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Case Law Details

Case Name : The Commissioner of Income Tax Vs Shri Shreyas S. Morakhia (Bombay High Court)
Appeal Number : Income Tax Appeal No. 89 of 2011
Date of Judgement/Order : 28/02/2011
Related Assessment Year :
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In a major relief to equity brokers, the conflicts arising on their “bad debt” claims have been put to rest by the Bombay High Court. Affirming to a ruling by Mumbai ITAT special bench In the case of DCIT vs. Shreyas S. Morakhia 40 SOT 432, the court on Tuesday said stock brokers were eligible to claim deduction of the entire amount due to them from clients as a bad debt, even though only the brokerages is offered as income.

HC has followed Delhi High Court judgment in Commissioner of Income Tax Vs. Bonanza Portfolio Ltd. [2010] 320 ITR 178 in which it was held as follows:-

“… the money receivable from the client has to be treated as “debt” and since it became bad, it was rightly considered as “bad debt” and claimed as such by the assessee in the books of account. Since this bad debt occurred in the year in question, it was shown by the assessee in that manner. Since the brokerage payable by the client is a part of the debt and that debt had been taken into account in the computation of the income, the conditions stipulated in sub-section (2) of section 36 read with section 36(1)(vii) stand satisfied in this case.  Hence, the question of law stands decided against the Revenue and in favour of the assessee.”

HC has held as follows:-

The value of the shares transacted by the assessee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. The brokerage having been credited to the profit and loss account of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. The fact that the liability to pay the brokerage may arise, as contended by the Revenue, at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or as the case may be purchase of shares. Since both form a component part of the debt, the requirements of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. Before concluding, we again take note of the fact that in paragraph 31 of its impugned decision the Tribunal has left the issue as regards the value of the shares which remain in the hands of the assessee which has to be adjusted against the amount receivable from the client to be determined before the regular Bench of the Tribunal following the view of the Special Bench. The view which has been taken by the Special Bench is, with respect, in accordance with law. We accordingly dispose of the appeal by answering the question of law as formulated in the affirmative and in favour of the assessee.

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