COMMISSIONER OF INCOME TAX Vs. SHREYAS S MORAKHIA

JUDGEMENT

(1.) This appeal by the Revenue arises from a decision of a Special Bench of the Income Tax Appellate Tribunal dated 16 July 2010. The Special Bench of the Tribunal was constituted to decide the following question of law 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 under Section 36(1)(vii) read with Section 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 clients apart from the commission earned by him.

(2.) In the batch of appeals, a common question of law arises. We proceed to dispose of the appeal arising out of the decision of the Special Bench. The Court has, however, in the interest of fairness heard the counsel in the batch of appeals on the questions of law raised. The appeal by the Revenue raises the same question of law as was referred to the Tribunal as noted above. The appeal is admitted on the question formulated and taken up for hearing and final disposal with the consent of the counsel for the Revenue and the counsel for the assessee.

(3.) The Assessment Year to which the appeal pertains is 1998-99. The assessee is a share broker. A return of income was filed on 2 November 1998 declaring a total income of Rs. 67,797/-. The assessee claimed a 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. The Assessing Officer 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, the Commissioner (Appeals) 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. The Commissioner 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 Income Tax Appellate Tribunal; 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 has rendered its decision on the question of law referred.