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TMI Blog2023 (6) TMI 1373X X X X Extracts X X X X X X X X Extracts X X X X ..... dent/assessee. 4. I.T.T.A. No. 307 of 2005 has been preferred by the Revenue as the appellant assailing the order dated 26.07.2004 passed by the Income Tax Appellate Tribunal, Hyderabad Bench-B, Hyderabad (briefly, 'the Tribunal' hereinafter) in I.T.A. No. 471/Hyd/2002 for the assessment year 1998-99. 5. Likewise I.T.T.A. No. 92 of 2006 has been preferred by the Revenue against the order dated 26.07.2004 passed by the Tribunal in I.T.A. No. 1049/Hyd/2002 for the assessment year 1999-2000. 6. Finally, I.T.T.A. No. 154 of 2006 has been preferred by the Revenue against the order dated 30.07.2004 passed by the Tribunal in I.T.A. No. 1175/Hyd/2003 for the assessment year 2000-01. 7. In all the three appeals, the respondent/assessee is M/s. Shriram Chits Limited, Hyderabad which subsequently came to be known as M/s. Shriram Chits Private Limited, Hyderabad. 8. Respondent is the assessee under the Act having the status of a company. Assessee is engaged in the chit fund business regulated under the Chit Funds Act, 1982. For the assessment year 1998-99, assessee filed return of income admitting a loss of Rs. 1,14,76,024.00 and deemed income of Rs. 26,96,890.00 under Section 115JA of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same to the income of the assessee. Insofar claim of bad debts amounting to Rs. 6,98,39,496.00 pertaining to running chits, assessing officer was of the view that the change in the method of recognition of bad debts was unrealistic and it was only a method to defer payment of taxes. Accordingly, the said claim of bad debts was also disallowed. As regards commission on cancelled chits claimed by the assessee to the tune of Rs. 58,58,658.00, assessing officer was of the view that change in the accounting policy was without any basis and not on sound principles. Accordingly, the said amount was added to the income of the assessee and brought to tax. In this assessment year, there was an additional claim of the assessee i.e., royalty to the extent of Rs.2,49,05,065.00. Royalty was being paid to the holding company by the assessee for the licence to use its logo as per agreement. This claim of royalty was disallowed by the assessing officer as according to the assessing officer, assessee had failed to prove the nexus as to whether the expenditure was incurred wholly and exclusively for the purpose of business. Assessing officer took the view that the transaction was of mutual convenie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the organisers unless it takes over the liability of some of the persons. In such a case, the unrecovered amount due from such persons will have to be treated as bad debts. Tribunal also took note of subsequent clarification of the CBDT dated 25.03.1992 reiterating the instruction No.1175. Thus, Tribunal following the instructions of the CBDT held that when the organiser takes over the liability of some of the members and when such amounts remained unrecovered, the same should be treated as bad debts. Instructions and clarification of CBDT clearly settles this issue. Tribunal also referred to certain judgments of the Supreme Court to highlight the binding nature of instructions and circulars issued by the CBDT on the revenue authorities and held that Revenue was bound to take the view that the amount recoverable from a defaulting prized subscriber by the foreman is a debt. 10.2. As to the second aspect, Tribunal noted the amendment to Section 36(1)(vii) of the Act with effect from 01.04.1989. Applying the decision of the Gujarat High Court in CIT v. Girish Bhagwatprasad (2002) 256 ITR 772, Tribunal found that the claim for bad debt was made on completion of the chit. The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture was held to be revenue income and was thus allowed. 11. Insofar assessment year 2000-01 is concerned, the appeal filed by the assessee being I.T.A.No.1175/ Hyd/2003 was allowed by the Tribunal by following its previous orders. As to claim of bad debts, Tribunal held that this issue was covered by its order dated 26.07.2004 passed in I.T.A.No.471/ Hyd/2002 for the assessment year 1998-99 filed by the assessee itself. As regards allowability of commission on cancelled chits, Tribunal followed its earlier decision dated 26.07.2006 passed in I.T.A.Nos.471 and 1049 of Hyd/2002 for the assessment years 1998-99 and 1999-2000. Finally on the point of liability of royalty payment, Tribunal also followed its earlier order dated 26.07.204 in the appeal of the assessee itself for the assessment year 1999-2000 being I.T.A.No.1049/Hyd/ 2002. Thus, appeal of the assessee was partly allowed vide the order dated 30.07.2004. 12. Against the aforesaid orders of the Tribunal, the three appeals have been preferred by the Revenue under Section 260A of the Act as mentioned supra. In all the three appeals, Revenue has proposed the following questions as substantial questions of law: 1. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; no deduction is allowable unless debt or part of it has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off; and the assessee is obliged to prove to the assessing officer that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act. Insofar the claim of commission on cancelled chits and royalty payment are concerned, learned Standing Counsel has supported the orders of the assessing officer as affirmed by the CIT (A). 14. Per contra, Mr. Easwar, learned Senior Counsel for the respondent/assessee has argued in support of the orders of the Tribunal. He has submitted a compilation of judgments and instructions of CBDT to contend that findings of the Tribunal are valid and unexceptionable. Similar claim for deduction of bad debts in chit business has been allowed by the Madras High Court and by the Karnataka High Court in several appeals. He has also placed reliance on the decision of the Supreme Court in TRF Limited v. CIT 323 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the claim for deduction as bad debt is allowable under Section 36(1)(vii) of the Act? The second aspect is the point of time at which such deduction is allowable. 17.1. On the issue of allowability of the claim as bad debt, Tribunal held as follows: 6.6 (i) We first examine the allowability of the claim as bad debt. The Hon'ble Andhra Pradesh High Court in the case of Goverdhan Upadhyan v. Aekelle Kameswar Rao (died) and others (1996 (4) ALT 1) held as follows: "The relationship between the prized subscriber and the foreman is of a debtor and creditor when the prized subscriber receives the amount and undertakes to pay the subsequent instalments due to the foreman." A full discussion on the issue is at pages 6 & 7 of the reported judgment wherein the judgment of the Hon'ble Madras High Court in the case of Angammal v. R. Sankaranarayanan (AIR 1989 Madras 53) was referred to. In its judgment in the case of Shriram Chits & Investments (P) Limited v. Union of India & others (AIR 1993 SC 2063) the Hon'ble Supreme Court was considering the constitutional validity of an enactment and had no occasion to consider the relationship which arises between foreman and the prized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the organizer takes over the liability of some of the members and when such amounts remain unrecovered, the same should be treated as bad debt. Thus the circular of the Board settles the first controversy. 6.6 (iv) The Hon'ble Supreme Court in the case of Ranadey Micro Nutrients v. CCE [(1996) 97 ELT 19] observed as follows: "One should have thought an officer of the Ministry of Finance would have greater respect for circulars such as these issued by the Board, which also operates as these issued by the Board, which also, operates under the aegis of the Ministry of Finance, for it is the board which is by statute, entrusted with the task of classifying excisable goods uniformly. The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance than the winning or losing of court proceedings." 6.6 (v) The binding nature of the circular issued by the Board of Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in this case (263 ITR 706) and thus we need not specifically deal with them." 6.6 (vii) Thus the Revenue has to apply the interpretation laid down by the Central Board of Direct Taxes on this issue in the circular issued in this regard. Thus we hold that the Revenue is bound to take a view that the amount recoverable from a defaulting prized subscriber by the foreman is a debt. 6.6 (viii) Various benches of the Tribunal have consistently taken a view that a claim of the assessee is maintainable as bad debt. It is not the case of the Revenue that the transaction in question was not bona fide or that the assessee has attempted to conceal taxable income or that this is a device for evasion of payment of tax. Only the legality of the claim under Section 36(1)(vii) and point of time of the claim are being disputed by the Revenue on the ground that this would lead to postponement of tax due to the government. Based on the foregoing discussion, we uphold the claim of the assessee and hold that the Revenue should follow the CBDT circular and take a view that the claim of the assessee is maintainable as bad debt. 17.2. Thus, Tribunal followed the decision of the jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings assessee had filed details of the bad debts showing proof of suits filed as well as suits filed in subsequent years, the details of which were examined by the assessing officer. After considering the decisions of the Mumbai and Chennai Benches of the Tribunal in similar matters as well as the decision of the Gujarat High Court in the case of Girish Bhagwatprasad (supra), Tribunal took the view that under Section 36(1)(vii) of the Act as it stood after the amendment with effect from 01.04.1989, writing off in the books of accounts of a bad debt is sufficient and the assessing officer has no option of deciding the year in which the debt had become bad debt. 17.4. With regard to the case of assessee, Tribunal noted that for the assessment years 1995-96 and 1997-98, the claim for bad debt was allowed by the first appellate authority i.e., CIT(A) against which Revenue was in appeal. Tribunal did not find any infirmity in the orders of the first appellate authority as the assessee had given details of the claim which were examined by the assessing officer. Being a voluntary payment in discharge of a legal obligation, assessee would be entitled to have the amount deducted as a bad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he prized subscriber on an auction after the foreman deducts his commission. 6.6 (xviii) The funds of the foreman are involved only to the extent of defaults both by the prized and nonprized subscribers. The claim of the foreman to the extent his funds are involved can be considered as an allowable claim. A future liability that may arise to the foreman due to continuing default in paying instalments by a prized subscriber cannot be claimed at this point of time. This factor can best be explained by the following example. 6.6 (xix) In a chit there are 24 subscribers and if each one of them contributes Rs. 100 per month for 24 months and in the 2nd month of the chit one subscriber bids and takes Rs. 2400 - the loss of Rs. 960 - commission @ 5% Rs. 120 i.e. Rs. 1,320/- and defaults for four consequent months and there is no other defaulter, the money put in by the foreman is Rs. 400 against Rs. 1,320/- due from the defaulting subscriber. So against Rs. 400 put in by the foreman due to legal requirements, at the end of 4 months, he is not entitled to write off Rs. 1,320/- and claim the same as a bad debt. This is not permissible. In other words, the foreman in this case would be w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for the entire amount outstanding. In estimating the amount of the provision for loss, the realisable value of the security lodged with the Foreman should also be considered." 6.6 (xx) On these facts a claim of loss without corresponding inflow of funds from the foreman, which is a definite possibility in this method of claim, cannot be upheld. The amount of loss can definitely be allowed to the extent that the foreman has put in his funds and has come to a conclusion that his funds are not recoverable due to the account becoming sticky and to the extent he has taken an honest decision for writing off the same in his books. In other words, 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 for the future instalments that are likely and yet to be defaulted, no claim can be allowed. The assessing officer cannot replace the judgment of the businessman. The facts that the assessee has written off as bad debt when prized subscribers defaulted for four consecutive months does not to our mind affect his claim as this is based on past experience of the assessee in his business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. Other deductions:- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (i) to (vi) ** (vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. 19.1. Thus, what is noticeable is that prior to the amendment, the amount of any debt or part thereof which was established to have become a bad debt in the previous year was an allowable deduction while computing the income in terms of Section 28 of the Act. However, this was subject to sub-section (2) of Section 36. After the amendment, the requirement of establishing a debt as a bad debt has been done away with. Whereafter, the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year became an allowable exemption. 19.2. This provision, pre and post amendment with effect from 01.04.1989 was considered by the Supreme Court in TRF Limited (supra). Whereafter, it was held that after 01.04.1989 it is not necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractual obligation which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum. Supreme Court has held as follows: 10. We do not agree with the view expressed by the Division Bench. When a prized subscriber is allowed to draw the chit amount, which is in the nature of a grant of a loan to him from the common fund in the hands of the foreman, with the concessional facility of effecting repayment in instalments; this is subject to the stipulation that the concession is liable to be withdrawn in the event of default being committed in payment of any of the instalments. The chit subscriber at the time of subscription, incurs a debt which is payable in instalments. If a subscriber is permitted to withdraw the collected sum on his turn, without being bound to pay the future instalments, it would jeopardise the interest of all other subscribers, and the entire mechanism of the chit fund system would collapse. 11. A perusal of the provisions of Chapter V of the 1982 Act makes it clear that if a prized subscriber defaults in making payment of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if any such dispute is on a promissory note, no order shall be passed under this sub-section unless such promissory note expressly states that the amount due under the promissory note is towards the payment of subscriptions to the chit. (3) Any person who holds any interest in the property furnished as security or part thereof, shall be entitled to make the payment under sub-section (2). (4) All consolidated payments of future subscriptions realised by a foreman shall be deposited by him in an approved bank mentioned in the chit agreement before the date of the succeeding instalment and the amount so deposited shall not be withdrawn except for payment of future subscriptions. (5) Where any property is obtained as security in lieu of the consolidated payment of future subscriptions, it shall remain as security for the due payment of future subscriptions." (emphasis supplied) 12. The object is to empower the foreman to recover the amount in a lump sum from a defaulting subscriber, so as to secure the interest of the other subscribers, and ensure smooth functioning of the chit fund. Such a provision would not amount to a penalty. 13. The relationship between the foreman a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the accounts of the assessee for the previous year; (ii) Such bad debt or part of it written-off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; (iii) No deduction is allowable unless the debt or part of it "has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year", or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (iv) The assessee is obliged to prove to the AO that the case satisfies the ingredients of Section 36(1)(vii) as well as Section 36(2) of the Act. 23.1. However, Supreme Court has clarified that even if a claim for deduction under Section 36(1) is not allowed, the possibility of its exclusion under Section 37 cannot be ruled out in as much as the heads of expenditure that can be claimed as deduction are not exhaustive, that being the precise reason for existence of Section 37. Therefore, in a given case, even if the expenditure relates to business and the claim f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure could not be said to be for acquisition of any asset at all. 26. In Honda Siel Cars India Limited (supra), Supreme Court once again examined the distinction between capital and revenue expenditure. Referring to its earlier decision in CIT v. Ciba of India Limited AIR 1968 SC 1131 : (1968) 69 ITR 692, 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. Supreme Court held as follows: 19. If the aforesaid factors are taken in isolation, probably the claim of the assessee may be justified. Distinction between capital and revenue expenditure with reference to acquisition of technical information and know-how has been spelled out by this Court [Ed.: A few such cases are CIT v. Wavin (I) Ltd., (1998) 8 SCC 585; Jonas Woodhead & Sons Ltd. v. CIT, (1997) 10 SCC 119; and Alembic Chemical Works Co. Ltd. v. CIT, (1989) 3 SCC 329 (Alembic case discussed below).] as well as the High Courts in series of cases. Primary test which is adopted to differentiate between capital and revenue expenditure remains the same, namely, the enduring nature test. It means where the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y same business was set up by the transferee company. However, in the present case, it is not the case. The grant of licence to use the intellectual property of the parent company for limited purpose, cannot be treated as transfer of ownership or title. Though the licence is renewed periodically, it by itself does not guarantee the renewal. Similarly, the parent company is always at liberty to not only cancel the license, but also grants such rights to any other organization. Further, the findings of the Apex Court in the above judgment that when the intellectual property right is not transferred, but permitted to be utilized for a particular period, would have to be treated as revenue expenditure, on application to the facts of this case, tilts the balance in favour of the assesses. Every expenditure incurred to acquire some right over intangible asset, cannot be ipso facto termed as capital expenditure. The nature of the assets, right, information or technical know-how that is transferred, must be such that without which the transferee could never commence the business. As rightly contented by the learned senior counsel appearing for the asessees, the benefit granted by the licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Shriram Chits and Investment Private Limited, Chennai v. ACIT [263 ITR (AT) 65]. This decision is not applicable to the facts of this case. The commission/remuneration to the foreman in that case was sought to be recognized 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 as in this case. The nature 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 recognized as income on the finalization of the issues. This is not an unacceptable proposition. We agree with the submission of the learned counsel for the assessee, which are at para 4.11 of this order. In the result, this ground of appeal of the assessee is allowed. 28.1. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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