Income Tax Appellate Tribunal - Hyderabad
M/S. Shriram Chits Pvt.Ltd.,, ... vs Department Of Income Tax on 28 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD " B " BENCH, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 390/Hyd/2012
Assessment Year : 2008-09
DCIT, Cir-3(1),
Hyderabad. .... Appellant
vs.
M/s. Shriram Chits Pvt. Ltd.,
Hyderabad.
PAN: AAFCS 4916D
...Respondent
ITA No. 323/Hyd/2012
Assessment Year : 2008-09
M/s. Shriram Chits Pvt. Ltd.,
Hyderabad. Appellant
-vs-
DCIT, Cir-3(1),
Hyderabad. Respondent
Appellant by : Shri K. Gyana Prakash
Respondent by : Shri K.C. Devdas
Date of hearing : 28-06-2012
Date of Pronouncement: 24-08-2012
ORDER
PER SAKTIJIT DEY, J.M.:
These cross appeals filed by the Revenue and the assessee are directed against order dated 30-12-2011 passed in Appeal No.354/Addl.CIT R-3/CIT(A)-IV/10-11 pertaining to the 2 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
assessment year 2008-09. For the sake of convenience, these are clubbed together and disposed of by this combined order.
ITA No.323/Hyd/ 2012- Assessee's appeal):
2. Grounds 1 and 6 are general in nature and they do not require any adjudication.
3. In ground Nos. 2 and 3, the assessee has challenged the order of the CIT (A) in not allowing deduction of irrecoverable amounts in respect of running and terminated chits as loss in course of carrying on business.
4. The assessee during the year had debited an amount of Rs.38,30,13,456/-on account of bad debts written off during the relevant previous year and out of which Rs.21,65,33,326/-
pertaining to running chits while Rs.16,64,80,128/- pertaining to the terminated chits. The assessee explained before the AO that these amounts were due and payable by defaulting prized subscribers. The assessee submitted before the AO that with regard to bad debts in respect of terminated chits, the assessee explained that irrecoverable amounts of subscription in respect of terminated chit groups outstanding as on 31-3-2008 were written off. The AO observed that chit fund transactions do not partake character of debt, and as such the relationship between chit organisation and the subscriber is not a relationship of creditor and debtor. The AO further concluded that since the assessee is in chit fund business and not money lending business, the bad debts to the extent of which is offered as income on accrual basis in the previous year or any earlier previous year shall alone be eligible for deduction u/s 36(1)(xii) of the Act. Therefore, he restricted the claim of bad debts to 5% of the amount due from 3 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
prized subscriber. The remaining 95% of the bad debts having not been offered as income in the previous year or any other earlier previous year were brought to tax and an amount of Rs.36,38,52,783 was disallowed and added to the total income of the assessee. The CIT (A) following the order dated 26-7- 200413-3-2011 passed by the ITAT in the assessee's own case held that bad debts relatable to terminated chits had to be allowed and bad debts relatable to running chits were set aside to the AO for re-computation as per the directions of ITAT vide its order dated 26-7-2004.
5. We have heard rival contentions and perused the materials on record. It has been contended by the ld. AR that the issue squarely covered by the decision of the ITAT in assessee's own case in ITA No. 490/Hyd/2010 and ITA No.720/Hyd/2010 in the case of the same assessee dated 11 th March, 2011.
6. The learned DR has submitted that the issue is covered by the decision of ITAT mentioned supra. We find from para-7 of the order of Tribunal, the Tribunal following its earlier order passed in ITA Nos.500, 507 of 1999 and others dated 26-7-2004 has upheld the CIT (A)'s order in allowing the bad debts relating to terminated chits and setting aside re-computation of bad debts for running chits. Following the aforesaid order of the ITAT, we uphold the directions of the CIT (A). Hence, grounds raised by the assessee are rejected.
7. Ground no.4 relates to disallowance of foreman dividend of Rs.7,99,69,867. We find similar issue also came up before the ITAT, Hyderabad Bench in the assessee's own case in ITA Nos.
4ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
490 and 720/Hyd/2010 dated 11-3-2011, the ITAT par4a 9 and 10 of its order upheld the order of the CIT (A) and dismissed the grounds raised by the assessee. Following the aforesaid orders of ITAT, we uphold the order of the CIT (A) and reject the ground raised by the assessee.
8. Ground Nos. 6 and 7 relate to levy of interest u/s 234B and 234C of the Act. Similar issue came up earlier before the ITAT, Hyderabad Bench in assessee's own case in ITA Nos. 490 and 720/Hyd/2010 dated 11-3-2011 (supra) wherein the Tribunal held in the following manner:-
"The next two grounds in assessee's appeal are related to levy of interest u/ss 234D and 234B which are mandatory and consequential in nature. Accordingly, these two grounds raised by the assessee are dismissed."
Following the aforesaid order of the ITAT, we reject the grounds raised by the assessee.
9. In the result, the appeal filed by the assessee stands dismissed.
ITA No.390/Hyd/2012- Revenue's appeal)10. In ground No.2 the revenue has challenged the order of the CIT (A) with regard to his finding on claim of bad debts on running and terminated chits. In view of our finding in ground Nos. 2 and 3 raised in assessee's appeal, the ground raised by the revenue is rejected.
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 5 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
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 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."
6ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
Following the aforesaid order of the ITAT, we uphold the order of the CIT (A) and reject the ground raised by the Revenue.
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. 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.7
ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
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 Srlram 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 Srlram Chits and Investments (P) Ltd.8
ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
7. By the agreement, Sriram Chits and Investments (P) Ltd., has formally committed Itself to the growth and development of Srlram Chits (Bangalore) (P) Ltd. for a further period of 7 years.
8. The duty of Srlram 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 Srlram Chits (Bangalore) (P) Ltd. Towards thl, Srlram Chits and Investments (P) Ltd. has provided financial assistance time and again to Srlram Chits (Bangalore) (P) Ltd. to help Its working capital requirements.
When Srlram Chits (Bangalore) (P) Ltd. commenced operations, all Its employees were from Srlram' Chits a. Investments (P) Ltd. who had prior experience In this line. Even now, Srlram 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 Srlram Chits and Investments {P} Ltd. which was· being used by It for Its operations was transferred to Srlram 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 Srlram 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 9 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
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 ahrd 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.
13. In Ground No.5, the revenue challenged the deduction allowed by the CIT (A) towards contribution to PF and ESI u/s 36(1)(ba). Briefly the facts are during the relevant previous year, in course of assessment proceedings the AO found from the report submitted in form 3CD that the assessee has not remitted the employees contribution towards PF amounting to Rs.25,97,844 and employees' contribution towards ESI amounting to Rs.76,770 within the due dates. He therefore concluded that since the assessee has not remitted contribution towards PF and ESI within the due dates, the same cannot be allowed as deduction u/s 36(1)(ba). Before the first appellate authority, the assessee submitted that the contribution towards PF and ESI were paid before the due date of filing of return, therefore, no disallowance could be made and CIT (A) following the decisions of the Hon'ble Supreme Court in the case of CIT vs. Vinay Cement Ltd., ( 213 CTR 268) which has been followed by the Hon'ble Delhi High Court in the case of CIT Vs. AIMIL Limited in ITA No.1063/Hyd/2006, 755 and 1246 of 2008 etc., dated 23- 12-2009, held that if the contributions towards PF and ESI have been paid before due date of filing of return, no addition could be made.
14. We find that the issue has been squarely covered by the judgment of Delhi High Court in the case of CIT vs.AIML Ltd., 321 ITR 508) and CIT vs. Vinay Cement Limited 313 ITR statutes 1.It 10 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.
has been held by the Hon'ble Supreme Court that when the contributions to PF has been made before the due date of filing the return, no disallowance could be made. In view of the aforesaid judgment of Supreme Court and Delhi High Court, we uphold the order of the CIT (A) and reject the grounds raised by the Revenue.
5. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the court on 14- 8-2012.
Sd/- sd/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated the 24 th August, 2012. Copy to:-
1) DCIT, Circle-3(1), 7th Floor, IT Towers, Hyderabad.
2) M/s. Shriram Chits Pvt. Ltd. 3 rd Floor, Anand Estates, Himayatnagar, Hyderabad.
3) CIT (A)-IV, Hyderabad.
4) The CIT Concerned, Hyderabad
5)The Departmental Representative, I.T.A.T., Hyderabad.
Jmr* 11 ITA Nos. 390 &323 of 2012 Ms. Shriram Chit FundsP. Ltd.