2013 (12) TMI 481 - AT - Income Tax

Bad debts on running and terminated chit funds - Held that - Following assessee s own case for AY 2009-10 - The amount of loss incurred by the assessee has to be allowed on both running and terminated chits if irrecoverable if the prized chit amount has gone out of the hands of the assessee - Bad debts can be allowed to the extent of instalments defaulted by the prized subscribers and written off as bad debt in the books of the assessee - The issue was remitted back for fresh adjudication. Taxability of foreman dividend - Held that - Following assessee s own case for earlier A.Y. 1991-92 to 1994-95 - The assessee was a business concern and its aim was to make profits and, thus, the principles of mutuality could not be applied to it - The assessee had earned income for the purposes of its business and to be utilised only for the purposes of its business - The assessee company participated in chits promoted by other companies or entities - Profit earning was the motto of the assessee- company - The profits in question arose and accrued from the trade or vocation which it carried on. The principles of mutuality are based on the concept that no one can make profits out of himself. The essence of mutuality is of complete identity between the contributor and the participator - Decided against the assessee. Commission on cancelled chits - Held that - Following assessee s own case for A.Y. 2009-10 - 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 - The commission Income accrues when the accounts have been finally settled to the defaulting non subscriber - 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 - Decided against Revenue. Royalty payment - Held that - The payment of royalty at 0.5% of having regard to the business requirements of the assessee 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 - Decided against Revenue.

Issues Involved:
1. Deduction of bad debts for running and terminated chits.
2. Taxability of foreman dividend.
3. Levy of interest under sections 234B and 234C.
4. Disallowance of commission on canceled chits.
5. Disallowance of royalty payment.

Detailed Analysis:

1. Deduction of Bad Debts for Running and Terminated Chits:
The assessee, engaged in the chit fund business, claimed bad debts amounting to Rs. 28,56,19,123.44, with Rs. 17,05,35,065.60 pertaining to running chits and Rs. 11,50,84,057.84 to terminated chits. The Assessing Officer (AO) restricted the claim to 5% of amounts due from prized subscribers, disallowing 95% of the bad debts, which were not offered as income in the previous or earlier years. The CIT(A), following ITAT decisions, directed the AO to allow bad debts related to terminated chits and compute those related to running chits as per ITAT directions. Both the assessee and revenue appealed. The ITAT, referencing its earlier decision for AY 2009-10, remitted the issue back to the AO to re-examine the bad debts in light of previous orders, thus allowing the grounds for statistical purposes.

2. Taxability of Foreman Dividend:
The assessee claimed foreman's dividend of Rs. 9,79,21,623/- as exempt under the principle of mutuality. The AO rejected this claim, and the CIT(A) upheld the AO's action, referencing the coordinate bench's decision in the assessee's own case (83 ITD 792). The ITAT, following its decision for AY 2009-10, dismissed the assessee's appeal, reiterating that the principle of mutuality does not apply to the foreman dividend, thus upholding the taxability of the foreman dividend.

3. Levy of Interest Under Sections 234B and 234C:
The assessee's grounds related to the levy of interest under sections 234B and 234C were deemed consequential in nature. The ITAT directed the AO to levy interest as per the outcome of the other grounds.

4. Disallowance of Commission on Canceled Chits:
The AO added Rs. 1,06,15,700/- being the commission on canceled chits. The CIT(A), following the Tribunal's decision in earlier years, directed the AO to delete this addition. The ITAT, referencing its decision for AY 2009-10, upheld the CIT(A)'s order, dismissing the revenue's appeal on this ground.

5. Disallowance of Royalty Payment:
The AO disallowed royalty payment of Rs. 3,33,86,186/-. The CIT(A), following the Tribunal's decision in earlier years, directed the AO to allow the disallowance. The ITAT, referencing its decision for AY 2009-10, upheld the CIT(A)'s order, dismissing the revenue's appeal on this ground.

Conclusion:
Both the assessee's and the revenue's appeals were partly allowed for statistical purposes, with the ITAT remitting the issue of bad debts back to the AO for re-examination. The ITAT upheld the CIT(A)'s orders on the taxability of foreman dividend, commission on canceled chits, and royalty payment, dismissing the revenue's grounds on these issues. The levy of interest under sections 234B and 234C was directed to be consequential.

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