DCIT, Circle 4 (2), Delhi vs Bonanza Portfolio Limited

“1.

Whether the Ld. CIT (A) has erred in deleting the disallowance of Rs.25,20,43,708/- under section 36(1)(vii) without adequately addressing the factual findings of the AO that many of the written off debts were not genuinely irrecoverable.

2.

Whether Ld. CIT (A) has erred in deleting the disallowance of Rs.25,20,43,708/- under section 36(1)(vii) without observing the fact brought on record by AO in the assessment order that assessee company entered into transaction with many of the same parties even after the claims had been written off in the books of accounts, which contradicts the principle of recoverability required under section 36(1)(vii) of the Income Tax Act, 1961.

3.

Whether the ld. CIT (A) failed to appreciate the AO’s findings that certain amounts had later on been recovered from parties in respect of whom bad debts were previously considered irrecoverable, making them unfit for write off.”

“The assessee furnished her reply dated 13.07.2011. In the submissions, the assessee explained that “the assessee company is engaged in the business of share broking, financial product distribution, depository services, trading of securities and portfolio management services. It is registered with SEBI, NSE, BSE and other exchanges in India. It is further stated that “the large refund claimed in ITR vis-à-vis self-assessment tax paid for the Assessment Year under consideration was due to the company opting for section 115BAA at the time of filling of return i.e. 02.02.2022, whereas self-assessment tax paid on 30.09.2021 and the advance tax was paid based on the tax working under normal tax provisions of the Income Tax Act, 1961.”

Regarding the appellant's contention that identical issue of bad debt on similar facts has already been settled in favour of appellant in his own case for A.Y. 2001-02 by Jurisdictional Hon'ble Delhi High Court & further, Assessing Officers have also allowed identical claim of bad debt on similar facts in appellant's cases from A.Y. 2012-13 to 2014-15 & A.Y. 2016-17 & 2017-18, the AO stated that every year, the issued are not identical. Further, the AO stated that written off criteria fixed by the appellant is not same. Accordingly, the AO disallowed sum of Rs.25,20,43,708/- stating that these are not suitable for being written off. Party wise claim of bad debts disallowed by the AO are as under:

S No	Party	PAN	Bad debt (Rs.)	Reason for disallowance by AO
1	GEETA CHETAN SHAH	APUPS9557F	13,26,24,725	Not suitable for write off
2	PVR IMPEX PVT LTD	AACCP2088C	3,44,18,190	Not suitable for write off
3	AVR OVERSEAS PVT LTD	AADCA7267M	1,94,69,128	Not suitable for write off
4	NARESH DWARKADAS HUF	AABHN4945G	1,94,11,320	Not suitable for write off
5	RAMESH SARAOGI	ASMPS2392F	1,49,67,151	Not suitable for write off
6	VIMLA DEVI MITTAL	AADPM9002F	1,16,48,658	Not suitable for write off
7	GIRISH HARIBHAI DOSHI	AADPD1631P	86,29,600	Not suitable for write off
8	UMR TRADING	AAFFU6442B	83,35,989	Not suitable for write off
9	FALGUNI JAGDISHCHANDRA JHAVERI	ADNPJ1581H	19,34,789	Not suitable for write off
10	SAMEER JAGDISHCHANDRA ZAVERI	AADPZ2244G	5,08,947	Not suitable for write off
11	OTHERS	VARIOUS PARTIES	95,211	Not suitable for write off
	TOTAL		25,20,43,708

5.3.2

The appellant in present appeal has contended that the AO has disallowed bad debts on extraneous grounds without making any adverse remark relating to the appellant satisfied the statutory conditions for claiming the bad debt. The appellant stated that it is engaged in share broking, financial product distribution, depository services, securities trading, and portfolio management services. The appellant company is a registered member of NSE, BSE &MCX. One of the activities involved by the appellant is to undertake activities like purchase/sale of shares and make transactions in F&O/ Cash segment on behalf of its clients and settle their dues with the exchange on behalf of its clients.

The appellant stated that in previous financial years, the appellant undertook such activities on behalf of its clients and paid money from its own pocket to settle the dues of exchange to recover the same from its respective clients. The brokerage/commission/DP charges/delay payments charges,etc, including the cost of purchase of shares arising from the such transactions very much form part of debts. However, the appellant company could not recover the amount of Rs.27,69,12,783/- from the clients on whose behalf the shares and F&O transactions have been entered into by it over the past many years. Therefore, the appellant decided to write off the sum as a bad debt u/s36(1)(vii) of the Act.

As regards to legality of the issue, the appellant has stated that original clause 36(1)(vii) prior to its amendment from A.Y.1989-90 required that in case where bad debts is deductible, it should be established to have become a bad debt in the previous year. However, the clause as amended from A.Y. 1989-90 grants deduction in respect of any bad debt which is "written off as irrecoverable in the accounts of the assessee for the previous year" i.e. under the amended clause, the requirement of establishing that the debt has become bad in the relevant accounting year is dispensed with and all that the appellant has to show is that the debt has been written off as irrecoverable. The appellant stated that AO had ignored the mandatory requirement of section 36(1)(vii) of the Act, which states that amounts actually written off as bad debts shall be allowed.

Further, the appellant stated that the issue of bad debts on the identical issue on similar facts has already been settled in the appellant's own case for A.Y.2001-02 by the Jurisdictional Hon'ble Delhi High Court in CIT vs Bonanza Portfolio 320 ITR 178(2010) Delhi. It was stated by the appellant that bad debts on similar facts and identical issues have also been allowed by the department itself in earlier and succeeding years, details of which are as under :

ASSESSMENT YEAR	BAD DEBTS CLAIMED AND ALLOWED (Rs.)	DATE OF ASSESSMENT ORDER U/S 143(3) / 143(1) of I T Act	ANNEXURES
2013-14	2,72,66,493	27-Jan-16 (143(3))	10(a) and 10(b)
2014-15	2,75,72,383	10-Dec-16 (143(3))	11(a) and 11(b)
2015-16	5,81,28,901	2-Aug-17 (143(3))	12(a) and 12(b)
2016-17	2,63,25,980	14-Aug-17 (143(1))	13(a) and 13(b)
2017-18	12,58,92,892	4-Dec-19 (143(3))	14(a) and 14(b)
2018-19	3,68,48,324	16-Mar-21 (143(3))	15(a) and 15(b)
2019-20	61,76,996	17-Mar-20 (143(1))	16(a) and 16(b)
2020-21	1,43,19,759	08-Aug-22 (143(1))	17(a) and 17(b)
2022-23	16,73,88,716	29-Jul-23 (143(1))	18(a) and 18(b)

5.3.3

In this regard, before deciding the issue, it is important to analyse the relevant sections of the Act i.e. section 36(1)(vii) which reads as under :

36 (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, computing the income referred to in section 28---- --

(vii)

subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year.

[provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause;]

[Provided further that there the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purpose of this clause.]

Further, section 36(2) reads as under :

(2)

in making any deduction for a bad debt or part thereof, the following provisions shall apply-

(i)

no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year; or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee;]

5.3.4

Further, the appellant has submitted that the issue of bad debts on identical issue on similar facts has already been settled in its own case by Jurisdictional Hon'ble Delhi High Court in CIT Vs Bonanza Portfolio (2009) 226 CTR 468 (Delhi). The Hon'ble Delhi High Court in the case held that the money receivable from the client had to be treated as 'debt' and since it became bad, it was rightly considered as 'bad debt' and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client was a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36, read with section 36(1)(vii), stood satisfied. Hence, the assessee was entitled to the deduction of the bad debt claimed.

The relevant paras of the order of Hon'ble Delhi High Court is as under :

'2.3 We have perused the records and considered the rival contentions carefully. The dispute raised is regarding claim of bad debt, which had been disallowed on the ground that the assessee had failed to establish that the debt had become bad during the year and also on the ground that the debt had not been taken into account in the computation of income of the earlier year. The issue whether the assessee is required to establish that the debt had become irrecoverable during the year even after the amendments w.e.f. 1st April, 1989 had been recently considered by the Hon'ble High Court of Delhi in Morgan Securities & Credits (P.) Ltd. (supra), in which the Hon'ble High Court after considering the Circular No. 551 of CBDT [[1990] 82 CTR (St) 325]noted that the amendments had been made with a view to ending litigation in relation to the practice that the assessee had to establish that the debt had become bad and held that there was no longer any burden on the assessee to establish that the debt had become bad. Therefore, the first limb of the issue raised in ground is covered by the judgment of Hon'ble High Court of Delhi (supra). As for the second aspect as to whether payment made by the assessee on behalf of the clients as a broker for purchase/sale of shares could be considered to have been taken into account in the computation of income of earlier years, we find that this issue has also been considered by the Delhi Bench of the Tribunal in case of Madhup Jain ( supra) vide their order dt. 31st May, 2007 in ITA No. 3950/Del/2004. In the said case, the Tribunal held that the brokerage payable by the clients is a part of the debt and since the part of the debt had been taken into account in the computation of income, the entire debt including the purchase/sale price paid by the assessee broker has to be taken as considered in computation of income and the conditions prescribed in s. 36(2)(i) were satisfied. The same view was taken by the Mumbai Bench of the Tribunal in case Olympia Securities Ltd. in their order dt. 21st Dec, 2006 in ITA No. 4053/Mum/2002. This aspect had also been considered by the Hyderabad Bench of the Tribunal in case of ITW Signode India Ltd. (supra). In that case, the bad debt had been claimed on account of intercorporate deposits (ICD) along with the interest due thereon. The Tribunal noted that the words used in the s. 36(1)(vii) were 'any bad debt or part thereof,' and since the interest payable being part of the debt, had been taken into account in the computation of income, the entire debt including ICD had to be taken as having been considered in the computation of income. Accordingly, the Tribunal held that the bad debt on account of ICD was allowable as deduction. The case of the assessee is thus covered by the decisions of the Tribunal (supra) and, therefore, respectfully following these decisions and the judgment of Hon'ble jurisdictional High Court in case of Morgan Securities & Credits (P) Ltd. (supra), we set aside the order of CIT(A) and allow the claim of the assessee."

10.

Insofar as question of burden is concerned, learned counsel for Revenue did not dispute that the aforesaid aspect stands settled by the judgment of this case in CIT v. Morgan Securities & Credits (P.) Ltd. [2007] 210 CTR (Delhi) 336 : [2007] 292 ITR 339 (Delhi), note whereof has been taken of by the Tribunal. We are, thus, left with only this aspect as to whether payment made by the assessee on behalf of his client was the payment for purchase to sale of shares and therefore, non-realization is to be treated as bad debt or it was to be treated as investment. As mentioned above, the assessee is carrying on business of shares and stock broking. He is member of National Stock Exchange. The shares were purchased by him on behalf of his clients. Merely because he made payments against those shares would not make it an investment by the assessee on his own behalf. We are of the opinion that the very basis of this argument is misconceived, namely, that the particular purchase should be treated as investment by the assessee only because he made the payment. As pointed out above, the assessee has shown the income in his books of account as income from the brokerage. That itself shows that insofar as transaction in question is concerned, it was treated as a transaction of brokerage for purchase/sale of shares on behalf of his clients and it was not a transaction which was entered into by the assessee on his own behalf. This Court had occasion to deal with somewhat similar issue in IT Appeal No. 415 of 2007 [reported as CIT v. DB (India) Securities Ltd. [2009] 226 CTR (Delhi) 466—Ed.] which appeal was decided against the Revenue by taking note of the following aspects :

"The admitted facts are that the assessee/respondent herein is a member of the Delhi Stock Exchange and is carrying on the business of shares and stock broking along with the allied activities such as broker/subbroker, underwriters to new issues of shares, debentures and securities of all kinds, brokers and fixed deposit of companies, trading in shares, investment consultants, etc. The assessee had purchased shares of M/s Mannu Finlease Ltd. in January and February, 1996 on behalf of and on instructions from its subbroker M/s Glory Securities Ltd. Total value of these shares purchased by the assessee was Rs. 1,06,10,247 at an average price of Rs. 55 per share. The said sub-broker had made payment to the extent of Rs. 64 lacs only. As remaining amount of Rs. 41,37,881 was not paid, the assessee did not deliver those shares to the sub-broker. However, in the said year, brokerage was shown as income in the IT return, which was assessed as well. Since balance payment was not made in the next year also, presumably because of the reason that the price of shares fell from Rs. 55 per share to Rs. 5 per share, the assessee in its IT return for the asst. yr. 2001-02 claimed deduction of Rs. 41,37,881 as 'bad debt' under s. 36(1)(vii) of the IT Act, 1961 (for short, the 'Act'). This deduction was initially disallowed by the assessing authority, which was affirmed by the CIT(A) in appeal but the Tribunal, in the appeal preferred by the assessee, has allowed the said deduction vide its impugned orders dt. 8th Sept., 2006.

Learned counsel for the Revenue, in this appeal filed against the aforesaid order, has canvassed two submissions :

(1)

The aforesaid amount could not be treated as 'debt' at all under the provisions of s. 36(2) of the Act and, therefore, the question of treating it as 'bad debt' does not arise.

(2)

The assessee had not sold the shares to anybody else in the market and in the absence of such a sale, the assessee could not claim the aforesaid amount as 'bad debt'.

Insofar as the first submission of learned counsel for the Revenue is concerned, we do not find any force therein. As pointed out in the aforesaid admitted facts, the assessee had purchased the aforesaid shares on behalf of the sub-broker and, in fact, paid the amount of Rs. 1,06,10,247. As against this amount, he received only a sum of Rs. 64 lacs. The brokerage which was received in the aforesaid transaction was shown as income by the assessee in the previous year, which was taxed as such as well by the assessing authority. Under these circumstances, only because shares were not delivered for want of full payment, which was to be made by the sub-broker to the assessee, it cannot be said that there was no transaction between the parties. Once we proceed on the basis that there was a valid transaction between the assessee and the sub-broker and the assessee had to make payment on behalf of the sub-broker, which he could not recover to the extent of Rs. 41,37,881, that sum has to be treated as 'debt'."

11.

Following the aforesaid order we hold that the money receivable from the client has to be treated as 'debt' and since it became bad, it was rightly considered as 'bad debt' and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-s. (2) of s. 36 r/w s. 36(1)(vii) stand satisfied in this case. Hence, the question of law stands decided against the Revenue and in favour of the assessee. This appeal is accordingly dismissed."

The facts of the aforesaid case are similar to the present case as in the present case also the appellant has claimed money irrecoverable from the client as bad debt and such debt has been claimed by the appellant in its books of accounts. The brokerage payable by the client was part of the debt and that debt has been taken into account in computation of income. Therefore, the conditions stipulated in sub-section (2) of section 36 r.w.s. 36(1)(vii) are satisfied.

Further, Hon'ble Supreme Court in case of TRF Ltd Vs CIT 323 ITR 397(SC) has held that position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

5.3.5

Further, it is also noticed that claim of bad debts on similar facts and identical issues in the case of the appellant itself has been accepted by the department and no adverse inference has been drawn in the cases of the appellant in earlier and succeeding years.