2012 (5) TMI 867 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of bad debts u/s 36(1)(vii) and 36(2)
2. Disallowance u/s 14A read with Rule 8D
3. Addition on account of royalty

Summary:

1. Allowance of Bad Debts u/s 36(1)(vii) and 36(2):
The first issue was whether the CIT(A) erred in allowing bad debts of Rs. 23,35,53,232/- relating to defaulting prized subscribers as a deduction while computing the income of the assessee. The Assessing Officer (AO) disallowed the bad debts, arguing that the conditions u/s 36(1)(vii) read with 36(2) were not satisfied, as the assessee did not offer the debt as income in the current or previous years and the business was not money lending but chit business. The CIT(A) allowed the claim, following the Tribunal's order in the assessee's own case for earlier years. The Tribunal upheld the CIT(A)'s decision, referencing its consistent rulings in favor of the assessee in similar cases, and recognizing the commercial prudence and business requirements for the assessee to step in for defaulting subscribers to maintain the chit business.

2. Disallowance u/s 14A read with Rule 8D:
The second issue was whether the CIT(A) erred in restricting the disallowance u/s 14A to Rs. 3,80,402/- as against Rs. 10,43,600/- disallowed by the AO. The AO applied Rule 8D to disallow expenses incurred in respect of exempt income. The Tribunal, referencing the Hon'ble Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [328 ITR 81], held that Rule 8D is applicable only from the assessment year 2008-09. Therefore, for the assessment year 2007-08, the AO should reasonably estimate the expenses attributable to earning exempt income without applying Rule 8D. The Tribunal set aside the lower authorities' orders and directed the AO to make a reasonable estimate.

3. Addition on Account of Royalty:
The third issue was whether the CIT(A) erred in deleting the addition of Rs. 82,93,635/- on account of royalty. The DR conceded that this issue was covered in favor of the assessee by the Tribunal's order in the assessee's own case. The Tribunal, following its earlier orders, held that royalty expenses are allowable as revenue expenditure. The Tribunal referenced its decision in the case of ACIT v. M/s. Shriram Chits Tamil Nadu Pvt. Ltd., where it was held that payments for the non-exclusive use of a logo based on turnover are revenue in nature and not capital expenditure.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on the issues of bad debts and royalty expenses, while it directed the AO to reasonably estimate expenses attributable to earning exempt income for the disallowance u/s 14A. The appeal of the Revenue was partly allowed.