TaxTMI 
TaxTMI 
2023 (6) TMI 1373
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....a Rao Kunchem, learned counsel for the respondent/assessee. 4. I.T.T.A. No. 307 of 2005 has been preferred by the Revenue as the appellant assailing the order dated 26.07.2004 passed by the Income Tax Appellate Tribunal, Hyderabad Bench-B, Hyderabad (briefly, 'the Tribunal' hereinafter) in I.T.A. No. 471/Hyd/2002 for the assessment year 1998-99. 5. Likewise I.T.T.A. No. 92 of 2006 has been preferred by the Revenue against the order dated 26.07.2004 passed by the Tribunal in I.T.A. No. 1049/Hyd/2002 for the assessment year 1999-2000. 6. Finally, I.T.T.A. No. 154 of 2006 has been preferred by the Revenue against the order dated 30.07.2004 passed by the Tribunal in I.T.A. No. 1175/Hyd/2003 for the assessment year 2000-01. 7. In all the three appeals, the respondent/assessee is M/s. Shriram Chits Limited, Hyderabad which subsequently came to be known as M/s. Shriram Chits Private Limited, Hyderabad. 8. Respondent is the assessee under the Act having the status of a company. Assessee is engaged in the chit fund business regulated under the Chit Funds Act, 1982. For the assessment year 1998-99, assessee filed return of income admitting a loss of Rs. 1,14,76,024.00 and deem....
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....rminated chits to the extent of Rs. 2,87,38,141.00 and added the same to the income of the assessee. Insofar claim of bad debts amounting to Rs. 6,98,39,496.00 pertaining to running chits, assessing officer was of the view that the change in the method of recognition of bad debts was unrealistic and it was only a method to defer payment of taxes. Accordingly, the said claim of bad debts was also disallowed. As regards commission on cancelled chits claimed by the assessee to the tune of Rs. 58,58,658.00, assessing officer was of the view that change in the accounting policy was without any basis and not on sound principles. Accordingly, the said amount was added to the income of the assessee and brought to tax. In this assessment year, there was an additional claim of the assessee i.e., royalty to the extent of Rs.2,49,05,065.00. Royalty was being paid to the holding company by the assessee for the licence to use its logo as per agreement. This claim of royalty was disallowed by the assessing officer as according to the assessing officer, assessee had failed to prove the nexus as to whether the expenditure was incurred wholly and exclusively for the purpose of business. Assessing of....
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....s loss, then it is business loss. Normally, there should be no loss to the organisers unless it takes over the liability of some of the persons. In such a case, the unrecovered amount due from such persons will have to be treated as bad debts. Tribunal also took note of subsequent clarification of the CBDT dated 25.03.1992 reiterating the instruction No.1175. Thus, Tribunal following the instructions of the CBDT held that when the organiser takes over the liability of some of the members and when such amounts remained unrecovered, the same should be treated as bad debts. Instructions and clarification of CBDT clearly settles this issue. Tribunal also referred to certain judgments of the Supreme Court to highlight the binding nature of instructions and circulars issued by the CBDT on the revenue authorities and held that Revenue was bound to take the view that the amount recoverable from a defaulting prized subscriber by the foreman is a debt. 10.2. As to the second aspect, Tribunal noted the amendment to Section 36(1)(vii) of the Act with effect from 01.04.1989. Applying the decision of the Gujarat High Court in CIT v. Girish Bhagwatprasad (2002) 256 ITR 772, Tribunal found that....
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....s entitled to treat the royalty payment as a business expenditure. Such expenditure was held to be revenue income and was thus allowed. 11. Insofar assessment year 2000-01 is concerned, the appeal filed by the assessee being I.T.A.No.1175/ Hyd/2003 was allowed by the Tribunal by following its previous orders. As to claim of bad debts, Tribunal held that this issue was covered by its order dated 26.07.2004 passed in I.T.A.No.471/ Hyd/2002 for the assessment year 1998-99 filed by the assessee itself. As regards allowability of commission on cancelled chits, Tribunal followed its earlier decision dated 26.07.2006 passed in I.T.A.Nos.471 and 1049 of Hyd/2002 for the assessment years 1998-99 and 1999-2000. Finally on the point of liability of royalty payment, Tribunal also followed its earlier order dated 26.07.204 in the appeal of the assessee itself for the assessment year 1999-2000 being I.T.A.No.1049/Hyd/ 2002. Thus, appeal of the assessee was partly allowed vide the order dated 30.07.2004. 12. Against the aforesaid orders of the Tribunal, the three appeals have been preferred by the Revenue under Section 260A of the Act as mentioned supra. In all the three appeals, Revenue ha....
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....verable in the accounts of the assessee for the previous year; such bad debt or part of it written off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; no deduction is allowable unless debt or part of it has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off; and the assessee is obliged to prove to the assessing officer that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act. Insofar the claim of commission on cancelled chits and royalty payment are concerned, learned Standing Counsel has supported the orders of the assessing officer as affirmed by the CIT (A). 14. Per contra, Mr. Easwar, learned Senior Counsel for the respondent/assessee has argued in support of the orders of the Tribunal. He has submitted a compilation of judgments and instructions of CBDT to contend that findings of the Tribunal are valid and unexceptionable. Similar claim for deduction of bad debts in chit business has been allowed by the Madras High Court and by the Karnataka H....
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.... the issue of bad debts. As already noted above, there are two aspects insofar the issue of bad debts is concerned. The first issue is whether the claim for deduction as bad debt is allowable under Section 36(1)(vii) of the Act? The second aspect is the point of time at which such deduction is allowable. 17.1. On the issue of allowability of the claim as bad debt, Tribunal held as follows: 6.6 (i) We first examine the allowability of the claim as bad debt. The Hon'ble Andhra Pradesh High Court in the case of Goverdhan Upadhyan v. Aekelle Kameswar Rao (died) and others (1996 (4) ALT 1) held as follows: "The relationship between the prized subscriber and the foreman is of a debtor and creditor when the prized subscriber receives the amount and undertakes to pay the subsequent instalments due to the foreman." A full discussion on the issue is at pages 6 & 7 of the reported judgment wherein the judgment of the Hon'ble Madras High Court in the case of Angammal v. R. Sankaranarayanan (AIR 1989 Madras 53) was referred to. In its judgment in the case of Shriram Chits & Investments (P) Limited v. Union of India & others (AIR 1993 SC 2063) the Hon'ble Supreme Co....
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.... M.O.L cannot be withdrawn on the basis of decision of Punjab & Haryana High Court in case of Soda Silicate & Chemical Works (supra). The Board's instruction stands." In this regard, it is clearly stated that when the organizer takes over the liability of some of the members and when such amounts remain unrecovered, the same should be treated as bad debt. Thus the circular of the Board settles the first controversy. 6.6 (iv) The Hon'ble Supreme Court in the case of Ranadey Micro Nutrients v. CCE [(1996) 97 ELT 19] observed as follows: "One should have thought an officer of the Ministry of Finance would have greater respect for circulars such as these issued by the Board, which also operates as these issued by the Board, which also, operates under the aegis of the Ministry of Finance, for it is the board which is by statute, entrusted with the task of classifying excisable goods uniformly. The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the bas....
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....ings on course by eliminating avoidable wastage of time, talent and energy of the assessing officer discharging the onerous public duty of collection of revenue." All the arguments of the learned Standing Counsel on the issue of CBDT circular are answered by the Hon'ble Supreme Court in this case (263 ITR 706) and thus we need not specifically deal with them." 6.6 (vii) Thus the Revenue has to apply the interpretation laid down by the Central Board of Direct Taxes on this issue in the circular issued in this regard. Thus we hold that the Revenue is bound to take a view that the amount recoverable from a defaulting prized subscriber by the foreman is a debt. 6.6 (viii) Various benches of the Tribunal have consistently taken a view that a claim of the assessee is maintainable as bad debt. It is not the case of the Revenue that the transaction in question was not bona fide or that the assessee has attempted to conceal taxable income or that this is a device for evasion of payment of tax. Only the legality of the claim under Section 36(1)(vii) and point of time of the claim are being disputed by the Revenue on the ground that this would lead to postponement o....
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....g prized subscribers at the closure of the chit. Later on, the assessee claimed deduction in the year of default itself. According to the Tribunal, what was required to be considered was whether the assessee had taken an honest and bona fide decision. Tribunal noted that during the assessment proceedings assessee had filed details of the bad debts showing proof of suits filed as well as suits filed in subsequent years, the details of which were examined by the assessing officer. After considering the decisions of the Mumbai and Chennai Benches of the Tribunal in similar matters as well as the decision of the Gujarat High Court in the case of Girish Bhagwatprasad (supra), Tribunal took the view that under Section 36(1)(vii) of the Act as it stood after the amendment with effect from 01.04.1989, writing off in the books of accounts of a bad debt is sufficient and the assessing officer has no option of deciding the year in which the debt had become bad debt. 17.4. With regard to the case of assessee, Tribunal noted that for the assessment years 1995-96 and 1997-98, the claim for bad debt was allowed by the first appellate authority i.e., CIT(A) against which Revenue was in appeal. ....
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....bserve that there is another angle to this issue. The claim proceeds on the premises that the money lifted by the prized subscriber at an auction is out of the funds ploughed in due to the legal requirements as the foreman. This premises is not true. The chit contributions of the other subscribers are handed over to the prized subscriber on an auction after the foreman deducts his commission. 6.6 (xviii) The funds of the foreman are involved only to the extent of defaults both by the prized and nonprized subscribers. The claim of the foreman to the extent his funds are involved can be considered as an allowable claim. A future liability that may arise to the foreman due to continuing default in paying instalments by a prized subscriber cannot be claimed at this point of time. This factor can best be explained by the following example. 6.6 (xix) In a chit there are 24 subscribers and if each one of them contributes Rs. 100 per month for 24 months and in the 2nd month of the chit one subscriber bids and takes Rs. 2400 - the loss of Rs. 960 - commission @ 5% Rs. 120 i.e. Rs. 1,320/- and defaults for four consequent months and there is no other defaulter, the money pu....
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....scribers to pay, and the appraisal of the uncollectibles based on the current business environment of the business of the relevant subscribers. For instance, where the past experience of a particular Chit Fund business indicates that the prized subscribers do not generally pay after a continuous default of paying, say, three instalments, it may be appropriate to make a provision for the entire amount outstanding. In estimating the amount of the provision for loss, the realisable value of the security lodged with the Foreman should also be considered." 6.6 (xx) On these facts a claim of loss without corresponding inflow of funds from the foreman, which is a definite possibility in this method of claim, cannot be upheld. The amount of loss can definitely be allowed to the extent that the foreman has put in his funds and has come to a conclusion that his funds are not recoverable due to the account becoming sticky and to the extent he has taken an honest decision for writing off the same in his books. In other words, bad debts can be allowed to the extent of the instalments defaulted by the prized subscriber, and written off as bad debt in the books by the assessee. But for t....
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....llowing clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (i) to (vi) ** (vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is established to have become a bad debt in the previous year. After the amendment with effect from 01.04.1989, Section 36(1)(vii) now reads as follows: 36. Other deductions:- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (i) to (vi) ** (vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. 19.1. Thus, what is noticeable is that prior to the amendment, the amount of any debt or part thereof which was established to have become a bad debt in the previous year was an allowable deduction while computing the income in terms of Section 28 of the Act. However, this was subject to sub-section (2) of Section 36. After the amendment, the requirement of....
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.... Limited (supra), the issue which had arisen for consideration before the Supreme Court was with respect to the jural relationship between a chit fund entity and the subscribers created by the chitti agreement; the related question was whether it is a debt in praesenti or a promise to discharge a contractual obligation. After an elaborate analysis, Supreme Court has held that the relationship between a chit subscriber and the chit foreman is a contractual obligation which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum. Supreme Court has held as follows: 10. We do not agree with the view expressed by the Division Bench. When a prized subscriber is allowed to draw the chit amount, which is in the nature of a grant of a loan to him from the common fund in the hands of the foreman, with the concessional facility of effecting repayment in instalments; this is subject to the stipulation that the concession is liable to be withdrawn in the event of default being committed in payment of any of the instalments. The chit subscriber at t....
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....pute shall, notwithstanding any contract to the contrary, make an order directing the subscriber to pay to the foreman the future subscriptions on or before the dates on which they fall due, and that, in case of any default of such payments by the subscriber, the foreman shall be at liberty to realise, in execution of that order, all future subscriptions and interest together with the costs, if any, less the amount, if any, already paid by the subscriber in respect thereof: Provided that if any such dispute is on a promissory note, no order shall be passed under this sub-section unless such promissory note expressly states that the amount due under the promissory note is towards the payment of subscriptions to the chit. (3) Any person who holds any interest in the property furnished as security or part thereof, shall be entitled to make the payment under sub-section (2). (4) All consolidated payments of future subscriptions realised by a foreman shall be deposited by him in an approved bank mentioned in the chit agreement before the date of the succeeding instalment and the amount so deposited shall not be withdrawn except for payment of future subscripti....
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.... (supra), which had a coram of two Hon'ble Judges, Supreme Court in Khyati Realtors Private Limited (supra) observed that in TRF Limited (supra) the Court did not examine the impact of Section 36(2). According primacy to its decision in Southern Technicalities Limited v. Joint CIT (2010) 320 ITR 577 (SC) and Catholic Syrian Bank Limited v. CIT (2012) 343 ITR 270 (SC) , Supreme Court held as follows:- 18. It is evident from the above rulings of this court, that: (i) The amount of any bad debt or part thereof has to be written-off as irrecoverable in the accounts of the assessee for the previous year; (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; (iii) No deduction is allowable unless the debt or part of it "has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year", or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the a....
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....rator as contribution towards research and development expenditure. Madras High Court held that such expenditure could not be regarded as capital expenditure. It being a business expenditure, assessee was entitled to claim deduction. This decision of the Madras High Court was upheld by the Supreme Court in Waven (India) Limited (supra) wherein Supreme Court agreed with the reasoning given by the Madras High Court while upholding the expenditure to be of revenue nature. The expenditures were incurred to obtain benefit of development and research made by the foreign company; such an expenditure could not be said to be for acquisition of any asset at all. 26. In Honda Siel Cars India Limited (supra), Supreme Court once again examined the distinction between capital and revenue expenditure. Referring to its earlier decision in CIT v. Ciba of India Limited AIR 1968 SC 1131 : (1968) 69 ITR 692, Supreme Court held that royalty paid for use of technical information or knowhow would be in the nature of revenue expenditure as no enduring benefit is acquired thereby. Supreme Court held as follows: 19. If the aforesaid factors are taken in isolation, probably the claim of the asses....
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....1. Thus, it is crystal clear from the aforesaid decisions of the Hon'ble Supreme Court that royalty payment made by the assessee, for use of logo or trademark for a particular period, for improvement/ expansion of business, would qualify as revenue expenditure. The judgment in Honda Siel Cars India Limited (supra) is of no assistance to the revenue as in that case, the technical know-how was shared pursuant to technical collaboration agreement and not only technical information was transferred, but on field complete assistance was given pursuant to the joint venture agreement. Further, in that case, the very same business was set up by the transferee company. However, in the present case, it is not the case. The grant of licence to use the intellectual property of the parent company for limited purpose, cannot be treated as transfer of ownership or title. Though the licence is renewed periodically, it by itself does not guarantee the renewal. Similarly, the parent company is always at liberty to not only cancel the license, but also grants such rights to any other organization. Further, the findings of the Apex Court in the above judgment that when the intellectual property right i....
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....deduct 5% as commission. This has nothing to do with the regular commission income of the assessee. Thus the stand of the assessee that the commission income accrues when the accounts have been finally settled to the defaulting non-subscriber to our mind appears to be the correct position. Otherwise in case of a non-prized subscriber the amount of 5% would be deducted from the amounts due to him much before the settlement of his account and recognized as income by way of transfer from current liabilities to profit and loss account. Reliance was placed by the Revenue on the Special Bench decision of the ribunal in the case of Shriram Chits and Investment Private Limited, Chennai v. ACIT [263 ITR (AT) 65]. This decision is not applicable to the facts of this case. The commission/remuneration to the foreman in that case was sought to be recognized on the completion of chit method and had nothing to do with the type of additional commission receivable in case of substitution of a subscriber as in this case. The nature of income in both these cases are different. The further commission of 5% receivable from a defaulting subscriber consequent to his removal and substitution on a full and....