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TMI Blog2011 (3) TMI 1652X X X X Extracts X X X X X X X X Extracts X X X X ..... running chits and therefore erred in giving the directions once again to compute the irrecoverable amounts in respect of running chits, instead of directing it's direction absolutely. 3. Brief facts of the case are that the assessee company is engaged in chit business. The assessee's grounds is with regard to disallowance of ₹ 38,52,87,420/- under the head 'bad debt', alternatively claimed u/s 28(1)/37(1) of the Act. The assessee, during the year under consideration had debited an amount of ₹ 40,55,65,704.86 on account of bad debts written off, out of which ₹ 24,44,98,431.20 pertained to the running chits while ₹ 16,10,67,273.66 pertained to the terminated chits. These bad debts have been claimed in terms of the method adopted by the assessee from assessment years 1998-99 onwards. 3.1. Referring to provisions of section 36(1)(vii) r.w.s. 36(2), the Assessing Officer is of the opinion that chit fund transactions do not partake the character of debt and as such the relationship between the chit organiser and the subscriber, whether or not a prized subscriber is not a relationship of creditor and debtor. For this proposition he relied on the decision of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by way of subscriptions in respect of a chit. The Assessing Officer concluded that the assessee is not entitled to the claim of bad debts as it fails to satisfy the conditions laid down u/s 36(2)of the Act. • The subscription/amount to be repaid by member towards future instalments is not a debt, especially within the meaning of AP Agricultural Indebtedness (Relief) Act. • No debtor and creditor relationship between foreman and subscriber • The debt is not part of income of previous year or any earlier previous year • Chit fund business is not money lending business 3.5. The Assessing Officer finally concluded that since the assessee is in chit fund business and not in money lending business, the bad debt to the extent of which is offered as income on accrual basis in the previous year or any earlier years shall alone be eligible for deduction u/s 36(1)(xii) of the IT Act, 1961 and, therefore, restricted the claim of bad debt to 5% of amounts due from prized subscribers, which is the foreman's commission, as the same was offered to income either in the previous years. The remaining 95% of the bad debts, not offered as income in the previous year or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rety in the form of immovable urban property was also being taken for future liability of over ₹ 1 lakh. The assessee also had the power to cancel and deliver all the subsequent instalments due. This, as per the Assessing Officer showed that the instalments due from defaulting subscribers are not a loss to the assessee company and it could partake the character of a loss only when recovery was not possible from the defaulted subscribers or the guarantors even after passing a decree by a Court of Law. Therefore, the assessee company could not have claimed loss immediately when a defaulted prized subscriber did not pay 6 instalments consecutively. 3.9. Referring to the decision of Hon'ble Apex Court in the case of Madan Gopal Bagla Vs. CIT (30 ITR 174), the Assessing Officer noted that the amount advanced by the company to the prized subscribers is the amount pooled from the members of the chit and therefore does not entirely belong to the assessee. The assessee is only the guarantor to conduct chit and therefore, any loss suffered by the reason of having to pay a debt borrowed for the benefit of another would be a capital loss of the assessee and not a business loss. The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n adopting this guideline or policy. 6.6.(xxi). 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 above, 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 debts is allowed for statistical purposes. Against this direction of the CIT(A), the assessee is in appeal before us. 5. The Learned Authorized Representative for the assessee has a made a plea before us that the bad debts are to be allowed either u/s 28 or u/s 36(1)(vii) of the Income Tax Act, 1961 and it need not to be set aside for fresh consideration of the Assessing Officer. 6. On the other hand, the Learned Departmental Representative has relied on the order of the CIT(A). 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore this Tribunal and the Tribunal has decided these issues in assessee's own case reported in 83 ITD 792. Respectfully following the same ratio laid down by the Tribunal in assessee's own case, we dismiss the two grounds taken by the assessee. 11. The next two ground Nos.6 & 7 in the assessee's appeal in ITA No.470/H/2010 is as follows: 6. The CIT(A) erred in upholding the disallowance of finance charges at ₹ 8,62,063/- is unsustainable in law. 7. The CIT(A) failed to note that the finance charges incurred by the assessee was an expenditure incurred wholly and exclusively in the course of carrying on business. 12. These two issues were not pressed by the assessee before the Tribunal and therefore these two grounds are dismissed as not pressed. 13. The next two grounds in assessee's appeal are related to levy of interest u/s 234D & 234B which are mandatory and consequential in nature. Accordingly, these two grounds raised by the assessee are dismissed. 14. The ground No.2 in Revenue appeal in ITA No.120/H/2010 is as follows: The CIT(A) ought to have appreciated the action of the Assessing Officer in making addition towards commission on removed chits which is contrave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this order. In the result, this ground of appeal of the assessee is allowed. 16. In view of the above order of this Tribunal, we dismiss this ground taken by the Revenue on the same lines. 17. The Ground No.3 in Revenue appeal in ITA No.120/H/2010 is as follows: The CIT(A) ought to have upheld the action of the Assessing Officer in making addition towards bad debts keeping in view the decision of Hon'ble Supreme Court in the case of Madan Gopal Gabla Vs. CIT (1956) 30 ITR 174 (SC) and as per the law the benefit of deduction u/s 37 is available only when expenditure is of the nature as specified under the provisions of section 30 to 36 of the IT Act, 1961. 18. Since the Tribunal has considered the order of the CIT(A) on this issue while deciding in the assessee's appeal in Ground Nos.2 & 3 in earlier quoted Paras, this ground of the Revenue becomes infructuous and hence dismissed as infructuous. 19. The Ground No.4 in Revenue appeal in ITA No.120/H/2010 is as follows: The CIT(A) ought to have appreciated the action of the Assessing Officer in adding Royalty payments made by the assessee company which are in contravention under the copy Act and as per section 37 of the IT Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince inception continued to book new business by using the logo of its Holding Company. 5. The business growth of Sriram Chits (Bangalore) (P) Ltd. over the years can be inferred from the following figures: FY 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 No. of Branches 4 6 7 9 11 19 19 Business (in lakhs) 29.49 66.41 105 81.26 184.01 260.05 359.05 Auction turnover 29.49 95.9 181.15 225.69 348.29 542.28 753.23 6. The right to use the logo from the Holding Company Sriram Chits and Investments (P) Ltd. was formally given to Sriram Chits (Bangalore) (P) Ltd. the subsidiary company in the year 1994 vide an agreement entered into, which provided for the payment of certain % of the Auction turnover as royalty to Sriram Chits and Investments (P) Ltd. 7. By the agreement, Sriram Chits and Investments (P) Ltd., has formally committed itself to the growth and development of Sriram Chits (Bangalore) (P) Ltd. for a further period of 7 years. 8. The duty of Sriram Chiuts and Investments (P) Ltd. does not end with merely transferring the right to sue its logo to its subsidiary company. It also assumes the responsibility to ensure that the name whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving regard to the business requirements of the assessee. In our view, 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 holding company has entered into similar agreements with other subsidiary companies and the CIT(A) has considered the same to be reasonable business outflow property under a specific agreement executed by the parties is very much reasonable and should have been accepted as a business expenditure allowable as deduction. We, therefore, delete the disallowance for these two years. The disallowance has been primarily based on a suspicion and incorrect appreciation of ahrd realities of the business by the revenue authorities. The disallowance is accordingly deleted. 21. Respectfully following the same and for the reasons given above by us we allow this ground of the assessee and delete the disallowance made on this account by the assessing officer. We direct the assessing officer to allow the claim of the assessee. 22. Respectfully following the above ratio laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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