I am a share broker. I bought shares for a client, he never paid, and I have written the whole amount off. The assessing officer allows me only the brokerage and says the value of the shares was never my income, so it was never my debt. Is that right?
No. The Bombay High Court held that a share broker is entitled to deduction of the whole of the irrecoverable amount, not merely the brokerage. The debt owed by the client is a single debt arising out of a single transaction, and it comprises the value of the shares purchased on the client's behalf as well as the brokerage charged on the purchase. Section 36(2)(i) requires that the debt, or part of it, has been taken into account in computing the income of the assessee. The brokerage is credited to the profit and loss account and is assessed as business income, so part of the debt has been taken into account, and the section is satisfied for the whole of the debt. The Court pointed to the bill itself, which shows the rate, the quantity and the total value of the shares as well as the brokerage, and held that once the brokerage has been taxed as business income it is evident that within the meaning of section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee. The appeal was disposed of by answering the question of law in the affirmative and in favour of the assessee, with no order as to costs. One thing was left over: the value of any shares still in the broker's hands has to be adjusted against what is receivable from the client.
Decided by the High Court (Bombay High Court - D.Y. Chandrachud and M.S. Sanklecha JJ) on 2012-02-28, reported as [2012] 342 ITR 285 (Bom). It bears on section 36(1)(vii), section 36(2), section 36(2)(i), section 260A, section 365 (Act of 2025) of the Income Tax Act 1961, in Deductions & Disallowances and Appeals matters.
For a broking business this is the difference between recovering a commission and recovering a settlement. The brokerage on a purchase is a fraction of one per cent; the value of the shares is the whole of it. An officer who allows only the brokerage has disallowed almost the entire claim while appearing to have allowed it, and that is how these disallowances are usually framed. The judgment removes the footing for it by fixing what the debt is before asking what was taxed. One transaction, one bill, one debt made up of the price of the shares and the broker's charge - and a statutory condition that asks only whether the debt or part of it went into the computation of income. The value of the case beyond broking is the same sentence read generally. Wherever an intermediary lays out money for a principal and bills it on with his own charge, the department's instinct is to say the pass-through was never income and so was never a debt. This is the answer, and it is an answer on the words of the provision rather than on the facts of share broking. Two things keep it honest. The Court left the adjustment for shares still held by the broker exactly where the Tribunal had left it, so the principle does not carry the quantum. And section 36(2) was the only question before the Court; the separate requirement that the debt be written off as irrecoverable in the accounts is untouched by it, and an officer beaten on the first point will usually take the second.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee carried on business as a share broker. For the assessment year 1998-99 he returned a total income of Rs 67,797 and claimed a deduction of Rs 28.24 lakh, being amounts due from clients in respect of share transactions effected on their behalf which had become irrecoverable. The Assessing Officer disallowed the claim, taking the view that the broking business had ceased and that no steps had been taken to recover the money. The Commissioner (Appeals) allowed it, finding that the assessee continued to act as a sub-broker. The Revenue appealed to the Tribunal, and because coordinate benches had taken conflicting views on whether a share broker's bad debt extends beyond the brokerage, a Special Bench was constituted. The Special Bench decided the point on 16 July 2010. It also left one matter over, recording in its paragraph 31 that the value of the shares remaining in the hands of the assessee, which has to be adjusted against the amount receivable from the client, was to be determined by the regular Bench. The Revenue carried the question to the Bombay High Court in Income Tax Appeal No. 89 of 2011.
The question of law was framed as "Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him." The Court answered it in the affirmative and in favour of the assessee. The debt owed by the client comprises the value of the shares transacted on his behalf and the brokerage payable by him, and both arise out of the same transaction. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the securities transaction tax and the service tax. The brokerage on the purchase of the shares has been taxed in the hands of the assessee as its business income, and once that is so, in the Court's words, "it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee." The condition in section 36(2)(i) is therefore satisfied for the debt as a whole, and the deduction is not confined to the brokerage. The Court held that the view taken by the Special Bench was, with respect, in accordance with law, and disposed of the appeal by answering the question in the affirmative and in favour of the assessee, with no order as to costs. It recorded, before concluding, that the Tribunal had left the adjustment for the value of shares remaining in the assessee's hands to the regular Bench.
The department's argument had an appealing simplicity. Section 36(2)(i) lets a bad debt be written off only if the debt has been taken into account in computing the income of the assessee. A broker's income is his brokerage. The purchase price of the shares was never his income; it was the client's money passing through his hands. So, said the officer, the brokerage may be written off and the rest may not. The Court's answer starts one step earlier, with what the debt actually is. When a broker buys shares for a client he pays the market for them and bills the client. What the client then owes is one sum, made up of what the shares cost and the broker's charge for getting them. The bill shows both, along with the transaction tax and the service tax, and there is no second transaction and no second debt. Splitting that single obligation into a recoverable part and an unrecoverable part is an operation the transaction does not support. Once the debt is seen as one debt, the words of section 36(2)(i) do the rest, and the Court reads them as they are written. The section does not require that the whole of the debt has been taken into account in computing income. It is satisfied where the debt, or part of it, has been. The brokerage is a part of this debt and it has been credited to the profit and loss account and assessed as business income. The condition is met, and it is met for the debt, not for a fraction of it. The Court took support from the earlier authorities on the same construction, including the Supreme Court's decision in T. Veerabhadra Rao and the Delhi High Court's decision in Bonanza Portfolio Ltd, and held that the Special Bench had read the provision correctly. There is a limit in the judgment and the Court put it in the last paragraph rather than burying it. Shares bought for a defaulting client may still be with the broker. To that extent he has not lost the money; he holds the asset. The Tribunal had left the value of those shares, to be adjusted against the amount receivable, for the regular Bench to determine, and the High Court recorded that without disturbing it. So the principle settles what the debt is; the arithmetic still has to account for what the broker kept.
Once that is so, it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court held that a share broker is entitled to deduction of the whole of the irrecoverable amount, not merely the brokerage. The debt owed by the client is a single debt arising out of a single transaction, and it comprises the value of the shares purchased on the client's behalf as well as the brokerage charged on the purchase. Section 36(2)(i) requires that the debt, or part of it, has been taken into account in computing the income of the assessee. The brokerage is credited to the profit and loss account and is assessed as business income, so part of the debt has been taken into account, and the section is satisfied for the whole of the debt. The Court pointed to the bill itself, which shows the rate, the quantity and the total value of the shares as well as the brokerage, and held that once the brokerage has been taxed as business income it is evident that within the meaning of section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee. The appeal was disposed of by answering the question of law in the affirmative and in favour of the assessee, with no order as to costs. One thing was left over: the value of any shares still in the broker's hands has to be adjusted against what is receivable from the client. This was decided by the High Court (Bombay High Court - D.Y. Chandrachud and M.S. Sanklecha JJ) and bears on section 36(1)(vii), section 36(2), section 36(2)(i), section 260A, section 365 (Act of 2025) of the Income Tax Act 1961. It is reported as [2012] 342 ITR 285 (Bom). For a broking business this is the difference between recovering a commission and recovering a settlement. The brokerage on a purchase is a fraction of one per cent; the value of the shares is the whole of it. An officer who allows only the brokerage has disallowed almost the entire claim while appearing to have allowed it, and that is how these disallowances are usually framed. The judgment removes the footing for it by fixing what the debt is before asking what was taxed. One transaction, one bill, one debt made up of the price of the shares and the broker's charge - and a statutory condition that asks only whether the debt or part of it went into the computation of income. The value of the case beyond broking is the same sentence read generally. Wherever an intermediary lays out money for a principal and bills it on with his own charge, the department's instinct is to say the pass-through was never income and so was never a debt. This is the answer, and it is an answer on the words of the provision rather than on the facts of share broking. Two things keep it honest. The Court left the adjustment for shares still held by the broker exactly where the Tribunal had left it, so the principle does not carry the quantum. And section 36(2) was the only question before the Court; the separate requirement that the debt be written off as irrecoverable in the accounts is untouched by it, and an officer beaten on the first point will usually take the second. If it applies to you, the first step is this: Produce the contract note or bill. It is the document the Court relied on, because it shows on its face that the rate, the quantity, the total value of the shares and the brokerage all arise out of one transaction with one client.
The assessee carried on business as a share broker. For the assessment year 1998-99 he returned a total income of Rs 67,797 and claimed a deduction of Rs 28.24 lakh, being amounts due from clients in respect of share transactions effected on their behalf which had become irrecoverable. The Assessing Officer disallowed the claim, taking the view that the broking business had ceased and that no steps had been taken to recover the money. The Commissioner (Appeals) allowed it, finding that the assessee continued to act as a sub-broker. The Revenue appealed to the Tribunal, and because coordinate benches had taken conflicting views on whether a share broker's bad debt extends beyond the brokerage, a Special Bench was constituted. The Special Bench decided the point on 16 July 2010. It also left one matter over, recording in its paragraph 31 that the value of the shares remaining in the hands of the assessee, which has to be adjusted against the amount receivable from the client, was to be determined by the regular Bench. The Revenue carried the question to the Bombay High Court in Income Tax Appeal No. 89 of 2011. The matter was decided on 2012-02-28 by the High Court (Bombay High Court - D.Y. Chandrachud and M.S. Sanklecha JJ). On those facts the High Court held as follows. The question of law was framed as "Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him." The Court answered it in the affirmative and in favour of the assessee. The debt owed by the client comprises the value of the shares transacted on his behalf and the brokerage payable by him, and both arise out of the same transaction. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the securities transaction tax and the service tax. The brokerage on the purchase of the shares has been taxed in the hands of the assessee as its business income, and once that is so, in the Court's words, "it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee." The condition in section 36(2)(i) is therefore satisfied for the debt as a whole, and the deduction is not confined to the brokerage. The Court held that the view taken by the Special Bench was, with respect, in accordance with law, and disposed of the appeal by answering the question in the affirmative and in favour of the assessee, with no order as to costs. It recorded, before concluding, that the Tribunal had left the adjustment for the value of shares remaining in the assessee's hands to the regular Bench.
The department's argument had an appealing simplicity. Section 36(2)(i) lets a bad debt be written off only if the debt has been taken into account in computing the income of the assessee. A broker's income is his brokerage. The purchase price of the shares was never his income; it was the client's money passing through his hands. So, said the officer, the brokerage may be written off and the rest may not. The Court's answer starts one step earlier, with what the debt actually is. When a broker buys shares for a client he pays the market for them and bills the client. What the client then owes is one sum, made up of what the shares cost and the broker's charge for getting them. The bill shows both, along with the transaction tax and the service tax, and there is no second transaction and no second debt. Splitting that single obligation into a recoverable part and an unrecoverable part is an operation the transaction does not support. Once the debt is seen as one debt, the words of section 36(2)(i) do the rest, and the Court reads them as they are written. The section does not require that the whole of the debt has been taken into account in computing income. It is satisfied where the debt, or part of it, has been. The brokerage is a part of this debt and it has been credited to the profit and loss account and assessed as business income. The condition is met, and it is met for the debt, not for a fraction of it. The Court took support from the earlier authorities on the same construction, including the Supreme Court's decision in T. Veerabhadra Rao and the Delhi High Court's decision in Bonanza Portfolio Ltd, and held that the Special Bench had read the provision correctly. There is a limit in the judgment and the Court put it in the last paragraph rather than burying it. Shares bought for a defaulting client may still be with the broker. To that extent he has not lost the money; he holds the asset. The Tribunal had left the value of those shares, to be adjusted against the amount receivable, for the regular Bench to determine, and the High Court recorded that without disturbing it. So the principle settles what the debt is; the arithmetic still has to account for what the broker kept. In the words reproduced by the source cited on this page: "Once that is so, it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee."
It was decided by the High Court on 2012-02-28 and is reported as [2012] 342 ITR 285 (Bom). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 36(1)(vii), section 36(2), section 36(2)(i), section 260A, section 365 (Act of 2025), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question of law was framed as "Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him." The Court answered it in the affirmative and in favour of the assessee. The debt owed by the client comprises the value of the shares transacted on his behalf and the brokerage payable by him, and both arise out of the same transaction. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the securities transaction tax and the service tax. The brokerage on the purchase of the shares has been taxed in the hands of the assessee as its business income, and once that is so, in the Court's words, "it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee." The condition in section 36(2)(i) is therefore satisfied for the debt as a whole, and the deduction is not confined to the brokerage. The Court held that the view taken by the Special Bench was, with respect, in accordance with law, and disposed of the appeal by answering the question in the affirmative and in favour of the assessee, with no order as to costs. It recorded, before concluding, that the Tribunal had left the adjustment for the value of shares remaining in the assessee's hands to the regular Bench. It arises in Deductions & Disallowances and Appeals matters, on section 36(1)(vii), section 36(2), section 36(2)(i), section 260A, section 365 (Act of 2025) of the Income Tax Act 1961, and was decided by Bombay High Court - D.Y. Chandrachud and M.S. Sanklecha JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the brokerage on that very transaction went into the profit and loss account and was assessed as business income. That is the whole of the section 36(2)(i) argument; without it the argument does not start. Claim the debt as one figure, not two. The point of the case is that value and brokerage are components of a single debt, so the requirement that part of the debt was taken into account carries the rest. Adjust for shares you still hold. The Court recorded that the Tribunal had left the value of the shares remaining in the assessee's hands, to be set against the amount receivable, for determination by the regular Bench. A claim that ignores that adjustment invites a reduction you cannot resist. Deal with the write-off separately. Section 36(2) is about whether the amount qualifies as a debt; whether it has been written off as irrecoverable in the accounts of the previous year is a distinct condition in section 36(1)(vii), and an officer refused on the first ground will often fall back on the second. If the officer objects that the broking business has since been given up or that no recovery proceedings were taken, keep the two objections apart from the section 36(2) point and answer each on its own footing.
Still good law. The decision is settled and is followed routinely. The Gujarat High Court followed it in Principal Commissioner of Income Tax v Shah Investor's Home Ltd on 4 May 2017, setting out the reasoning of paragraph 10 word for word. The Tribunal at Mumbai applied it in Sharekhan Ltd on 3 July 2018 and in Motilal Oswal Securities Ltd on 28 December 2018, at Chennai in Systematix Shares and Stocks and at Jaipur in Data Infosys Limited, and it is the decision cited whenever an officer confines a broker's bad debt to the brokerage. Most of those orders print the citation as 342 ITR 285 (Bom); the Gujarat High Court prints 343 ITR 225, so check the report you are citing from. The reasoning is not confined to share broking. What it decides is a question about the words of section 36(2)(i): whether the condition is satisfied for the whole of a debt when only a component of it has entered the computation of income. The answer is that it is, because the section speaks of the debt or part thereof. Any intermediary who bills a principal for a cost he has laid out plus his own charge is on the same ground, and the argument runs the same way. What the case does not settle is the amount. The Court expressly left standing the Tribunal's direction that the value of shares remaining in the broker's hands is to be adjusted against the amount receivable from the client. A claim built on this judgment which ignores that adjustment is not supported by it. Nor does the case answer the other conditions. Section 36(1)(vii) requires the debt to be written off as irrecoverable in the accounts of the previous year, and section 36(2) carries further requirements about the year. Those were not what the question of law was about. The Income-tax Act, 1961 was repealed on 1 April 2026 by section 536(1) of the Income-tax Act, 2025, and section 536(2)(c) continues it for proceedings about tax years beginning before that date, so this remains the governing law for those years. The successor to section 36(1)(vii) and section 36(2) has not been established on the department's own pages and is therefore not stated here; an appeal to the High Court under section 260A, which is what this was, is now section 365 of the 2025 Act. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This record was built from the judgment's own text, and the question of law, the operative reasoning and the disposal were each checked before being used. The judgment was read on its own page, in printed form: the Bombay High Court, 28 February 2012, D.Y. Chandrachud and M.S. Sanklecha JJ, in Income Tax Appeal No. 89 of 2011. Every passage relied on here was located in that text and read in the paragraphs around it, and the question of law, the paragraph 10 reasoning and the paragraph 14 disposal were taken from it word for word. The sentence quoted on this page was then found in another court. The Gujarat High Court set out paragraph 10 of this judgment as a direct quotation on 4 May 2017 in Principal Commissioner of Income Tax v Shah Investor's Home Ltd, and its text of the quoted sentence matches word for word. That is the corroboration the quotation rests on. The substance was checked against a second forum as well. The Tribunal at Mumbai in Sharekhan Ltd, decided 3 July 2018, applies the decision, prints the citation 342 ITR 285 (Bom), and carries the propositions this page states: that the value of the shares transacted on behalf of clients is as much a part of the debt as the brokerage, and that where both form components of the debt the requirement of section 36(2)(i) is fulfilled if a part is taken into account. That order renders them in the past tense, as a report of what the High Court held rather than as the Court's own prose, so it has been used here for substance only and none of its wording has been carried across. The paragraph 14 disposal was read on the judgment's own page and is stated on this page in ordinary words rather than quoted, because no second court reproducing it could be found. One caution for anyone citing it. The case is filed on the taxpayer's side and belongs there, but it is marked as a trap for the quantum. It settles what the debt is and it settles that section 36(2)(i) is met for the whole of it; it does not settle how much is deductible, because the shares the broker still holds have to come off the receivable, and the Court left that adjustment standing in its last paragraph. A claim that quotes the principle and forgets the last paragraph is the claim that gets cut down. The judgment decides the question of law as framed and nothing wider. It does not decide the amount of the deduction. The Court recorded, in its concluding paragraph, that the Tribunal had left the value of the shares remaining in the hands of the assessee - which has to be adjusted against the amount receivable from the client - for determination before the regular Bench, and it did not disturb that. What became of that determination is not known from the copy read. The requirement in section 36(1)(vii) that the debt be written off as irrecoverable in the accounts of the previous year was not the question referred and is not decided here. Nor is the Assessing Officer's original ground, that the broking business had ceased and that no recovery steps had been taken; the Commissioner (Appeals) found the assessee continued as a sub-broker and the matter went forward on the section 36(2) point. The decision of the Special Bench is identified in the copy read by its date, 16 July 2010, and by the reference to its paragraph 31. Its appeal numbers and the parties' names as they stood before the Tribunal are not given in the copy read, and neither are the dates of the assessment order or of the order of the Commissioner (Appeals). The copy read gives the returned income and the amount claimed but not the composition of the Rs 28.24 lakh between the value of shares and brokerage, nor the number of clients involved. The earlier decisions the Court drew on are named in the copy read as T. Veerabhadra Rao, a decision of the Supreme Court, and Bonanza Portfolio Ltd, a decision of the Delhi High Court of 2010. Neither was read for this page and no account of either is given here beyond the fact that this Court followed them. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question of law was framed as "Whether on the facts and circumstances of the case and in law, the assessee, who is a share broker, is entitled to deduction by way of bad debts under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961 in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients apart from the commission earned by him." The Court answered it in the affirmative and in favour of the assessee. The debt owed by the client comprises the value of the shares transacted on his behalf and the brokerage payable by him, and both arise out of the same transaction. The bill raised on the client reflects the rate, quantity and total value of the shares transacted as well as the brokerage, apart from the securities transaction tax and the service tax. The brokerage on the purchase of the shares has been taxed in the hands of the assessee as its business income, and once that is so, in the Court's words, "it is evident that within the meaning of Section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee." The condition in section 36(2)(i) is therefore satisfied for the debt as a whole, and the deduction is not confined to the brokerage. The Court held that the view taken by the Special Bench was, with respect, in accordance with law, and disposed of the appeal by answering the question in the affirmative and in favour of the assessee, with no order as to costs. It recorded, before concluding, that the Tribunal had left the adjustment for the value of shares remaining in the assessee's hands to the regular Bench.
TaxSphere, “CIT v Shreyas S. Morakhia”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-shreyas-s-morakhia-a-share-brokers-bad-debt-includes-the-value-of-the-shares/ (validity last checked 2026-09-23)
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The Approving Panel held that my client's arrangement is NOT an impermissible avoidance arrangement, but the Assessing Officer has taxed the same transaction under another section anyway. Can he do that?
The High Court admitted my appeal without framing any question of law, heard it, and then formulated questions in the judgment itself. Is that a good disposal under section 260A?
The Assessing Officer has reduced my client's bad-debt claim by the s.36(1)(viia) provision created in the SAME year, not just by the opening balance. Is the current year's provision part of the credit balance for the purposes of the proviso to s.36(1)(vii)?
My company deals in shares as part of its business, but its income comes mainly from lending. The Commissioner (Appeals) has treated the share loss as a speculation loss under the Explanation to section 73. Is the company excepted?
