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| Bombay HC gives relief to brokers for deduction on bad debts |
| Palak Shah / Mumbai Feb 29, 2012, 00:03 IST |
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In a major relief to equity brokers, the conflicts arising on their "bad debt" claims have been put to rest by the Bombay High Court. Affirming to a ruling by Mumbai Income Tax (I-T)department, the court on Tuesday said stock brokers were eligible to claim deduction of the entire amount due to them from clients as a bad debt, even though only the brokerages is offered as income.
The judgement was given by Justice D Y Chandrachud and M S Sanklecha on Tuesday.
The deductions claimed on bad debts incurred by stock brokers due to amounts payable from their clients has been controversial.
This was due to tax departments and courts in different states of the country issuing contradictory rulings in the past.
In fact, even the Mumbai I-T tribunal had issued contradictory orders on this issue in the past.
However, in the case of broker Shreyas Morakhia, the Mumbai I-T special bench had ruled in the tax payers’ favour and observed that brokerage receivable on purchase of shares for his clients is part of the debt receivable by a broker from client.
"Once such brokerage is credited to the Profit and Loss account of the stock broker and it is taken into account in computing his taxable income, it should be regarded as if the entire debt has been 'taken into account in computing the income' of the tax payer prior to claiming the deduction," the I-T department had said in its ruling earlier. This was affirmed by the Bombay HC on Tuesday.
Experts from tax advisory firms said on Tuesday's judgement will help stock brokers across the country to deal with the tax authorities, which have different views on the subject.
The crux of the issue was how provisions in the Indian Income-Tax Act, 1961, dealing with deductibility of bad debts incurred by tax payers, was to be interpreted?
Currently, the Act contains a specific provision, which allows tax payers in India to claim a tax deduction for any bad debts or part thereof, which is written off as irrecoverable in their books of accounts.
The Act provides that the deductibility of bad debts should be subject to certain other conditions.
One such key condition that the debt is 'taken into account in computing the income of the tax payer' prior to claiming the deduction or 'the debt should represent monies lent in the ordinary course of the business of banking / money lending'.
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