IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "F", MUMBAI
BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RAO, J.M.
ITA No. 6875/Mum/2008
Assessment Year: 2005-06
N.H. Securities Ltd., ... Appellant Bhupen Chambers, Ground Floor,
9, Dalal Street, Fort, Mumbai - 400 023.
(PAN - AAACS7140Q)
Asstt. Commissioner of Income-tax, ...Respondent Central Circle 40, Mumbai.
Appellant by : Mr. Rajiv Khandelwal
Respondent by : Dr. P. Daniel.
PER V. DURGA RAO, J.M.:
This appeal filed by the Revenue is directed against the order of CIT(A)-24, Central-VII, Mumbai, passed on 05/09/2008 for the assessment year 2005-06.
2. Ground No. 1 raised by the assessee reads as under:- "1. The CIT(A) erred in enhancing the income of the appellants by Rs. 31,47,188/- by not allowing expenses claimed by the appellants on the ground that the appellants have not carried out any business activity during the year under reference and thereby not allowing carry forward of loss of Rs. 31,47,188/-.
The appellants contend that on the f acts and circumstances of the case and in law, the CIT(A) ought not to have enhanced the income of the appellants and ought to have allowed the carry forward of the business loss of Rs. 31,47,188/- inasmuch as the appellants have carried on business during the year."
3. During the course of assessment proceedings, the AO treated the business of Rs. 31,47,188/- as speculation loss and allowed to be carried forward as speculation in view of the Explanation below 2 ITA No. 6875/M/2008
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section 73 of the Act. No such set-off was allowed on the income from other sources. During the course of appellate proceedings, the learned CIT(A) had observed that business loss had been determined by the AO at Rs. 31,47,188/-, which had been treated as speculative loss and had been allowed to be carried forward in view of the Explanation below to section. 73 of the Act. However, it was noticed from the audited accounts that no business activity was carried out by the assessee during the year under consideration and a loss of Rs. 80,000/- was shown under the head 'shares and securities' on account of valuation of closing stock which had been treated as non- genuine by the AO. The CIT(A) further observed that the assessee has not carried any business activity in shares and securities from the year 2001 on account of cancellation of registration as share broker, loss arising from mere valuation of the opening stock of shares would not lead to the conclusion that the assessee was carrying on any such activity. The CIT(A) also observed that the word 'business' connotes some real, substantial and systematic or organized course of activity or conduct with a set of purposes. The CIT(A) held that for the purpose of claiming deduction u/s 37 of the Act, the expenditure must be incurred for the purposes of business which was in existence during the year and the profit of which are under assessment and, if during the year no business was in existence either because it was discontinued or for some other reason, the question of computation of income does not arise at all. The learned CIT(A) relying on various case laws, directed the AO to withdraw such loss carried forward to subsequent assessment years. He, accordingly, held that there would be enhancement of income to the extent of Rs. 31,47,188/-, which has been wrongly allowed to be carried forward by the AO. Aggrieved by the order of the CIT(A) the assessee is in appeal before us.
4. Before us, the learned counsel for the assessee submitted that the assessee was in the business of share trading activity and the assessee was unable to carry forward the business activities because 3 ITA No. 6875/M/2008
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of the SEBI order and the same was challenged before the Hon'ble High Court and also before the Hon'ble Supreme Court. Stoppage of the business is only temporary and not permanent and even the order passed by the SEBI is only a temporary order, therefore, it cannot be said that the assessee is not in the business activity. The learned counsel further submitted that similar issue has been considered by the Mumbai Bench of ITAT in the assessee's sister concern case, viz., KNP securities P. Ltd. in ITA Nos. 5008 & 5009/Mum/07 for AYs 2003-04 & 2004-05 vide order dated 29 t h May, 2009. The said decision was followed by the ITAT, Mumbai Bench in another sister concern case of the assessee, namely, Triumph Securities in ITA No. 1053 & 2111/Mum/08 for AY 2001-02 & 2002-03, order dated 31/12/2010.
5. On the other hand, the learned DR submitted that finally the Hon'ble High Court and Supreme court confirmed the order passed by the SEBI and he supported the order passed by the CIT(A) in support of revenue's case.
6. We have heard both the parties, perused the record and gone through the orders of the authorities below. The CIT(A) passed enhancement order on the ground that the assessee has not carried out any business during the year and allowability of business expenses u/s 37 the assessee has to carry out the business activity and directed the AO to enhance the assessment. Under similar facts and circumstances, the ITAT in the case of Triumph Securities (supra) following the decision in the case of KNP securities P. Ltd. (supra), held as under:-
17. Af ter hearing both the parties, we f ind identical issue had come up bef ore the Tribunal in the case of KNP Securities P Ltd (supra) wherein the Assessing Off icer had disallo wed various expenses claimed by the assessee in its P&L Account on the ground that the assessee has not carried out any business activity since SEB I made restriction vide order dated 11.4.2001. In appeal, the C IT(A) upheld the action of the Assessing Off icer and on f urther appeal, the Tribunal vide order dated 29.5.2009 allowed the various expenses claimed by the 4 ITA No. 6875/M/2008
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assessee. The relevant portion of the order of the Tribunal reads as under:
"5 We have heard the rival submissions and considered them caref ully. We have also perused the material on record along with various case laws relied by both the parties. Af ter considering the relevant material it is seen that the assessee was doing business of share trading and security etc. Various business expenses incurred f or the purpose of its business activities were held as allo wable in past. In the year under consideration, the ld AO negatived the claim of the assessee f or the reason that there is no business activity during the year under consideration as SEB I has imposed restriction vide order dated 11.4.2001. Copy of the order issued by SEB I is placed at pages 82 to 84 of the paper book. It is mentioned in this order that the assessee is barred f rom undertaking any f resh business as stock broker till f urther order as on account of indications of the prima f acie involvement of Mr Ketan Parekh in manipulating certain scrips of various companies. It has been noticed that M/s V N Parekh Securities Ltd and M/s KNP Securities Ltd are also the entities controlled by and connected with Mr Ketan Parekh or Mr Kartik Parekh. Theref ore, in vie w of the po wers conf erred under the provisions of sub section (3) of
sec. 4 r.w.s 11 and 11B of the SEBI Act, 1902, the assessee was barred f rom undertaking any f resh business as stock brokers till f urther orders as stated above. Thereaf ter, SEB I passed another order on 21st June 2001 stating that in view of the order of SEB I dated 4.4.2001 and 10.4.2001 debarring them f rom undertaking any f resh business as a stock broker and merchant bankers till f urther orders should be continued. This action of the SEB I has been challenged by the assessee bef ore the appropriate authorities. Copy of the petition f iled bef ore the Securities Appellate Tribunal is placed at page 94 of the paper book. In vie w of these f acts and circumstances, the assessee was not allo wed to do its business activity in share on the stock exchange f loor.
5.1 Not doing business activity was not on account of assessee's will but on account of f orced circumstances; theref ore, it cannot be said that the assessee has closed/discontinued its business activity its o wn. The establishments of the assessee were intact and they were to be maintained. Staff members were kept and salaries were paid to them. Loans taken f rom various banks and others f or the purpose of business activity in past were outstanding during the year under consideration; theref ore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used f or the reason that SEB I has passed an order barring the assessee not to do any business activity. Theref ore, it also cannot be said that the assessee could not use the BSE card its own which was ready to use. In these circumstances, we are of the considered vie w that the assessee's business does not come to an end or discontinued.
5.2 The meaning of discontinuation is explained in the Law Lexicon where "it implies a voluntary act and abandonment of 5 ITA No. 6875/M/2008
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possession f ollowed by the actual possession of another, it implies that the person
discontinuing has given up the lend and lef t it to the possessed by anyone choosing to come in as held in the case of Qadir Bux vs Ramchand 1917 AIR 289 at page 295. It is f urther explained at the same page at 563 of the law Lexicon that "discontinue; to cause to cease or to put a stop.
5.3 In the present case neither the business is discontinued on account of voluntary act of the assessee nor the same has put to stop its o wn. The business could not be done f or the reason that SEB I has barred the assessee not to do any business activity till f urther orders. The assessee was barred till f urther orders clearly mean that the assessee was not barred permanently. The permanent order issued in
the year 2007 and f rom the year of 2007, the assessee cannot do any business activity; theref ore, at the most it can be said that no xpenses can be allowed f rom that year. Ho wever, f or the earlier year, in our considered vie w, the expenses incurred by the assessee f or the purpose of its business activity are allo wable as the establishment was
not scraped and the assessee was still hopef ul to start its business activity.
6 In the case of CIT vs Vellore Electric Corporation Ltd reported in 243 ITR 529, the Hon'ble Madras High Court has held that:
"it could not be said that there was a permanent closure, as the validity of the Act was yet to be f inally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The f act that it had continued to maintain an establishment was indication of its intention to resume business, if an opportunity f or it arose by reason of the Supreme Court holding in its f avour. The expenses incurred by it while awaiting the decision of the Supreme Court could not altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act. The possible resumption of the business was dependent on the outcome of the appeals pending bef ore the Supreme Court. The amounts claimed were also not very
substantial. The Tribunal had taken a broad vie w of the matter and had held in f avour of the assessee. There was no ground to diff er"
6.1 The f acts bef ore the Hon'ble High Court were that the assessee was a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertakings (Acquisition) Act, 1973. Af ter an unsuccessf ul attempt to challenge the validity of that Act in the High Court, the assessee had f iled appeals bef ore the Supreme Court which were pending during the relevant years i.e. AYs 1975-76 to 1979-80. The AO held that the assessee was not carrying on any business and limited the salary paid to the 6 ITA No. 6875/M/2008
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employees of the assessee to 10% and the audit f ee was limited to 15%. That was aff irmed by the f irst appellate authority. Ho wever, the Tribunal held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee. On ref erence, the Hon'ble Madras High Court aff irmed the vie w taken by the Tribunal.
6.2 The ratio of the decision of the Hon'ble Madras High Court is squarely applicable on the f acts of the present case as in the present case also the assessee was restricted by the order of the SEB I not to do any business activity, however, establishment of the assessee was maintained and various expenses were incurred which were necessary and they were connected with the business activity of the assessee.
7. In the case of Sree Meenakshi Mills Ltd, in 63 ITR 207, the Apex Court has allowed various expenses on account of expenditure f or prosecuting civil proceedings. In this case, the assessee company which carried on the business of cotton spinning and weaving, f inding its own handlooms in its f actory premises inadequate, distributed yarn produced by it to weavers outside the f actory. Under clause 18B of the Cotton Cloth and Yan (Control) order 1945, the Textile Commissioner was authorised to direct any manuf acture or dealer or any class of manuf acturers or dealers, inter-alia, not to sell or deliver any yarn or cloth of specif ied description except to such person or persons and subject to such conditions as he might specif y. Accordingly, the order passed by the Textile Commissioner directing the company not to sell or deliver yarn manuf actured by it except to such person or persons as he might specif y. Ho wever, the company continued to deliver yarn to weavers outside f actory. The action of the Commissioner was challenged bef ore the appellate authority and the same was rejected by the High Court as well as the Supreme Court. On appellate proceedings, the expenses incurred by the assessee were claimed as business expenditure and they were not allowed by the AO by observing that these expenses were not f or the purpose of business and were not incurred during the year under consideration. Matter reached up to the stage of the Hon'ble Supreme Court who has allowed the expenditure incurred by the company as business expenditure by holding as under:
"that the object of the petition was t secure a declaration that the order dated Feb 20th 1946, in so f ar as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was unauthorised, and to prevent enf orcement of that order. Thereby, the company was seeking to obtain an order f rom the court enabling the business to be carried on without interf erence. The amounts expended by the company on that behalf were expenditure laid out wholly and exclusively f or the purpose of its business and were deductible u/s 10(2)(xv).
It was f urther held that;
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"the question of admissibility u/s 10(2)(xv) had to be decided not on what was f ound or observed by the High Court in appeal f rom the order in the proceedings u/s 45 of the Specif ic Relief Act or by the Privy Council but upon the f indings of f act recorded by the Tribunal. Expenditure incurred to resist in a civil proceedings the enf orcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisf ied, be admissible as a deduction u/s 10(2)(xv)"
7.1 The ratio of the decision of the Apex Court also goes in f avour of the assessee as the litigation expenses incurred in respect to its business were held as business expenditure.
7.2 In the present case also all the expenses incurred are connected with the business of the assessee only; theref ore, the expenses claimed by the assessee are allo wable.
8. In the case of M/s Marine Labour Supplying Co, decided in ITA No.6048 & 6049/Mum/07 vide order dated 2.12.2008, the Tribunal by f ollowing the decision in the case of Ruia Shelters Ltd in 10 SOT 157 (Mum) and in the case of Chunilal &Co in 4 SOT 309(Mum(TM) held that if f or the reason due to lullness of business no business can be done f or AYs 2002-03 to 2005-06, the assessee is entitled to deduction in respect of administrative and other expenses which are required to be incurred f or keeping the business alive.
9. We have also taken into consideration various case laws on which reliance has been placed by the ld DR and f ound that they are distinguishable on f acts.
10. In the case of Chinai and Co P Ltd in 206 ITR 616, the Hon'ble Bombay High Court has held that the
assessee company could not be entitled f or any deduction of expenses claimed by it as business expenditure u/s 37 as the assessee company has stopped carrying on its business at the end of December, 1969. The mere f act that it continued to hold its investments would not be suff icient f or the purpose of establishing that it continued to carry on business.
10.1 In the present case, the assessee has not stopped the business activity its o wn but it was f orced by SEB I not to do any business activity. Theref ore, the ratio of this decision of the Hon'ble Bombay High Court is not applicable on the f acts of the present case.
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11. Similarly, the decision of the Hon'ble Gujarat High Court in the case of Nathalal Asharam in 194 ITR 110 is also not applicable on the f acts of the present case as the company paid compensation to its employees under the provisions of sec. 25 FFF of Industrial Disputes Act 1947 on account of retrenchment which were held as not related to the business carried on by the assessee.
11.1 We have also taken into consideration various other case laws relied upon by the ld DR and found that they are distinguishable on f acts.
12. In the present case, no such f acts are involved as all the expenses incurred were in connection with the business activity only and f or keeping the business alive, to maintain its business establishment and to meet that the obligation of interest on loan etc taken f or its business activity; theref ore, we hold that various expenses incurred by the assessee are allowable as deduction. However, admissibility of the expenditure was not examined by the AO f or the reason that he has disallo wed the expenditure on the ground that they are not allowable as the assessee has not done any business activity. Theref ore, f or the purpose of examining the admissibility/genuineness of these expenses, the mater is sent to the f ile of the AO. The assessee has contended that depreciation and interest have been allowed by the Tribunal as allo wable while passing order f or AY 2000-01. The AO will take into consider the order of the Tribunal and if it is f ound that f acts are similar then of course, in vie w of the decision of the Tribunal, the claim of the assessee on account of depreciation and interest has to be allowed."
17.1 Since the f acts of the impugned appeal are identical to the f acts in the case of the sister concern of the assessee i.e KNP Securities P Ltd ; theref ore, respectf ully f ollowing the decision of the Tribunal, we hold that the assessee is entitled to claim various expenses debited in the P&L account. We hold and direct accordingly. The ground raised by the assessee is accordingly allo wed."
7. Since the issue under consideration is identical to that of the case decided by the Co-ordinate in the case of Triump Securities Ltd. (supra), we respectfully follow the same and in the light of that this ground of the assessee is allowed.
8. Ground No. 2, reads as under:-
" The C IT(A) erred in upholding the action of the AO in not allowing business loss of Rs. 80,000/-, being loss on account of valuation of shares, on the ground that the transactions are not genuine in nature and also that the appellants have not carried on any business activity during the year.
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The appellants contend that on the f acts and in the circumstances of the case and in law, the observations, of the C IT(A) in upholding the action of the AO in not allowing the impugned loss arising on transactions carried out in the pursuit of business, are erroneous, baseless and contrary to the provisions of law. The C IT(A) ought to have allo wed the impugned loss as claimed by the appellants.
9. During the course of assessment proceedings, the AO asked the assessee to furnish the details of business loss of Rs. 80,000/- vide its letter dated 12/10/07. The assessee had furnished the details of loss from shares on securities at Rs. 80,000/-, which is on account of valuation at market to market valuation of stock held by the assessee. The shares had been held by the company as stock. As such, it was claimed that the loss arising is allowable as business loss. It was further stated that there is no trading transaction in shares entered into by the company. After considering the submissions of the assessee, the AO observed that loss is due to valuation of shares, in certain cases value is taken as Zero, and the zero valuation is taken due to non-marketability of the shares and also unlisting them from the stock exchange. The AO further observed that the shares held as stock are the same, which were purchased by the assessee during the scam period of 2001 in the group cases of Ketan V. Parekh. He also held that in the assessment order passed for the AY 2001-02, 2002-03 and 2003- 04 the losses incurred were not genuine and the same was disallowed for these years. Since there is no change in the facts as no further shares were purchased, the AO disallowed the loss shown by the assessee of Rs. 80,000/- treating as not genuine. On appeal, the CIT(A) held that the assessee has not carried out any business activity, therefore, loss resulting on account of mere valuation of such shares cannot be considered as business loss and confirmed the order of the AO. Aggrieved, the assessee is in appeal before us.
10. Before us, the learned counsel for the assessee submitted that the assessee has taken market value as NIL because the company was de-listed and it would not be able to carry the business. He further submitted that the assessee has taken the value at NIL because of the compelling circumstances, therefore, it does not mean that there is no share value. He finally submitted that the matter may be remitted back to the file of the AO for determination of the value.
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11. On the other hand, the learned DR supported the orders of the authorities below.
12. We have heard both the parties and perused the record as well as gone through the orders of the authorities below. The learned CIT(A) gave a specific finding that the case in hand is similar to the large number of group cases pertaining to the assessee and in those cases losses have been held as non-genuine. He further submitted that the loss resulting on account of mere valuation of shares, cannot be considered as business loss in any case. Before us, the assessee has not brought anything on record with regard to other group cases. In view of the specific finding given by the CIT(A), we do not find any reason to interfere in the order of the CIT(A) and, therefore, the order of the CIT(A) is hereby upheld on this issue. Accordingly, this ground of appeal of the asessee is dismissed.
13. Ground No. 3 is directed against the action of the CIT(A) in upholding the action of the AO in considering interest received on fixed deposits Rs. 6,19,480/- as 'income from other sources' instead of business income.
14. The AO treated the business loss in shares etc. as speculation loss in view of the Explanation below section 73, since the assessee being a company was trading in shares. Therefore, the AO treated the interest on FD as 'income from other sources'. On appeal, after considering the submissions of the assessee, the CIT(A) held that it is an undisputed fact that the assessee was engaged in share trading since long and not engaged in any financing activity. Simply for the fact that the interest was earned on pledged fixed deposits, it does not lead to the conclusion that the assessee was engaged in the business of earning interest. He, therefore, held that there is no direct nexus between the interest and the normal business activity carried on by the assessee. He also held that it is worth mentioning here that the assessee in computation of income has itself shown the interest income under the head 'other sources'. In view of the said findings, the CIT(A) confirmed the action of the AO. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
15. At the time of hearing, the learned counsel for the assessee canvassed that the issue under consideration is covered by the decision of the 11 ITA No. 6875/M/2008
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coordinate Bench "K", Mumbai in the case of sister concern of the assessee, viz, M/s Classic Shares & Stock Broking Services Ltd. in ITA Nos. 191/M/08 & 1135/M/08 for AY 2002-03 and 2003-04, vide order dated 19/11/10. The learned DR, on the other hand, relied upon the orders of the authorities below.
16. After considering the rival submissions, perusing the record, we find that the issue under consideration is covered by the decision of a co- ordinate bench in case of assessee's sister concern, namely, M/s Classic Shares & Stock Broking Services Ltd. (supra), wherein the co-ordinate bench held as under:-
"4.2 We have perused the records and considered the matter caref ully. The dispute is regarding nature of interest income received by the asessee f rom the FDRs pledged with the banks f or issue of bank guarantee to the stock exchange in connection with the trading business of the assessee. The assessee had been debarred by SEB I f or share transactions business in 2001 due to allegations of irregularities and manipulations. The case of the assessee is that the order of SEBI had been challenged. The license of the assessee had been cancelled only in the year 2005 and the order canceling the license had also been challenged by the assessee which was dismissed by SAT much later and the order of SAT was also conf irmed by the Hon'ble Supreme Court. But these were subsequent activities and in the year under consideration the business of the assessee had not closed and it was only suspended in view of the adverse order by SEBI. We f ind similr situation had been considered by the Tribunal in the case of KNP Securities Pvt. Ltd. (supra) another concern of Ketan Parekh Group in which similar claim was made by the assessee that business was in existence and not closed. The Tribunal f ollowing the judgment of Hon'ble High Court of Madras in case of CIT Vs. Vellore Electrical Corporation Ltd. (243 ITR 529) held that the business had not closed and the claim of expenditure had to be allowed. Respectf ully f ollowing the said decision of the tribunal we hold that the business of the assessee had not been closed in the relevant year and theref ore FDRs had to be treated as pledged in connection with the business which was in existence and theref ore the interest income had to be treated as incidental business income. We accordingly set aside the order of CIT(A) and allowed the claim of the assessee."
17. Since the issue under consideration is identical to that of the case decided by the co-ordinate bench in the case of assessee's sister concern as above, we respectfully follow the same and in the light of that we set aside the order of CIT(A) and allow the claim of the assessee. 12 ITA No. 6875/M/2008
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18. Ground No. 4 is directed against the action of the CIT(A) in upholding the order of the AO in disallowing a sum of Rs. 8,54,540/- being bad debts written off.
19. The AO noted that in schedule 2 to the profit and loss account shown under operating and administrative costs, the assessee claimed vatav expenses of Rs. 8,54,540/-. On scrutiny, it was revealed that this party was client of the assessee pertaining to the year 1997-98 on account of share broking. The amounts which were due to the assessee as clients accounts pertaining to the period for which the assessee company was doing the business of brokerage during the period 1997 and 1998 in the stock exchange was shown as the bad debts. It was observed by the AO that in the present case, the company was doing business as share broker and this amount was due on account of client account. This amount was not on account of trading in sale of shares done by the company and the amount had not been taken into account as a sale during the transaction as a share broker. The company was only getting brokerage as a percentage of the amount of shares purchased by the client. At no this debt was incurred on revenue account and the amount has not been taken in computing the profit. It may be the case of the assessee that part of the amount written off also represent that portion of money which had been accounted as brokerage and which had been taken into account in computing the income of the business. He was of the view that mere fact that the company lost money was not sufficient to justify deduction. It could be a capital loss and all debt did not quality for such deduction. The AO, therefore, held that the assessee company was not doing any business in banking or money lending so that it can claim the amount as bad debt u/s 36(2). He further held that the amount due had not accrued on account of sale of any goods, which had been taken into account in computing income of the asesssee as required u/s 36(1)(vii). It was further observed that debts are pertaining to the transaction of group concerns, associate concerns of group connected with Shri Ketan Parekh who was involved in the security scam of 2001. The AO with the above observations concluded that since the claim of the asesssee is not considered as debt during the course of assessment proceedings it cannot be allowed as bad debt at all, therefore, the claim of the assessee of bad dbt under the head expenses and losses was rejected and disallowed the same. Aggrieved, the assessee carried the matter in appeal before the CIT(A). 13 ITA No. 6875/M/2008
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20. Before the CIT(A) the AR of the assessee contended that the debt written-off is of Montrosa Investments Pvt. Ltd. which was not a group concern or an associate concern and hence, the reasons recorded by the AO in his order are baseless and erroneous. It was further contended that the debt had been written off in the accounts by transferring the balance in the debtors account to another account called 'Vatav Account'. As such the requirement of section 36(1)(vii) to write off the bad debt as irrecoverable in the accounts of the assessee was fulfilled. The reasons for writing-off the bad debts among others, are constant follow-up with the client bearing no result and the amount outstanding since long. The AR of the assessee placed reliance on the decisions of the ITAT, Mumbai Benches, which were reproduced by the CIT(A) in his order at page No. 9. After considering the submissions of the assessee, the CIT(A) held as under:- "16. I have caref ully considered the above f acts and f ind that the appellant has not been able to rebut the observation and the f inding of the AO regarding applicability of section 36(2). Nothing has been brought on record to sho w that the debt written off was ever taken into consideration f or arriving at the income in the past or not. Thus, one of the major conditions f or allowing the deduction has not been f ulf illed by the appellant. It may also be stated here that the issue requires to be decided in the light of the f act that the appellant was not carrying on any business activity as the only business of share trading has remained banned by the orders of SEBI f rom April, 2001. Apparently, no business activity has been carried on by the appellant and in such a circumstance, there is no question of allowing any deduction under the head business income. Thus, the disallowance made by the AO is also f ound to be correct f rom such a diff erent perspective as well. Accordingly, the action of the AO is f ully justif ied and the addition made is, hereby, upheld."
21. We have heard both the parties and perused the record as well as gone through the orders of the authorities below. The issue involved in this ground is whether the bad debts claim of the asessee is allowable or not. The AO had observed that the assessee has not taken into account the bad debts claim in the earlier years. It is also not clear from the order of the AO that whether the assessee has taken into consideration the amount of brokerage and the same has been shown in P&L A/c or not. The CIT(A) simply confirmed the order of the AO. In the case of Shreyas S. Morakhia, 5 ITR 1, the special bench of Tribunal held that if the brokerage amount is taken in the account, remaining amount has to be allowed as a bad debt. The detailed findings of the Special Bench of the Tribunal in the case of Shreyas S. Morakhia, are extracted below:
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"29. At the time of hearing bef ore us, the ld. Counsel f or the assessee has strongly relied on the decisions of Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and in the case of CIT vs. Bonanza Portf olio Ltd. (supra) stating that the same are directly on the point in issue and there being no contrary decision of the Hon'ble jurisdictional High Court or any other High Courts, this Special Bench has to f ollow the same. We have caref ully perused the said decisions of the Hon'ble Delhi High Court. In the case of DB (India) Securities Ltd.(supra), the assessee was a member of Delhi Stock Exchange and was carrying on the business of shares and stock broking. The assessee had purchased shares on behalf of his client f or the total value of Rs. 1.06 crores at an average price of Rs. 55 per share. The said client made a payment to the extent of Rs. 65 lacs only to the assessee and the remaining amount of Rs. 41 lacs had remained unpaid. The brokerage income earned by the assessee in respect of the said transaction of purchase of shares was duly declared in its return of income and was assessed as well in the earlier year. The balance amount of Rs. 41 lacs remained unpaid even in the next year also apparently because of the reason that the price of shares f ell f rom Rs. 55 to Rs. 5 per share. In the return of income f iled f or the said year, the assesse claimed deduction of Rs. 41 lacs as bad debts u/s 36(1)(vii). The A.O. disallowed the claim of the assessee f or the said deduction which was conf irmed by the ld. CIT(A). On f urther appeal by the assessee, the Tribunal, however, allowed the said deduction and when the matter reached to the Hon'ble Delhi High Court, it was sought to be canvassed on behalf of the Revenue that the amount receivable by the assessee f rom its client against purchase of shares could not be treated as "debt" under the provisions of section 36(2) and theref ore, the question of allowing any deduction f or the said amount treating the same as bad debt would not arise. Hon'ble Delhi High Court did not f ind merit in this contention raised on behalf of the Revenue holding that there was a valid transaction between the assessee and his client and since the assessee had to make payment on behalf of his client which he could not recover to the extent of Rs. 41 lacs, the said sum has to be treated as his "debt". It was also held that the brokerage which was received f or the said transaction was sho wn as income by the assessee in the earlier years and the same was taxed as such by the assessing authority. It was held that the assessee theref ore was entitled f or deduction on account of bad debt u/s 36(1)(vii) r.w.s. 36(2). A similar issue again came up f or consideration bef ore the Hon'ble Delhi High Court in the case of CIT vs. Bonanza Portf olio Ltd. (supra) wherein the question of law which arose for consideration was whether in view of the provisions of section 36(1)(vii), the total debit balance including the consideration collectible by the assessee company for the sale/purchase of shares could be claimed by the assessee as bad debts when it had only credited brokerage in the P&L account and it was held by the Hon'ble Delhi High Court f ollowing, inter alia, the decision in the case of CIT vs. DB (India) Securities Ltd. that the money receivable by 15 ITA No. 6875/M/2008
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the assessee as share broker f rom his clients against purchase of shares made on their behalf has to be treated as "debt" and since the brokerage payable by the client was a part of that debt and that part had been taken into account in computation of his income, the conditions stipulated in section 36(1)(vii) and 36(2) stood satisf ied and the assessee was entitled f or deduction in respect of the said amount since it had become bad. In our opinion, the ratio of these decisions of the Hon'ble Delhi High Court in the case of CIT vs. DB (India) Securities Ltd.(supra) and in the case of CIT vs. Bonanza Portf olio Ltd. (supra) is squarely applicable to the issue which is under consideration in the present case bef ore this Special Bench.
30. The learned D.R. has contended bef ore us that the rules and regulations of stock exchange governing relations between broker and his clients as well as the guidelines issued by the SEB I f rom time to time protecting the interest of share broker were not brought to the notice of the Hon'ble Delhi High Court in the cases of CIT vs. DB (India) Securities Ltd.(supra) and CIT vs. Bonanza Portf olio Ltd. (supra) and Their Lordships thus had no occasion to consider the issue in the light of the same. Ho wever, as already held by us, the said rules and regulations as well as guidelines are not relevant in the context of issue ref erred to this special bench which raises a specif ic question of law. We have already noted that the f act which is not in dispute is that the assessee has actually suff ered the loss as a result of the amount in question representing debt becoming irrecoverable. It is theref ore not relevant whether such loss has been incurred by the assessee as a result of not f ollowing the relevant rules and regulations and guidelines or even af ter f ollowing the same. As observed by us, this aspect may be relevant in the context of quantif ication of such loss. As a matter of f act, one of the arguments raised on behalf of the Revenue in the case of DB (India) Securities Ltd. (supra) was that the assessee having not sold the shares to anybody else in the market, the assessee could not claim the amount in question as bad debt and while dealing with the same, it was held by the Hon'ble Delhi High Court that the sale consideration which such shares could f etch in the market needs to be adjusted against the amount of bad debt claimed by the assessee f or arriving at the actual f igure of "bad debts".
31. The contention raised on behalf of the Revenue based on the sale value of shares which are bound to remain with the assessee and which the assessee is entitled to sale and adjust the sale consideration thereof against the amount receivable f rom the client so as to arrive at the actual amount of bad debt thus is relevant f or quantif ying the actual amount of bad debt and it is at liberty to raise the same, if permissible, bef ore the Division Bench during the course of hearing of the appeal. The ld. D.R. has also raised certain other doubts or disputes in the written submissions f iled bef ore this Special Bench relating to certain f actual aspects of the case. Although, no such doubts or disputes appear to have been raised even by the A.O. in the assessment order, the ld. Counsel f or the assessee has f airly 16 ITA No. 6875/M/2008
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agreed that if it is so f elt by the Division Bench af ter considering the arguments of both the sides while hearing the appeal of the assessee that these aspects need verif ication, the assessee will have no objection f or getting such verif ication done f rom the A.O.
32. Keeping in vie w all the f acts of the case and the legal position emanating f rom the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, f rom his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising f rom such transactions very much f orms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisf ies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts af ter having written of the said debts f rom his books of account as irrecoverable. We, theref ore, ans wer the question ref erred to this Special Bench in the aff irmative that is in favour of the assessee."
22. In view of the said decision, we remit the matter back to the file of the AO with a direction to decide the issue following the said special bench decision of the Tribunal and in accordance with law after providing reasonable opportunity of hearing to the assessee.
23. Ground No. 5 is directed against the action of the CIT(A) in not deciding on the action of the AO in treating business loss of Rs. 31,47,188/- as speculation loss by invoking the provisions of Explanation to section 73 and thereby not allowing set-off of the loss against income computed under the head 'income from other sources' Rs. 6,19,480/-.
24. The CIT(A) had directed the AO to verify the facts and decide the issue in accordance with law. At the time of hearing, the learned counsel for the assessee submitted that the business income of the assessee of Rs. 6,73, 81,303/- claimed u/s 41(1) of the Act, and, therefore, Explanation to section 73 is not applicable to the case of the assessee. The alternate submission of the learned counsel is that, in any case, the business loss claimed by the assessee is less than the business income and, therefore, Explanation to section 73 is not applicable to the case of the asessee. After careful consideration of the orders of the AO as well as CIT(A), we find that the revenue authorities have not dealt the issue properly and, therefore, we remit the issue back to the file of the AO with a direction to examine the issue in detail and decide afresh in accordance with law after providing 17 ITA No. 6875/M/2008 NH Securities Ltd.
reasonable opportunity of hearing to the assessee. Thus, this ground of appeal is treated as allowed for statistical purposes.
25. Ground No. 6 is directed against the action of the CIT(A) in upholding the addition of Rs. 2,12,56,534/- being the amount credited to capital reserve on account of waiver of principal amount of loan allowed by Centurion Bank.
27. As per the assessment order, during the course of assessment proceedings, the AR of the asesssee was asked to furnish the details on increase in capital reserve during the year. The AR of the assessee filed the copy of ledger of capital reserve account and statement of accounts, which were reproduced by the CIT(A) at page 10 of his order. Before the AO, it was claimed that the amount credited to the capital reserve was on account of waiver allowed by the bank on principal amount and hence credited to capital reserve. It was submitted that the extinguishment was of liability of principal amount and hence the same is not liable to be taxed under the Act being on capital account. The AO rejected the submission of the assessee on the ground that the total amount payable to Centurion Bank as on 31/03/01 was Rs. 10,99,64,081/- and after addition in respect of interest and other charges of Rs. 2,12,56,534/- to total amount of Rs. 13,12,20,615/- was due on 31/03/2002. The AO noted that the assessee was a defaulter to repay the above amount in time, hence, the Centurion Bank had filed the suit before DRT(2), Mumbai. The DRT passed interim injunction order dated 4 t h January, 2002 restraining inter-alia the company from transferring, selling, creating any third party rights, disposing of or dealing with any of the assets of the company. Thereafter, the bank invocated shares pledged by the company and reduced the liabilities by Rs. 5,70,45,587/- against the original demand of Rs. 13,12,20,615/-. The balance amount of Rs. 7,41,61,301/- was settled by order dated 25 t h November, 2004 passed by the DRT(2). The AO further noticed that the assessee paid Rs. 67,80,000/- as against the liability of Rs. 7,41,61,301/- and the remaining amount of Rs. 6,73,81,301/- was written off. The AO noted that the order of the DRT(2) had not clearly specified whether the write-off amount is a principal or interest amount. Due to Hon'ble DRT(2) order, the assessee's liability of Rs. 6,73,81,303/- was written off which included principal amount of Rs. 4,61,24,769/- and interest and other 18 ITA No. 6875/M/2008
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charges re Rs. 2,12,56,534/- The AO further noted that the assessee had already been debited interest and other charges from the profit and loss account in relevant assessment year and increased the liability by way of enhancing the secured loan in the balance sheet and it had benefited by way of written off interest and other charges of Rs. 2,12,56,534/- by order of the Hon'ble DRT(2). The AO, therefore, noted that as per section 41(1) of the Act, 'any person has obtained some benefit in respect of such trading liability by way of remission or cessation thereof the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profit of business and accordingly chargeable as the income of that previous year. In view of the above findings, the AO held that the above liability remitted was now treated as a business income of the assessee and the same was added to the total income. He further held that due to Hon'ble DRT(2) order, the asessee's liability of Rs. 6,73,81,303/- was written off which included principal amount of Rs. 4,61,24,769/- and the assessee had treated this amount as a capital receipt and transferred the same amount in capital reserve of the company in the current year balance sheet. The AO finally held that due to Hon'ble DRT(2) order the assessee had benefited by way of remission of principle amount of Rs. 6,73,90,591/- which was assessee's capital receipt but benefit availed by the assessee by way of remission or cessation should be treated as income and added to the assessee's total income. On appeal, the CIT(A) held as under:- "21. I have caref ully considered the above f acts f rom which it is quite evident that a part of the amount waived pertains to principal as also of interest. It is categorically stated by the AO that out of total amount waived by the bank amounting to Rs. 6,73,81,303/-, Rs. 4,61,24,769/- was principle while the balance Rs. 2,12,56,534/- was interest portion. In so f ar as the interest is concerned, it is not disputed by the appellant that the same was debited to the prof it and loss account of the previous year. As such, once the liability allo wed as deduction in the past has been waived, it is a case of cessation of liability which is clearly hit by the provisions of section 41(1) of the Act. However, in so f ar as the principle part is concerned, the amount being capital in nature and there being nothing on record to show that the same was allo wed as deduction in the past, the AO has f ailed to give any cogent any reason f or taxing the sum. The provisions of section are 41(1) are not applicable to such a sum. Accordingly, the addition is restricted to Rs. 2,12,56,534/- and the balance amount would stand deleted."
28. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
19 ITA No. 6875/M/2008
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29. At the time of hearing, the learned counsel for the assessee submitted that the amount of waiver of Rs. 6,73,81,303/- allowed by the Bank was on principle amount and hence, not liable to be taxed u/s 41(1) of the Act.
30. The learned DR on the other hand placed reliance on the orders of the authorities below.
31. We have heard both the parties, perused the record and gone through the orders of the authorities below. The issue involved in this ground is relating the amount of waiver of loan of Rs. 6,73,81,303/- allowed by the Centurion Bank was on principle amount or on revenue account. The AO held that the entire waiver amount was on revenue account and therefore, the provisions of section 41(1) applies to facts of the case whereas the CIT(A) held that the total amount waived by the Bank amounting to Rs. 6,73,81,303/-, out of which Rs. 4,61,24,769/- was principle and the remaining balance of Rs. 2,12,56,534/- was interest portion. After careful consideration of the orders of the authorities below, we find that it is not clear that exactly what amount waived by the Bank relating to principle amount and interest amount. However, the CIT(A) has allowed the amount of Rs. 4,61,24,769/- on the ground that the above amount of waiver was relating to principle and, therefore, section 41(1) has no application. Against this finding of the CIT(A), no appeal has been preferred by the Revenue. Therefore, the only dispute is the amount of waiver of Rs. 2,12,56,534/- whether the waiver is relating principle or interest. In so far as the application of section 41(1) is concerned, it is a well settled law that if the cessation is given by the Bank on one time settlement towards principle amount only, cannot be treated as cessation of liability chargeable to tax u/s 41(1) of the Act. Therefore, after considering the totality of the facts of the case, we are of the view that the issue needs a detailed verification of facts and, therefore, in the interest of justice we restore the issue to the file of the AO with a direction to examine the issue in detail and decide the same afresh in accordance with law after providing reasonable opportunity of being heard to the assessee. Thus, this ground of appeal of the assessee is treated as allowed for statistical purposes. 20 ITA No. 6875/M/2008
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31. In the result, appeal of the assessee is treated as partly allowed for statistical purposes.
Pronounced in the open court on this 23 r d day of December, 2011.
Sd/- Sd/- (P.M. JAGTAP) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 23 r d December, 2011
1) The Appellant.
2) The Respondent.
3) The CIT (A) concerned.
4) The CIT concerned.
5) The Departmental Representative, "F" Bench, I.T.A.T., Mumbai.