2018 (7) TMI 1735 - HC - Income Tax

Revenue's Appeals Dismissed, Assessee Prevails on Key Issues

Commissioner of Income Tax Versus Shriram Chits & Investments P. Ltd.

Commissioner of Income Tax Versus Shriram Chits & Investments P. Ltd. - [2019] 410 ITR 10 (Mad) Issues Involved:1. Eligibility for depreciation on trucks.2. Set off of carry forward business losses against dividend income.3. Treatment of unpaid prize chit money as bad debts.4. Relationship of creditor and debtor in chit fund transactions.Detailed Analysis:1. Eligibility for Depreciation on Trucks:The Tribunal examined the factual position, including sub-lease agreements, purchase bills, and registration certificates, concluding that the vehicles were owned by the Bank of Madura Ltd. and leased out by the assessee. The Tribunal found that the vehicles were registered in various states, and thus, the assessee was eligible for depreciation. This conclusion was supported by the Supreme Court decision in I.C.D.S. Ltd. vs. Commissioner of Income-tax, which held that as long as the asset is used for the business purpose of the assessee, the requirement of Section 32 is satisfied. The Tribunal's factual findings and the Supreme Court's ruling led to the conclusion that the assessee is entitled to claim depreciation.2. Set Off of Carry Forward Business Losses Against Dividend Income:This issue arose only for the assessment year 1997-98. The Tribunal referred to the assessee’s sister concern's case, Shriram Investments (firm), where it was held that investments were business investments and interest on borrowings for these investments should be allowed under 'business income'. The Tribunal cited several legal precedents, including United Commercial Bank vs. Commissioner of Income Tax and Commissioner of Income Tax vs. Rajeeva Lochan Kanoria, to support this view. The Revenue did not dispute the identical nature of transactions, and previous High Court decisions had dismissed the Revenue's appeals on similar grounds. Thus, the Tribunal's decision to allow the set-off of carry forward business losses against dividend income was upheld.3. Treatment of Unpaid Prize Chit Money as Bad Debts:The Tribunal's decision was based on the assessee's own case in Commissioner of Income Tax vs. M/s.Shriram Chits & Investments Ltd., where it was established that the nature of chit agreements and the obligations of the foreman under the Chit Funds Act create a relationship akin to creditor and debtor. The Supreme Court had ruled that chit transactions are not money lending transactions, but the obligations under the Chit Funds Act necessitate treating unpaid amounts as bad debts. The Tribunal and the Commissioner of Income Tax (Appeals) had previously allowed such claims as bad debts, and the Revenue had not disputed these findings in earlier years. Therefore, the Tribunal's decision to treat unpaid prize chit money as bad debts was affirmed.4. Relationship of Creditor and Debtor in Chit Fund Transactions:The Tribunal referred to the Supreme Court decision in Sriram Chits & Investments P. Ltd. vs. Union of India, which clarified that chit fund transactions do not constitute money lending and do not create a traditional creditor-debtor relationship. However, the obligations under the Chit Funds Act, such as the foreman's duty to ensure the continuity of chit cycles and to cover defaults, create a functional creditor-debtor relationship for the purpose of claiming bad debts under Section 36 of the Income Tax Act. The Tribunal and the Commissioner of Income Tax (Appeals) had consistently treated such defaults as bad debts, and this interpretation was upheld by the High Court.Conclusion:The appeals filed by the Revenue were dismissed, with all substantial questions of law answered in favor of the assessee. The Tribunal's findings on the factual and legal issues were upheld, affirming the assessee's eligibility for depreciation on trucks, the set-off of carry forward business losses against dividend income, and the treatment of unpaid prize chit money as bad debts.