CIT vs. Bonanza Portfolio (Delhi High Court)

Share broker is eligible to claim “bad debts” u/s 36 (1) (vii) / 36 (2)

The assessee, a share broker, purchased shares on behalf of its client and paid for them. The brokerage on the said transaction was offered to tax. As the client did not pay for the shares, the assessee wrote off the amount due and claimed the same as a bad debt u/s 36 (1) (vii). The AO rejected the claim on the ground that as the said “debt” had not “been taken into account in computing the income”, the conditions of s. 36 (2) (i) were not satisfied. This was confirmed by the CIT (A). On appeal, the Tribunal upheld the claim on the ground that s. 36 (2) (i) required “such debt or part thereof” to be taken into account in computing the income and as the brokerage had been offered to tax, s. 36 (2) (i) was satisfied. On appeal by the Revenue, HELD dismissing the appeal:

(i) The assessee being a broker, the fact that it paid for the shares did not make it an “investment” for the assessee. The transaction was one of brokerage on purchase / sale on behalf of the client;

(ii) The money receivable from the client for the said shares was a “debt” and since it became bad, it was rightly treated as a “bad debt”;

(iii) Since the brokerage payable by the client was a part of the debt and that debt had been taken into account in computing the income, the conditions of s. 36 (2) (i) read with s. 36 (1) (viii) were satisfied and the entire bad debt was allowable as a deduction.