Telangana High Court
The Commissioner Of Income Tax, ... vs M/S. Shriram Chits Pvt, Ltd, Hyderabad on 9 June, 2023
THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
AND
THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY
I.T.T.A. Nos.307 of 2005, and 92 and 154 of 2006
COMMON JUDGMENT:(Per the Hon'ble the Chief Justice Ujjal Bhuyan) Substantial questions of law raised in the three appeals being identical, the appeals were heard together and are being disposed of by this common judgment and order.
2. The three appeals have been filed by the Revenue as the appellant under Section 260A of the Income Tax Act, 1961 (briefly, 'the Act' hereinafter) assailing various orders passed by the Income Tax Appellate Tribunal which would be adverted to in the succeeding paragraphs of this judgment.
3. We have heard Mr. J.V.Prasad, learned Standing Counsel for the Income Tax Department representing the appellant and Mr. R.V.Easwar, learned Senior Counsel for Mr. Maheswara Rao Kunchem, learned counsel for the respondent/assessee.
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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.
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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 deemed income of Rs.26,96,890.00 under Section 115JA of the Act. The case was selected for scrutiny, whereafter order of assessment was passed on 30.03.2001 under Section 143(3) of the Act. Assessee had debited an amount of Rs.5,72,83,854.00 to the profit and loss account towards bad debts. Assessing officer on the grounds and reasons mentioned in the order of assessment took the view that the amount claimed as bad debts could not be allowed as a deduction having regard to the provisions of Section 36(1)(vii) read with Section 36(2) of the Act. Accordingly, the said amount was added to the income of the assessee. That apart, the decision of the assessee in advancing the point of recognition as bad debt to four months of default which resulted in an additional amount of arrears to the extent 4 of Rs.3,91,93,724.00 was held to be unrealistic and accordingly was disallowed.
8.1. Assessing officer noticed that the assessee had recognised the income on commission on cancelled chits on actual payment basis as against the earlier policy of removal basis and claimed that but for this change in the accounting policy, the profit would have been higher by Rs.1,25,15,338.00. Assessing officer was of the view that change in the accounting policy was without any basis and not on sound principles. This was done to shift the profit of one year to another year which would be an incorrect method of computing profits. Accordingly, the amount of Rs.1,25,15,338.00 was added to the income of the assessee and brought to tax.
8.2. In appeal before the Commissioner of Income Tax (Appeals) IV, Hyderabad (briefly, 'CIT(A)' hereinafter), the first appellate authority upheld the decision of the assessing officer by holding that the bad debts claimed by the assessee were not allowable deduction. As to change in the method of accounting, CIT(A) also affirmed the view 5 taken by the assessing officer. As regards commission on cancelled chits, view taken by the assessing officer was upheld, thus appeal filed by the assessee was dismissed vide the order dated 28.03.2002.
8.3. Aggrieved thereby assessee preferred further appeal before the Tribunal which was registered as I.T.A.No.471/Hyd/2002.
9. For the assessment year 1999-2000, assessing officer vide the assessment order dated 28.03.2002 passed under Section 143(3) of the Act disallowed the claim of bad debts of the assessee on terminated 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, 6 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 officer took the view that the transaction was of mutual convenience prompted by extraneous considerations rather than any commercial expediency, the payment made was for a mere altruistic consideration with a view to avoid tax liability without any genuine purpose or reason.
9.1. Aggrieved by the aforesaid order of assessment, assessee preferred appeal before CIT(A). By the appellate 7 order dated 26.11.2002, CIT(A) held that all bad debts were not allowable deduction and accordingly upheld the view taken by the assessing officer. Likewise, preponing the default to bad debts after four months period was held to be unrealistic, not reflecting the correct profits of the business. Therefore, order of the assessing officer was upheld on this ground as well. Insofar commission on cancelled chits is concerned, CIT(A) affirmed the decision of the assessing officer and dismissed this ground of appeal of the assessee. Similarly, on the claim of royalty payment, CIT(A) held that assessee had failed to establish that the expenditure was for the purpose of business dictated by commercial expediency. Therefore, it was held that assessing officer was justified in disallowing the expenditure and adding the same to the income of the assessee.
9.2. Assessee thereafter preferred further appeal before the Tribunal which was registered as I.T.A.No.1049/ Hyd/2002. This appeal was heard by the Tribunal along with the appeal filed by the assessee for the assessment 8 year 1998-99 being I.T.A.No.471/Hyd/2002 and four other appeals.
10. By the common order dated 26.07.2004, the aforesaid two appeals of the assessee for the assessment year 1998-99 and 1999-2000 were allowed in part. On the question of liability of bad debts, Tribunal noticed that there were two aspects relating to the claim; firstly, whether the claim for deduction as bad debt was allowable under Section 36(1)(vii) of the Act, and second was the point of time at which such deduction becomes allowed.
10.1. Insofar first aspect is concerned, Tribunal noted that Central Board of Direct Taxes (CBDT) had issued instruction No.1175 dated 16.05.1978 wherein it was clearly provided that if any person organises chit funds and for this purpose brings the members together, administers the chit funds and thereby earns commission etc, profits made by such a person is income from business. If for any special reason, there is loss, then it is business loss. Normally, there should be no loss to the 9 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 10 High Court in CIT v. Girish Bhagwatprasad1, Tribunal found that the claim for bad debt was made on completion of the chit. The decision whether the debt has become bad or not has to be viewed with a dispassionate attitude and the fact that the assessee had not taken steps by way of legal proceedings against the debtor would not automatically justify treating him as not entitled to write off the amount as a bad debt. Thereafter, Tribunal held that 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 of the same in his books. In other words, all 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 the future instalments that are likely and yet to be defaulted no claim can be allowed. Assessing officer cannot replace the judgment of the 1 (2002) 256 ITR 772 11 assessee. The fact that assessee has written off as bad debt when prized subscribers defaulted for four consecutive months did not affect his claim as this was based on past experience of the assessee in his business. The Tribunal did not find anything amiss in adopting this policy. However, to allow the claim to the extent indicated above, Tribunal noted that fresh collection of facts and figures would be required. Thus, Tribunal set aside the order of the assessing officer and remanded the matter back to the file of the assessing officer for considering the claim afresh.
10.3. As regards commission on cancelled chits is concerned, Tribunal found that from out of the amount payable to the defaulting subscriber consequent to his replacement by another person, the assessee is entitled to deduct five per cent as commission. This amount has nothing to do with the regular commission income of the assessee. Tribunal accepted the stand of the assessee that the commission income accrues when the accounts had been finally settled to the defaulting non-subscriber. 12 On this ground, Tribunal set aside the order of the assessing officer as affirmed by CIT (A). 10.4. Finally insofar royalty payment is concerned, Tribunal was of the view that the assessee had paid royalty to M/s.Shriram Chits and Investments Limited for use of their name and logo in its chit business. Tribunal held that assessee was 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 13 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 has proposed the following questions as substantial questions of law:
1. Whether on the facts and in the circumstances of the case, when the assessee did not satisfy the conditions under Sections 36(1)(vii) read with Section 36(2) of the Act with regard to his claim of bad debts, whether the finding of the Tribunal dismissing the appeal preferred by the Revenue and upholding the claim of the assessee in toto, is sustainable in law?
2. Whether the failure of the Tribunal to note that the CBDT circular dated 16.05.1978 relied on by the assessee with regard to its claim of deduction of bad debts, since cannot supplant to the statutory requirements under Section 36 of the Act, its 14 findings relying on the said CBDT circular are sustainable in law?
3. When the assessee is not doing the banking business and the bad debts claimed by it were not shown as income in the profit and loss account and it did not comply with other conditions under Section 36(1)(vii) read with Section 36(2) of the Act, is it entitled to claim the same as deduction as erroneously held by the Tribunal is sustainable in law?
4. Whether the finding of the Tribunal upholding the claim of the assessee with regard to royalty payments without considering the concurrent reasons of the authorities is sustainable in law?
5. Whether the finding of the Tribunal upholding the claim of the assessee with regard to "commission on removed chits" without appreciating the concurrent reasoning of the department is sustainable in law?
12.1. While question Nos.1, 2 and 3 pertain to the claim of bad debts, question No.4 pertains to the claim as to royalty payments, whereas question No.5 pertains to the claim of the assessee with regard to commission on removed or cancelled chits.15
13. Mr. J.V.Prasad, learned Senior Counsel, Income Tax Department has assailed the orders of the Tribunal on all the three issues. Insofar the claim of bad debts is concerned, he submits that Tribunal did not appreciate Section 36(1)(vii) read with Section 36(2) of the Act in proper perspective. In support of such a contention, he has placed reliance on a recent decision of the Supreme Court in Principal Commissioner of Income Tax v. Khyati Realtors Private Limited2. He submits that to allow the claim of bad debts, the same has to be written off as irrecoverable 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 2 447 ITR 167 : 2022 SCC OnLine SC 1082 16 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 High Court in several appeals. He has also placed reliance on the decision of the Supreme Court in TRF Limited v. CIT3 as well as instruction No.1175 of CBDT which was subsequently clarified by CBDT on 25.03.1992. In support of his submission, learned Senior 3 323 ITR 397 17 Counsel has also placed reliance on the decision of the Supreme Court in Oriental Kuries Limited v. Lissa4. 14.1. On the question of royalty payment, he submits that this issue is squarely covered by the decision of the Madras High Court in CIT v. Wavin (India) Limited5 which was affirmed by the Supreme Court in CIT v. Wavin (India) Limited6 as well as by a recent decision of the Madras High Court dated 30.06.2022 in Shriram Transport Finance Company Limited v. Income Tax Officer (T.C.A.No.755 of 2009 and batch). He has also placed reliance on the decision of the Supreme Court in Honda Siel Cars India Limited v. CIT7.
14.2. Insofar commission on removed chits is concerned, learned Senior Counsel adverted to and supported the decision of the Tribunal. He, therefore, submits that there is no error or infirmity in the view taken by the Tribunal. No substantial questions of law arise under the three appeals.
4 (2019) 19 SCC 732 5 (1983) 143 ITR 281 (Mad) 6 236 ITR 314 7 (2017) 8 SCC 170 18 14.3. Mr. Easwar, learned Senior Counsel also submits that I.T.T.A.No.199 of 2005 filed by the Revenue under Section 260A of the Act against the same order of the Tribunal dated 26.07.2004 in I.T.A.No.506/Hyd/1999 for the assessment year 1995-96 was dismissed by this Court vide the order dated 28.12.2022 as the tax effect in the said appeal was found to be below the monetary limit for filing appeal in the High Court. Likewise, I.T.T.A.No.183 of 2005 filed by the Revenue against the same order of the Tribunal dated 26.07.2014 in I.T.A.No.327/Hyd/2001 for the assessment year 1997-98 was dismissed by this Court vide the order dated 28.12.2002 as the tax effect in the said appeal was found to be below the monetary limit for filing appeal in the High Court. He, therefore, seeks dismissal of the present three appeals on merit as well.
15. Submissions made by learned counsel for the parties have received the due consideration of the Court. 19
16. Since I.T.T.A.No.307 of 2005 was argued as the lead case, we may refer to the order passed by the Tribunal which has been assailed in the said appeal.
17. First, let us take up 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 20 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 Court was considering the constitutional validity of an enactment and had no occasion to consider the relationship which arises between foreman and the prized subscriber when he defaults. The jurisdictional High Court judgment in straight on this point.
6.6 (ii) Whatever may be the interpretation placed by Courts on this issue, the CBDT has placed its interpretation on the issue.
6.6 (iii) The instructions issued by the Central Board of Direct Taxes vide Instruction No.1175 under Order F.No.21/78-IT (80) dated 16th May, 1978 read as under:
"(a) If any person organizes Chit Funds and for this purpose brings the members together, administers the Chit Funds and thereby earns commission etc. profits made by such a person is income from business and if for any special reason there is loss then it is business loss. Normally, there should be no loss to the organiser unless he takes over the liability of some of the members. In such a case, the unrecovered amount due from such members will have to be treated as bad debts and the test to be adopted in usual business assessment for the allowance of bad debts would be applicable in such cases also.21
(b) In the hands of the subscribers, a few will be receiving more than what they have subscribed. This extra amount is in the nature of interest and as such taxable.
Members who take the money earlier from the chit will necessarily have to contribute more which means that they incur loss, which is nothing but interest paid for moneys taken in advance. The claim of such a loss will have to be considered for the purpose of allowance according to the provisions of the Act depending upon how the money was utilised by the subscriber.
Subsequently the Board issued clarification on a query from the Chief Commissioner of Income Tax II, New Delhi on 25th March 1992 which is as follows:
Subject: CBDT Instruction No.1175, dated May 16, 1978 Liability to assessment - Profits made by subscriber of chit funds -
Question regarding.
1. I am directed to refer to your letter F.No.66(II)/HO/proposal under Section 263/91-92/4101, dated November 15, 1991 on the above mentioned subject.
2. The issues raised by you have been carefully examined by the Board. In this regard, I am directed to say, that Board are of the view that Instruction No.1175 issued in consultation with 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."22
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 basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance than the winning or losing of court proceedings."
6.6 (v) The binding nature of the circular issued by the Board of Direct Taxes on the Revenue officials need not be reiterated. As the Central Board of Direct Taxes has placed its interpretation on the 23 issue, the same has to be necessarily applied by all the income tax authorities though the interpretations may have otherwise been made by the courts and this proposition is laid down by the Hon'ble Supreme Court in the case of Collector of Central Excise v. Dhiren Chemical Industries (259 ITR 554 at 557) wherein it is held as follows:
"We need to make it clear that regardless of interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding on the Revenue."
Similar was the view of the Hon'ble Supreme Court in the case of K.P.Varghese (131 ITR 597 (SC)). The Apex Court held as follows, at page 612 of the Report:
"The two circulars of the CBDT to which we have just referred are legally binding on the revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of sub-section (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri v. K.K.Sen, (AAC (1965) 56 ITR 198) and the other in Ellerman Lines Limited v. CIT [(1971) 82 ITR 913] that circulars issued by the CBDT under Section 119 of the Act are binding on all officers and persons employed in the execution of the Act 24 even if they deviate from the provisions of the Act."
6.6 (vi) The Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706 (SC)) at page 732 observed as follows:
"in the teeth of this clarification, the assessing officer chose to ignore the guidelines and spent their time, talent and energy on the consequential matters, we think that the Central Board of Direct Taxes was justified in issuing "appropriate" direction vide Circular No.789 (see (2000) 243 ITR (St.)
57) under its powers under Section 119, to set things 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 25 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 of tax due to the government. Based on the foregoing discussion, we uphold the claim of the assessee and hold that the Revenue should follow the CBDT circular and take a view that the claim of the assessee is maintainable as bad debt. 17.2. Thus, Tribunal followed the decision of the jurisdictional High Court in the case of Goverdhan Upadhyan v. Aekelle Kameswar Rao8. Thereafter, Tribunal referred to and followed instruction No.1175 dated 16.05.1978 issued by the CBDT which was later on clarified by the CBDT itself on 25.03.1992. As per the instructions of CBDT, if any person organised chit funds and brings the members together, administers the chit funds and thereby earns commission etc., profits made by such a person is income from business and if for any special reason, there is loss then it is business loss. Normally, there should be no loss to the organiser unless 8 1996 (4) ALT 1 26 it takes over the liability of some of the members. In such a case, the unrecovered amounts due from such members would have to be treated as bad debt. The test to be adopted in usual business assessment for the allowance of bad debts would be applicable in such case also. In the clarification dated 25.03.1992, CBDT reiterated the view taken in instruction No.1175 dated 16.05.1978. After referring to various Supreme Court decisions, Tribunal held that instructions and circulars issued by CBDT are binding on revenue authorities. Therefore, there was no reason for the revenue authorities not to follow the instructions of CBDT. Further, Tribunal observed that there was no reason to deny the claim of the assessee of bad debt. It is not the case of the Revenue that the transaction in question was not bona fide or that the assessee had attempted to conceal taxable income or that the claim was a device for evasion of payment of tax. Only the legality of the claim under Section 36(1)(vii) of the Act and the point of time of that claim were being disputed by the Revenue on the ground that this would lead to postponement of tax due 27 to the government. On due consideration, Tribunal upheld the claim of the assessee and held that the Revenue should follow CBDT instruction and took the view that the claim of the assessee is maintainable as bad debt.
17.3. Insofar the second aspect is concerned, Tribunal noted that earlier the assessee was making claim for bad debts in respect of defaulting 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), 28 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. Tribunal did not find any infirmity in the orders of the first appellate authority as the assessee had given details of the claim which were examined by the assessing officer. Being a voluntary payment in discharge of a legal obligation, assessee would be entitled to have the amount deducted as a bad debt in the year of write off. The decision whether the debt has become bad or not has to be viewed dispassionately. The fact that the assessee had not taken steps by way of legal proceedings against the debtor would not automatically justify the 29 finding that he would not be entitled to write off the amount as a bad debt. Honesty of the assessee is relevant. What is required to be seen is whether a bona fide assessment has been made by the assessee to the effect that realisation of the debt is not possible. Revenue cannot insist on any demonstrable and infallible proof that the debt has become bad debt. For the assessment years 1995-96 and 1997-98, the view taken by the first appellate authority was affirmed and Revenue's appeals on the issue of bad debts were dismissed.
18. Coming to the assessment years 1998-99 and 1999-2000, Tribunal was of the view that the issue was the same. Only difference was that in the earlier assessment years, assessee was making the claim of bad debt in respect of the prized subscribers on the closure of the chit i.e., the year in which the chit was closed. From the assessment year 1998-99 onwards, assessee made its claim after the default was made by the prized subscriber in payment of four instalments. Tribunal held as follows: 30
6.6 (xvi) Now we consider the appeals of the assessee for the assessment years 1998-99 and 1999-2000 on the same issue. The crucial difference in the claim of the assessee for these two years is that the assessee was earlier making the claim for such bad debt in respect of the prized subscribers on the close of the chit i.e., the year in which the chit is closed. From the assessment year 1998-99, the assessee made its claim after default was made by the prized subscriber in payment of four instalments.
6.6 (xvii) Though we have held that the decision of the assessee to write off a particular sticky debt cannot be questioned by the Revenue, when it is a honest decision and though we have given a finding that the decision is a honest decision viewed from a businessman's point of view, we observe 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 non-
prized 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 31 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 put in by the foreman is Rs.400 against Rs.1,320/- due from the defaulting subscriber. So against Rs.400 put in by the foreman due to legal requirements, at the end of 4 months, he is not entitled to write off Rs.1,320/- and claim the same as a bad debt. This is not permissible. In other words, the foreman in this case would be writing off a future possible liability of Rs.920 that may or may not arise. A loss may be claimed without bringing in funds. This factor is also explained in the Technical Guide on Accounting and Auditing for Chit Fund Business published by the Research Committee of the Institute of Chartered Accountants of India, New Delhi which at page 19 under the head Accounting Standard (AS) 4, Contingencies and Events occurring after the Balance Sheet date at para 3.11 and 3.12 read as follows:
"3.11. In a Chit Fund Business, it is possible that some prized subscribers may not pay their instalments after receiving the prized amount. The loss arising on account of non-payment of instalments by a prized subscriber is borne by the 32 Foreman. Accordingly, in respect of the instalments which have become due on the balance sheet date but not by the prized subscribers as well as the instalments which have not become due on the balance sheet date but the prized subscriber has defaulted in respect of the instalments which have become due, a provision has to be created or a contingent liability has to be disclosed keeping in view the requirements of paragraphs 10 and 11 of AS 4 reproduced below:
"10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
11. The existence of a contingent loss should be disclosed in the financial statements if either of the conditions in paragraph 10 is not met, unless the possibility of a loss is remote."
3.12. The amount of the provision for loss in respect of the defaulting prized subscribers can be estimated on the basis of, amongst other things, the past experience of the enterprise, information about the ability of the individual subscribers 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 33 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 the future instalments that are likely and yet to be defaulted, no claim can be allowed. The assessing officer cannot replace the judgment of the businessman. The facts that the assessee has written off as bad debt when prized subscribers defaulted for four consecutive months does not to our mind affect his claim as this is based on past experience of the assessee in his business and is in tune with the current RBI norms for NBFCs as well as for banking companies. These decisions have become a 34 prudential norm in the financial sector. Thus there is nothing wrong in adopting this guideline or policy.
6.6 (xxi) We have to mention that this issue has not come up during the course of arguments of the case. If the assessee has made the claim as indicated above, no prejudice would be caused to him by setting aside the matter. Similarly no prejudice would be caused to revenue on this count as it can examine the claim afresh. To allow the claim to the extent indicated above fresh collection of facts and figures are required and thus we set aside the issue to the file of the assessing officer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for the assessment years 1998-99 and 1999-2000 on this ground of allowability of bad debt is allowed for statistical purposes.
18.1. Thus, the view taken by the Tribunal was that bad debts could 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 the future instalments that are likely and yet to be defaulted no claim can be allowed. However, Tribunal was of the view that full facts and figures were not available and therefore, the matter was remanded back to the file of the 35 assessing officer for considering the claim afresh. Accordingly, the orders of the assessing officer for the assessment years 1998-99 and 1999-2000 on the issue of allowability of bad debt as affirmed by the CIT(A) were set aside and the matter was remanded back to the file of the assessing officer for consideration afresh.
19. We may now advert to Section 36(1)(vii) of the Act which is relevant. It may be mentioned that this provision had undergone amendment with effect from 01.04.1989. Prior to 01.04.1989, Section 36(1)(vii) read as under:
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 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 36 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 establishing a debt as a bad debt has been done away with. Whereafter, the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year became an allowable exemption.
19.2. This provision, pre and post amendment with effect from 01.04.1989 was considered by the Supreme Court in TRF Limited (supra). Whereafter, it was held that after 37 01.04.1989 it is not necessary for the assessee to establish that the debt in fact has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.
20. Before we proceed further it would be apposite to advert to sub-section (2) of Section 36 and Section 37 of the Act.
20.1. As per sub-section (2) of Section 36, in making any deduction for a bad debt or a part thereof, the provisions contained therein shall be applied, such as, no such deduction shall be allowed unless such debt or part thereof 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 assessee; if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be 38 deductible in the previous year in which the ultimate recovery is made; any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous order, but the assessing officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; etc. 20.2. Thus, what sub-section (2) of Section 36 says is that the deductions claimed under sub-section (1)(vii) of Section 36 would be subject to fulfilment of the conditions mentioned in sub-section (2).
21. On the other hand, Section 37(1) provides that any expenditure other than capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in calculating the income chargeable under the head "profits and gains of business or profession".
39
22. In Oriental Kuries 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 the time of subscription, incurs a debt 40 which is payable in instalments. If a subscriber is permitted to withdraw the collected sum on his turn, without being bound to pay the future instalments, it would jeopardise the interest of all other subscribers, and the entire mechanism of the chit fund system would collapse.
11. A perusal of the provisions of Chapter V of the 1982 Act makes it clear that if a prized subscriber defaults in making payment of an instalment, the chit foreman has the right to recover the amount covering all future subscriptions from the defaulting subscriber as a consolidated amount. Section 32 of the 1982 Act empowers the foreman to recover the consolidated payment of all future subscriptions forthwith in the case of a default. Chapter V of the Chit Funds Act, 1982 prescribes the rights and duties of prized subscribers. Sections 31 to 33 in Chapter V read as follows:
"31. Prized subscriber to furnish security.--Every prized subscriber shall, if he has not offered to deduct the amount of all future subscriptions from the prize amount due to him, furnish, and a foreman shall take, sufficient security for the due payment of all future subscriptions and, if the foreman is a prized subscriber, he shall give security for the due payment of all the future subscriptions to the satisfaction of the Registrar.
32. Prized subscriber to pay subscriptions regularly.--Every prized subscriber shall pay his subscriptions regularly on the dates and times and at the 41 place mentioned in the chit agreement and, on his failure to do so, he shall be liable to make a consolidated payment of all the future subscriptions forthwith.
33. Foreman to demand future subscriptions by written notice.--(1) A foreman shall not be entitled to claim a consolidated payment from a defaulting prized subscriber under Section 32 unless he makes a demand to that effect in writing.
(2) Where a dispute is raised under this Act by a foreman for a consolidated payment of future subscriptions from a defaulting prized subscriber and if the subscriber pays to the foreman on or before the date to which the dispute is posted for hearing the arrears of subscriptions till that date together with the interest thereon at the rate provided for in the chit agreement and the cost of adjudication of the dispute, the Registrar or his nominee hearing the dispute 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 42 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 subscriptions.
(5) Where any property is obtained as security in lieu of the consolidated payment of future subscriptions, it shall remain as security for the due payment of future subscriptions."
(emphasis supplied)
12. The object is to empower the foreman to recover the amount in a lump sum from a defaulting subscriber, so as to secure the interest of the other subscribers, and ensure smooth functioning of the chit fund. Such a provision would not amount to a penalty.
13. The relationship between the foreman and the subscribers in a chit fund transaction is of such a nature that there is a necessity and justification for making stringent provisions to safeguard the interest of the other subscribers, and the foreman. If a prized subscriber defaults in payment of his subscriptions, the foreman will be obliged to obtain 43 the equivalent amount from other sources, to meet the obligations for payment of the chit amount to the other members, who prize the chit on subsequent draws. For raising such an amount, the foreman may be required to pay high rates of interest.
14. The stipulation of empowering the foreman to recover the entire balance amount in a lump sum, in the event of default being committed by a prized subscriber, is to ensure punctual payment by each of the individual subscribers of the chit fund. Without punctual payments, the system would become unworkable, and the foreman would not be in a position to discharge his obligations to the other members of the chit fund.
15. In view of the aforesaid discussion, 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.
23. In Khyati Realtors Private Limited (supra), on which much reliance has been placed by Mr. Prasad, learned Standing Counsel, a three-Judge Bench of the Supreme Court took the view that merely stating a debt as an irrecoverable write off without appropriate treatment in the accounts as well as known compliance with the 44 conditions mentioned in Section 36(1)(vii) and 36(2) of the Act would not entitle the assessee to claim a deduction as a bad debt. Referring to the earlier decision of the Supreme Court in TRF Limited (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 CIT9 and Catholic Syrian Bank Limited v. CIT10, 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 9 (2010) 320 ITR 577 (SC) 10 (2012) 343 ITR 270 (SC) 45 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 assessee;
(iv) The assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act.
23.1. However, Supreme Court has clarified that even if a claim for deduction under Section 36(1) is not allowed, the possibility of its exclusion under Section 37 cannot be ruled out in as much as the heads of expenditure that can be claimed as deduction are not exhaustive, that being the precise reason for existence of Section 37. Therefore, in a given case, even if the expenditure relates to business and the claim for its treatment under other provisions are unsuccessful, application of Section 37 is per se not excluded.
24. After a thorough consideration, we are of the view that decision of the Supreme Court in Khyati Realtors Private Limited (supra) does not really undermine or render the decision of the Tribunal unsustainable. 46 Tribunal has given good reasons as to why the claim of bad debt is an allowable deduction under Section 36(1)(vii) of the Act. That apart, Tribunal took the view that 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 at the same time clarifying that for future instalments that are likely and yet to be defaulted no claim for bad debt can be allowed. However, to allow such a claim to the extent indicated, Tribunal observed that more facts and figures were required and therefore, relegated the matter back to the file of the assessing officer. We see no error or infirmity in the view taken by the Tribunal on the issue of bad debts covering both the facets.
25. That brings us to the next issue as to royalty payment. While deleting the disallowance made on this count by the assessing officer and allowing the claim of the assessee, Tribunal took note of the fact that the only ground for the disallowance was that in the prior assessment years no such payment was made. However, 47 the undisputed fact is that the logo and the words "Shriram Chits" is owned by M/s.Shriram Chits and Investments (Private) Limited. Assessee had used the logo and the above words while carrying on its business. 25.1. This issue is no longer res integra. In the case of Wavin (India) Limited (supra), Madras High Court examined such a claim in the context of amount paid to a foreign collaborator 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.
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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 Limited11, 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 assessee may be justified.
Distinction between capital and revenue expenditure with reference to acquisition of technical information and know-how has been spelled out by this Court [Ed.: A few such cases are CIT v. Wavin (I) Ltd., (1998) 8 SCC 585; Jonas Woodhead & Sons Ltd. v. CIT, (1997) 10 SCC 119; and Alembic Chemical Works Co. Ltd. v. CIT, (1989) 3 SCC 329 (Alembic case discussed below).] as well as the High Courts in series of cases. Primary test which is adopted to differentiate between capital and revenue expenditure remains the same, namely, the enduring nature test. It means where the expenditure is incurred which gives enduring benefit, it will be treated as capital expenditure. In contradistinction to the cases where expenditure of concurrent and reoccurring nature is incurred and 11 AIR 1968 SC 1131 : (1968) 69 ITR 692 49 the latter would belong to revenue field. Technical information and know-how are intangible. They have different and distinct character from tangible assets. When the expenditure is incurred to acquire a tangible asset, determination as to whether the said acquisition of tangible asset is of capital nature or the expenditure is of revenue nature, may not pose a problem. However, in case of technical information and know-how, having regard to their unique characteristic, the questions that need to be posed for determining the nature of such an expenditure are also of different nature. In case where there is a transfer of ownership in the intellectual property rights or in the licences, it would clearly be a capital expenditure. However, when no such rights are transferred but the arrangement facilitates grant of licence to use those rights for a limited purpose or limited period, the Courts have held that in such a situation, the royalty paid for use of such technical information or know-how would be in the nature of revenue expenditure as no enduring benefits is acquired thereby. This was so held in a classic case, entitled CIT v. Ciba of India Ltd. (AIR 1968 SC 1131 :
(1968) 69 ITR 692) 26.1. This decision of the Supreme Court has been followed by the Madras High Court in Shriram Transport Finance Company Limited (supra). Madras High Court has held that royalty payment made by the assessee for use 50 of logo or trademark for a particular period for improvement/ expansion of business would qualify as revenue expenditure. Thus, Madras High Court held as follows:
7.11. 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 is not transferred, but permitted to be utilized for a particular period, would have to be treated as 51 revenue expenditure, on application to the facts of this case, tilts the balance in favour of the assesses. Every expenditure incurred to acquire some right over intangible asset, cannot be ipso facto termed as capital expenditure. The nature of the assets, right, information or technical know-how that is transferred, must be such that without which the transferee could never commence the business. As rightly contented by the learned senior counsel appearing for the asessees, the benefit granted by the licensor is not enduring in nature in the present case. The assessing officer without appreciating the terms of the licence agreement and ascertaining the nature of the expenditure incurred by the assessee companies, disallowed the deduction of royalty payment and allowed the depreciation at 25% treating it as capital expenditure. However, the appellate authorities, while deleting the disallowances made by the assessing officer, have rightly treated the royalty payment as revenue expenditure. Once the payment of royalty is treated as revenue expenditure, automatically, it goes without saying that the assesses would be entitled to 100% deduction. Therefore, we need not interfere with the orders passed by appellate authorities. Accordingly, the substantial questions of law relating to royalty, are answered in favour of the assessees.
27. We are in respectful agreement with the view expressed by the Madras High Court as extracted supra. 52 Therefore, we have no hesitation in answering this issue in favour of the assessee.
28. The last issue is that of the claim relating to commission on removed chits. Tribunal decided this issue in favour of the assessee. This was what the Tribunal held:
6.3. Time of recognition of income from Commission on cancelled chits: This issue is involved in the assessee's appeals for assessment years 1998-99 and 1999-2000. The dispute is about time of accrual of the income by way of commission in respect of cases where defaulting non-prized subscribers who are removed from the chit and in whose place new subscribers are substituted. On a careful consideration of the issue, we find that from out of the amount that is payable to the defaulting subscriber consequent to his replacement by another person the company is entitled to 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 53 to profit and loss account. Reliance was placed by the Revenue on the Special Bench decision of the Tribunal 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 final settlement of a defaulting subscriber account is recognized as income on the finalization of the issues. This is not an unacceptable proposition. We agree with the submission of the learned counsel for the assessee, which are at para 4.11 of this order. In the result, this ground of appeal of the assessee is allowed.
28.1. Thus, according to the Tribunal, from out of the amount that is payable to the defaulting subscriber, subscription to his replacement by another person, the assessee is entitled to deduct 5% as commission. This commission amount has got nothing to do with the regular commission income of the assessee. Stand of the assessee that the commission income accrues when the 54 accounts have been finally settled with the defaulting non-subscriber is the correct position.
29. We are in agreement with the view expressed by the Tribunal on this issue. Thus, this issue is also answered in favour of the assessee.
30. Therefore, on a thorough examination of all aspects of the matter, we answer the questions proposed by the Revenue as substantial questions of law against the Revenue and in favour of the assessee.
31. Resultantly, the appeals fail and are accordingly dismissed. No costs.
______________________________________ UJJAL BHUYAN, CJ ______________________________________ C.V.BHASKAR REDDY, J 09.06.2023 Pln