Case Law Details
The brief facts of this issue is that the assessee advanced a sum of Rs. 2 crores on 20.5.1992 to Broker Shri.Pallav Sheth under portfolio management scheme. The said broker is supposed to manage the trading portfolio of shares and securities on behalf of the assessee. The said advance was made to Shri.Pallav Sheth during the course of business of the assessee for the purpose of purchase and sale of shares under portfolio management scheme. Out of the said advance, a sum of Rs. 1,99,08,500/- became irrecoverable from the said broker and assessee chose to write off the same in its books of accounts by crediting the advance receivable vis a vis the concerned party account. The assessee claimed the same as deduction as bad advances written off as irrecoverable which was disallowed by the Learned AO and upheld by Learned CIT (A). Aggrieved, the assessee is in appeal before us on the following grounds :-
a) Bad Advance – Rs.1,99,08,500/-
“For that the learned CIT(Appeals) was not justified in ignoring the provisions of the Income Tax Act in disallowing the said write off although there was no dispute that it had become bad.
For that the learned CIT(Appeals) failed to appreciate that the appellant did not file any claim with the Special Court and therefore, irrespective of the outcome of its proceedings, the appellant would not be able to recover any amount.
On the facts and in the circumstances of the case, the learned CIT(Appeals) was not justified in disallowing the amount irrecoverable from Broker of Rs. 1,99,08,500/-“
2. We have heard the rival submissions and perused the materials available on record. The Learned AR filed the sequence of events before us about the conduct of the said broker and the difficulties underwent by him due to his fraudulent acts committed earlier. It is not in dispute that the broker Shri.Pallav Sheth was declared a defaulter and suspended by the Bombay Stock Exchange from entering the capital markets due to his involvement in securities scam in the year 1992. We find that the aspect of irrecoverability of trade advances given during the course of business of the assessee is proved beyond doubt from the sequence of events in tabular form stated hereinabove which shows the conduct of the broker Shri.Pallav Sheth. We find that on 27.7.1992, movable and immovable properties of Shri.Pallav Sheth were provisionally attached u/s 281B of the Income Tax Act which was later modified on 14.10.1993. We find in October 1992, the equity shares and debentures of various Indian companies were seized by CBI from the residential and office premises of Shri.Pallav Sheth. We also find that a notice was issued by Bombay Stock Exchange advising members not to deal in shares attached by the Income Tax Department including those seized by CBI. We find that Shri.Pallav Sheth had submitted to a consent decree for a sum of Rs. 50 crores upon application by the Custodian appointed under the Special Court Act which was agreed to be paid in installments. But he paid only Rs 2 crores and defaulted in the payment of further installments. The Learned AR placed the copy of the Hon’ble Supreme Court judgement to prove these facts in the case of Pallav Sheth vs Custodian and Others reported in (2001) 7 Supreme Court Cases 549. We find that the assessee had patiently waited for recovery of the dues by watching the various judicial proceedings of Shri.Pallav Sheth due to fraudulent acts committed by him and finally decide to write off the advances as bad and irrecoverable in its books by crediting the advance vis a vis the concerned broker Shri. Pallav Sheth account in its books in Asst Year 1995-96.
3. We also appreciate the statement of the Learned AR that till date not even a single penny could be realized by the assessee from said broker. We also find that the said broker Shri.Pallav Sheth had committed an act of insolvency on 22.4.1996 vide Insolvency Petition No. 49 of 1996 and declared insolvent by the competent authority. Though this act of insolvency had happened subsequent to the write off the trade debt and trade advance by the assessee, we hold that the subsequent conduct and negative development in the hands of the broker Shri.Pallav Sheth only strengthens the earlier conscious and judicious decision of the assessee to write off the advances and debts as irrecoverable.
4. We are not in agreement with the arguments of the Learned DR that the contention of assessee paying advance to Shri.Pallav Sheth under portfolio management scheme is a fresh point raised before this tribunal in the second round of appellate proceedings, as, we find from Para 2 of old tribunal order, a clear finding has been given that the assessee had indeed advanced monies to the broker under portfolio management scheme.
5. We also find that the decision of Hon’ble Calcutta High Court relied by the Learned AR in the case of CIT vs Coates of India Ltd reported in 232 ITR 324 (Cal) fully supports the view of the assessee. The relevant extract is reproduced herein below:-
Held, that what had been taken into consideration by the Commissioner of Income-tax (Appeals) and the Tribunal was the ability or feasibility of the recovery of the debt from the angle of the assessee and not of the debtor and in those circumstances both of them erred in law. Therefore, the Tribunal was not justified in law in deleting the disallowance of the bad debts.
6. We find that since the trade advance was made during the course of its business by the assessee, any loss on account of recoverability would automatically fall under the category of trade debt / receivable and hence is allowable as business loss. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Mysore Sugar Co. Ltd reported in (1962) 46 ITR 649 (SC) . The facts before the Hon’ble Apex Court and decision rendered thereon is given below:-“
Facts: The assessee who carried on the manufacture of sugar used to advance seedlings, fertilisers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered. A Committee appointed by the Government recommended that the assessee should ex gratia forgo some of its dues. The assessee accordingly waived its rights in respect of Rs. 2,87,44 and claimed this amount as a deduction under sections 10(2)(xi) and 10(2)(xv) of the income‑tax Act. The question was whether the amount of Rs.2,87,422 which was given represented a loss of capital or was a revenue expenditure:
Held, that so far as the assessee company was concerned it was merely making a forward arrangement for the next year’s crops and paying an amount in advance out of the price; there was no element of a capital investment in making the advance and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible.”
We find that the decision of Hon’ble Bombay High Court in the case of Harshad J. Choksi vs CIT reported in (2012) 25 taxmann.com 567 (Bom) also supports the view of the assessee. The question raised before the Hon’ble Bombay High Court and the decision rendered thereon is reproduced below:-
“Questions:
- Whether if an amount is held to be not deductible as a bad debt in view of non-compliance of the condition precedent as provided under section 36(2), could the same be considered as an allowable business loss?
- Whether, therefore, the amount of Rs. 44.98 lakhs could be considered as an allowable business loss?
Held:
- Section 28 imposes a charge on the profits or gains of business or profession. The expression ‘Profits and gains of business or profession’ is to be understood in its ordinary commercial meaning and the same does not mean total receipts. What has to brought to tax is the net amount earned by carrying on a profession or a business which necessarily requires deducting expenses and losses incurred in carrying on business or profession. The Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 has held that in assessing the amount of profits and gains liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental to it. [Para 10]
- On the basis of the aforesaid decision, it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee ‘s claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker. [Para 11]
- In fact, the Bombay High Court in the case of CIT R.B. Rungta & Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922. [Para 12]
- Therefore, the amount of Rs. 44.98 lakhs, which was held to be not deductible as bad debts in view of the provisions of section 36(2), could be considered as an allowable business loss. [Para 13]
8 In view of the aforesaid judicial decisions, we hold that the assessee is entitled to claim deduction towards write off of bad advances amounting to Rs. 1,99,08,500/- and we have no hesitation in directing the Learned AO to grant deduction towards the same. Accordingly, the grounds raised by the assessee in this regard are allowed.
