SHRI R S SYAL and SHRI VIVEK VARMA JJ Appellant by Shri Deepak Tralshawala Respondent by Shri P C Maurya ORDER Per VIVEK VARMA JM The appeals are filed by the assessee for assessment years 2005 06 and 2006 07 against the orders of CIT A IV Mumbai dated 01 08 2008 and 31 03 2009 As some grounds involved in the two impugned years are common we are for the sake of convenience passing a consolidated order covering both the years 2 The assessee had filed grounds of appeal along with form No 36 These grounds have since been revised in both the years we therefore are proceeding with the revised grounds of appeal 3 The assessee company engaged in buying and selling of shares on behalf of clients engaged in debt market for buying and selling of Govt Bonds Corporate Bonds on behalf of the corporate 4 The first ground of appeal in assessment year 2005 06 pertains to disallowance of Rs 4 05 823 under section 14A of the I T Act The facts emerging from the assessment order are that the assessee earned dividend of Rs 6 58 333 on shares and mutual funds and Rs 39 07 070 from long term capital gains Against these incomes the assessee informed the AO that no expenditure has been incurred The AO observed that ldquo a certain percentage of the expenses claimed by the assessee would be definitely attributable to the tax free income earned by the assessee rdquo The AO relied on the decision of ACIT v s Citicorp Finance India Ltd reported in 108 ITD 457 Mum and observed ldquo it is difficult to ascertain the exact amount of expenditure incurred to earn the tax free income rdquo But the following expenses are directly or indirectly related to the earning of exempt income A Directors remuneration Rs 14 64 000 B Stock Exchange expenses Rs 14 34 738 The AO therefore estimated the ratio of exempt income to total income which came at 14 and applied this 14 on Rs 28 98 738 aggregate of the above two figures He accordingly computed the disallowance at Rs 4 05 823 and added it back to the income of the assessee 5 Aggrieved the assessee approached the CIT A who has restored the issue to the file of the AO with the direction ldquo the appellant is required to furnish computation as per Rule 8D to the AO and the AO shall after verifying the same recompute the disallowance u s 14A of the I T Act with respect to exempt dividend income and also of exempt long term capital gain rdquo 6 The assessee not satisfied is now before the ITAT 7 The Authorised Representative pointed out that the issue is now covered by the decision of the Hon ble jurisdictional High Court at Bombay in the case of Godrej and Boyce Mfg Co Ltd vs DCIT reported in 328 ITR 81 wherein the Hon ble Bombay High Court has held that application of Rule 8D is prospective and shall apply from assessment year 2008 09 The Hon rsquo ble High Court however says a reasonable disallowance may be made against the income claimed to be exempt 8 The A R therefore pleaded that the issue is now settled the computation of disallowance has to be made at a reasonable basis considering the fact that the assessee has not incurred any expenditure specifically for the earning of exempt income 9 The DR relied upon the decisions of the revenue authorities 10 We have heard the arguments and perused the orders of the revenue authorities and have also gone through the order of the Hon ble jurisdictional High Court As per the decision of the Hon ble Bombay High Court in the case of Godrej and Boyce Mfg Co Ltd vs DCIT supra some reasonable disallowance has to be made in this case we would respectfully following the decision of the Hon ble Bombay High Court set aside the order of the CIT A on this issue and direct the AO to recompute the disallowance at a reasonable figure The ground is allowed for statistical purposes 11 Ground No ii is against the disallowance of Rs 5 78 183 claimed as debts arising from share trading business In the assessment order the AO observed as under 6 2 The assessee rsquo s representative vide their letter dated 24 09 2007 submitted as under mdash S N Client Code No Name of the Party Address Amt of Bad Debts Rs 1 4243 M s Harsha Pranav Sec P Ltd 416 Kubera Towers Narayanguda Hyderabad mdash 500 029 Andhra Pradesh 66 780 2 4254 M s Vivensari Financial Services Ltd 416 Kubera Towers Narayanguda Hyderabad mdash 500 029 Andhra Pradesh 5 11 403 Total 5 78 183 With reference to the above they are our regular clients and they have started and securities business with us in the year 1999 2000 These above transactions through Bombay Stock Exchange and we have executed the sauda on behalf of them and the contract note Bill being delivered to them We have also sent the periodic statement of account to them in time to time In spite of our repeated reminders and telephonic communications they haven rsquo t made the above payments After considering the fact that the above amount is not recoverable from the above two parties we have claimed for bad debts account in the financial year 2004 05 Assessment Year 2005 06 ldquo 6 3 The explanation of the assessee was considered but not found acceptable on the following grounds Claim as Bad Debt u s 36 1 vii and 36 2 Non satisfaction of provision of section 36 1 vii Without prejudice even if the amount outstanding is considered to be a debt then also it cannot be said that it had become Bad A bad debt is a debt which is worthless or the debt which is not worthy of being recovered Thus if a debt is bad in nature the chances of its recovery are bleak and remote Assessee has not furnished any evidence in support of its claim that the said debt had become lsquo bad rsquo It has not produced anything in respect of its claim that the said party had expressed its inability to make payment also no documents have been furnished with regard to claim that efforts were made to collect that dues Further there is nothing brought on record to show that the said defaulting party rsquo s weak financial capacity The debt has not been shown to have become bad Non satisfactions of conditions under section 36 2 ldquo The allowability of claim u s 36 1 vii is further governed by the Sec 36 2 of the I T Act Section 36 2 provides that unless such debt or part thereof have been included in the computation of income of previous year or earlier previous years it can not be allowed as bad debt u s 36 i vii This has significant implications in the cases of shares and stockbrokers The broker act as agents and facilitate transactions between principals In the case of share and stock brokers what is credited to profit and loss account is the from the purchase or sale on behalf of the clients Thus in case the client does not pay in the future this debt can not partake the nature of lsquo bad debt rsquo allowable u s 36 1 vii as this amount of debt has not been included in the computation of income as required u s 36 2 Accordingly this being a case of stockbroker and the debt being related to his client the debt cannot be allowed as bad debt as this amount has not been included in the computation of 7 income as required u s 36 2 rdquo The AO further observed ndash Thus if the assessee has not collected sufficient margins and also chosen not to close out the transactions when dues are not received from clients it would be by infracting the above said provisions Hence the amounts remaining not collected from clients it would be expenditure due to infracting the above said provisions In view of Explanation to section 37 any expenditure towards infraction of law is not allowable This view is further fortified by the decision in the case of ACIT vs Subhash Chand Shorewala 91 TTJ Del 57 wherein it is held that the amount paid by the assessee as a result of its failure to adhere to regulatory procedure mandated by the Delhi Stock Exchange in relation to the assessee rsquo s business of broking is not allowable It has also been held in the case of Kapoor Sons and Co Vs ITO 7 lTD Del 319 that an infraction of law committed in the carrying on of a lawful business cannot be treated as a normal incidence of business The rules and regulations of the stock exchange are as statutory in character as has been held in the case of Hemendra V Shah Vs Stock Exchange Bombay by the Bombay High Court The facts show that the amount of bad debt in the assessee rsquo s case would be nothing but expenditure incurred towards violation of Rules and regulations of the stock exchange and SEBI specially the impugned SEBI circular hence not allowable m view of explanation to section 37 The details filed by the assessee show that sufficient margins have not been collected and also transactions have not been closed out with its client The said debt became the liability of the assessee only because assessee failed to carry on the business as laid down in the regulations and notifications issued Hence in view of the foregoing discussion allowing the bad debt as business loss also cannot be considered as the said loss is towards violation of law and therefore not allowable in view of explanation to section 37 and abovereferred decisions However and without prejudice to the above even if assessee rsquo s claim of business loss is considered the same cannot be allowed because the said loss has not crystallized during the relevant previous year and admittedly in earlier previous years Without prejudice to the above if the amount outstanding is considered as debt then the un recovered debts cannot be allowed as business loss for the reason that there being specific provisions for allowability of bad debts the matter cannot be considered under other provisions Reliance in this regard also can be had from the decision of ITAT Bombay Bench in the case of Harshad J Choksi 52 lTD 511 wherein it has been held that loss on account of BAD DEBTS can only be allowed with reference to the fulfillment of conditions contained u s 36 2 The applicability of the specific provision cannot be ignored Further in a recent decision reported in 291 ITR 228 Raj in Kashmir Trading Co Vs DCIT the Hon rsquo ble Rajasthan High Court has held that the requirement of sub sec 2 of sec 36 is to be established even in a case where the sum is written off in the books of account The enquiry is to be made only when debt is written off in the books of account It is a condition precedent before any claim for deduction on account of debt becoming bad is inquired into Thus the assessee is bound to explain the measures he has taken before arriving at the conclusion that the debt has become bad Accordingly in view of above discussion claim of bad debts of Rs 5 78 183 is disallowed and added to the net result declared by the assessee rdquo 13 Aggrieved the assessee approached the CIT A who set aside the issue to the file of the AO with the direction ldquo to allow the debt of the expenditure of brokerage income shown with respect to each party in any previous year rdquo 14 Since the issue is already restored to the AO we find no reason to give a distinct finding hence we shall not disturb the decision of the CIT A who has restored the issue with specific directions we endorse the same and uphold the order of the CIT A We hold accordingly 15 Grounds No iii and iv have not been pressed and hence these are dismissed as not pressed 16 Ground No v herein and ground No 1 in assessment year 2006 07 are common and relate to disallowance of STT payments 17 The AO observed ldquo The assessee has debited to the Profit and Loss A c Securities Transaction Tax amounting to Rs 3 25 483 which has not been added to the computation of income even though it is not an allowable expenditure as per Sec 40 ib The assessee was asked why this amount has not been added back The A R of the assessee explained that this amount pertained to client on whose behalf we have executed the saudas and the STT pertaining to those saudas is borne by the assessee We have debited this amount which is a lawful expense for procuring the business during the year 2004 05 The arguments of the assessee have been considered but the same are not acceptable since STT paid is specifically prohibited under the Act as a deduction The claim with regard to rebate could have been made by the concerned clients Or if the clients have declared capital gains such a deduction is specifically prohibited by proviso 5 to section 48 But no evidence brought on record to refute the claim Further an expenditure which is specifically prohibited cannot be allowed as an expenditure even if it pertains to some one else rdquo 18 The assessee not satisfied approached the CIT A who observed as under ldquo a The provisions of section 40 a ib clearly prescribes that the amount of STT shall not be deducted in computing income chargeable under the head ldquo Profits and Gains of Business or Profession rdquo notwithstanding anything contrary in section 30 to 38 of the l T Act Thus he claim of appellant is not to be allowed It has been held in cases of Forbes Campbell and Co Ltd vs CIT 206 ITR 495 Born and CIT vs Rajaram Bandekar and Sons Shipping Pvt Ltd 237 ITR 628 Born that specific provision shall prevail upon general provision Therefore the claim is not at all allowable u s 37 when the specific provision of section 40 a ib clearly states that the deduction of STT is not be allowed notwithstanding anything contrary in section 30 to 38 of the l T Act b Further the legislative intentions are absolutely clear that the payment of STT be not allowed as deduction as is clear from section 40 a ib it tax rebate u s 88E is allowable in case of trader of share and not at all allowable in case of investor in shares as provided in 5th Proviso to section 48 Although a trader get compensated for STT paid but no such tax rebate is available to an investor The investors who are not entitled to any rebate benefit of STT have however passed the STT amount to brokers in the form of higher brokerage by the STT amounts The broker has accepted the liability to bear the STT on behalf of the clients but the broker is not allow to claim tax rebate u s 88E as the sum is available only to actual buyers and sellers and not to brokers It is a kind of tax planning wherein the investor clients of the assessee are trying to claim the deduction of STT amount by way of higher brokerage and the assessee is trying to claim deduction sec 37 Su................Income Tax - Case Law
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