CIT vs. DB (India) Securities (Delhi High Court)

DATE: (Date of pronouncement)
DATE: September 18, 2009 (Date of publication)

Click here to download the judgement (db_india_securities_broker_bad_debt.pdf)

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

The assessee, a broker, purchased shares of the value of Rs.1,06,10,247 on behalf of its sub-broker. The sub-broker made payment of Rs.64 lakhs. As the remaining amount of Rs.41,37,881 was not paid, the assessee did not deliver those shares to the client though it offered the brokerage to tax. Since the balance payment was not made even in the next year, the assessee claimed deduction of Rs. 41,37,881 as a “bad debt” u/s 36 (1) (vii). The Tribunal allowed the claim. On appeal by the Revenue to the High Court HELD:

(i) The contention of the Revenue that the said amount was not a “debt” u/s 36 (2) and, therefore, could not be treated as a “bad debt” was not acceptable because there was a valid transaction between the assessee and the sub-broker. The brokerage was offered to tax and assessed. The assessee had to make payment on behalf of the sub-broker and as he could not recover to the extent of Rs.41,37,881/-, that sum had to be treated as a “debt”.

(ii) However, as the assessee had retained the shares, the “bad debt” would have to be reduced by the sale proceeds of the said shares. The balance was allowable.

Note: The issue as to whether a share broker can claim the irrecoverable amounts due from clients as a “bad debt” u/ss 36 (1) (vii) r.w.s. 36 (2) is pending before the Special Bench, Mumbai in Shri Shreyas S. Morakhia. For other judgements on whether a broker can claim a “bad debt” or a “trading loss” see the Consolidated Digest of Case Laws.