Income Tax Appellate Tribunal - Mumbai
Harshad J. Choksi vs Assistant Commissioner Of Income-Tax on 19 December, 1994
Equivalent citations: [1995]52ITD511(MUM)
ORDER
M.K. Chaturvedi, Judicial Member
1. This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-XIX, Bombay (Mrs. V. Sharma) and pertains to the assessment year 1991-92.
2. The assessee is a stock and share broker. He is a member of the Bombay Stock Exchange. Mercantile system of accountancy was followed during the year under consideration. A receipt of Rs. 1, 82, 86, 821 towards brokerage (gross) was reflected in the accounts. It was stated before the AO that brokerage had been charged ranging from 0. 15% to 0. 17% depending upon the prices of the shares. Rate varied from client to client. There was no uniform rate. On the net amount of brokerage of Rs. 1, 03, 30, 257 the assessee shown a net profit of Rs. 9, 41, 781. An amount of Rs. 47, 58, 250 was written off. It was alleged to be loss caused to the assessee due to the breach committed by the three members of the Bombay Stock Exchange. These members were declared as defaulters. The detail of the loss is as under:
(i) M/s. Nagordas Laljee Rs. 11, 81, 555. 00
(ii) M/s. Sankalchand Damodardas Rs. 23, 94, 663. 57
(iii) M/s. Jamnadas Sankalchand Rs. 9, 21, 991. 50
(iv) Paid to Stock Exchange Rs. 2, 60, 040. 00 (on account of squaring up on transaction of Nagardas Laljee and Brij Laxmi)
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Rs. 47. 58, 250. 00
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The abovesaid amount was debited in the book under the head 'Vatav Kasar' account.
3. The amount of Rs. 47, 58, 250 had been written off and the same was claimed as 'BAD DEBTS' before the AO. The claim of the assessee was, therefore, examined by the AO on the touchstone of Section 36(1)(vii) and Section 37(2) of the Income-tax Act. It was found that conditions precedent for availing of the benefit of these sections did not exist in the facts and circumstances of the present case. It was observed that for allowing deduction in respect of any bad debt, written off as irrecoverable, the essential conditions under Section 36(2) are that the debts should have become bad and must have been taken into account in the computation of income of the previous year or of an earlier previous year. It is not sufficient to claim the debt to be bad merely on the basis of declaration of the Stock Exchange.
4. Even before us initially the dispute on this point was raised in the same manner. The grounds 1. 1 and 1. 2 taken before us are reproduced here as under:
1. 1. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in disallowing the claim of bad debts of Rs. 47, 58, 250.
1. 2. The CIT(A) had come to the conclusion that the brokers were defaulters as certified by the Stock Exchange and he ought to have taken into consideration the provisions of Section 36(1)(iii) and 36(2) and allowed the same. Inspite of overwhelming evidence, the CIT(A) disallowed the bad debts claimed by the appellant of Rs. 47, 58, 250.
5. At the time of hearing, the learned counsel for the assessee took the following two additional grounds:
1. That the learned CIT(A) grossly erred in holding that the loss of Rs. 11, 81, 555 on account of transactions with M/s. Nagardas Laljee was a speculative loss.
She ought to have held that the said loss was a trading loss, deductible while arriving at the current year's business profits.
2. That the learned CIT(A) grossly erred in disallowing the appellant's claim for deduction of Rs. 23, 94, 663. 57 and Rs. 9, 21, 991. 50 on account of transactions with M/s. Sankalchand Damodardas and M/s Jamnadas Sankalchand.
She ought to have held that the said amount represented regular business losses deductible while arriving at the current year's Business profits.
6. Shri S. E. Dastur along with S/Shri F. B. Andhyarujina and A. V. Sonde appeared on behalf of the assessee. Relevant documents and papers were filed. At the outset, Shri Dastur fairly conceded that the assessee is not fulfilling all the conditions contemplated under Section 36(2) for claiming bad debt. It is true that the debt was not taken into computation of income of the previous year or the earlier previous year. Shri Dastur, therefore, agreed that the amount claimed under the nomenclature 'Vatav Kasar' is not allowable Under Section 36(2) as bad debt. But it is allowable as a business loss. Shri Dastur submitted that the list of allowances enumerated in the Income-tax Act, 1961 is not exhaustive. The item of loss incidental to the carrying on the business may be deducted in computing the profits and gains of that business, even if it does not fall within any of the sections (30 to 43C). To support this proposition Sri Dastur relied on the ratio laid down in the case of Ramchandor Shivnarayan v. CIT [1978] 111 ITR 263 (SC).
7. Taking us to the background of the matter Shri Dastur submitted that this amount was debited under the head 'Vatav Kasar'. There was no possibility of the recovery of this amount from the defaulting members. Therefore, the amount was written off. The first set of loss occurred on account of badla transactions with M/s. Nagordas Laljee, 1, 000 shares of A. C. C. and an amount of Rs. 11, 81, 555 became due on account of badla transaction. The value of ACC shares shot up from Rs. 550 to 1870 per share in a short span of two months. The debtor paid the first badla but could not keep up his promises in respect of subsequent badla dates. The transaction was found to be genuine. No doubt was casted in regard to the veracity of the transaction. The assessee did not get the badla amount on the subsequent settlement dates. Apropos, M/s. Sankalchand Damodardas and M/s. Jamnadas Sankalchand, the sums of Rs. 23, 94, 663. 57 and Rs. 9, 21, 991. 50 respectively were outstanding. The transaction with these persons took place on principal to principal basis.
8. Adverting to the impugned order, Sri Dastur pointed out that the CIT(A) verified the parties ledger accounts in respect of the assessee as printed out in the stock exchange computer records. He also considered the certificates given by the Bombay Stock Exchange and also verified the balance-sheet in respect of the outstanding in the case of M/s. Sankalchand Damodardas and M/s. Jamnadas Sankalchand. The amounts were found duly reflected in the balance sheet of M/s. Sankalchand Damodardas. The genuineness of this transaction was, therefore, found to be beyond question as the first badla transaction with M/s. Nagordas Laljee was duly paid by the party. It was also observed by the CIT(A) that the transactions took place in the due course of business. The fact concerning unusual movements in the price of ACC shares was also considered.
9. Sri Dastur invited our attention on the prescription of Section 230 of the Indian Contract Act, 1872 and also on Article 191 of the Bye-laws of the Bombay Stock Exchange. It was stated that the Stock Exchange does not recognise any party to any bargain in the market other than its own members and every member is directly and primarily liable to every other member with whom he effects a bargain for its due fulfilment in accordance with the Rules, Bye-laws and Regulations of the Exchange whether such bargain be for on account of the member effecting it or for on account of a principal.
10. Shri Dastur further submitted that where there is no specific statutory provision for a deduction in the computation of taxable business profits, it does not mean that the item goes without any deduction at all, but the question will have to be decided on the basis of commercial accounting principles. If such claim arise out of the carrying on or incidental to carrying on of business, it should be allowed.
11. Corning to the nature of loss, Sri Dastur submitted that loss in question cannot be construed to be a speculative loss. The assessee purchased the shares from the market to fulfil the commitment. The transaction was entered into not with the objective to earn any profit out of it but to make good the loss. It was to honour the obligation.
12. It was further stated that so far nothing was realised from the defaulting brokers. Stock Exchange sold the card of M/s. Nagordas Laljee for Rs. 55 lakhs. In regard to other defaulting members nothing happened as yet to the knowledge of the assessee. However, if any amount is realised, the same can be taxed under Section 45(1) of the I. T. Act, 1961. Sri Dastur relied on some precedents also.
13. The next issue relates to the disallowance of Rs. 1, 94, 774. Sri Dastur submitted that this amount of Rs. 1, 94, 774 comprised of number of small amounts. There was no remission of the debt by the party concerned. Therefore, the "Write off by the assessee could not be considered to be "cessation of liability". Since the liability has not come to an end, the addition on this count is not correct.
14. The next issue relates to the disallowance of Rs. 5, 57, 584 on account of loss arising out of "Vandah transactions". Sri Dastur submitted that these losses were in relation to transactions with parties of the value below Rs. 4, 000 each. Therefore, complete details in regard to the parties names could not be furnished. On test check basis the transactions to the tune of Rs. 4, 36, 124 were found to be genuine.
15. Vandah transaction arise due to the following reasons:
(a) Wrong execution of orders, i. e., sale order being executed as purchase orders or vice-versa or purchase/sale of totally different scrip (example Mid-West Leasing purchase/sold instead of Mid-East Leasing);
(b) Incorrect execution of orders in relation to quantity and/or price limits;
(c) Non-confirmation of a properly executed sauda;
(d) Wrong confirmation of sauda to third party.
16. Considering the turnover of the assessee, the amount shown as vandah transaction was stated to be normal. The dispute was caused due to human error. At page 45 of the paper book, details are filed. In the said details, the name of the scrip, rate, party for which transaction was executed, loss and reasons for vandah, are described. The loss was therefore claimed to be allowable under the laws.
17. The next issue relates to the allowability of sub-brokerage paid to M/s Vijaylaxmi Investments - Rs. 1, 10, 300 and Shri Rupesh D. Sheth -Rs. 51, 756. The learned counsel stated that the sub-brokerage was paid in the normal course of the business. The assessee was instructed to execute the transaction by the sub-broker. In consideration thereof, amount of sub-brokerage was paid. The mere fact that the amount of sub-brokerage was set off against the debit balance is not the material aliunde to which the addition could be sustained.
In regard to the payment to Shri Rupesh D. Sheth, it was submitted that since Mr. Choksi had confirmed the receipt of the amount by way of adjustment, the payment is to be accepted as genuine. Relevant details were furnished. Alternatively, it was argued that if sub-brokerage is not to be allowed, the amount in question may be considered as loss and the same should be allowed.
18. The last ground relates to the disallowance out of travelling expenses, general and staff welfare expenses at Rs. 10, 000 each. Shri Dastur submitted that this point was argued and details were submitted before the CIT(A), despite he dismissed this ground by putting the remark "not seriously contended". According to the learned counsel, the addition is without any basis. Therefore, the amount added should be deleted from the total income.
19. Shri A. P. Pawar, Id. D. R. appeared before us. In regard to the allowability of Rs. 47, 58, 250 it was argued that this amount was claimed by the assessee in his return as bad debts. The revenue authorities found that the enabling conditions as prescribed Under Section 36(2) are not being satisfied. In view of the same, the claim of the assessee was disallowed. Since, it was claimed as bad debt, the allowability was considered taking into consideration the applicability of Sections 36(1)(iv) and 36(2) of the Act. Finding difficulty, in view of the prescription given in Section 36(2), the assessee now intends to make a change in his stands. Therefore, the additional grounds for treating the bad debts as business loss were raised. The assessee was acting as a broker. He acted on behalf of the principals. Therefore, legally, he was not responsible to make good the loss. There is absolutely nothing on record to show that the assessee was forced to sell the ACC shares at a loss. This transaction was not reflected in the trading account. Therefore, no assumption or presumption can be drawn in relation to the veracity of the explanation offered by the assessee. This loss can at most be considered as capital loss or loss arising out of speculation business. It was further submitted that there is no provision in the Act under which such loss could be allowed. Admittedly the amount was claimed as a. bad debt. Therefore, it ought to be considered within the parameters of Section 36(2). True, the list of allowances as given in the Act is not exhaustive. But only those items which do not fall within the ambit of list should be considered in that context. In the case of Lords Dairy Farm Ltd., the Court was concerned with the defalcation by an employee. In the Act, there is no section to deal with such loss. Therefore, it was held to be allowable. But, when there is specific provision to deal with the situation, the issue ought to be examined on the touchstone of that section. Clearly, it was a debt. It was written off in the books. Therefore, its allowability depends on the satisfaction of conditions contained under Section 36(2).
20. In regard to the allowability of Rs. 1, 94, 774, being the amount written back to the Profit & Loss Account, Sri Pawar, relied on the decision of the jurisdictional High Court rendered in the case of CIT v. Bennett Coleman & Co. Ltd. [1993] 201ITR 1021 (Bom.). It was submitted that this is a clear case of cessation of liability and the Hon'ble High Court has decided this issue against the assesssee.
21. In regard to the amount of loss arising out of Vandah transactions', Id. D. R. submitted that the assessee failed to produce the relevant records. Therefore, the AO was justified in making the addition. He further relied on the orders of the revenue authorities.
22. In regard to the allowability of sub-brokerage paid to M/s. Vijaylaxmi Investments and Shri Rupesh D. Sheth, it was submitted that the concerned parties did not render any services. There is no evidence on record to show the nexus of the expenditure with the earning of income. In respect of M/s. Vijaylaxmi Investments summons could not be served on the party as the address was not correctly given. The assessee produced the party. It was stated that proprietary concern was started on 3-4-1990 and the business was discontinued in February 1991. There is absolutely no evidence to show that how this party came in the contact of the assessee. The party was not having any office premises. No books of account were maintained. There was no bank account. Even the names of the major scrip transacted, in respect of which the party acted as intermediary, could not be recalled. No amount of actual brokerage was paid. The amount of brokerage was set off against the debit balance standing in the name of the said party.
23. In regard to Shri Rupesh D. Sheth, it was submitted that the payment was made by mere adjustment. No books were maintained by Mr. Sheth. There was no sufficient evidence to prove the veracity of the transaction.
24. In regard to the disallowance out of travelling expenses and general staff welfare expenses, it was submitted that these amounts were disallowed for want of complete details. This ground was not pressed before the CIT(A).
25. We have heard the rival submissions in the light of the material placed before us and precedents relied upon. We have perused the records. We have also taken into consideration the additional grounds raised before us.
26. At the outset, Sri Dastur fairly conceded that the conditions precedent as contemplated Under Section 36(2) did not exist in the facts and circumstances of the present case. Therefore, the claim of bad debt as made by the assessee is not allowable as 'bad debt', but it is allowable as a business loss.
27. True, claiming under a wrong provision does not debar the assessee to make a rightful claim, provided relevant details are furnished at the time of filing the return and if it is possible to gather the true nature of the claim. In such eventuality wrong label attached by the assessee to his claim will not disentitle him from getting relief under the proper head to which the claim belongs. In the instant case, it was contended that the claim made under the head 'Vatav kasar' ought to be considered as a business loss.
28. The list of allowances enumerated under Sections 30 to 40(c) is not exhaustive. An item of loss incidental to the carrying on of a business may be deducted in computing the profits and gains of that business, even if it does not fall within any of the sections. Sections 30 to 40(c) expressly provide that what can be deducted in computing the business income. If an expenditure comes within any of the enumerated classes of allowances, it is to be considered as per the prescription of the statutory provisions. But there may be an expenditure which, though not exactly covered by any of the enumerated classes, it would also be considered in finding out the true assessable profits or gains arising out of the business as Sections 30 to 43(c) do not deal exhaustively with the deductions which must be made to arrive at the true profits and gains.
29. The word 'income' or 'profits and gains' should be understood as including losses also, so that in one sense 'profits and gains' represent 'plus' income, whereas the losses represent 'minus' income. In other words, the loss is negative profit. Both positive and negative profits are of revenue character. Both must be entered into computation. Thus, trading loss of a business is deductible in computing the profits earned by the business even though there is no specific provision for allowance thereof. Loss is a thing which comes upon the assessee ab extra. Loss may be of various kinds. There may be loss due to theft or embezzlement. Bad debt also is a kind of loss.
30. The assessee is a stock broker. The modus operandi: assessee receives the orders for the purchase and sale of shares from various clients. These orders are received (in most of the cases) orally either through the party or through the sub-broker. ' Assessee is not required to disclose the name of the principal. As per the regulations of the Stock Exchange, the transaction can be entered only through the brokers. It is the responsibility of the broker to honour the transaction. If broker commits any breach, he is treated as a defaulter. Stock Exchange authorities take action against the defaulter. His card may be confiscated and auctioned in public to make good the loss due to breach. Article 191 of the Stock Exchange Bye-laws reads as under:
191. The exchange does not recognise as parties to any bargain in the market any parties other than its own members and every member is directly and primarily liable to every other member with whom he effects a bargain for its due fulfilment in accordance with the Rules, Bye-laws and Regulations of the Exchange whether such bargain be for account of the member effecting it or for account of a principal.
31. An item of loss incidental to carrying on of the business may be deducted in computing the profits of the business even if it does not fall within any of the sections. But this rule cannot be applied where the items of loss can be linked or associated with the provisions of the Statute. Sections 30 to 43(c) expressly provide what can be deducted in computing business income. If an expenditure comes within any of the enumerated clauses of allowances, it is mandatory on the part of the A. O. to consider the same under the appropriate provision. There may be an item of expenditure or loss which, though not exactly covered by any of the enumerated clauses, may have to be considered in finding the "true assessable profits or gains. We now examine the applicability of the ratio of the decision cited before us. In the case of Ramchandar Shivnarayan (supra), there was a theft by stranger. This item is beyond the list of allowances as is given under Sections 30 to 43(c). Therefore, the Apex Court has held that the list is not exhaustive. The loss was directly connected with the business operation. It was incidental to the carrying on of the business. In such situation, it was part of the trading loss. Similarly, in the case of Lords Dairy Farm Ltd. v. CIT [1955] 27 ITR 700 (Bom.), there was loss due to defalcation by an employee. This is also outside the list of allowances as given in the Act. Therefore, it was allowed. In the case of Badridas Daga v. CIT [1958] 34 ITR 10 (SC), there was embezzlement by employee or agent. Similarly in the case of G. G. Dandekar Machine Works Ltd. v. CIT [1993] 202 ITR 161 (Bom.) there was embezzlement from current account of the assessee maintained for running the business. There is no specific provision in the Income-tax Act, which can be linked for the allowance of such loss. Therefore, these losses were allowed and list as given under Sections 30 to 43(c) was held not to be exhaustive.
32. Adverting to the facts of the present case, we find that the assessee claimed the amount as "bad debt". It was reflected in the accounts as "Vatav kasar". Before the revenue authorities also the claim was in respect of bad debt. Even before us it was admitted that the amount is of the nature of "BAD DEBTS" but the same should be allowed as a loss.
Loss on account of BAD DEBTS, can only be allowed with reference to the fulfilment of conditions contained Under Section 36(2). The applicability of the specific provision cannot be ignored. The precedents cited speak only about the situation where the law is silent. Facts are different in the present case. Admittedly the loss was on account of BAD DEBTS. It was fairly conceded by Shri Dastur that the conditions precedent for allowability of the bad debt as contemplated Under Section 36(2) cannot be satisfied. In such circumstances, the claim of the assessee cannot be allowed. We, therefore, uphold the impugned order on this count.
33. In regard to the disallowance of Rs. 5, 57, 584 on account of loss out of "Vandah transaction", we have noted that these losses were in respect of transaction with the parties of the value below Rs. 4, 000 each. The revenue authorities made test check and transactions up to the value of Rs. 4, 36, 124 were found to be genuine. It was stated that similar losses in "Vandah transaction" were allowed in the past. The assessee filed list of the names of the connected parties to the extent it was available. Considering the volume of trade and the nature of losses and in view of the facts and surrounding circumstances, we are of the opinion that such disallowance is not justified and we allow the appeal and direct the AO to delete the addition made on this count.
34. In regard to the payment of sub-brokerage, we have noted that the parties accepted the factum of payment. In regard to M/s. Vijaylaxmi Investments, we find that disallowance was made mainly on the ground that brokerage was not actually paid. The amount due was set off against the debit balance of the party. Similarly, in regard to Shri Rupesh D. Sheth also, an amount of Rs. 51, 756 was credited to his account and adjusted by the assessee against the personal loss in shares. We have also perused the other reasonings given by the revenue authorities in support of the disallowance. On consideration of totality of facts we allow the appeal on this ground. Accordingly, we direct the AO to delete the addition made on this count.
35. In regard to the disallowance out of travelling expenses and staff welfare expenses at Rs. 10, 000, each we have gone through the reasonings given by the AO. These expenses were disallowed for want of details. We find that this ground was not pressed before the CIT(A). On merits also, in our opinion, for want of details, no other view can be taken. Accordingly, we uphold the impugned order on this count.
36. In the result, the appeal of the assessee stands partly allowed.