Madras High Court
Commissioner Of Income Tax vs Shriram Chits & Investments P. Ltd on 4 July, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam, V.Bhavani Subbaroyan
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 04.07.2018
CORAM
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN
Tax Case (Appeal) Nos.1079 to 1082
and 1209 to 1211 of 2007
Tax Case (Appeal) No.1079:-
Commissioner of Income Tax,
Chennai. ... Appellant
-vs-
Shriram Chits & Investments P. Ltd.,
1 Club House Rd, Mount Road,
Chennai-600 002. ... Respondent
Tax Case (Appeal) filed under Section 260A of the Income-tax Act, 1961 against the common order of the Income Tax Appellate Tribunal Madras 'B' Bench, dated 28.09.2006 in I.T.A.No.1173/Mds/1999.
For Appellant : Mr.T.R.Senthil Kumar,
Senior Standing counsel
for Income Tax Department
: assisted by Mr.S.Rajesh,
Senior Standing counsel
for Income Tax Department
For Respondent : Mr.R.Sivaraman
******
COMMON JUDGMENT
[Delivered by T.S.Sivagnanam, J.] These tax case appeals are directed against the common order passed by the Income Tax Appellate Tribunal, Madras 'B' Bench, dated 28.09.2006 in I.T.A.Nos.1173/Mds/1999, 1713/Mds/2000, 1575/Mds/2004, 480/Mds/2002, 1212/Mds/1999, 1716/Mds/2000 and 481/Mds/2002 . These appeals are by the Revenue and they have been admitted on the following substantial questions of law:-
(i) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the assessee is eligible for depreciation on the trucks without any finding of fact that it is the owner of such trucks?
(ii) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the carry forward business losses can be set off against dividend income?
(iii) Whether, in the facts and circumstances of the case and in view of the decision of the Supreme Court in the case of Sriram Chits & Investments P. Ltd. vs. Union of India (AIR 1993 SC 2063) that Chit fund is not a money lending business, the Tribunal was right in treating moneys not paid by the prize chit winners as bad debts?
(iv) Whether there is a relationship of creditor and debtor between the assessee and the subscribers to the chit to warrant the treatment of default in payment by them as bad debt?
2.Mr.R.Sivaraman, learned counsel appearing for the assessee submitted that thought the above four substantial questions of law have been framed for consideration, all the questions do not arise in all the appeals and he has given an index to issues, which arise in respect of the appeals before us. This is not disputed by the Revenue. For better appreciation, the same is quoted hereunder:-
Question of Law ITA Nos.
Assessment Year TC(A) Nos.
Remarks
1.Lease Portfolio Management System 1173/1999 1713/2000 480/2002 1575/2004 1996-97 1997-98 1998-99 1998-99 1079/2007 1080/2007 1081/2007 1082/2007 This issue does not arise in the TC(A) Nos.1209, 1210, 1211 of 2007
2.Carry forward business loss can be set off against Dividend Income 1713/2000 1997-98 1080/2007 This issue does not arise in TC(A) Nos.1079, 1081, 1082, 1209, 1210, 1211 of 2007.
Covered by the assessee's own case in TC(A) Nos.2657 of 2006 and 1017, 1018 of 2007 against the ITA Nos.550, 551 and 552 of 1997 dated 17.09.2014 before the Hon'ble High Court of Madras
3. Bad debts 1173/1999 1713/2000 480/2002 1996-97 1997-98 1998-99 1079/2007 1080/2007 1081/2007 Covered by the assessee's own case in TC(A) Nos.1528, 1529 of 2005 and 1142 of 2006 dated 22.08.2012 before the Hon'ble High Court of Madras and in TC(A) Nos.615 and 616 of 2008 dated 19.12.2012 before the High Court of Madras.
3.The Revenue does not dispute the above submission made by the learned counsel for the assessee. Thus, we propose to decide the substantial questions of law, which arise for consideration in each of the appeals vis-a-vis the relevant assessment years.
4.First we take up the issue with regard to bad debts. This issue arises in all the assessment years.
5.The learned counsel for the assessee submitted that this issue is squarely covered in the assessee's own case in Commissioner of Income Tax vs. M/s.Shriram Chits & Investments Ltd. in Tax Case (Appeal) Nos.996 to 998 of 2005 dated 03.04.2012. The Revenue does not dispute the said proposition. The operative portions of the judgment read as follows:-
9.In order to decide on the rival contentions made, it is necessary to get into the decision of the Apex Court reported in AIR 1993 SC 2063 (Shriram Chits & Investments (P) Ltd. Vs. Union of India & others), a decision which dealt with the vires of the Chit Funds Act.
10.The present assessee company, apart from similarly placed chit companies, challenged the validity of the Chit Funds Act, that the regulatory measures over the business of the chit companies were in violation of Article 19(1) (g) of the Constitution of India. While upholding the provision of the Chit Funds Act, in the decision reported in AIR 1993 SC 2063 (Shriram Chits & Investments (P) Ltd. Vs. Union of India & others), the Apex Court pointed out that the dominant purpose of the Act is to regulate the chit, control the activity of the foreman and protect the interests of the subscribers. The Apex Court further pointed out that the pith and substance of the Act was to deal with special contract and consequently, it fell within Entry 7 of List III of the Third Schedule to the Constitution. In paragraph 13 of the judgment of the Apex Court, it pointed out that Section 6 of the Act specifically refers to chit agreement to be entered into between the subscribers and the foreman. The Act provided for, how the contract has to be implemented and acted upon between the parties to the contract and that it could not be treated as a money lending business. The agreement entered into as per Section 6 provides for distribution of the chit amount. The foreman brings the subscribers together. The Act provides for payment of commission for the services rendered by the foreman and the foreman does not lend any money belonging to him. The foreman is responsible for regular collection of subscriptions from a widely scattered body of members. He has to conduct the draws or the auction and maintain accounts. He is under obligation to pay the prize amount on the due date whether or not all the members have paid their subscriptions. In case of defaults, he had often to make good the deficit out of his own resources. If the prized member defaults in his instalments, litigation follows to recover the amount. If the defaulter is a non-prized member, the foreman has to find out a suitable substitute or, in the alternative, has to take over the chit himself and continue the business. Noting the obligation of the foreman, the Apex Court pointed out, that the dominant purpose of the Act being to regulate the chit, control the activity of the foreman and protect the interest of the subscribers, the legislature had brought in this special kind of contract. Thus holding that the provisions of the Act are regulatory in nature, the Apex Court further pointed out that the Act intends to avoid fraud played on the subscribers by delaying the payment. Dealing with the nature of chit agreement, the Apex Court referred to the decision of the Kerala High Court reported in AIR 1983 Ker 178 (FB) (Janardhana Mallan Vs. Gangadaran), holding that the chit transaction is not a money lending transaction within the meaning of Money Lenders Act and there is no creditor and debtor relationship, for the purpose of it being treated as a money landing transaction.
11.Keeping this declaration of law, when we look into the provisions of the Chit Funds Act, one may note the obligation of the foreman, particularly as given under Section 21. While enumerating the rights of the foreman, the Act also takes care to impose an obligation on the foreman to do all acts which may be necessary for the due and proper conduct of the chit under sub clause (f) which empowers the foreman to substitute subscriber in the place of defaulting subscriber. As far as the duties of the foreman as enumerated under Section 22(2) of the Act is concerned, the Act stipulates that in the event of default by a prized subscriber, in respect of the prize amount due in respect of any draw remaining unpaid until the date of the next succeeding installment, the foreman shall deposit the prize amount in a separate account in an approved bank mention in the chit agreement. The Act also provides that where the prize subscriber does not collect the prize amount in respect of any instalment of a chit within a period of two months from the date of the draw, it shall be open to the foreman to hold another draw in respect of such instalment. The Section also provides that the foreman may appropriate to himself the interest accruing on the amount deposited under the second proviso to sub-section (1), for which he is entitled.
12. As far as the balance sheet of the company is concerned, Section 24 enumerates what is required to be stated in the balance sheet. The Rules therein provide for the format of the balance sheet. A reading of the schedule, as against the assets side, shows loans and advances to subscribers as well as the liabilities as relatable to non-prized subscribers. The assets side also contains receipt of interest and such other amount which can be transferred to fall under the caption of assets. In terms of the provisions thus prescribed in Section 24, the balance sheet and profit and loss account clearly showed the amount intimated by the company as against the default committed by the chit holders and the balance sheet was also audited by the Chartered Accountant qualified to act as Auditor under the Companies Act. In the context of the payment thus made, the question that arises herein is as to whether the activity of the assessee could be termed as falling under the status of a creditor that on the debt amount advanced, the same could be characterised as a debt for the purpose of treating it under Section 36(2) of the Chit Funds Act.
13. It is a settled position of law as held in [2010] 323 ITR 397 (SC) (TRF Limited vs. Commissioner of Income Tax) that after the amendment to Section 36(1)(vii) of the Income Tax Act, with effect from 01.04.1989, it is not necessary for an assessee to establish that the debt, in fact, has become irrecoverable and that it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the context of the different stand taken by the revenue in the year and the consideration in contradistinction to the earlier years, the terms of the claim of the assessee in earlier years assume significance.
14. It is not denied by the Revenue that in respect of the earlier years 1990-91 and 1991-92, the claim of the assessee for deduction as a bad debt was allowed and in the appeal preferred by the Revenue before the Tribunal, the Tribunal referred to the clarification issued by the Board in F.No.169/21/78/21/78-IT(80) dated 16th May 1997, which reads as follows:-
(a) If any person organises Chit Funds and for this purposes 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.
(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.
15. The subsequent clarification issued on 25.03.1992, which had been extracted in the order of the Tribunal relating to the assessment years 1990-91 and 1991-92, merits to be extracted hereunder:-
Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes 25th March 1992 The Chief Commissioner of Income tax II New Delhi.
Sir, Subject : CBDT Instruction No.1175 dated May 16, 1973 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.
3. Regarding proceedings under Section 263 pending before the Commissioner of Income-tax Delhi-II, New Delhi,Board cannot issue any directions.
Thanking you, Yours faithfully sd/-
Under Secretary of the Government of India
16. Having regard to the specific observation of treating the unrecovered amount of the subscriber and the debts as bad debts, the Tribunal allowed the case of the assessee that the claim was to be construed as a bad debt, allowable as deduction under Section 36. In the background of the above facts, although we are inclined to dismiss the Revenue's appeal, the decision taken by the Commissioner of Income Tax (Appeals) in respect of the above-said claim merits to be noted herein.
17. A perusal of the order of the Commissioner of Income Tax (Appeals) shows as regards the responsibility of the Foreman as listed under the Chit Funds Act. It is admitted by the parties herein that having regard to the obligation under the Chit Funds Act, the assessee had to pump in its own money for the purpose of ensuring that the chit cycle goes on as promised. It is an admitted fact that in respect of shortfall due to non-payment, the company brought in its own money which was utilised for running the chit business and this did not stand in the way of the statutory obligation of the foreman on getting the chit cycles move on as before. Thus with statutory obligation imposed and well in compliance of the said obligation, that the company had to pay its own money to have the successful chit circulated as before, as pointed out by the Apex Court, if there is an obligation under a special contract between the defaulted chit holder and the company, even if the amount due is not treated as a debt within the meaning of the Money Lenders Act, yet, the contract gives rise to a relationship of a creditor and debtor. Thus, the Commissioner of Income Tax (Appeals) having gone into the requirement of the provisions under the Chit Funds Act, held that the advancement of the money is part and parcel of the business, thus giving rise to a situation that when the defaulter did not make the payment to the company, the company had to claim it as a bad debt for the purpose of deduction under Section 36.
18. It may be of relevance herein to note that while considering the said claim, the Commissioner of Income Tax (Appeals) pointed out that having regard to the nature of payment made, the claim has to be considered as intimately connected with the business, resulting as a case of a bad debt. Hence, apart from Section 36, the same merited to be considered as falling under Sections 28 and 37 in the business expenditure resulting in a loss. As already pointed out, when the Revenue went on appeal as against the view of the Commissioner of Income Tax (Appeals) challenging that it would amount to a bad debt, apparently, no claim was made on the side of the Revenue to dispute the view of the Commissioner of Income Tax (Appeals) that the claim might also fall under the head of business loss under Section 28. thus, when the Tribunal rejected the Revenue's appeal, it clearly pointed out that it confirmed the view of the Commissioner of Income Tax (Appeals) as stated above that the claim is allowable not only as a bad debt, but could also be considered as a case of business loss under Section 28. The question raised before this Court thus is relatable to one part of the Tribunal's order as to whether the defaulted amount paid by the assessee could be treated as a bad debt.
19. It is not denied by the Revenue that the payment made in the course of the business had resulted in a loss of the chit amount which is also allowable under Section 28. Given the above-said fact, we have no hesitation in rejecting the Revenue's appeal on this question.
20. Learned counsel appearing for the Revenue brought to our attention the decision of the Bombay High Court dated 28.02.2012 in T.C.No.89 of 2011, wherein, the Bombay High Court had an occasion to consider the money paid by the stock broker on the default committed by its client. The Bombay High Court held that the liability to pay the brokerage may arise at a point of time anterior to the liability to pay the value of the shares transacted. Nevertheless, it would constitute part of the debt that arises on the same transaction involving the sale or purchase of shares. Since the transactions are part of the same transaction and since both form a component or part of the debt, the requirement of Section 36(2)(i) are fulfilled and the assessee is entitled to treat it as a bad debt. Extending the same logic to the present case herein, going by the obligation of the foreman arising under Sections 21 and 22 of the Chit Fund Act to make good the default to the successful bidder on the subsequent day transaction, the claim was rightly considered by the Tribunal as one allowable under Section 36 of the Act.
21. As far as the reliance placed on the decision reported in [2010] 328 ITR 342 (Commissioner of Income Tax vs. Sahib Chits (Delhi) (P) Ltd.) is concerned, we do not find that the Revenue could draw any assistance from the said decision, since the said decision relates to a totally different situation. A perusal of the above judgment of the Delhi High Court shows that it is more on the question of discount allotted to the members of the chit in the prized chit disbursed by the various members and the successful bidder being given the contribution made. Thus the distribution was not made out of any money borrowed by the assessee to result in a debt for considering the same as deduction at source.
22. As far as the decision reported in [1998] 229 ITR 727 (Suman Saving and Investments Pvt. Ltd. vs. CIT) is concerned, the same also is not of any relevance to the case herein, considering the amendment to Section 36 and the nature of business of the assessee herein on the admitted position that when the Department had not agitated the issue further in respect of assessment years 1990-91 and 1991-92 and the situation herein is no different from that of the earlier orders, we have no hesitation in confirming the order of the Tribunal, thereby dismissing the Revenue's appeal.
In the result, the Tax Case Appeals stand dismissed. No costs.
6.Accordingly, 3rd and 4th substantial questions of law, which arise in all the cases, are answered against the Revenue and in favour of the assessee.
7.The next substantial question of law, which is taken up for consideration is whether in the facts and circumstances, the Tribunal was right in holding that carry forward business losses can be set off against dividend income?
8.As mentioned above, this issue arises only in one of the assessment years, viz., 1997-98, which is subject matter of appeal in T.C.(A) No.1080 of 2007.
9.We have perused the order passed by the Tribunal and in paragraph 7 in page 9 of the order passed by the Income Tax Appellate Tribunal (ITAT), this issue has been considered. The Tribunal pointed out that this issue has been considered by the Tribunal in the assessee's own case for the earlier years and quoted that portion of the order. However, we find that this is not the assessee's own case, but the assessee's sister concern, viz., Shriram Investments (firm). The appeals being I.T.A.Nos.550 to 552/Mds/1997 for the assessment years 1992-93 to 1994-95.
10.It is not in dispute that the transaction was identical and the Tribunal considered the submissions and held that the assessee's plea that the investments were business investments and the interest on borrowings made for these investments have to be allowed under the head 'business income'. The Tribunal while rendering such a finding of fact, took note of the legal principle laid down in
(i) United Commercial Bank vs. Commissioner of Income Tax reported in 32 ITR 688;
(ii) Commissioner of Income Tax vs. Cocanada Radhaswami Bank Limited reported in 57 ITR 306;
(iii) Assistant Commissioner of Income Tax vs. Laxmi Agents Private Limited reported in 125 ITR 227; and
(iv) Commissioner of Income Tax vs. Rajeeva Lochan Kanoria reported in 208 ITR 616, wherein, it was held that, if in substance investments are business investments, the interest on borrowings made for those investments have to be allowed irrespective of the fact that income from dividend has to be assessed under a separate head.
11.The Revenue did not dispute that the transaction was identical, neither before the Tribunal nor before us. Therefore, the case on hand stands covered by the decision of the Tribunal in the assessee's sister concern [Shriram Investments (firm)].
12.The Revenue preferred tax case (appeals) against the said order of the Tribunal in T.C.(A) Nos.2657 of 2006 and 1017 and 1018 of 2007, which were dismissed by judgment dated 17.09.2014. Thus, the question has to be answered in favour of the assessee and against the Revenue. Accordingly, 2nd substantial question of law is answered in favour of the assessee and against the Revenue.
13.The next question to be considered is whether the Tribunal was right in holding that the assessee is eligible for depreciation on the trucks without any finding of the fact that it is the owner of such trucks.
14.We have perused the order of the Tribunal from which, it is seen that the Tribunal has examined the factual position. After perusing the records, the Tribunal has given its findings in paragraph 11 of the impugned order wherein, it has been pointed out that the Tribunal has gone through the copies of the sub-lease agreement, the relevant purchase bills for the vehicles and other connected papers from which, it can be seen that the dealers of the vehicles have sold the vehicles to the Bank of Madura Ltd. only and thus, they are the absolute owners of the vehicles. Further, the Registration Certificate not only shows the existence of the vehicles, but their leasing also. Thus, the Tribunal concluded that the RC books, which were issued by the State Government, establish the existence of the vehicles and that the vehicles are registered in various States and therefore, held that it is wrong on the part of the Assessing Officer as well as the Commissioner of Income Tax (Appeals) to hold that no assets are involved in the lease transaction. Thus, on appreciation of the factual position, the Tribunal observed that the assets are purchased from various companies and the clients are not taking the assets on lease whereas, various individual persons or organizations have undertaken the sub-lease from the assessee company. After analyzing the factual position, the Tribunal allowed the depreciation on Lease Port Folio Management System and accordingly, the assessee succeeded.
15.The learned counsel appearing for the assessee submitted that first substantial question of law, which has been framed for consideration may be answered in favour of the assessee, as the factual position has been clearly spelt out by the Tribunal. Apart from the said fact, in the decision of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd. vs. Commissioner of Income-tax reported in [2013] 350 ITR 527 (SC), identical facts arose for consideration and the Court held that since the assessee is the owner of the vehicle, it has used the asset in the course of business, thus, satisfying both the regulations and Section 32 of the Act and hence, entitled to claim depreciation in respect of addition made to the trucks, which were leased out. Therefore, it is submitted that the said question of law has to be answered in favour of the assessee.
16.The learned Senior Standing Counsel appearing for the Revenue on instructions would submit that the decision in the case of I.C.D.S. Ltd. (supra), referred by the assessee would squarely cover the case of the assessee. In the said case, the assessee's company was engaged in the business of hire purchase, leasing and real estate business, etc. It had purchased vehicles directly from the manufacturers. The assessee, as a part of its business, leased out these vehicles to its customers and thereafter, had no physical affiliation with the vehicles. In fact, lessees were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988. In the return of income, the assessee claimed depreciation in relation to the vehicles, which had been financed by the assessee, but registered in the name of third parties. The assessee also claimed depreciation at a higher rate on the ground that the vehicles were used in the business of running on hire. The Assessing Officer disallowed the claims, both of depreciation and higher rate, on the ground that the assessee's use of these vehicles was only by way of leasing out to others and not was actual user of the vehicles in the business of running them on hire and it had merely financed the purchase of these assets and was neither the owner nor user of these assets. The Tribunal agreed with the assessee on both the counts. The High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled to claim depreciation in respect of these vehicles.
17.On appeal before the Hon'ble Supreme Court, it was held that Revenue argued that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation, and not the assessee. We are not persuaded to agree with the argument. The Section requires that the assessee must use the asset for the purposes of business. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of Section 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assessee. In the present case before us, the assessee is a leasing company which leases out trucks that it purchases. Therefore, on a combined reading of Section 2(13) and Section 2(24) of the Act, the income derived from leasing of the trucks would be business income, or income derived in the course of business, and has been so assessed. Hence, it fulfills the aforesaid second requirement of Section 32 of the Act viz., that the asset must be used in the course of business.
18.In the instant case, the Assessing Officer doubted the very genuineness of the transaction and also as to whether the vehicles were in existence and the assessee had acted only as a financier. However, for the subsequent year, the details were verified and it was recorded by the tribunal that the vehicles were registered in various States and it is wrong on the part of the Assessing Officer as well as the Commissioner of Income Tax (Appeals) to hold that no assets are involved in the lease transaction. We find from the order passed by the Tribunal that, the Tribunal had gone through the copies of the sub-lease agreement, the relevant purchase bills for the vehicles and other connected papers including bank documents and registration certificate, etc., and rendered such finding. Thus, the issue has been factually concluded by the tribunal and the case of the assessee is also fully supported by the decision in the case of I.C.D.S. Ltd. (supra), which decision the Revenue does not dispute.
19.Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue.
20.Thus, for the above reasons, the appeals, filed by the Revenue, are dismissed. No costs.
(T.S.S., J.) & (V.B.S., J.)
04.07.2018
abr
Index : Yes
To
1.The Commissioner of Income Tax,
Chennai.
2.The Income Tax Appellate Tribunal
Madras 'B' Bench.
3.The Commissioner of Income Tax (Appeals)-IV,
Chennai.
T.S.Sivagnanam, J.
and
V.Bhavani Subbaroyan, J.
(abr)
T.C.(A) Nos.1079 to 1082 of 2007
and 1209 to 1211 of 2007
04.07.2018