Bad debts if not allowable u/s 36(2), would be allowable u/s 37 – Bombay HC


Harshad J Choksi v CIT (Income Tax Appeal No. 43 OF 1997 dated August 14, 2012) (Bom HC)

Background:

The assessee is a stock and share broker. During the assessment year 1991-1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the BSE. The AO held that the assessee was not entitled to claim the benefit of bad debts in respect of Rs.47.58 lacs, as the assessee has not satisfied the condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year. On Appeal, the Commissioner of Income Tax (Appeals) upheld the finding of the Assessing Officer to the extent of Rs.44.98 lacs after having allowed an amount of Rs.2.60 lacs as a business loss. 

On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of the Act, the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business. The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.

Assessee’s contentions:

  • The issue arising in the present reference stands concluded by the order of this court in the matter of Commissioner of Income Tax v. Shreyas S. Morakhia dated 28th February, 2012 in ITA No. 89 of 2011. It has been held therein that even if a part of the bad debts has been taken into account while computing the income of the assessee, and offered for tax in a earlier year, the same would be sufficient satisfaction of Section 36(2) of the Act.
  • In any view of the matter, even if the amount of Rs.44.98 lacs is not allowable as a bad debt, the same should be considered as a allowable business loss in computing the profits and gains of business and profession under Section 28 of the Act.
  • Any loss which occurs in carrying on the business and is related to the business operation is entitled to be deducted to arrive at the profits and gains of a business under Section 28 of the Act. In support thereof, he relies upon the decision of this court in the matter of Commissioner of Income Tax v. R.B. Rungta & co. reported in 50 ITR page 233.

Tax authority’s arguments:

  • The decision of this court in the matter of Shreyas S. Morakhia (Supra) will not apply to the present facts, as in this case the loss arose on account of a fellow member of the stock exchange not honoring its commitment
  • The amount claimed as bad debts is specifically provided for under section 36 of the Act and in such cases it is not permissible to apply any other section of the Act to determine the allowability of the same as a deduction

HELD:

  • Section 28 of the Act 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.
  • The Supreme Court in the matter of Badridas Daga v. Commissioner of Income Tax, reported in 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.
  • 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.

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