2023 (6) TMI 1373 - HC - Income Tax

Allowability of the claim as bad debt - when the assessee did not satisfy the conditions under Sections 36(1)(vii) r.w.s. 36(2) of the Act with regard to his claim of bad debts - whether the claim for deduction as bad debt was allowable u/s 36(1)(vii)? - HELD THAT - Tribunal has given good reasons as to why the claim of bad debt is an allowable deduction under Section 36(1)(vii) of the Act. That apart, Tribunal took the view that 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 at the same time clarifying that for future instalments that are likely and yet to be defaulted no claim for bad debt can be allowed. However, to allow such a claim to the extent indicated, Tribunal observed that more facts and figures were required and therefore, relegated the matter back to the file of the assessing officer. We see no error or infirmity in the view taken by the Tribunal on the issue of bad debts covering both the facets. Disallowance of royalty payment - distinction between capital and revenue expenditure - Tribunal took note of the fact that the only ground for the disallowance was that in the prior assessment years no such payment was made - HELD THAT - As undisputed fact is that the logo and the words Shriram Chits is owned by M/s. Shriram Chits and Investments (Private) Limited. Assessee had used the logo and the above words while carrying on its business. Honda Siel Cars India Limited 2017 (6) TMI 524 - SUPREME COURT , Supreme Court once again examined the distinction between capital and revenue expenditure. Referring to its earlier decision in CIT v. Ciba of India Limited 1967 (12) TMI 3 - SUPREME COURT Supreme Court held that royalty paid for use of technical information or knowhow would be in the nature of revenue expenditure as no enduring benefit is acquired thereby. As per Shriram Transport Finance Company Limited. 2022 (6) TMI 1428 - MADRAS HIGH COURT royalty payment made by the assessee for use of logo or trademark for a particular period for improvement/ expansion of business would qualify as revenue expenditure This issue is no longer res integra. In the case of Wavin (India) Limited 1981 (6) TMI 5 - MADRAS HIGH COURT as examined such a claim in the context of amount paid to a foreign collaborator as contribution towards research and development expenditure. Madras High Court held that such expenditure could not be regarded as capital expenditure. It being a business expenditure, assessee was entitled to claim deduction. This decision of the Madras High Court was upheld by the Supreme Court in Waven (India) Limited 1997 (9) TMI 6 - SC ORDER wherein Supreme Court agreed with the reasoning given by the Madras High Court while upholding the expenditure to be of revenue nature. The expenditures were incurred to obtain benefit of development and research made by the foreign company; such an expenditure could not be said to be for acquisition of any asset at all. Therefore, we have no hesitation in answering this issue in favour of the assessee. Accrual of income - Commission on removed chits - according to the Tribunal, from out of the amount that is payable to the defaulting subscriber, subscription to his replacement by another person, the assessee is entitled to deduct 5% as commission. This commission amount has got nothing to do with the regular commission income of the assessee - HELD THAT - Stand of the assessee that the commission income accrues when the accounts have been finally settled with the defaulting non-subscriber is the correct position. We are in agreement with the view expressed by the Tribunal on this issue. Thus, this issue is also answered in favour of the assessee.

Summary

Issues Involved:
1. Claim of bad debts
2. Claim of royalty payments
3. Commission on removed or cancelled chits

Summary:

1. Claim of Bad Debts:
The Tribunal examined whether the claim for deduction as bad debt is allowable under Section 36(1)(vii) of the Income Tax Act, 1961, and the point of time at which such deduction is allowable. The Tribunal referred to CBDT Instruction No.1175 dated 16.05.1978 and its subsequent clarification on 25.03.1992, which stated that unrecovered amounts due from members in chit funds should be treated as bad debts. The Tribunal upheld the claim of the assessee, stating that the Revenue should follow the CBDT circular and consider the claim maintainable as bad debt. The Tribunal also noted that bad debts could 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 not for future instalments that are likely and yet to be defaulted. The matter was remanded back to the assessing officer for fresh consideration of facts and figures.

2. Claim of Royalty Payments:
The Tribunal allowed the claim of the assessee for royalty payments made for the use of the logo and the words "Shriram Chits," treating it as a business expenditure. The Tribunal referred to the decisions in CIT v. Wavin (India) Limited and Honda Siel Cars India Limited, which held that royalty paid for the use of technical information or know-how is in the nature of revenue expenditure. The Tribunal concluded that the royalty payment made by the assessee for the use of a logo or trademark for business improvement qualifies as revenue expenditure.

3. Commission on Removed or Cancelled Chits:
The Tribunal decided in favor of the assessee regarding the commission on removed or cancelled chits. It held that the commission income accrues when the accounts have been finally settled with the defaulting non-subscriber. The Tribunal found that the 5% commission deducted from the amount payable to the defaulting subscriber upon replacement by another person is separate from the regular commission income of the assessee. The Tribunal's decision was based on the correct position that commission income accrues upon the final settlement of accounts with the defaulting non-subscriber.

Conclusion:
The Tribunal's decisions on all three issues were upheld, and the appeals filed by the Revenue were dismissed. The Tribunal's reasoning and adherence to CBDT instructions and relevant case law were found to be valid and unexceptionable. The questions proposed by the Revenue as substantial questions of law were answered against the Revenue and in favor of the assessee.