2018 (6) TMI 555 - AT - Income Tax

ITAT affirms taxability of dividend, allows deductions for bad debts & commissions, aligns with previous rulings.

The ITAT dismissed both the assessee's and the revenue's appeals, upholding the CIT(A)'s orders. The taxability of foreman dividend was confirmed, while ... Taxability of foreman dividend on Company’s chit - principles of mutuality - Held that:- CIT(A), who had upheld the action of the AO by relying on the decision of the ITAT in assessee’s own case [2002 (1) TMI 271 - ITAT HYDERABAD-B] for earlier years that there is no principles of mutuality and that there is not complete identity between the foreman and other participators - since the ground raised in AYs 2013-14 and 2014-15 are materially identical to that of earlier years, following the decision therein, we uphold the order of CIT(A) - thus ground of assessee is dismissed. Deduction of bad-debts relating to running and terminated chits - Held that:- On perusal of earlier year orders of ITAT in assessee’s own case, we find that the ITAT has allowed the assessee’s claim of bad debts in AY 2011-12 wherein it is said, that the claim of the assessee for deduction of bad debts written off is also allowable alternatively as business loss u/s 28(i) - thus we uphold the order of CIT(A) - ground of revenue is dismissed. Commission on cancelled chits and royalty payment - Held that:- Getting directions of ITAT in assessee’s own case as above, we uphold the order of the CIT(A) in allowing the claim of assessee with regard to commission on cancelled chits and claim on royalty payment - thus ground of revenue is dismissed. Issues Involved:1. Taxability of foreman dividend.2. Deduction of bad debts.3. Commission on cancelled chits.4. Royalty payment.Detailed Analysis:1. Taxability of Foreman Dividend:The primary issue in the assessee's appeals was the taxability of the foreman dividend for the AYs 2013-14 and 2014-15. The assessee argued that the foreman dividend should not be taxable based on the principle of mutuality, citing the Punjab & Haryana High Court decision in the case of Soda Silicate & Chemical Works. The AO rejected this claim, referencing Section 21 of the Chit Funds Act, 1982, and various case laws, and brought the foreman dividend to tax. The CIT(A) upheld the AO's decision, relying on the ITAT's previous rulings in the assessee's own cases. The assessee's representative admitted that this issue was consistently decided against the assessee in prior years. The ITAT reiterated that the principles of mutuality do not apply to commercial entities like the assessee, which is a company formed to derive profits from the business of chits. The foreman’s role and rights under the Chit Funds Act differ from other participants, negating the mutuality principle. Consequently, the ITAT dismissed the assessee's appeals, upholding the CIT(A)'s order.2. Deduction of Bad Debts:The revenue's appeal challenged the CIT(A)'s decision to allow the assessee's claim for bad debts related to running and terminated chits for AY 2013-14. The AO had disallowed a significant portion of the bad debts claimed by the assessee, arguing that it did not satisfy the conditions under Section 36(2) of the IT Act. The CIT(A) allowed the claim, following the ITAT's decisions in the assessee's earlier cases. The ITAT reviewed the previous orders and upheld the CIT(A)'s decision, noting that the ITAT had consistently allowed such claims in earlier years. The ITAT directed the AO to re-examine the issue in light of prior rulings, confirming that bad debts related to running and terminated chits should be allowed if they are written off in the books.3. Commission on Cancelled Chits:The revenue also contested the CIT(A)'s decision to allow the assessee's claim regarding the commission on cancelled chits. The CIT(A) had followed the ITAT's earlier rulings in the assessee's favor. The ITAT referred to its previous decisions, which established that the commission income from defaulting subscribers should be recognized when the accounts are finally settled. The ITAT found the CIT(A)'s order consistent with these rulings and dismissed the revenue's appeal on this issue.4. Royalty Payment:The revenue's appeal included a challenge to the CIT(A)'s decision to allow the assessee's claim on royalty payments. The CIT(A) had relied on the ITAT's earlier decisions, which found that royalty payments to the parent company for using its logo were legitimate business expenses. The ITAT reviewed the facts and previous rulings, confirming that the royalty payments were reasonable and necessary for the assessee's business. The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s order.Conclusion:Both the assessee's and the revenue's appeals were dismissed. The ITAT upheld the CIT(A)'s orders on all issues, confirming the taxability of foreman dividend, allowing the deduction of bad debts, commission on cancelled chits, and royalty payments as legitimate business expenses. The decisions were consistent with the ITAT's prior rulings in the assessee's own cases.