Income Tax Appellate Tribunal - Hyderabad
M/S. Shriram Chits (P) Ltd.,, Hyderabad vs Department Of Income Tax on 27 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 975/HYD/2012
Assessment Year : 2009-10
Dy. Commissioner of Income-tax, ... Appellant
Circle-3(1), Hyderabad
Vs.
M/s Shriram Chits (P) Ltd., ... Respondent
Hyderabad
(PAN - AAFCS4916D/SH-15)
Appellant by : Shri K. Gnana Prakash
Respondent by : Shri K.C. Devdas
Date of Hearing : 27/09/2012
Date of Pronouncement : 12/10/2012
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
This appeal filed by the revenue is directed against the order of CIT(A)-IV, Hyderabad dated 30/03/2012 for the assessment year 2009-10.
2. Ground No. 1 is general in nature and the same is not required to be adjudicated by us.
2975/Hyd/2012 M/s Shriram Chits (P) Ltd.
3. Ground No. 2 is directed against the action of the CIT(A) in deleting the disallowance of bad debts on running and terminated chits.
4. The assessee had debited an amount of Rs. 32,16,07,099.61 on account of bad debts written off, out of which Rs. 16,51,09,672.70 pertained to the running chits, while Rs. 15,64,97,426.91 pertained to the terminated chits. The AO held that since the assessee is in chit fund business and not in money lending business, the bad debt to the extent of which is offered as income on accrual basis in the previous year or any earlier previous years shall alone be eligible for deduction u/s 36(1)(xii) of the I.T. Act, 1961 and, therefore, he restricted the claim of bad debt to 5% of amounts due from prized subscribers, which is the Foreman's commission as the same was offered to income either in the previous year or in the earlier previous years. The remaining 95% of the bad debts, not offered as income in the previous year or any other earlier previous year were brought to tax by the AO. The AO, therefore, restricted the bad debts claim of the assessee to Rs. 1,60,80,355/- and the balance amount being Rs. 30,55,26,745/- was disallowed and added back to the total income.
5. Aggrieved, the assessee carried the matter in appeal before the CIT(A).
6. After considering the submissions of the assessee, the CIT(A) directed the AO to allow the bad debts claim of the assessee by holding as under:-
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"6. I have gone through the submissions of the appellant as also the arguments of the AO put forth in the assessment order. It is seen that an identical issue has been decided in the appellant's appeal for assessment 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(A), and the departmental appeal in this regard was dismissed by Hon'ble ITAT. In view of the above, bad debts relatable to terminated chits were directed to be allowed. The view taken in the appellant order for the AY 2007-08 has been upheld by the Hon'ble ITAT also in their order dt. 11/03/2011. Continuing the stance taken on this issue in earlier years, and respectfully following the decision of the Hon'ble Jurisdictional ITAT, therefore, bad debts relatable to terminated chits are directed to be allowed in respect of the AY 2008-09 also.
6.1 So far as the allowability of bad debts relatable to running chits is concerned, from the orders of Hon'ble ITAT, it is seen that vide para 6.6(xx) and 6.6(xxi), the Hon'ble ITAT had set aside the matter for computing bad debts so relatable. Respectfully following the decision of jurisdictional ITAT in appellant's case in the earlier years on this issue, as also continuing the stance taken in assessment year 2005-06 to 2008-09, therefore, the AO is directed to compute bad debts relatable to running chits as per the directions contained in the order of Hon'ble ITAT. Ground No. 1(a) is therefore decided in favour of the appellant, subject to the above direction."
7. Aggrieved by the order of the CIT(A), the revenue is in appeal before us.
8. We have heard both the parties and perused the record as well as the orders of the authorities below. We find that the issue in dispute is squarely covered by the decisions of the ITAT in assessee's own cases for earlier years for AYs. 1995-96 to 1999-00, 2002-03 to 2006-07, 2007-08 and 2008-09 and the CIT(A) followed the same and decided the issue, therefore, we find no infirmity in 4 975/Hyd/2012 M/s Shriram Chits (P) Ltd.
the order of the CIT(A) and the same is hereby confirmed. Accordingly, ground No. 2 raised by the revenue is dismissed.
9. Ground No. 3 is directed against the action of the CIT(A) in deleting the disallowance made by the AO towards commission on cancellation chits.
10. The AO had noticed that from the AY 1998-99, the assessee is recognizing the income from 'commission on cancelled chits' on actual payment basis, as against the earlier policy of recognizing the same on removal basis. He noted that when non-prized subscribers make default in payment of later instalments of their subscriptions, new subscribers were taken in their place. The defaulting non prized subscribers get back their subscriptions after deduction of commission of 5% of the chit value on cancelled chits. He opined that the income by way of commission @5% on the amount payable to the removed subscribers accrues at the time of completion of the series as per the chit agreement and not when the account of the defaulting non-prized subscriber is settled by payment to him, as contended by the assessee. After referring to the provisions of the Andhra Pradesh Chit Fund Act, 1971, decisions of High Court and Supreme Court and the details furnished by the assessee, the AO observed that the amount to which the assessee was entitled as commission from the removed subscribers in respect of the chit series which were completed during the FY 2008-09, @5% of chit value of cancelled chits was Rs. 8,75,71,450/- and out of the same, an amount of Rs. 8,00,92,773/- had been added back to the income of the assessee in the assessment order for AY 2008- 5 975/Hyd/2012 M/s Shriram Chits (P) Ltd.
09.The balance amount of Rs. 74,78,677/- was added back to the total income of the assessee for the year under consideration.
11. On appeal, before the CIT(A), the learned AR of the assessee submitted that the Hon'ble ITAT "B' Bench in its order dated 20/07/2004 held that the method of accounting of commission on cancelled chits adopted by the assessee was correct. After considering the submissions of the assessee, the CIT(A) held that since the accounting treatment given by the assessee to such 'commission' has been upheld by the Hon'ble ITAT in the earlier years, respectfully following the decision of the ITAT, directed the AO to accept the same and deleted the addition of Rs. 74,78,677/- made by the AO.
12. Aggrieved, the revenue is in appeal before us.
13. The learned counsel for the assessee canvassed that the issue in dispute is squarely covered by the decisions of the ITAT in assessee's own case for earlier years. The learned DR, on the other hand, did not controvert the submission made by the learned counsel for the assessee nor brought any contrary decision in this regard.
14. We have heard both the parties and perused the record. We find that the issue is squarely covered by the decisions of the ITAT in assessee's own cases in earlier years. In AY 2008-09 being ITA Nos. 390/Hyd/2012(Revenue's appeal) and 324/Hyd/2012 (assessee's appeal), the Tribunal dismissed similar ground raised by the revenue by observing as under:-
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"11. In ground No.3, the revenue has challenged the deletion of the amount of Rs.1,62,45,800/- towards commission on cancelled chits. We find identical issue came up before the ITAT, Hyderabad Bench in assessee's own case passed in ITA No.120/Hyd/2010 the ITAT following its earlier order passed in assessee's own case upheld the order of the CIT (A) in allowing the commission on cancelled chits. The observation of the ITAT in para-15 which is extracted hereunder:-
"15. Similar issue came up for consideration before this Tribunal in assessee's own case in earlier orders for the assessment years 1998899, 1999-2000 in ITA Nos.471/H/2002 & 1049/H/2002 respectively wherein the Tribunal held in Para 6.3 as follows:
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 recognised as income by way of transfer from current liabilities to profit and loss account. Reliance placed by the Revenue on the Special Bench decision of the Tribunal in the case of Shriram Chits & Investments P Ltd. Chennal Vs. 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 recognised 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 natures 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· recognised as Income on the finalisation of the issues. This is not an unacceptable proposition. We agree with the 7 975/Hyd/2012 M/s Shriram Chits (P) Ltd.
submissions 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."
Following the aforesaid order of the ITAT, we uphold the order of the CIT (A) and reject the ground raised by the Revenue."
15. Since the issue under consideration is identical to that of AY 2008-09, respectfully following the decision of the coordinate bench in that year, we uphold the order of the CIT(A) in deleting the addition of Rs. 74,78,677/- made by the AO and dismiss the ground of appeal of the revenue.
16. Ground No.4 is directed against the order of the CIT(A) in deleting the disallowance of royalty payment made by the AO.
17. As per the assessment order, the royalty payment of Rs. 3,29,63,986/- made to M/s Shriram Financial Services Holdings P. Ltd., Chennai (formerly known as Shriram Chits and Investments P. Ltd., Chennai) name changed in AY 2006-07. The AO observed from records that the assessee was no more a subsidiary of the said compay. However, the AR of the assessee maintained before him that royalty was being paid to him in line with earlier years and that the subsequent independent status of the assessee had no impact on it. The AO found that this issue had arisen for the first in AY 1999-2000 on the ground that since 01/04/1998 as the assessee started making royalty payment in view of the agreement for the licence to use their logo. However, He noticed that the assessee had been using the logo since assessment year 1988-89 and no reason could be adduced as to why the payment of royalty suddenly started 8 975/Hyd/2012 M/s Shriram Chits (P) Ltd.
after ten years of using the logo. He opined that mere use of their logo could not be considered as giving any additional advantage to the assessee in view of their goodwill earned by them on their won in the state of Andhra Pradesh. He further felt that the transaction between the assessee and the Chennai company, which is a major share holder in the assessee company was nothing but a transaction of mutual interest. He also took note of the fact that Shriram Chits and Investment Ltd., Chennai, had no taxable income or any tax liability under the regular provisions of the Act upto the AY 2002-03 and for the assessment year 2005-06. The AO had tabulated the details of their income and the tax payment at pra 6.3 of the Assessment order. He felt that the royalty payment was only meant to reduce the taxable income of the assessee company, without resulting in any additional tax liability of the holding company. Considering that the said payment had no rational or logical basis and could not be considered as arising out of business expediency in any manner, the AO concluded that the royalty payment of Rs. 3,29,63,986/- is not wholly and exclusively incurred for the purpose of business as contemplated u/s 37(1) and, therefore, disallowed the same.
18. On appeal, before the CIT(A), it was pointed out by the AR of the assessee that similar came to the ITAT in assessee's own case for AY 2004-05 dt. 26/07/04 wherein the ITAT had decided the issue in favour of the assessee. The CIT(A) following the order of the ITAT in assessee's own case directed the AO to allow deduction in respect of such payments of royalty.
19. Aggrieved, the assessee is in appeal before us.
9975/Hyd/2012 M/s Shriram Chits (P) Ltd.
20. Before us, the learned counsel for the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of the ITAT in assessee's own case for AY 2008-09 (supra). The learned DR did not object to the submission made by the learned counsel for the assessee.
21. After hearing the rival submissions and perusing the record, we find that the issue in dispute is squarely covered by the orders of the ITAT in assessee's own cases in earlier years. In AY 2008-09, the ITAT while rejecting the ground raised by the revenue held as under:
"12. Ground No. 4 relates to deletion of the royalty payment of Rs.3,34,31,583/-. Similar issue came up before the ITAT for the earlier assessment year in iTA No. 490/Hyd/10, ITA No.720/Hyd/10 and the ITAT held in the following manner:-
"20. Similar issue came up for consideration before this Tribunal for the assessment years 2004-05! 2005~06 and 2006-07. The Tribunal vide its order dated 26.7.2004 in Para 20 held as follows: Page 136, 137, 138 of PB.
6.7(lv): We are convinced with the arguments of the learned counsel for the assessee. The Bangalore Bench of the Tribunal In ITA No.751, ·750, 749 &. 748/(Bang.)/1998 In the case of M/s Srlram Chits (Bangalore) Ltd. Vs. DCIT (assistant) Special Range, Bangalore held as follows:
"29. We have carefully gone through the records and consideration the rival contentions. M/s Sriram Chits &. Investment (P) Ltd. having registered office at Madras was the absolute owner of the copy right relating to existing artistic work "Srlram Chits" logo registered as such under the provisions of the Copy Right Act, 1957 with the Registrar of Copyrights bearing registration No.A/49899/88 dated 7.7.1988. The assessee entered Into an agreement with the holding company for exclusive use of the logo of the holding company In the course of soliciting Its business amongst potential Investors. The conditions of the agreement provided that the assessee shall pay royalty of 0.5% on the annual auction turnover of the assessee determined on the basis of value of auctions fixed during the year. In fact, the assessee has used the logo to the best advantage of business. The assessee was to carry on the business of chit fund In the state of Karnataka and the holding company gradually stopped floating new (grounds as It did In 1984) allowing subsidiary company to expand itself.10
975/Hyd/2012 M/s Shriram Chits (P) Ltd.
The growth of business of the assessee over the years of the order of the CIT (A) is very much relevant. The relevant portion reads:
1. Srlram Chits 8r. Investments (P) Ltd. commenced operations In Karnataka In the year 1984. The business of the company In Karnataka Increased over the years upto 1990-91 when the auction turnover touched Rs.80.39 lakhs.
2. Srlram Chits and Investments (P) Ltd. decided to expand its business In Karnataka by forming a subsidiary company Srlram Chits (Bangalore) (P) Ltd.
3. In the year 1990, Srlram Chits (Bangalore) (P) Ltd. was formed and was carrying on the business of Chit Funds In the State of Karnataka and Srlram Chits and Investments (P) Ltd. gradually stopped floating new groups allowing the subsidiary company to expand.
4. Srlram Chits (Bangalore) (P) Ltd. since Inception continued to book new business by using the logo of its Holding Company.
5. The business growth of Srlram Chits (Bangalore) (P) Ltd. over the years can be Inferred from the following figures:
FY 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996- 97 No.of 4 6 7 9 11 19 19 Branches Business 29.49 66.41 105 81.26 184.01 260.05 359.05 (In lakhs) Auction 29.49 95.9 181.15 225.69 348.29 542.28 753.23 Turnover
6. The right to use the logo from the Holding Company Sriram Chits and Investments (P) Ltd. was formally given to Sri ram Chits (8angalore) (P) Ltd. the subsidiary company In the year 1994 vide an agreement entered Into, which provided for the payment of certain 010 of the Auction turnover as royalty to Sriram Chits and Investments (P) Ltd. 8
7. By the agreement, Sriram Chits and Investments (P) Ltd., has formally committed Itself to the growth and development of Sriram Chits (Bangalore) (P) Ltd. for a further period of 7 years.
8. The duty of Sriram Chlts and Investments (P) Ltd. does not end with merely transferring the right to sue Its logo to Its subsidiary company. It also assumes the responsibility to ensure that the name which It has built up over the years Is maintained by Sriram Chits (Bangalore) (P) Ltd. Towards the, Sriram Chits and Investments (P) Ltd. has provided financial assistance time and again to Srlram Chits (Bangalore) (P) Ltd. to help Its working capital requirements.11
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When Sriram Chits (Bangalore) (P) Ltd. commenced operations, all Its employees were from Sriram' Chits a. Investments (P) Ltd. who had prior experience In this line. Even now, Sriram Chits (Bangalore) {P} Ltd. looks for managerial support from Srlram Chits and Investments (P) Ltd. which Is being provided. In addition to this, the entire software package of Sriram Chits and Investments {P} Ltd. which was· being used by It for Its operations was transferred to Sriram Chits. ,. (Bangalore) (P) Ltd. for carrying out Its day to day routines. The Holding company also holds periodical meetings with the executives of the subsidiary Company In order to monitor Its activities. : ...
10. The reasonability of 0.5% royal. The use of logo Is enhancing the growth of Sriram Chits (Bangalore) (P) Ltd. cannot be under estimated."
30. The record also shows that holding company was providing financial assistance time and again to the assessee to help In Its working capital requirements. The record further shows that when the assessee commenced Its operation, ails Its employees were from holding company who had prior experience In this line. It Is claimed that even the assessee looks for managerial support, from Its holding company which Is again provided. The holding company Is also stated to have conducted periodical meetings with the executives of the assessee In order to monitor Its meetings. All these and the table extracted above shows that there has been a substantial Increase In the new business as also auction turnover from what was only 29.49 lakhs In assessment 1990-91 to Rs:225.69 lakhs In the assessment year 1994-95 and Rs.348.29 lakhs In the assessment year 1995-96 and the business has been substantially growing from year to year. The financing business and conducting of the chit business Is not that easy unless It Is backed by the promoters who have highest Integrity and trustworthiness. MIs Srlram Chits and Investments (P) Ltd. Madras (holding company has been In the names for Itself with the investors In the south. We are, therefore, of the considered opinion that the payment of royalty at 0.5% of having regard to the business requirements of the assessee. In our view, the payment Is for, legitimate benefit taken In the course of business and from any standard, It cannot be said that payment of Rs.1 lakh as royalty Is sufficient to produce the business of the magnitude procured by the assessee over the years. The holding company has entered Into similar agreements with other subsidiary companies and the CIT(A) has considered the same to be reasonable business outflow property under a specific agreement executed by the parties Is very much reasonable and should have been accepted as a business expenditure allowable as deduction. We, therefore, delete the disallowance for these two years. The disallowance has been primarily based on a suspicion and Incorrect appreciation of hard realities of the business by the revenue authorities. The disallowance Is accordingly deleted.' Following the aforesaid finding of the ITAT, we uphold the order of the CIT (A) and reject the ground raised by the Revenue."
22. As the issue under consideration is identical to that of AY 2008-09, respectfully following the decision of the ITAT in that year, 12 975/Hyd/2012 M/s Shriram Chits (P) Ltd.
we uphold the order of the CIT(A) on this count and dismiss the ground of appeal of the revenue.
23. In the result, appeal of the revenue is dismissed.
Pronounced in the open court on 12 th October, 2012.
Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 12 th October, 2012
kv
Copy to:-
1) DCIT, Circle 3(1), 7 th Floor, "B" Block, IT Towers, AC
Guards,Hyderabad
2) M/s Shriram Chits (P) Ltd., 3-6-478, 6 th Floor, Anand
Estates, Opp. Indian Bank, Liberty Road, Hyderabad - 500 029.
3) The CIT(A)-IV, Hyderabad
4) The CIT-III, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad