Mahendra N.Patel, Baroda vs Assessee

This appeal is filed by the assessee against the order of Ld. CIT(A)- II, Baroda dated 03-01-2008 for A.Y. 1994-95.

I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 2 Shri Mahendra N. Patel vs. ITO

2. The facts as culled out from the material on record are as under.

3. Assessee is an individual stated to be a share-broker registered with Vadodara Stock Exchange. Assessee filed his return of income declaring total income at Rs. 1,37,700/-. The assessment was originally framed u/s. 143(3) vide order dated 27-03-1997 and the total income was determined at Rs. 18,86,840/-. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A) who dismissed the appeal of the assessee. Thereafter assessee preferred appeal before Hon'ble Tribunal. Hon'ble Tribunal vide order in ITA No. 270/Ahd/1997 and ITA No. 568/Ahd/2002 order dated 03-02-2005 restored the issue to the file of AO to decide the issue afresh as per law. Pursuant to the directions of Hon'ble Tribunal, AO passed order u/s. 143(3) r.w.s. 254 of the Act vide order dated 26-12-2006 and again determined the total income at Rs. 18,86,840/-. Aggrieved by the order of AO, Assessee once again carried the matter before Ld. CIT(A) who vide order dated 03-01-2008 dismissed the appeal of the assessee. Aggrieved by the aforesaid order of Ld. CIT(A), Assessee is now in appeal before us in second round and has raised the following ground.

"1. On the facts and circumstances of the case, the Ld CIT(A) is not justified both in law and on facts in upholding the order of Ld. ITO, disallowing legitimate business loss of Rs. 35,31,918/- arisen out of business transactions of sub brokers during the year. The Ld. CIT(A) ought to have allowed business loss incurred by the appellant.

It is prayed that the impugned business loss of Rs. 3531918/- be allowed."

4. AO noticed that Assessee had claimed business loss of Rs. 35,31,918/- on account of financial failures of his three sub-brokers. The assessee was asked to justify its claim to which assessee inter alia submitted that he had appointed sub-brokers namely, Patni Investment I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 3 Shri Mahendra N. Patel vs. ITO Centre, Mosum Investments and Bharat B. Patel & Co. These sub-brokers failed to discharge their financial obligation at the time of various settlements. The amount due on settlements was therefore paid by the assessee on account of failure of the sub brokers to meet their commitments. The brokers had given post dated cheques to the assessee towards the dues but the cheques bounced. Since Assessee could not recover the money, the business loss of Rs. 35,31,918/- due from the three sub-brokers was claimed as business loss. The submission of the assessee was not found acceptable to the AO as he was of the view that the amount outstanding were in respect of share transactions and the claim of the assessee should have been of bad debts and not as business loss. AO was further of the view that the bad debts could not be allowed to the assessee because to claim the expenditure of bad debts, the assessee has to write off the bad debts in the books of accounts. Since the assessee had not complied with the provisions of section 36(1)(vii), he could not be allowed the deduction as bad debts. With respect to the claim of business loss, AO was of the view that Assessee had neither claimed the business loss in his books of accounts nor in the return of income that the claim was made during the course of assessment proceedings. He was further of the view that during the course of assessment proceedings, since the assessee could not explain substantial cash credits of Rs. 17.13 lacs, the claim of business loss was made by Assessee and thus the claim was an afterthought. He accordingly denied the claim of the assessee. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A) who upheld the addition made by the AO by holding as under:

"2.3 I have considered the submissions of the counsel and facts of the case. It is a fact that appellant neither claimed bad debts or business loss in respect of Rs. 35,31,918/- in the return of income filed for A.Y. 1994-95. It is also not in dispute that appellant made the claim of business loss for the first time on 21st March 1997 during the finalization of assessment proceedings. It is clear that the I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 4 Shri Mahendra N. Patel vs. ITO said claim was made after three years from the end of the accounting year. The back ground of raising such claim was mentioned by the Assessing Officer that substantial cash credits were found to be unexplained and to reduce the tax liability of the year such claim was made. In support of this claim, appellant submitted that cheques issued by the sub brokers were bounced till June 1994. If the claim would have been relating to the A.Y. 1994- 95, appellant could have revised the return for this year as early as in the year 1994 itself. However, appellant made the claim of business loss by filing revised return for A.Y.1995-96. Even such claim of loss was not made in the original return for A.Y. 1995-96, therefore, considering the claim of business loss in A.Y. 1994-95 is not as per appellant's own claim or records.

2.3.1 Coming to the submissions made by the appellant, it is argued that the business loss occurred during F.Y.1993-94. However, as discussed earlier, till March 1997 no such claim was made. Even cheques issued by these sub brokers were bounced in next F.Y. i.e. in 1994-95. Further, the sub brokers were independent and they were not doing business for the appellant. The payment outstanding in their names were on account of share transactions done by them through appellant and therefore outstanding debt in their name were rightly treated by the Assessing Officer as debtor. The appellant suffered loss because the three sub brokers did not make the payment of debts owed by them to the appellant. Even this was not clear till the end of this accounting year. The sub brokers have also submitted declaration that they were the debtors of the appellant therefore these debtors default is covered under bad debts. Obviously the conditions precedents for allowing any bad debts is not fulfilled in the sense that such debts were not written off as required u/s. 36(l)(vii) and therefore the appellant's claim is not allowable as bad debts.

2.3.2. Coming to the appellant's claim of business loss, the same is applicable in the case of loses for which there is no specific provision for allowance. In the case of bad debts, the specific provisions are there u/s.36(1)(vii) read with section 36(2) and therefore the claim of bad debts cannot be considered under general claim u/s.28 on account of trading/business loss. The decisions referred by the appellant in the case of Kedarnath Jute Mfg, that the writing off in the books of accounts is not necessary in the case of business loss, is not relevant in the facts of the appellant's case. Appellant himself claimed such loss in subsequent I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 5 Shri Mahendra N. Patel vs. ITO year by way of revised return and as such loss was never claimed in the books of accounts. As far as this year is concerned, such claim was made after three years. All these facts prove that the loss is not at all relating to this year and therefore all the decisions referred by the appellant in support or its claim do not help. Appellant himself mentioned several case laws wherein business loss were not allowed if the same were not incurred in the previous year. In view of the facts mentioned by the Assessing Officer and also discussed earlier, the loss is on account of non-payment of dues from the sub brokers and such events happened in subsequent year and therefore the loss, is not relating to the previous year. Similarly, the loss is not on account of mistake committed by the appellant or his employees. Since the claim of loss is made only in the assessment proceedings after three years and also by making the same claim in the next assessment year, it is clear that such loss is not incurred/ relevant to this year and hence not allowable.

2.3.3. Firstly, the appellant's claim is considered within the provisions of section 36(1)(vii) read with 36(2) wherein the same is found to be prima facie rejectable since the amounts were not written off in the books of accounts. Secondly, the appellant's claim as business loss is not allowable on two counts - i) business loss on account of bad debt is not allowable since there is specific provision governing the same and ii) the claim is not relating to the current year in view of the facts mentioned."

5. Aggrieved by the order of Ld. CIT(A), Assessee is now in appeal before us.

6. Before us Ld. AR reiterated the submissions made before AO and Ld. CIT(A). He further submitted that the three sub-brokers were part of the business activities of the assessee and therefore non payment by them amounted to business loss and further there was direct nexus between the business transaction of the sub-brokers and the business losses of the assessee. Ld. AR further submitted that assessee earned brokerage on transactions made by sub-broker and the income from such business is treated as the business income. Ld. AR further submitted that the sub-

I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 6 Shri Mahendra N. Patel vs. ITO brokers had given post dated cheques to Assesse to clear the dues but all of the post dated cheques got dishonored. He pointed to the copy of the cheques and the memo received from the bank with respect to the dishonoring of cheques. The Ld. AR therefore submitted that the loss incurred by the assessee was in the normal course of business and therefore should have been allowed as deduction. Ld. DR on the other hand supported the order of AO and Ld. CIT(A) and further submitted that no claim of business loss was made by the assessee in the return of income. He further submitted that the claim of business loss cannot be accepted by the assessee as it is a case of bad debts and that the loss of bad debts can only be allowed only after complying with the conditions prescribed u/s. 36(1)(vii) of the Act. He thus supported the order of AO and Ld. CIT(A).

7. We have heard the rival submissions and perused the material on record. The dispute in the present case is about the allowability of loss as business loss. It is an undisputed fact that the assessee was engaged as a share broker and was member of the Vadodara Stock Exchange and further its submission that the three sub-brokers were appointed by him as per rules and regulations of stock exchange. The amount due from these sub-brokers which could not be recovered on account of their inability to pay has been claimed as business loss. Before us, though it was orally submitted that Assessee had earned income from brokerage (including the parties from whom the amount has been claimed as loss) in earlier years but however no such details of the income earned in earlier years have been furnished. Further, it is also a fact that to clear the outstanding dues against their respective names, the sub-brokers had issued post dated cheques which subsequently got dishonoured. It is the submission that some of the cheques were dishonored during the year under review and I.T.A No. 1364/Ahd/2008 A.Y. 1994-95 Page No 7 Shri Mahendra N. Patel vs. ITO some cheques got dishonoured in subsequent years. However the amount of cheques which have been dishonoured during the year under review needs verification and the income earned by the assessee as brokerage from the 3 parties and other parties. We therefore remit the issue to the file of AO so that he can examine the income earned by the assessee from brokerage in earlier years and the cheques which have been dishonoured during the year. The assessee shall be free to produce any additional documents before AO. The AO after examining the aforesaid decide the issue in accordance with law. In the result, this ground of the assessee is partly allowed for statistical purpose.

8. Thus the appeal of Assessee is partly allowed for statistical purpose.

Order pronounced in open court on the date mentioned hereinabove at caption page

Sd/- Sd/-

(G.C. GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER Dated :04/03/2015 ak

आदे श क ूितिल प अमे षत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद