Income Tax Appellate Tribunal - Hyderabad
M/S. Shriram Chits (P) Ltd.,, Hyderabad vs Assessee on 19 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 651/Hyd/2012
Assessment year 2009-10
M/s. Shriram Chits (P) Ltd. Vs. The Joint CIT (OSD)
Hyderabad Circle-3(1)
PAN: AAFCS4916D Hyderabad
Appellant Respondent
Appellant by: Sri K.C. Devadas
Respondent by: Sri M.H. Naik
Date of hearing: 19.03.2013
Date of pronouncement: 05.04.2013
ORDER
PER CHANDRA POOJARI, AM:
This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 30.03.2012 for assessment year 2009-10.
2. The first effective ground in this appeal is as under:
The learned CIT(A)-IV, Hyderabad ought to have also held that the deduction of irrecoverable amounts in respect of running and terminated chits was deductible u/s. 28 of the IT Act, 1961 as a loss arising in the course of carrying on business by the appellant.
3. Brief facts of the issue are that the assessee has debited an amount of Rs. 32,15,07,099.61 as bad debts written off. Out of this Rs. 16,51,09,672.70 pertains to running chits and an amount of Rs. 15,64,97,426.91 pertains to terminated chits. The assessee explained before the Assessing Officer that these 2 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== amounts were due and payable by defaulting prized subscribers. The assessee submitted that sec. 22 of the Chit Funds Act enjoins upon the Foreman, i.e. the assessee company, an obligation to pump in money on behalf of the defaulting prized subscribers in order to complete the cycle of a particular chit group. It was averred that the foreman has to step into the shoes of the defaulting subscribers and that in the chit fund business, the principal risk undertaken by the assessee is the loss arising out of defaulting members.
4. With regard to the bad debts in respect of chit groups, the assessee explained that irrecoverable amounts of subscription in respect of terminated chit groups outstanding as on 31.3.2009 were written off during the A.Y. 2009-10. For bad debts in respect of running chit groups, the assessee explained that irrecoverable amounts of subscription which were in arrears for 6 months as on 31.3.2009 were written off. The assessee claimed that future instalments of subscription payable by the prized subscribers were not written off. It claimed that these bad debts have been claimed in terms of the method adopted by the assessee from· assessment year 1998-99 onwards.
5. Citing from the order of the Tribunal dated 26.7.2004 (page 50 & 51, para 6.6 (XX), (XXI) and [xxi], the assessee 3 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== submitted before the Assessing Officer that after verifying the facts, bad debts written off in respect of running chit groups were allowed and modification order were passed on these lines for the A.Y. 1998-99 and 1999-2000. In the assessment year 2000-01 also, bad debts written off in respect of running chit groups were allowed in the modification order. Such bad debts allowed by the CIT(A) also in the A.Y. 2001-02 to 2007-08, following the order of the Tribunal.
6. The representative of the assessee alternatively submitted that the amounts not recovered from the defaulting prized subscribers should be considered as trading loss per se arising in the course of. carrying on of the business by way of providing guarantee within the meaning of sec. 22 of the Chit Funds Act.
7. On appeal the CIT(A) observed that an identical issue has been decided in the assessee's appeal for asst. years 2004-05 to 2008-09 also. It was observed in those orders that for asst. years 1995·96 and 1997-98, bad debts in respect of terminated chits had been allowed as deduction by CIT (Appeals), and the departmental appeal in this regard was dismissed by the Tribunal. In view of the above, bad debts relatable to Terminated Chits were directed to be allowed. The view taken in the appellate order for the A.Y. 2007-08 has been upheld by the 4 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== Tribunal also in their order dated 11.3.2011. Continuing the stance taken on this issue in earlier years, and following the decision of the Tribunal, therefore, bad debts relatable to terminated chits are directed to be allowed in respect of the A.Y. 2008·09 also.
8. The CIT(A) observed, with regard to allowability of bad debts relatable to running chits is concerned, that it is seen from Tribunal order that vide par 6.6 (xx) and 6. 6 (xxi) , the Tribunal had set aside the matter for computing bad debts so relatable. Following the decision of Tribunal in assessee's case in the earlier years on this issue, as also continuing the stance taken in assessment year 2005-06 to 2008-09, he directed the Assessing Officer to compute bad debts relatable to running chits as per the directions contained in the said order of Tribunal. Thus, the CIT(A) allowed claim of the assessee at Rs. 1,60,80,355 out of Rs. 30,55,26,745.
9. Since the claim of the assessee relating to bad debts has been allowed under the provisions of sec. 36(1}(viii) by the CIT(A), the alternative claim u/s. 28(1)/37(1) is not required to be adjudicated. Therefore, he has dismissed the alternative ground. Against this the assessee is in appeal before us.
10. We have heard both the parties and perused the material on record. The crux of argument of the assessee's counsel is 5 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== that in earlier years similar claim of the assessee has been allowed by the Tribunal and on that basis the present claim is to be allowed. He relied on the order of the Tribunal dated 12.10.2012 in ITA No. 975/12 for A.Y. 2009-10. While disposing the appeal for A.Y. 2009-10, the Tribunal relied on the earlier order of the Tribunal for A.Ys. 1995-96 to 1999-2000, 2002-03 to 2006-07 and 2008-09. In earlier year, the Tribunal remitted the issue for computing the bad debts relatable to running chits. We have no dispute with regard to the findings of the Tribunal on earlier occasion. The amount of loss incurred by the assessee has to be allowed on both running and terminated chits if irrecoverable if the prized chit amount has gone out of the hands of the assessee. In other words, bad debts can be allowed to the extent of instalments defaulted by the prized subscribers and written off as bad debt in the books of the assessee. Accordingly, we direct the Assessing Officer to decide the issue in the light of the order of the Tribunal for A.Ys. 1995- 96, 1997-98, 1998-99 and 1999-2000 in ITA No.500/Hyd/1999 and 506/Hyd/1999 (1995-96), 294/Hyd/2010 and 327/Hyd/ 2001 (1997-98), 471/Hyd/2002(1998-99), 1049/Hyd/2002 (1999-2000) in assessee's own case dated 26.7.2004 wherein the Tribunal remitted the issue back to the file of the Assessing Officer to see whether the assessee made a claim of bad debt and written off in the books of account. Thus on similar 6 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== direction we remit the issue back to the file of the Assessing Officer to re-examine the issue in the light of the order of earlier years i.e., 1995-96, 1997-98, 1998-99 and 1999-2000 (supra). This ground of the assessee is allowed for statistical purposes.
11. The next ground (ground No. 4) is with regard to upholding the taxability of foreman dividend at Rs. 8,44,39,492. Brief facts of the issue are that during the assessment proceedings, the Assessing Officer found that the above referred dividend income on company's chits was claimed as not taxable in view of the decision of Hon'ble Punjab and Haryana High Court in the case of Soda Silicate and Chemical Works (179 ITR 588). However, the Assessing Officer concluded that the contributors to the chit were not contributors to the mutual society. Besides, the profit arising as dividend on the chit subscribed by the Foreman is not distributed among the subscribers but among the share holders of the assessee company. He further found that Department's contention had been upheld by the Tribunal for Asst. Years 1999-2000, 2000-01 and 2001-02 as reported in 83 ITD 792, besides in the assessee's own appeals for the A.Ys. 2002-03 to 2007-08. He also referred to the decision of the Tribunal Delhi Bench in the case of Sarvpriya Chits Pvt. Ltd. vs. CIT (60 ITD 674) wherein it was held that in case of chit fund business, principle of 7 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== mutuality will not apply. Accordingly, the claim of exemption of Foreman's dividend was rejected and addition under reference was made.
12. During the appellate proceedings, the representative of the assessee submitted that though the department's contention has been upheld by the Tribunal, the assessee's appeal under sec. 260A of the Act on this issue is still pending before the Hon'ble Andhra Pradesh High Court. He, therefore, reiterated the arguments submitted on this issue in the earlier years.
13. On appeal the CIT(A) followed the earlier order of the Tribunal in assessee's own case reported in 83 ITD 792 (Hyd) for A.Y. 1991-92 to 1994-95 wherein the Tribunal observed as follows:
"The only issue to be decided was whether the principle of mutuality was applicable to the assessee, which was a chit fund company. Admittedly, the assessee was a commercial entity formed to derive profits and gains from the business of chits. It is a settled proposition of law that the principle of mutuality is not applicable to commercial organisations formed with an object of earning profit of commercial nature. Under consideration was the case of a company which carried on the business of chit funds and not that of an assessee who joined as a subscriber to chits for personal savings or otherwise. The issue on hand was the taxability of The dividend earned by the assessee- company, which joined the chit groups promoted by it either as a foreman in fulfilment of the requirement of law, i.e., Chit Funds Act, 1982 (Central Act 40 of 1982) or on the assessee- company entering into the shoes of defaulting subscribers or in some cases to fill up vacant chits as a matter of 8 ITA No. 651/Hyd/2012 M/s. Shriram Chits (P) Ltd.
==================== necessity or expediency of its business and not by choice. It was not the case of the assessee-company that it participated in chits promoted by other companies or entities. The basic principle of mutuality cannot be applied to income from commercial pursuits. Profit earning was the motto of the assessee-company. The profits in question arose and accrued from the trade or vocation which it carried on.
The principles of mutuality are based on the concept that no one can make profits out of himself. The essence of mutuality is of complete identity between the contributor and the participator. Under section 21 of the Chit Funds Act, 1982, the foreman 5 role and rights are at variance with the other participators and contributors. The foreman need not forego discount or loss and can take the first instalment. Thus, it cannot be said that there is complete identity between the foreman and other participators in the chit. It cannot also be said that the profit is made out of itself. Thus, the principles of mutuality cannot on this count also be applied to chit fund companies. The assessee was a business concern and its aim was to make profits and, thus, the principles of mutuality could not be applied to it. The issue on hand, was covered by the judgment of the jurisdictional High Court in the case of Kovur Textiles (supra), inasmuch as the assessee had earned income for the purposes of its business and to be utilised only for the purposes of its business. The issue was squarely covered in favour of the revenue by the decision of the jurisdictional High Court in the case of Purushotham Reddy (supra) as the only plank on which. exemption was claimed in that case, was mutuality and nothing else. It could be said that it was a consistent view of the jurisdictional High Court. Thus, the order of the Commissioner (Appeals) was upheld and appeals of the assessee dismissed."
14. Before us the learned AR made a plea that the assessee claim has to be allowed in view of the judgement of Madras High court in the case of CIT vs. Shriram Chits and Investments Ltd. (83 DTR 208).
9 ITA No. 651/Hyd/2012
M/s. Shriram Chits (P) Ltd.
====================
15. We have heard both the parties ad perused the material on record. The plea of the assessee is devoid of merit. The issue considered by the Madras High Court is relating to allowability of contribution of the assessee as a foreman in the place of a defaulted subscriber as bad debt u/s. 36(1)(vii) or as a business loss u/s. 28(1) of the Act. Now we are concerned in assessee's case with regard to taxability of foreman dividend received. It was categorically held by the Tribunal in earlier years as there is no applicability of "mutuality" on this income. Being so, we are inclined to follow the earlier order of this Tribunal and dismiss this ground.
16. The last ground in assessee's appeal is with regard to levy of interest u/s. 234B and 234C. Levy of interest under these sections is consequential and mandatory which has to be computed by the Assessing Officer while passing giving effect order.
17. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 5th April, 2013.
Sd/- Sd/-
(SAKTIJIT DEY) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 5th April, 2013
10 ITA No. 651/Hyd/2012
M/s. Shriram Chits (P) Ltd.
====================
Copy forwarded to:
1. M/s. Shriram Chits (P) Ltd., 3-6-478, 3rd Floor, Anand Estates, opp. Indian Bank, Liberty Road, Himayathnagar, Hyderabad-500 029.
2. The Joint CIT (OSD), Circle-3(1), Hyderabad.
3. The CIT(A)-IV, Hyderabad.
4. The CIT-III, Hyderabad.
5. The DR - A Bench, ITAT, Hyderabad.
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