Income Tax Appellate Tribunal - Hyderabad
Shriram Chits (P) Ltd., Hyd, Hyderabad vs Assessee on 29 April, 2016
ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad 'A' Bench, Hyderabad
Before Shri P.Madhavi Devi, Judicial Member
& Shri B. Ramakotaiah, Accountant Member
ITA No. 1187/Hyd/2015
(Assessment year: 2012-13)
M/s. Shriram Chits (P) Ltd Dy. Commissioner of
Hyderabad Vs. Income Tax, Circle 3(1)
PAN: AAFCS 4916 D Hyderabad 500029
(Appellant) (Respondent)
ITA No.1224/Hyd/2015
(A.Y 2012-13)
Dy. Commissioner of Income M/s. Shriram Chits (P)
Tax, Circle 3(1) Vs. Ltd Hyderabad
Hyderabad 500029 PAN: AAFCS 4916 D
(Appellant) (Respondent)
For Assessee : Shri K.C. Devadas
For Revenue : Shri D. Srinivas, DR
Date of Hearing : 23.02.2016
Date of Pronouncement : 29.04.2016
ORDER
Per Smt. P. Madhavi Devi, J.M.
ITA No.1187/Hyd/2015 (Assessee's Appeal):
The above are cross appeals by both the assessee as well as the Revenue against the order of the CIT (A) dated 28.07.2015 for the A.Y 2012-13. In its appeal, the assessee has raised the following grounds:
1. The order of the CIT (A)-3 Hyderabad is unsustainable both in Law and on facts.
2. The learned CIT (A)-3 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 I.T. Act, 1961, as a loss arising in the course of carrying on business bythe Appellant.
3. The learned CIT (A)-3 Hyderabad failed to note that the AO for the earlier years followng the directins of ITAT Page 1 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad allowed the deduction of bad debts in respect of running chits and therefore erred in giving the directions once again to compute the irrecoverable amounts in respect of running chits, instead of directing its deduction absolutely.
4. The learned CIT (A)-3 Hyderabad erred in upholding the taxability of foreman dividend at Rs.15,67,25,358/-.
5. The learned CIT (A)-3 ought to have clearly held that the foreman dividend was not taxable on the principles of mutuality.
6. Any other ground(s) that may be urged at the time of hearing.
2. Ground Nos. 1 & 6 are general in nature and hence need no adjudication. Ground Nos 2 & 3 are against the directions of the CIT (A) to the AO to compute the irrecoverable amounts in respect of running and terminated chits, instead of directing its deduction absolutely by following the decision of ITAT in the earlier years.
3. Brief facts of the case are that the assessee company, engaged in the chit fund business, filed its return of income for the relevant A.Y on 23.09.2012 declaring a total income of Rs.51,95,51,430. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has debited an amount of Rs.38,34,09,104.35 on account of bad debts written off during the relevant financial year and that out of this, bad debts amounting to Rs.24,85,55,397 pertain to the running chits and the balance bad debts of Rs.13,48,53,707 pertain to terminated chits. On a query raised by the AO, the assessee filed detailed submissions which are reproduced by the AO at Para 2 of the assessment order. The AO was however, not convinced with the assessee's submissions. He observed that for and from the A.Y 1989-90, the conditions required for alowance of a bad Page 2 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad debt u/s 36(1)(vii) r.w.s. 36(2) are to be fulfilled. He observed that in the case of the assessee, the chit fund transactions will not partake the character of debt and as such the relationship between the chit organization and the subscriber is not the relationship of a creditor and debtor and that the debt is not part of income for previous year or any earlier previous years and that chit fund business is not money lending business. The AO, after taking note of the Hon'ble Supreme Court judgment in the case of Sriram Chits and Investments Pvt. Ltd vs. Union of India, reported in AIR 1993 (Supreme Court) 2003 and also the provisions of the Chit Funds Act, 1982, held that the bad debts to the extent of which is offered as income on accrual basis in the previous year or of any earlier previous years alone shall be eligible for deduction u/s 36(vii) of the Act. He thus, restricted the claim of bad debts to 5% of the amounts due from prized subscribers, which is the foreman's commission, as the same was offered to tax either in the relevant or earlier previous years. He thereafter, disallowed the balance 95% of the claim of the assessee. He also observed that in the assessee's own case for the earlier A.Y, the tribunal has granted relief to the assessee, but that the disallowance is made to keep the issue alive as the revenue has carried the matter in further appeal before the Hon'ble High Court. Aggrieved, assessee preferred an appeal to the CIT (A), who allowed the same by following the decisions of ITAT for the A.Ys 1995-96 to 1999-2000, 2002-03 to 2006-07, 2008-09 to 2010-11 in ITA No.809 and 1214/Hyd/2014 dated 29.10.2014 wherein it was held that such amounts are allowable u/s 37(1) of the Act. However, the assessee is in appeal before us seeking the allowability of the same as business income u/s 28 of the Act in Ground Nos. 2 & 3.
Page 3 of 11ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad
4. Having regard to the rival contentions and the material on record, we find that this issue had arisen in the earlier AYs as well before this Tribunal and vide orders dated 11.03.2011 in ITA No.490/Hyd/2010 for the A.Y 2007-08, this Tribunal has held as under:
"4. On appeal the CIT(A) held that the bad debts relatable to terminated chits are to be allowed in view of the order of this Tribunal dated 26.7.2004 in ITA Nos. 500, 506/H/2009, ITA No.294, 327/H/2001, ITA No.471 & 1049/H/2004. However, in the case of running chits, he has set aside the matter to the file of Assessing Officer with a direction to compute the bad debts relatable to running chits as per the directions contained in the order of this Tribunal dated 26.7.2004 in ITA Nos.500, 506/H/2009, ITA No.294, 327/H/2001, ITA No.471 & 1049/H/2004 for the assessment years 1995-96, 1997-98 and 1999-2000 wherein the Tribunal has given its findings in Para No. 6.6(xx) and 6.6 (xxi):
6.6 (xx). On these facts a claim of loss without corresponding inflow of funds from the foreman which is a definite possibility in this method of claim, cannot be upheld. The amount of loss can definitely be allowed to the extent that the foreman has put in his funds and has come to a conclusion that his funds are not recoverable due to the account becoming sticky and to the extent he has taken an honest decision for writing off the same in his books. In other words, bad debts can be allowed to the extent of the instalments defaulted by the prized subscriber, and written off as bad debt in the books by the assessee. But for the future instalments that are likely and yet to be defaulted, no claim can be allowed. The facts that the assessee has written off as bad debt when prized subscribers defaulted for four consecutive months does not to our mind affect him claim as this is based on past experience of the assessee in his business and is in tune with the current RBI norms for NFBCs as well as for Banking Companies. These decisions have become a prudential norm in the financial sector. Thus, there is nothing wrong in adopting this guideline or policy.
6.6.(xxi). We have to mention that this issue has not come up during the course of arguments of the case. If the assessee has made the claim as indicated above, no prejudice would be caused to him by setting aside the matter. Similarly no prejudice would be caused to revenue on this count as it can examine the claim afresh. To allow the claim to the extent indicated above fresh collection of facts and figures are required and thus we set aside the issue to the file of the Assessing Officer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for the assessment years 1998-99 and 1999-2000 on this ground of allowability of bad debts is allowed for statistical purposes.Page 4 of 11
ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad Against this direction of the CIT(A), the assessee is in appeal before us.
5. The Learned Authorized Representative for the assessee has a made a plea before us that the bad debts are to be allowed either u/s 28 or u/s 36(1)(vii) of the Income Tax Act, 1961 and it need not to be set aside for fresh consideration of the Assessing Officer. 6. On the other hand, the Learned Departmental Representative has relied on the order of the CIT(A).
7. We have heard both the parties and perused the materials available on record. Similar issues came up for consideration on earlier occasions before this Tribunal. The Tribunal has considered this issue vide its order dated 26.7.2004 in ITA Nos.500, 506/H/1999, ITA Nos.294, 327/H/2001 and ITA Nos.471 & 1049/H/2002 for the assessment years 1995-96, 1997-98, 1998-99 and 1999-2000 wherein the Tribunal held in Para 4 as follows:
4. Coming to the grounds in the Revenue appeals, these issues are squarely covered by the order of this Tribunal 'B' Bench dated 26.7.2004 in ITA Nos.500, 506/Hyd/1999, ITA Nos.294, 327/Hyd/2001 and ITA Nos.471/Hyd/2002 & 1049/Hyd/2002 for the assessment years 1995-96, 1997-98 and 1999-2000 and wherein it was held at page No.51 of the order as follows:
6.6.(xxi). We have to mention that this issue has not come up during the course of arguments of the case. If the assessee has made the claim as indicated, no prejudice would be caused to him by setting aside the matter. Similarly no prejudice would be caused to revenue on this count as it can examine the claim afresh. To allow the claim to the extent indicated above fresh collection of facts and figures are required and thus we set aside the issue to the file of the Assessing Officer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for the assessment years 1998-99 and 1999-2000 on this ground of allowability of bad debt is allowed for statistical purposes.
Accordingly, we do not find any infirmity in the order of the CIT(A) and therefore, the Assessing Officer is directed to re-compute the bad debts relatable to running chits as per the directions of the ITAT in its order cited supra as in the earlier years. Accordingly, this ground raised by the assessee as well as Revenue is dismissed. 8. In view of the above order of this Tribunal, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. Accordingly, these two grounds raised by the assessee are dismissed.
8. In view of the above order of this Tribunal, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. Accordingly, these two grounds raised by the assessee are dismissed".
Page 5 of 11ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad
5. Respectfully following the same, we do not find any infirmity in the order of the CIT (A). The assessee's ground No. 2 & 3 are accordingly rejected.
6. As regards grounds 4 & 5 against the order of the CIT (A) upholding the taxability of foreman dividend at Rs.15,67,25,358, the learned Counsel for the assessee fairly admitted that this issue also is covered against the assessee by the above decision for the A.Y 2007-08. The relevant portion of the order is reproduced hereunder:
"9. The next two ground Nos.4 & 5 in the assessee's appeal in ITA No.470/H/2010 is as follows: 4. The CIT(A) Hyderabad erred in upholding the taxability of foreman dividend at Rs.10,59,45,915/- 5. The CIT(A) ought to have clearly held that the foreman dividend was not taxable on the principles of mutuality.
10. Similar issues came up for considered before this Tribunal and the Tribunal has decided these issues in assessee's own case reported in 83 ITD
792. Respectfully following the same ratio laid down by the Tribunal in assessee's own case, we dismiss the two grounds taken by the assessee".
7. Respectfully following the same, we dismiss these two grounds of appeal.
8. In the result, assessee's appeal is dismissed.
ITA No.1224/Hyd/2015 - Revenue's appeal9. In this appeal, the Revenue has raised the following grounds of appeal:
1. The learned CIT (A) erred in both in law and on facts of the case.
2. The learned CIT (A) erred in deleting the addition of Rs.52,54,100 made on account of commission on cancelled chits, not considering the fact that the assessee is following mercantile system of accounting Page 6 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad and all the incomes and expenditures are to be accounted for on 'accrual basis'.
3. The learned CIT (A) erred in deleting the disallowance of Royalty payment of Rs.3,76,81,919 to M/s Shriram Ownership Trust, not considering the observations of the AO that the said expenditure is not incurred wholly and exclusively for the purpose of business as per the provisions of section 37(1) of the Act.
4. Any other ground(s) that may be urged at the time of hearing".
10. Having regard to the rival contentions and the material on record, we find that the order of the CIT (A) is in consonance with the directions of ITAT in the assessee's own case for the earlier A.Ys. The relevant paras are reproduced hereunder for ready reference:
"14. The ground No.2 in Revenue appeal in ITA No.120/H/2010 is as follows:
The CIT(A) ought to have appreciated the action of the Assessing Officer in making addition towards commission on removed chits which is contravention and not properly dealt by the assessee company as per the guidelines of Sec.21(3) of the Andhra Pradesh Chit Fund Act, 1971.
15. Similar issue came up for consideration before this Tribunal in assessee's own case in earlier orders for the assessment years 1998-99, 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 Page 7 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad 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 was placed by the Revenue on the Special Bench decision of the Tribunal in the case of Shriram Chits & Investments P Ltd. Chennai 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.
16. In view of the above order of this Tribunal, we dismiss this ground taken by the Revenue on the same lines.
19. The Ground No.4 in Revenue appeal in ITA No.120/H/2010 is as follows:
The CIT(A) ought to have appreciated the action of the Assessing Officer in adding Royalty payments made by the assessee company which are in contravention under the copy Act and as per section 37 of the IT Act, 1961.
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(iv): 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 Sriram 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 "Sriram Chits" logo registered as such under the provisions of the Copy Right Act, 1957 with the Registrar of Copyrights bearing registration No.A/49890/88 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 Page 8 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad 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 Karnatka 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. Sriram Chits & 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. Sriram Chits and Investments (P) Ltd. decided to expland its business in Karnataka by forming a subsidiary company Sriram Chits (Bangalore) (P) Ltd.
3. In the year 1990, Sriram Chits (Bangalore) (P) Ltd. was formed and was carrying on the business of Chit Funds in the State of Karnataka and Sriram Chits and Investments (P) Ltd. gradually stopped floating new groups allowing the subsidiary company to expand.
4. Sriram Chits (Bangalore) (P) Ltd. since inception continued to book new business by using the logo of its Holding Company.
5. The business growth of Sriram 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 Sriram Chits (Bangalore) (P) Ltd.
the subsidiary company in the year 1994 vide an agreement entered into, which provided for the payment of certain % of the Auction turnover as royalty to Sriram Chits and Investments (P) Ltd.
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 Chiuts 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 thi, Page 9 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad Sriram Chits and Investments (P) Ltd. has provided financial assistance time and again to Sriram Chits (Bangalore) (P) Ltd. to help its working capital requirements.
9. When Sriram Chits (Bangalore) (P) Ltd. commenced operations, all its employees were from Sriram Chits & Investments (P) Ltd. who had prior experience in this line. Even now, Sriram Chits (Bangalore) (P) Ltd. looks for managerial support from Sriram 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, alls 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. M/s Sriram 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 Page 10 of 11 ITA Nos 1224 and 1187 of 2015 Sriram Chit Funds P Ltd Hyderabad 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. 21. Respectfully following the same and for the reasons given above by us we allow this ground of the assessee and delete the disallowance made on this account by the assessing officer. We direct the assessing officer to allow the claim of the assessee".
11. Respectfully following the same, we reject the Revenue's grounds of appeal.
12. In the result, Revenue's appeal is dismissed.
13. To sum up, appeals of both the assessee and the Revenue are dismissed.
Order pronounced in the Open Court on 29th April, 2016.
Sd/- Sd/-
(B. Ramakotaiah) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 29th April, 2016.
Vnodan/sps
Copy to:
1. Shri K.C. Devadas, 3-6-478, III Floor, Anand Estates, Opp:
Indian Bank, Liberty Road, Himayathnagar, Hyderabad 500029
2. Dy. Commissioner of Income Tax, Circle 3(1), Hyderabad 500029
3. CIT(A) - 3 Hyderabad
4. Principal Commissioner of Income Tax, -3 Hyderabad
5. The DR, ITAT, Hyderabad
6. Guard File By Order Page 11 of 11