2014 (11) TMI 13 - AT - Income Tax

Chit funds - Claim of deduction on bad debts on running and terminated groups Bad debts allowable u/s 37(1) or business loss u/s 28 - Held that - Following the decision in M/s. Shriram Chits (P) Ltd. Versus The Joint CIT (OSD), Hyderabad 2013 (5) TMI 227 - ITAT HYDERABAD - 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 thus, the order of CIT(A) is upheld in allowing the claim of the assessee for deduction on account of bad debts relating to running chits and terminated groups Decided against revenue. Taxability of foreman s dividend Held that - Following the decision in M/s. Shriram Chits (P) Ltd. Versus The Joint CIT (OSD), Hyderabad 2013 (5) TMI 227 - ITAT HYDERABAD -in case of chit fund business, principle of mutuality will not apply. Accordingly, the claim of exemption of Foreman s dividend was rejected and addition under reference was made - there is no applicability of mutuality on this income the order of the CIT(A) confirming the taxability of foreman s dividend in the hands of the assessee upheld Decided against assessee. Commission on cancelled chit funds Held that - As decided in assessee s own case for the earlier assessment year, it has been held 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 - 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 - 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 - 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 - the order of the CIT(A) is upheld in deleting the addition Decided against revenue. Addition on payment of royalty Held that - As decided in assessee s own case for thea earlier assessment year, it has been held that when the assessee commenced its operation, ails its employees were from holding company who had prior experience in this line - 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 - the payment Is for, legitimate benefit taken in the course of business and from any standard, it cannot be said that payment of ₹ 1 lakh as royalty is sufficient to produce the business of the magnitude procured by the assessee over the years the order of the CIT(A) is upheld in deleting the disallowance on payment of royalty Decided against revenue.

Issues Involved:
1. Deduction on account of bad debts in respect of running and terminated groups.
2. Taxability of foreman's dividend.
3. Disallowance of commission on cancelled chits.
4. Disallowance of payment of royalty.
5. Levy of interest under S.234B.

Issue-wise Detailed Analysis:

1. Deduction on Account of Bad Debts in Respect of Running and Terminated Groups:
The assessee, a chit fund company, claimed a deduction of Rs. 28,30,96,460 for bad debts written off related to running and terminated chits. The Assessing Officer (AO) restricted the claim to 5% of the amounts due from the prized subscribers, disallowing the remaining 95% on the ground that it did not represent the income of the assessee. The CIT(A) allowed the claim for terminated chits and directed the AO to compute bad debts for running chits as per the Tribunal's directions from earlier years. The Tribunal upheld the CIT(A)'s order, following its own decisions from previous years, allowing the deduction for bad debts if the prized chit amount had gone out of the assessee's hands, and directed the AO to re-examine the issue in light of earlier orders.

2. Taxability of Foreman's Dividend:
The assessee claimed exemption for foreman's dividend of Rs. 12,02,66,441 based on the principle of mutuality. The AO rejected this claim, and the CIT(A) upheld the AO's decision, following the Tribunal's earlier ruling that the principle of mutuality does not apply to commercial entities like chit fund companies. The Tribunal confirmed the taxability of foreman's dividend, reiterating that the principle of mutuality is not applicable as the assessee is a commercial entity formed to derive profits.

3. Disallowance of Commission on Cancelled Chits:
The AO had disallowed Rs. 74,78,677 as commission on cancelled chits, arguing that the income accrues at the time of completion of the chit series. The CIT(A) deleted this disallowance, following the Tribunal's earlier orders which upheld the assessee's method of recognizing commission income on actual payment basis. The Tribunal upheld the CIT(A)'s order, reiterating that the issue is covered by its previous decisions in favor of the assessee.

4. Disallowance of Payment of Royalty:
The AO disallowed the payment of royalty, which the CIT(A) deleted. The Tribunal upheld the CIT(A)'s order, following its own earlier decisions that recognized the royalty payment as a legitimate business expenditure. The Tribunal noted that the payment was for the use of the holding company's logo, which contributed to the assessee's business growth, and thus should be allowed as a business expense.

5. Levy of Interest under S.234B:
The issue of levy of interest under S.234B was deemed consequential in nature. The Tribunal directed the AO to allow consequential relief to the assessee, if any.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, upholding the CIT(A)'s orders on the issues of bad debts, foreman's dividend, commission on cancelled chits, and royalty payments, while providing for consequential relief on the issue of interest under S.234B.

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