission earned by him.
