Income Tax Appellate Tribunal - Chennai
Shriram Chits Tamilnadu Pvt Ltd., ... vs Department Of Income Tax on 17 April, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI.
Before Abraham P. George, Accountant Member &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. No. 1842/Mds/2010
Assessment Year: 2007-08
The Assistant Commissioner of M/s. Shriram Chits Tamilnadu Pvt.
Income Tax, Company Circle VI(2), Vs. Ltd., Greams Dugar, 4th Floor,
Aayakar Bhavan, New Block, 7th 149 Greams Road, Chennai - 6.
Floor, 121, M.G. Road,
Chennai 600 034. [PAN: AABCS0167N]
(Appellant) (Respondent)
Revenue by : Shri C.V. Pavan Kumar
Assessee by : Shri R. Sivaraman, Advocate
Date of Hearing : 17.04.2012
Date of pronouncement : 08.05.2012
ORDER
PER Challa Nagendra Prasad, Judicial Member
This is an appeal filed by the Revenue against the order of the CIT(A) V, Chennai dated 18.08.2010 in ITA No. 358/2009-10 for the assessment year 2007-08. Shri C.V. Pavan Kumar, DR represented on behalf of the Revenue and Shri R. Sivaraman, Advocate represented on behalf of the assessee.
2. The first issue in the grounds of appeal of the Revenue is that the CIT(A) erred in allowing bad debts of `.23,35,53,232/- relating to defaulting prized subscribers as deduction while computing income of the assessee.
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3. The Assessing Officer, while completing the assessment, disallowed bad debts relating to prized subscribers claimed by the assessee stating as under:
"I have carefully considered the assessee's submissions. The submission of the Assessee is not tenable as per law due to the following reasons :-
i) As per Section 36(1) (vii) read with sub-section 36(2), for allowing bad debt the following conditions should be satisfied.
a) Assessee should have offered this amount as income either during the current assessment year or in the earlier assessment years.
b) Assessee should have incurred these debts during the course of carrying on the business activities of money lending or banking.
The first condition not at all apply to the assessee as it did not offer the above debt as income either in this year or in the earlier years. As stated in the second condition the assessee has not incurred these debts during the course of carrying on the business activities of money lending or banking as the assessee's business is chit business. As the assessee has not satisfied the conditions for allowance of bad debt, the assessee is not entitled for this claim.
ii) The Hon' ble Supreme Court in the case of Shriram Chits and investments, cited in AIT 1993 SC 2063, has held that chit business is not money lending activity. Further, it has been held by the Supreme Court as follows:
"The chit agreement has to be treated only as a contract between the subscribers and the foreman and it could not be considered as a money lending business"
Therefore, according to the Supreme Court, it is a special form of contract contemplated by Entry 7 of list III of VII schedule to the constitution of India and cannot be termed as money lending business.
iii) Further, "the following observations at page 2074 at Para 33 are pertinent and apt to the present case, it is clear that the foreman does not lend his money to any of the subscribers. The foreman acts only as person to bring together the subscribers and certain obligations are 3 I.T.A. No. No. 1842/ 842/M/10 cast upon him with a view to protect the subscribers from the mischief and fraud committed by the foreman in view of his position. The amounts are paid to the subscribers as per the Chit and in accordance with the provisions of the Act. It will not be correct to state that each subscriber lends money to the person who gets chit earlier. It cannot also be construed that the person who gets chits later should be treated as the money lender. The agreement between the parties that is entered as per section 6 of the Act only provides for distribution of the chit amount. The agreement has to be treated as contract between the subscribers and the foreman and it is the foreman who brings the subscribers together and therefore, the Act provided for payment of commission for the services rendered by the foreman as he does not lend money belonging to him".
iv) The trading loss or a business is deductible in computing the profits carried by the business even though there are no specific provisions for allowance thereof. But the amounts given to the defaulted prized subscriber are not having the character of income. Hence, this cannot be allowed. Further, from the decision of the Supreme Court referred above, the amounts given to prized subscriber do not have the character of revenue in nature. Hence, the assessee's plea is not acceptable. For this reason also the assessee's claim is not allowable.
v) Reliance is also placed on Andhra Pradesh High Court decision in the case of Suman Savings and Investments P Ltd vs. CIT Judgement dated 01-07-97 cited in (229 ITR 727) wherein the High Court has held that "where the loanee or debtor has proprietary interest in the money which he receives as in the case of chit fund company when the chit is paid to the members, it does not fall within the meaning of section. 40 A(8)(iv) Explanation(c). Here, in the context explanation is talking about the definition of a funding company. As such, the court has clearly ruled that chit fund company does not form part of a 'financial company'. The same logic can be applied here also.
vi) The assessee has stated that in the assessee's own case, the Hon'ble Tribunal has allowed the bad debt claim for different assessment years and hence requested to allow the claim. The department has not, accepted the decision of the Hon'ble ITAT and has filed reference appeals before the Hon'ble High Court. As such the issue has not reached finality.
For the reasons stated above, the assessee's claim of bad debt is 4 I.T.A. No. No. 1842/ 842/M/10 disallowed."
4. The CIT(A) allowed the claim of the assessee following this Tribunal's order in I.T.A. No. 1632/Mds/2003 order dated 28.09.2006 for the assessment year 2000-01, wherein this Tribunal allowed the claim for deduction of bad debts claimed by the assessee by dismissing the Revenue's appeal.
5. At the time of hearing both the parties have agreed that this issue is covered in favour of the assessee by the order of this Tribunal in assessee's own case for the earlier assessment years and placed a copy of the order of this Tribunal before us.
6. We have heard both sides, perused the orders of lower authorities and the order of this Tribunal in I.T.A. No. 2117/Mds/2008 dated 26..06.2009 for the assessment year 2004-05 and I.T.A. Nos.727 & 728/Mds/2010 for the assessment years 2001-02 & 2006-07 dated 24.06.2011, wherein this Tribunal had allowed the claim for the bad debts relating to defaulting prized subscribers by dismissing the Revenue's appeal. The relevant portion of the order of this Tribunal in I.T.A. No. 2117/Mds/2008 dated 26.06.2009 is as under:
"8. Issue No.1: Regarding bad debts: We have heard the learned Departmental Representative as well as the learned Authorized Representative and considered the relevant records. At the outset, we note that the identical issue has been considered and decided by this Tribunal in the case of M/s. Shriram Chits & Investment Private Limited, a sister concern of the assessee vide order dated 31.12.2004 as under:5 I.T.A. No.
No. 1842/ 842/M/10 "18. We have considered the rival submissions on either side, and also perused the material available on record. We have also carefully gone through the provisions of Chit Fund Act, 1982 and the judgement of the Supreme Court !in the case of Shriram Chits and Investments (P) Ltd., Vs. Union of India (supra). The Supreme Court, after examining the scheme of the Chit Fund Act, observed that the provisions of Chit Fund Act provides for a special form of enforceable contract between the subscribers and the foreman. Therefore, it cannot be a money lending business. The Supreme Court in categorical terms held that the foreman does not lend his money to any subscribers. The foreman acts only as a person to bring together the subscribers and certain obligations cast upon him with a view to protect the subscribers. The Supreme Court observed that the purpose of the Chit Fund Act is to regulate and control the activity of the foreman in order to protect the interest f the subscribers.
Therefore, it is clear that even though the chit transaction is not a money lending transaction, the foreman who is organizing the chit business has a statutory Obligation to pay subscription relating to the defaulting subscriber so as to protect the interest of the subscriber who is paying the subscription regularly.
19. We have also carefully gone through the provisions of Chit Fund Act, 1982. Section 2(1) of the Chit Fund Act defines "defaulting subscriber". According to this section, a subscriber who has defaulted in the payment of subscription due in accordance with the terms of the chit agreement, would be treated as defaulting subscriber. Section 16 of the Chit Fund Act provides for the method of conducting draw. Section 17 requires the foreman to prepare the minutes of the proceedings and the same has to be filed before the Registrar within 21 days from the date of draw as required under Section 18 of the Chit Fund Act. Section 22 provides that the foreman shall pay the prize amount to the prized subscriber on furnishing sufficient security for the due payment of future subscriptions. The payment shall be made within seven days from the date of draw or before the date of next succeeding instalment whichever is earlier. Therefore, it is very clear that there is a statutory obligation on the part of the foreman to pay the prize amount to the prized subscriber within seven days from the date of draw. Section 21 enables the foreman to collect all the subscriptions from the subscribers and to distribute the price amount to the prized subscriber. In case a subscriber fails to pay the subscriptions, Section 28 of the Chit 6 I.T.A. No. No. 1842/ 842/M/10 Fund Act empowers the foreman to remove the defaulting subscriber from the list of subscribers. If the defaulting subscriber pays the defaulted installment with interest within seven days from the date of receipt of notice of removal, then his name shall be re-entered in the list of subscribers. Section 28 read with Section 21(f) empowers the foreman to substitute any person in the place of defaulting subscriber whose name has been removed from the list of subscribers. Therefore, the scheme of the chit fund under the Chit Fund Act , 1982 provides for substitution of defaulting subscriber by another person. The foreman is also empowered to claim a consolidated payment of all future subscriptions forthwith in case of prized subscriber commits a default. The foeman is also at liberty to realize all future subscriptions and interest by executing the security offered by the prized subscriber.
20. We have also carefully gone through the circular of the CBDT in Instructions No.1175 dated 16.05.1978. The CBDT clearly says that the person, who is organizing the chit fund bringing together the members, earns commission which is' income from business. If for any reason there is a loss, then it has to be assessed as business loss. The CBDT has also observed that normally there should be no loss to the organizer unless he takes over the liability of some of the defaulting members. In such a case, the highest bidder who is treated as prized subscriber under the provisions of the Chit Fund Act is to be paid within a period of seven days from the date of bidding. The prized subscriber remains as a subscriber till the remaining period of that particular chit for which the bidding was done. The assessee as a foreman in conducting the business of chit funds. Chit fund business comprises of several chits of small groups. The prized subscriber of a chit is a member of one of such chits. In order to continue the chit for the full term and in the interest of assessee's business as foreman, the assessee has to take over the liability of the defaulting subscriber and: make contribution on behalf of defaulting subscriber. i The assessee is claiming this amount of contributions as a bad debt. This amount may, be a loss, as observed by CBDT, in carrying on the chit fund business and is similar to the loss that is claimed by a person who guarantees recovery of repayment of loan to a bank. The assessee as foreman in their interest to maintain the chit fund business and in the interest of maintaining the chit of particular group of members and keeping them together and 7 I.T.A. No. No. 1842/ 842/M/10 keeping t e chit alive, has paid as guarantor the subscription f the defaulting subscriber. Therefore, this contribution which was incurred by the assessee is clearly a business loss or trading loss. It has got no connection to a bad deb. Bad debt normally requires the assessment of income on accrual basis in the earlier years and in case the assessee as any problem or difficulty in recovering the said amount, the amount so included in the total income may be allowed as bad debt under Section 36(1)(vii) read with section 36(2). The amount of contribution made by the assessee i place of the defaulting subscriber is in the interest of the maintaining the business and to protect the interest of the non-prized subscribers. Therefore, it is clearly a loss incurred by the assessee. In the event of the assessee not stepping in place of the defaulting subscriber, the chit itself would be a disarray and it would be breach of contract with the subscribers. The assessee, in order to maintain the chit agreement and to have the confidence of the subscribers, makes the contribution for the defaulting subscriber and this contribution is clearly an expenditure or business loss at the time the assessee makes the payment. Therefore, it is purely commercial prudence and the business requirements that come into play for contribution as subscriber for the defaulting subscriber and at that point of item, it is a loss or an .expenditure. This view of ours is fortified by the judgement of the Apex Court in the case of the Commissioner of Income Tax Vs. Nainital Bank Limited (1966) (62 ITR 638). Whenever the amount is recovered either by substituting the un- recovered amount due from such members will have to be treated as bad debt and the test to be adopted in usual business assessment for the allowance of bad debt would be applicable in such cases also. This Tribunal in the assessee's own case for the Assessment Year 1990-1991 and 1991-1992 in I.T.A. No.1128 and 1129(Mds)/95 examined the circular of the CBDT and found that the' un-recovered due from subscribers of chit has to be treated as bad debt. It is also n t in dispute that the amount recovered from the defaulting subscribers were shown and offered for taxation in the year in which it is actually recovered.
21. We find that Section 36(2) of the Income Tax Act provides two conditions for allowing a debt as bad debt. The assessee has to satisfy anyone of the condition for claiming the same as bad debt. The first condition is that the amount which is claimed as bad debt ought to have been included in the income of the assessee in the previous year in which the amount was written 8 I.T.A. No. No. 1842/ 842/M/10 off as bad debt or in any of the earlier previous year. The second condition is that the amount shall represent the money lent in the ordinary course of business of banking or money lending business. Section 36(1)(vii) says that subject to provisions of Sub-Section (2), the amount which is written off as irrecoverable in the accounts of the assessee for the previous year shall be allowed while computing the income of the assessee. The Supreme Court in the assessee' own case, held that the chit transaction is not a money lending transaction. The other condition as per Section 36(2) is that the amount so advanced should have been included in the income of the previous year or earlier previous years. It is no body's case that the amount so contributed by the assessee on behalf of the defaulting subscribers was included in the total income of the assessee in any of the previous years. The provisions of Section 36(2) was not examined by the CBDT while issuing instructions to allow the amount paid by the foreman as bad debt. However, it is pertinent to note, the CBDT observed that the foreman may suffer loss when the liability of defaulting subscriber was taken over. Therefore, the CBDT impliedly accepted the commercial expediency with regard to payment of subscription of the defaulting subscriber.
22. In a chit fund business, as discussed in the earlier paragraphs, there is a provision for auctioning, which auction results in the prize being given to the higher bidder. The defaulting subscriber or by enforcing the security offered by the priced subscriber, the same was admittedly offered for taxation in the year in which it was recovered. Therefore, in our considered opinion, the first Appellate Authority has rightly allowed the claim of the assessee. Therefore, we uphold the order of the CIT(A) for the reasons we have discussed in this order."
9. The said order of this Tribunal has been consistently followed in the subsequent years dated 21.10.2005, 28.09.2006 and 19.12.2007 in the assessee's own cases as referred by the learned Authorized Representative. We have perused the relevant orders and found that this Tribunal as decided this claim consistently in favour of the assessee. Accordingly, by following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the Revenue. The order of the CIT(A), qua this issue is upheld."
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7. Accordingly, by following this Tribunal's order in assessee's own case, we decide this issue in favour of the assessee and against the Revenue.
Therefore, we uphold the order of the CIT(A) on this issue.
8. The next issue in the grounds of appeal of the Revenue is that the CIT(A) erred in restricting the disallowance under section 14A to `.3,80,402/-
as against `.10,43,600/- disallowed by the Assessing Officer.
9. The Assessing Officer, while completing the assessment disallowed `.10,43,600/- under section 14A read with Rule 8D to expenses incurred in respect of exempt income earned by the assessee.
10. The counsel for the Revenue relied on the order of the Assessing Officer and submitted that the CIT(A) is not correct in restricting the disallowance to `.3,80,402/- as against `.10,43,600/- made by the Assessing Officer.
11. The counsel for the assessee submitted that it had not incurred any expenditure in earning the exempt income and therefore, there is no justification in disallowing any expenditure attributable to earning of dividend income.
12. We have heard both the sides and perused the materials available on record. This issue is decided by the Hon'ble Bombay High Court in the case 10 I.T.A. No. No. 1842/ 842/M/10 of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [328 ITR 81], wherein their Lordships held as under:
"Held, that the provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/ income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."
Therefore, in view of the Hon'ble Bombay High Court's decision (supra), we, set aside the orders of the lower authorities and direct the Assessing Officer not to apply Rule 8D in the present case since the assessment year under appeal is 2007-08 and Rule 8D is applicable only from the assessment year 2008-09. However, the Assessing Officer may reasonably estimate the expenses attributable to earning of exempt income as held by the Hon'ble Bombay High Court. Accordingly, this ground of appeal of the Revenue is allowed for statistical purpose.
13. The last issue in the grounds of appeal of the Revenue is that the CIT(A) erred in deleting addition of `.82,93,635/- on account of royalty.
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14. At the time of hearing, the DR conceded that the issue is covered in favour of the assessee by this Tribunal's order in assessee's own case.
15. We have perused the orders of this Tribunal in I.T.A. No. 727 & 728/Mds/2010 in the case of ACIT v. M/s. Shriram Chits Tamil Nadu Pvt.
Ltd. dated 24.06.2011 for the assessment years 2001-02 & 2006-07. This Tribunal following its earlier order dated 16.12.2010 in I.T.A. No. 725/Mds/2010 and I.T.A. No. 726/Mds/2010 held that the royalty expenses are allowable as revenue expenditure and the relevant portion of the order of the Tribunal is as under:
"5. Relevant paras 16 to 19 of the order of the Tribunal dated 16th December, 2010 (supra) are reproduced hereunder:-
"16. The next issue of this appeal relates to the direction given by the ld. CIT(A) to the Assessing Officer to allow the Royalty of `.47,85,125/- in full as revenue expenditure instead of `.11,96,281/- allowed as depreciation. The facts of this issue are that the assessee had paid Royalty of `.47,85,125/- to Shriram Chits & Investments Pvt. Ltd for using the logo owned by the latter. The Assessing Officer has found that this payment relates to payment of Royalty for acquiring an intangible asset. He has ignored the mode and method of payment, and duration of payment, holding them to be irrelevant for the purpose. On the contrary, he has allowed depreciation @ 25% on the entire payment by holding it a capital expenditure. Accordingly, he has added back `.47,85,125/- and has allowed depreciation of `.11,96,281/-. In first appeal, the ld. CIT(A) has allowed the entire amount of `.47,85,125/- holding it to be a revenue expenditure. Revenue is aggrieved.
17. After hearing both sides carefully in the light of the aforesaid material available on record, we find that the impugned payment was made to Shriram Chits & Investments Pvt. Ltd for the non-exclusive user of the logo based on turnover 12 I.T.A. No. No. 1842/ 842/M/10 and was not a lump sum payment. The assessee had no other rights including the right to transfer the use of the logo. Shriram Chits & Investments Pvt. Ltd has given the right of user to other companies also which include Shriram Chits Tamilnadu Pvt. Ltd, Shriram Chits (Bangalore) Pvt. Ltd and Shriram Chits Pvt. Ltd. In assessment year 2001-02, the CIT wanted to treat the payment as capital expenditure in the case of Shriram Chits Tamilnadu Pvt. Ltd, but after hearing the assessee's objections, he dropped the proceedings initiated u/s 263 of the Act. In the case of Shriram Chits Tamilnadu Pvt. Ltd, the ld. CIT(A) has accepted the claim of the assessee by holding that this expenditure as revenue in nature and the Department has accepted this finding of the ld. CIT(A) and has not filed further appeal before the ITAT for assessment years 2004-05 and 2005-06.
18. The ld.DR has relied on the decision of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs CIT, 224 ITR 342, in support of his ground. The ld.AR has supported the order of the ld. CIT(A).
19. We have gone through the decision relied upon by the ld.DR and have found that their Lordships of Supreme Court were actually considering a case of Composite Agreement which involved an agreement to implement a turnkey project right from providing design, etc. in establishing the factory and user of the technical know-how, thereafter. Their Lordships of Supreme Court have clearly held that payment made for the user of the logo is always revenue in nature. While coming to the above conclusion, the Hon'ble Supreme Court has referred to its various decisions in this judgment which also favour the case of the assessee. We, therefore, do not find any force in this ground of Revenue as well."
6. Assessee here also was using the logo owned by Shriram Chits and Investments Ltd. and therefore, respectfully following the decision of co-ordinate Bench, we are of the opinion that the CIT(Appeals) was justified in directing the A.O. to allow the royalty expenses as revenue. The Tribunal had, while giving the above decision, considered the decision of Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. v. CIT (224 ITR 342)."
16. Respectfully following the Tribunal's order dated 24.06.2011, we 13 I.T.A. No. No. 1842/ 842/M/10 decide this issue in favour of the assessee. The grounds of appeal of the Revenue on this issue are dismissed.
17. In the result, the appeal of the Revenue is partly allowed.
Order pronounced on Tuesday, the 8th of May, 2012 at Chennai.
Sd/- Sd/- (ABRAHAM P. GEORGE) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 08.05.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.