If brokerage offered to tax, the principal debt qualifies as a “bad debt” u/s 36(1)(vii) r.w.s. 36(2)

CIT vs. Shreyas S. Morakhia (Bombay High Court)

The assessee, a share broker, claimed deduction u/s 36(1)(vii) of Rs.28.24 lakhs as a “bad debt” being the amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf which had become irrecoverable. The AO rejected the claim on the ground that as the assessee had offered only the amount of brokerage as income and not the entire amount due from the client, the condition in s. 36(2) that the amount of bad debts must be taken into account in computing the total income was not satisfied. The CIT (A) & the Special Bench of the Tribunal (40 SOT 432) allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal: