Rosy Blue Securirites P.Ltd, Mumbai vs Assessee

This appeal has been preferred by the Assessee against order dated 02.03.2011, passed by the Ld.CIT(A)-8, for the quantum of assessment u/s 143(3) of the Act, for the A.Y. 2001-02, on following grounds:-

"1. The learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of bad debts aggregating to Rs. 2,61,09,809/- written off during the year. It is submitted that the appellant, a share broker, could not be recovered a sum aggregating to Rs. 2,61,09,809/- from its clients in respect of the transactions effected on their behalf including brokerage and having written off the irrecoverable amount is entitled to deduction ITA No. 2745/Mum/2011 2 Assessment Year: 2001-02

as bad debts under Section 36(1)(vii) read with section 36(2) of- the Income-tax Act 1961.

2. Without prejudice and in an alternate, the learned Commissioner of Income-tax (Appeals) erred in not allowing the said amount of Rs. 2,61,09,809/- as business loss. It is submitted that the appellant, a share broker, had suffered the said loss in the normal course of its business and as such same is ought to be allowed as deduction in computing the income for the year.

3. The learned Commissioner of Income-tax (Appeals) erred in not adjudicating the additional ground of appeal. It is submitted that the learned Commissioner of Income-tax (Appeals) ought to have disposed off the additional grounds of appeal raised before him.

It is further submitted that considering the facts and circumstances of the case that the arbitration award relating to recovery of debts aggregating to Rs. 2,61,09,809/- was received during the previous year relevant to Assessment Year 2003-04, the loss of Rs. 2,61,09,809/- be allowed as deduction in the- Assessment Year 2003-04."

2. Brief facts of the case are that, the assessee company is engaged in the business of share broking. As against the returned loss of Rs.11,22,400/-, the assessment was completed u/s 143(3) at an income of Rs.57,81,590/-. Thereafter, the said order was set aside by the Chief CIT (OSD) u/s 263 on 10.03.2006, with the direction to verify the genuineness of the claim of bad debts of Rs.2,61,09,809/-. Said order was upheld by the Tribunal. In the set aside proceedings, the AO has noted that in the ledger account of M/s. Kiraj Consultants Pvt. Ltd. there was a debit balance which was claimed as 'bad debt' being written off. Alternatively, it was submitted that same should be allowed as business loss. The debit balance has arisen due to transactions undertaken by the assessee on behalf of M/s. Kiraj Consultants Pvt. Ltd. who was a sub- broker of the assessee. The AO noted that said party stared its ITA No. 2745/Mum/2011 3 Assessment Year: 2001-02

operation with the assessee on 18.04.2000 with a transaction raising a debit of Rs.1,66,93,881/-. The assessee did not recover the said amount till the closure of the financial year and in fact the debit balance increased to Rs.3,28,15,200/- at the year end 31.03.2001. He observed that no prudent businessman will allow its sub-broker to run up huge debit balance right from the day one. The assessee has even issued cheques to the said party despite there was a huge debit balance. Thus, such an action of the assessee defies business and commercial logic. The said payments quite at best can be considered as advance and assessee cannot be entitled to written off the advance to be allowable as revenue expenditure. After noting down increase of debits in the account of M/s. Kiraj Consultants Pvt. Ltd., the AO observed that assessee has not taken steps to recover the money and instead has written off the debts, before taking any legal recourse. He further pointed out that the assessee by not collecting sufficient margin money and also by not closing out the transactions where dues cannot received from the client, was in fact infringement of the regulatory provision of SEBI. He further noted that as per the Arbitration Award dated 20.11.2002, the assessee was in possession of certain shares belonging to M/s. Kiraj Consultants Pvt. Ltd. which was procured by the assessee upon the orders of arbitration authority which resulted into deduction of liability by Rs.2,40,70,297/- from Rs.2,61,09,809/-. Thus, he was of the opinion that debt were recoverable and had not gone bad in this year. After referring to various decisions, he disallowed the claim of bad debt and also the claim of business loss.

ITA No. 2745/Mum/2011 4 Assessment Year: 2001-02

3. The Ld. CIT(A), agreed with the reasoning and conclusion drawn by the AO and held that same is not allowable. He further held that debit amount of Rs.2,61,09,809/- included the amount of Rs.63 lakhs paid by the assessee, despite there was substantial debit balance in the account of M/s. Kiraj Consultants Pvt. Ltd. This cannot be allowed as bad debt. Regarding alternative plea, he held that the losses cannot be said to have arisen in the A.Y. 2001-02 as the pendency of alternation proceedings instituted by the assessee clearly establish that liability on account of loss had not crystallized in this year.

4. Before us, learned counsel Shri Nitesh Joshi submitted that, it is an undisputed fact that assessee had business transaction with M/s. Kiraj Consultants Pvt. Ltd.. The huge debit balance had arisen during the course of business only. Since amount was irrecoverable during the year the assessee has written off the said amount as bad debt and therefore, same is allowable in view of the decision of Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT reported in 323 ITR 397. He also filed a copy of general ledger account and also the party account of Kiraj consultants to show that the amount has been written off as bad debt. He also pointed out that the assessee has also written a letter to Kiraj Consultants about the repayment of the outstanding and has also instituted arbitration proceedings for the recovery of the amount. Thus, assessee's claim of is bad debt should be allowed.

5. On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT(A).

6. We have heard the rival submissions and also perused the relevant material placed on record. It is an undisputed fact that assessee had ITA No. 2745/Mum/2011 5 Assessment Year: 2001-02

business relation with M/s. Kiraj Consultants Pvt. Ltd., as it was sub- broker of the assessee. During the course of such business transaction there were huge debit balance in the account of the said party. One of the reasons given by the AO and Ld. CIT(A) that A prudent businessman will not allow such huge debit balance to continue till the year end. Such a reasoning cannot be sustained as the revenue cannot decide the business decisions and the transactions between the two parties and how the assessee should run a business to avoid loss or bad debt. Now it is quite settled law that, if the bad debts has been written off in the books of account, then it is not necessary for the assessee to establish that debt has become irrecoverable. It is the decision of the assessee to write off the bad debt as irrecoverable in the accounts of the assessee. This proposition has been quite settled by the Hon'ble Supreme Court in the case of TRF Ltd. Vs. CIT (supra) and catena of other decisions. However, from the perusal of the order of the appellate order, it is seen that, Ld. CIT(A) has made on observations that assessee has not written off the bad debts in the account of M/s. Kiraj Consultants Pvt. Ltd. and in its books of account. On the contrary the Learned counsel has filed a copy of general ledger account and also the parties account of M/s. Kiraj Consultants Pvt. Ltd., wherein it has been clearly shown that amount of Rs.2,61,09,809/- has been transferred to bad debts. Even in the P&L Account, in schedule 12 the bad debts written off [net of provisions] have been shown. Thus, this matter needs verification from the end of the AO to see, whether the bad debts has in fact been written off in accounts of the assessee or not. Thus ground raised by the assessee on this score is treated as partly allowed for statistical purpose. In view of ITA No. 2745/Mum/2011 6 Assessment Year: 2001-02

the finding given above, the alternative ground raised by the assessee has become purely academic and hence it is treated as infructuous.

7. In the result, the appeal filed by the Assessee is partly allowed for statistical purposes.

Order pronounced in the open court on this 10th day of April, 2015.

Sd/- Sd/- (B.R. BASKARAN) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 10.04.2015 *Srivastava

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "D" Bench //True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.