Bad debts allowed to share broker for amount not recovered from the client towards purchase of shares
Dy. CIT Vs. Shri Shreyas S. Morakhia (ITA No. 3374 / Mum / 2004)
· The taxpayer, a share broker, purchased certain shares on behalf of the client. However, he could not recover the amount due from the client and claimed deduction for such bad debt in the return of income.
· The Assessing Officer rejected the claim of the taxpayer. However, the Commissioner of Income-tax (Appeals) allowed the deduction.
· Aggrieved by the order, Revenue preferred an appeal before the Tribunal.
Issue before the Tribunal
· Whether the taxpayer was entitled to deduction for bad debt arising on account of non-recovery of amount paid for purchase of shares on behalf of his client?
Contentions of the Revenue
· Bad debt cannot be allowed as deduction as the debt was not taken into account in computing the income of the taxpayer, as required under Section 36(1 )(vii) of the ITA of the Income-tax Act, 1961 (the ITA).
· Loss cannot be allowed as it was suffered owing to breach of SEBI guidelines, which were framed to safeguard the interest of the brokers.
· Exception (Bad debt is allowed despite it is not taken into account for computing the income) provided under the ITA for allowance of bad debt, available to the taxpayers engaged in money lending / banking business cannot be extended to share brokers.
Contentions of the Taxpayer
It is not necessary that the entire amount of debt had to be taken into account in computing the income of the taxpayer. Even if a part of the debt was considered, it was sufficient compliance of provisions of ITA for allowance of such bad debt as held in the case of CIT v. A P V. T Veerabhadra Rao, K. Koteshwar Rao & Co.  155 ITR 152 (SC).
Brokerage is a part of debt receivable by the share broker and once such brokerage has been credited to the Profit and Loss account, any bad debt shall be allowed as deduction. ( CIT v. DB (India) Securities Ltd.  318 ITR 26 (Del); CIT v. Bonanza Portfolio Ltd.  320 ITR 178 (Del).)
Observations and Ruling of the Tribunal
If the interest is offered to tax, the loan is considered to be “taken into account in computing the income of the assessee” and any bad debt on such amount qualifies for deduction. The aforesaid principle equally applies to a share broker.
Brokerage is a part of debt receivable by the share broker against purchase of shares and once such brokerage is considered while computing the income, the bad debt shall be allowed as deduction.
The loss cannot be equated to expenditure incurred by the taxpayer for any purpose which is an offence or which is prohibited by law. Reliance was placed on the Bombay High Court decision where bad debt on account of forbidden wayada transactions was held allowable (CIT v. Pranlal Kesurdas  49 ITR 931 (Bom)).
Where the taxpayer has actually suffered a loss as a result of non-recovery, the allow ability was required to be considered under the provisions of the ITA. It was not relevant whether such loss had been suffered as a result of not following the SEBI guidelines.
Exception provided under the ITA for allowance of bad debt to money lending / banking business is only clarificatory in nature and adverse inference cannot be drawn against the taxpayer.
Accordingly, bad debt was allowed as a deduction.