2012 (4) TMI 630 - HC - Income Tax

Claim of bad debt under s. 36 - Held that - Going by the obligation of the foreman arising under ss. 21 and 22 of the Chit Funds Act to make good the default to the successful bidder on the subsequent day transaction, the claim was rightly considered by the Tribunal as one allowable under s. 36 of the Act.

Issues Involved:
1. Whether the payment made by the assessee to cover the defaulted installments of the successful chit holder can be claimed as a bad debt under Section 36 of the Income Tax Act.
2. Whether the payment made by the assessee can be considered as a business loss under Sections 28 and 37 of the Income Tax Act.

Detailed Analysis:

1. Claim of Bad Debt under Section 36:

The assessee, a chit fund company, claimed the payment made to cover defaulted installments by the successful chit holder as a bad debt. The Revenue disallowed the claim, arguing that the assessee was not engaged in money-lending activities, and thus, there was no creditor-debtor relationship to justify the claim under Section 36 of the IT Act.

Upon appeal, the CIT(A) viewed the advancement of money towards the defaulted chit group as part of the assessee's business operations. The CIT(A) noted that the foreman's responsibility under the Chit Funds Act included ensuring the continuation of the business by covering any shortfall due to defaults. Consequently, the default by the chit holder was seen as giving rise to a claim that could be treated as a bad debt. The Tribunal upheld this view, referencing the decision in CIT v. Nainital Bank Ltd., and confirming that the payments made were in the interest of managing the business and protecting non-prized subscribers.

The Tribunal also noted that any recovered amounts from defaulting subscribers were offered for taxation in the year of recovery, thus supporting the assessee's claim. The Revenue's appeal to the High Court argued that the nature of the assessee's business did not support a claim under Section 36(2) for bad debts.

2. Business Loss under Sections 28 and 37:

The CIT(A) also considered the claim as a business loss under Sections 28 and 37, reasoning that the advancement of money was integral to the business operations of running a chit fund. The Tribunal confirmed this view, noting that the claim could be allowable as a business loss, apart from being considered a bad debt.

The High Court examined the obligations of the foreman under the Chit Funds Act, particularly Sections 21 and 24, which require the foreman to ensure the proper conduct of the chit and substitute defaulting subscribers. The Court noted that the foreman's obligation to cover defaults was part of the business operations and the amounts paid were reflected in the balance sheet as liabilities.

The Court referenced the Supreme Court's decision in Shriram Chits & Investments (P) Ltd. v. Union of India, which clarified that chit transactions are not money-lending activities and do not create a creditor-debtor relationship under the Money Lenders Act. However, the contractual obligation under the Chit Funds Act could give rise to a creditor-debtor relationship, justifying the claim as a bad debt.

The High Court also noted the Revenue's acceptance of similar claims in the assessment years 1990-91 and 1991-92, supported by CBDT instructions treating unrecovered amounts from subscribers as bad debts. Given this precedent, the Court found no reason to deviate from the earlier decisions, confirming the Tribunal's view that the claim was allowable as a bad debt and as a business loss.

Conclusion:

The High Court dismissed the Revenue's appeals, affirming that the payment made by the assessee to cover defaulted installments was allowable as a bad debt under Section 36 and as a business loss under Sections 28 and 37 of the IT Act. The Court emphasized the consistent treatment of such claims in previous years and the statutory obligations under the Chit Funds Act, which justified the assessee's position.

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