2016 (6) TMI 54 - AT - Income Tax

Computation of irrecoverable amounts in respect of running and terminated chits - Held that - This issue had arisen in the earlier AYs as well wherein held that we have to mention that this issue has not come up during the course of arguments of the case. If the assessee has made the claim as indicated, no prejudice would be caused to him by setting aside the matter. Similarly no prejudice would be caused to revenue on this count as it can examine the claim afresh. To allow the claim to the extent indicated above fresh collection of facts and figures are required and thus we set aside the issue to the file of the Assessing Officer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for the assessment years 1998-99 and 1999-2000 on this ground of allowability of bad debt is allowed for statistical purposes.Accordingly, we do not find any infirmity in the order of the CIT(A) and therefore, the Assessing Officer is directed to re-compute the bad debts relatable to running chits as per the directions of the ITAT in its order cited supra as in the earlier years. Accordingly, this ground raised by the assessee as well as Revenue is dismissed Taxability of foreman dividend - Held that - The assessee fairly admitted that this issue also is covered against the assessee by the above decision for the A.Y 2007-08 upholding the taxability of foreman dividend Addition towards commission on removed chits - Held that - On a careful consideration of the issue, we find 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. Thus the stand of the assessee that 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. Otherwise 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

Summary

Issues Involved:
1. Deduction of irrecoverable amounts in respect of running and terminated chits.
2. Taxability of foreman dividend.
3. Addition on account of commission on canceled chits.
4. Disallowance of royalty payment to M/s Shriram Ownership Trust.

Issue-wise Detailed Analysis:

1. Deduction of Irrecoverable Amounts in Respect of Running and Terminated Chits:
The assessee argued that the CIT (A) should have allowed the deduction of bad debts related to running and terminated chits under Section 28 of the Income Tax Act, 1961, as a loss arising in the course of carrying on business. The AO had restricted the claim of bad debts to 5% of the amounts due from prized subscribers, citing the Supreme Court's judgment in Sriram Chits and Investments Pvt. Ltd vs. Union of India and the provisions of the Chit Funds Act, 1982. The CIT (A) had allowed the deduction following ITAT's decisions for previous years but directed the AO to compute the irrecoverable amounts afresh. The Tribunal upheld the CIT (A)'s order, referencing its earlier decisions, and dismissed the assessee's grounds, confirming that the deduction should be computed as per the directions given in previous ITAT orders.

2. Taxability of Foreman Dividend:
The assessee contended that the foreman dividend should not be taxable based on the principles of mutuality. However, the CIT (A) upheld the taxability of the foreman dividend amounting to ?15,67,25,358/-. The Tribunal noted that this issue was already decided against the assessee in its own case for the A.Y 2007-08, where the Tribunal had dismissed similar grounds. Respectfully following the same decision, the Tribunal dismissed the assessee's grounds on this issue.

3. Addition on Account of Commission on Canceled Chits:
The Revenue challenged the deletion of an addition of ?52,54,100 made by the AO on account of commission on canceled chits, arguing that the assessee follows a mercantile system of accounting and should account for incomes and expenditures on an accrual basis. The CIT (A) had deleted this addition, and the Tribunal found the CIT (A)'s order consistent with ITAT's directions in the assessee's own case for earlier years. The Tribunal upheld the CIT (A)'s decision, referencing previous ITAT orders that recognized the commission income on the final settlement of accounts with defaulting subscribers.

4. Disallowance of Royalty Payment to M/s Shriram Ownership Trust:
The Revenue also contested the deletion of a disallowance of ?3,76,81,919, arguing that the royalty payment was not incurred wholly and exclusively for business purposes as per Section 37(1) of the Act. The CIT (A) had deleted this disallowance, and the Tribunal found the CIT (A)'s order aligned with ITAT's decisions for earlier years. The Tribunal noted that similar issues were decided in favor of the assessee in previous years, where it was held that the royalty payment to the holding company was a legitimate business expenditure and should be allowed as a deduction. Respectfully following the same, the Tribunal rejected the Revenue's grounds and upheld the CIT (A)'s order.

Conclusion:
Both the assessee's and the Revenue's appeals were dismissed. The Tribunal upheld the CIT (A)'s decisions on all contested issues, following precedents set in the assessee's own cases for earlier assessment years. The order was pronounced in the Open Court on 29th April 2016.