2015 (4) TMI 680 - HC - Income Tax

Bid-loss - Claim of business loss - Whether the Tribunal was correct in holding that a sum of ₹ 7,20,32,155/- should be allowed as a bid loss since the assessee was following Completed Contract Method of accounting without considering the nature of loss on account of which the Assessing Officer and the Appellate Commissioner had disallowed the claim? - Held that - All that the assessee did was, filed a written submission on 03.02.2006 stating that as the tickets have been bid at the early stage of the duration of respective chit groups, when there will be high competition, the assessee has been foregoing a higher amount of bid loss. This is due to the principle of the discounted auction flow where one has to forego a higher rate of discount and obtain a specified amount of money rather than at a later date. In other words, the assessee was explaining the principle followed by them, which results in bid loss. What the Assessing Authority wanted was to give evidence that the assessee actually incurred the said loss in following the said principle, which was not furnished. Therefore he disallowed the said bid loss. Therefore, the Tribunal was not justified in setting aside the well considered order passed by the First Appellate Authority. In that view of the matter, the impugned order cannot be sustained. However, if the assessee is able to substantiate the said claim by producing acceptable evidence, in law the assessee would be entitled to the benefit of deduction. - Matter remanded to the Assessing Authority to decide the claim of business loss claimed by the assessee. - Decided in favor of revenue.

Summary

Issues:
- Disallowance of bid-loss claimed by the assessee
- Allowability of bad debts claimed by the assessee
- Excessive royalty paid by the assessee to its parent company

Disallowed Bid-Loss:
The assessee, a private limited company engaged in chit business, filed returns declaring a loss. The Assessing Authority disallowed amounts claimed under royalty, bad debts, and bid-loss. The Commissioner of Income Tax (Appeals) deleted royalty and bad debts disallowances but confirmed bid-loss disallowance. The Tribunal held that the assessee followed a consistent accounting system and recognized bid-loss only upon chit completion. The Tribunal set aside the order disallowing bid-loss, directing its allowance. The revenue appealed, questioning the bid-loss allowance under the Completed Contract Method.

Bad Debts Claim:
The Appellate Authorities allowed the assessee's bad debts claim under Section 36(1)(vii) r.w.s.36(2) without considering the nature of the transaction. The Tribunal remanded the matter to the Assessing Authority to substantiate the business loss claim with evidence. The Court referred to a previous judgment in favor of the assessee regarding bad debts, answering the issue in favor of the assessee and partly allowing the appeal.

Excessive Royalty Payment:
The Appellate Authorities held that the royalty paid by the assessee to its parent company was not excessive or unreasonable, exempting it from section 40A(2) & (3) provisions. The Court referred to a previous judgment in favor of the assessee regarding royalty payments, answering the issue in favor of the assessee and partly allowing the appeal. The matter was remanded to the Assessing Authority to decide the business loss claim.