Friday, April 6, 2012

If brokerage offered to tax, the principal debt qualifies as a “bad debt” u/s 36(1)(vii) r.w.s. 36(2)


The assessee, a share broker, claimed deduction u/s 36(1)(vii) of Rs.28.24 lakhs as a “bad debt” being the amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf which had become irrecoverable. The AO rejected the claim on the ground that as the assessee had offered only the amount of brokerage as income and not the entire amount due from the client, the condition in s. 36(2) that the amount of bad debts must be taken into account in computing the total income was not satisfied. The CIT (A) & the Special Bench of the Tribunal (40 SOT 432) allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal:

S. 36(2)(i) provides 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 the income of the assessee. The debt comprised of the value of the shares transacted and the brokerage payable by the client. The brokerage as well as the value of the shares constituted a part of the debt due to the assessee since both arose out of the same transaction. The fact that the liability to pay brokerage arose at a point in time anterior to the liability to pay the value of the shares transacted makes no material difference to the position. As the brokerage from the transaction of the purchase of shares had been taxed in the hands of the assessee as business income, the debt or part thereof has been taken into account in computing the income of the assessee and the requirements of s. 36(1)(vii) r.w.s. 36(2) were satisfied. (Issue regarding the value of the shares which remain in the hands of the assessee which has to be adjusted against the amount receivable from the client left open) (CIT vs. T. Veerabhadra Rao 155 ITR 152 (SC) CIT vs. Bonanza Portfolio Ltd 320 ITR 178 (Del) followed)

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