ACIT, Hyderabad v. M/s Shri Ram Chits P.Ltd.,, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO: 152/HYD/2007 ASSESSMENT . YEAR 2003-04 ITA NO.153/HYD/2007 2002-03 THE DY. CIT CIRCLE 3(1) HYDERABAD VS M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) (APPELLANT) (RESPONDENT) ITA NO.154/HYD/2007 ASSESSMENT. YEAR: 2003-04 ITA NOS.155/HYD/2007 2002-03 M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) VS THE DY. CIT CIRCLE 3(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.630/HYD/2008 ASSESSMENT YEAR : 2004-05 M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) THE DY. CIT CIRCLE 3(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.852/HYD/2008 ASSESSMENT YEAR :2004-05 THE ACIT CIRCLE 3 (1) HYDERABAD M/S SRI RAM CHITS (P ) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) (APPELLANT) (RESPONDENT) ITA NO.927/HYD/2008 ASSESSMENT. YEAR : 2005-06 M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) THE ACIT RANGE 3 HYDERABAD (APPELLANT) (RESPONDENT) 2 2 ITA NO.1117/HYD/2008 ASSESSMENT. YEAR : 2005-06 THE ACIT RANGE 3 HYDERABAD M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) (APPELLANT) (RESPONDENT) ITA NO.541/HYD/2009 ASSESSMENT. YEAR : 2006-07 M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) THE ACIT RANGE 3 HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.655/HYD/2009 ASSESSMENT. YEAR : 2006-07 THE DY.CIT CIRCLE 3(1) HYDERABAD M/S SRI RAM CHITS (P) LTD. HYDERABAD (PAN AAFCS 4916 D/SH-15) (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. VASUNDHARA SINHA DR RESPONDENT BY : SHRI K.C. DEVADAS O R D E R PER SHRI CHANDRA POOJARI ACCOUNTANT MEMBER: THESE 10 APPEALS PREFERRED BY THE ASSESSEE AS WELL A S THE REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDERS PASSED BY THE CIT(A) HYDERABAD AND PERTAINS TO THE ASSESSMENT YEARS 2002-03 2 003-04 2004-05 2005-06 AND 2006-07. SINCE COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS THEY ARE CLUBBED TOGETHER HEARD TO GETHER AND DISPOSED OFF VIDE THIS COMMON ORDER FOR THE SAKE OF CONVE NIENCE. 2. THE FIRST COMMON GROUNDS IN THE ASSESSEE AS WELL AS IN THE REVENUE APPEALS I.E. ASSESSEE APPEALS IN ITA NO.154/ 155 /07 630/HYD/2008 927/HYD/2008 AND 541/HYD/2009 AND REVENU E APPEALS IN ITA NOS.153/152/852/1117/655/HYD/2007 ARE RELATING TO ALLOWABILITY OF BAD DEBTS. 3 3 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. AT THE TIME OF HEARING THE AUTHORIZED REPRE SENTATIVE OF ASSESSEE NOT SERIOUSLY PRESSED THE GROUNDS IN THESE APPEALS B EFORE US. ACCORDINGLY THE GROUNDS TAKEN BY THE ASSESSEE IN THE ABOV E SAID APPEALS ARE DISMISSED AS NOT PRESSED. 4. COMING TO THE GROUNDS IN THE REVENUE APPEALS TH ESE ISSUES ARE SQUARELY COVERED BY THE ORDER OF THIS TRIBUNAL B BENCH DATED 26.7.2004 IN ITA NOS.500 506/HYD/1999 ITA NOS.294 3 27/HYD/2001 AND ITA NOS.471/HYD/ AND 1049/HYD/2002 FOR THE ASSESSMENT YEARS 1995-96 1997-98 1998-99 AND 1999-2000 AND WHEREIN IT WAS HELD AT PAGE NO.51 OF THE ORDER AS FOLLOWS: 6.6(XXI): WE HAVE TO MENTION THAT THIS ISSUE HAS N OT COME UP DURING THE COURSE OF ARGUMENTS OF THE CASE. IF THE ASSESSEE H AS MADE THE CLAIM AS INDICATED NO PREJUDICE WOULD BE CAUSED TO HIM BY S ETTING ASIDE THE MATTER. SIMILARLY NO PREJUDICE WOULD BE CAUSED TO REVENUE O N THIS COUNT AS IT CAN EXAMINE THE CLAIM AFRESH. TO ALLOW THE CLAIM TO TH E 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 CONS IDERING THE CLAIM AFRESH IN THE LIGHT OF THIS ORDER. THUS THE APPEAL OF THE ASSESS EE FOR THE ASSESSMENT YEARS 1998-99 AND 1999-2000 ON THIS GROUND OF ALLOWABILIT Y OF BAD DEBT IS ALLOWED FOR STATISTICAL PURPOSES. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE CIT(A) AND THEREFORE THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTED THE BAD DEBTS RELATABLE TO RUNNING CHITS AS PER THE DIRECTIONS OF TH E ITAT IN ITS ORDER CITED SUPRA AS IN THE EARLIER YEARS. ACCORDINGLY THE GR OUND RAISED BY THE ASSESSEE AS WELL AS REVENUE IS DISMISSED. 5. COMING TO THE NEXT COMMON GROUND IN ALL ASSESSEES APPEAL RELATING TO THE DISALLOWANCE OF FOREMAN DIVIDEND. T HIS ISSUE ALSO ALREADY DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE AGAINST THE A SSESSEE IN ITS ORDER CITED SUPRA WHEREIN THE TRIBUNAL FOLLOWED I TS EARLIER ORDER IN 4 4 ASSESSEES OWN CASE REPORTED IN 83 ITD 792. RESPECTFULLY F OLLOWING THE SAME RATIO LAID DOWN BY THE TRIBUNAL IN ITS ORDER IN ASSESSEES OWN CASE WE DISMISS THE GROUND TAKEN BY THE ASSESSEE. 6. THE NEXT COMMON GROUNDS BY THE ASSESSEE ARE RELATING DISALLOWANCE OF FINANCIAL CHARGES. THE ASSESSING OFFICER NOT ICED THAT THE ASSESSEE COMPANY AS PAID INTEREST AT 25% TO THE FOLLOWING THREE COMPANIES: 1. RAJANI INVESTMENTS (P) LTD. CHENNAI 2. HYMAVATHI ENTERPRISES (P) LTD. CHENNAI 3. BILLAHARI INVESTMENTS (P) LTD. CHENNAI 6.1. SINCE THE ASSESSEE HAS PAID AN INTEREST OF 28% PER ANNUM WHEN COMPARED TO THE RATE OF INTEREST I.E. AT 12.77% RECEIVED FROM VARIOUS OTHER COMPANIES TO WHOM THE ASSESSEE ADVANCED MONEY THE ASSESSING OFFICER HELD THAT IT IS AN EXCESS PAYMENT. THE PL EA OF THE ASSESSEE IS THAT IT WAS PAID SUCH HIGH RATE OF INTEREST ON A CCOUNT OF BUSINESS EXPEDIENCY AND THE EXPENDITURE WAS INCURRED WH OLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. FURTHER THE CO NTENTION OF THE ASSESSEE'S COUNSEL IS THAT THE ASSESSEE ADVANCED THE MONEY TO SIST ER CONCERN TO REDUCE INTEREST BURDEN THEREBY THE ASSESSEE ENJO YED THE BENEFIT OF REDUCTION OF INTEREST LIABILITY. HAD THE ASSESSEE NOT ADVANCED THE MONEY TO SISTER CONCERN INTEREST BURDEN WOULD HAVE BEEN MORE SINCE FUND WOULD HAVE BEEN REMAINED WITH THE ASSESSEE AS I DLE FUND. FURTHER HE SUBMITTED THAT THE SISTER CONCERN FILED CONF IRMATION LETTER FOR ADVANCING THE MONEY TO THEM. THE ASSESSING OFFICER WANTE D THE CASH FLOW STATEMENT FROM THE SISTER CONCERN REGARDING THE UTI LISATION BY THE SISTER CONCERN. HE SUBMITTED THAT FUND WAS USED BY THE SISTE R CONCERN FOR BUSINESS PURPOSE ONLY AND THE RATIO LAID DOWN BY T HE SUPREME COURT IN THE CASE OF M/S S.A. BUILDERS LTD. VS. CIT & OTHERS ( 288 ITR 1) (SC) 5 5 FULLY SATISFIED. FURTHER HE SUBMITTED THAT THE CHAR TERED ACCOUNTANT HAS ALSO GIVEN CERTIFICATE REGARDING UTILISATION OF FUND BY THE SISTER CONCERN. HENCE HE SUBMITTED THAT THE ADDITION TO BE DELETED. 7. ON THE OTHER HAND THE DEPARTMENTAL REPRESENTATI VE SUBMITTED THAT MAJOR SHAREHOLDERS OF THE ABOVE COMPANIE S ARE EITHER ASSOCIATE COMPANIES OF SRIRAM GROUP OR THE PARTNERS OF T HE ASSOCIATE FIRMS OF SRIRAM GROUP. THUS THE COMPANIES ARE CLEVERLY FLOATED IN SUCH A WAY NONE OF THE DIRECTORS OF THE ASSESSEE COMPANY OR THE RELATIVES SHARE HOLDERS ARE DIRECTORS IN THE ABOVE SAID COMPANIES SO AS TO AVOID THE PROVISIONS OF SECTION 40A(2) (B) OF THE IT ACT. HE SUBMITTED THAT THERE WAS NO REASON TO PAY SUCH HIGH R ATE OF INTEREST TO THOSE COMPANIES. HE SUBMITTED THAT INTEREST PAID ON SE CURITY DEPOSITS AND UTILISING THESE AMOUNTS DIVERTING TO SISTE R CONCERN AS ADVANCES. HE SUPPORTED THE ORDER OF THE LOWER AUTHORIT IES. 8. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. IN THESE CASES THE ASSESSEE PAID HEAVY INTEREST ON SECURITY DEPOSITS A ND IT IS EXCESS OVER THE INTEREST RECEIVED FROM THE SISTER CONCERNS. THE ASSESSEE TAKEN A PLEA THAT THE INTEREST WAS PAID FOR THE PURPOSE OF COMMERCIAL EXPEDIENCY AND THE ASSESSEE WAS FORCED TO PAY TH E INTEREST TO VARIOUS COMPANIES WHICH WERE SUBSCRIBING ITS CHITS AND TH EY ARE SUBSCRIBING THESE VACANT CHITS WHERE THE ASSESSEE CANNOT SUBSCRIB E ITS OWN CHIT MORE THAN ONE TIME AND ALSO THESE COMPANIES ARE CONTRIBUTED HUGE AMOUNT AS SECURITY DEPOSIT AGAINST DUE PAYMENTS FOR FUTURE SUBSCRIPTION. THESE FACTS ARE REQUIRED TO BE VERIFIED FR OM THE FINANCIAL STATEMENTS OF THOSE COMPANIES AND CASH FLOW STATEMENTS. TH E PURPOSE FOR WHICH THESE FUNDS IS ADVANCED WHY THE INTERESTS WERE PAID AT SUCH HIGH RATE WERE TO BE EXAMINED BY THE ASSESSING OFFICER . THE ASSESSEE REQUIRED TO DEMONSTRATE THE USAGE OF THE FUNDS BY THE SISTER CONCERN FOR BUSINESS PURPOSE. IF THE ASSESSEE DIVERTED ITS INTEREST BEAR ING FUNDS TO 6 6 THE SISTER CONCERN FOR ANY PURPOSE OTHER THAN BUSINESS PUR POSE THEN THIS IMPUGNED INTEREST TO BE DISALLOWED. IN OTHER WO RDS IF THE ASSESSEE USED THE SISTER CONCERN AS A CONDUIT TO DIVERT INTEREST BEA RING FUNDS TO THE PERSONAL ADVANTAGE ANY DIRECTOR OR RELATIVE OF DIRECTORS OF THE ASSESSEE COMPANY THEN THIS INTEREST TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THE PAYMENT OF INTEREST IS GEN UINE. FURTHER ONCE IT IS BORNE OUT OF THE RECORD THAT ASSESSEE HAD BORR OWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRE D AND ON THE OTHER HAND CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST OR LESS INTEREST WITHOUT A NY BUSINESS PURPOSE THE INTEREST TO THAT EXTENT ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED U/S 36(1) (III ) OF THE ACT. SUCH BORROWINGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. ACCORDINGLY ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON THE BORROWINGS TO THE EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS OR OTHER PERSONS WITHOUT INTEREST. THE E STABLISHMENT OF NEXUS OF FUNDS BORROWED VIS.A.VIS THE FUNDS DIVERTED TOWARDS SISTER CONCERNS ON INTEREST FREE BASIS IS CONCERNED IN OUR VIEW THAT THE ONUS OF PROVING THE NEXUS OF FUNDS AVAILABLE WITH THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTEREST IS ON THE ASSESSEE . SEC.36(1) (III) OF THE ACT PROVIDES FOR DEDUCTION OF IN TEREST ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUC H DEDUCTION THE BOOKS OF ACCOUNT THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAISE D BY THE ASSESSEE THE SAME WERE USED FOR BUSINESS PURPOSE. IF IN THE PROCESS EXAMINATION OF GENUINENESS OF SUCH DEDUCTION IT TRANSPIR ES THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERN AT VERY LOW INTEREST THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSE E TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON FRESH BORROWINGS AND PENDING LOANS ON WHICH 7 7 ASSESSEE INCURRING INTEREST LIABILITY STILL THERE IS A JU STIFICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON BUSINESS PURPOSE AND ACCORDINGLY SUCH INTEREST PAYMENT CANNOT BE ALLOWED AS A DEDUCTION. MORE SO WHEN THE INTEREST PAID IS IN EXCESS OF WHAT IS RECEIVED FROM SISTER CONCERN IS TOWARDS DUE PAYMENT OF FUTURE INSTALMENT S SUCH EXCESS INTEREST CANNOT BE ALLOWED AND ASSESSEE IS NOT BOUND T O PAY ANY INTEREST ON SECURITY DEPOSIT AS SAME IS ONLY TOWARDS DUE PA YMENT OF FUTURE INSTALMENTS. WITH THIS DIRECTION WE SET ASIDE T HE ISSUE TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION. 9. THE NEXT GROUND IN ASSESSEE APPEAL IN ITA NO.630/HY D/2008 FOR ASSESSMENT YEARS 2004-05 THIS IS WITH REFERENCE TO DISA LLOWANCE OF CONSUMER DURABLE LOSS. ACCORDING TO THE ASSESSEE COMPANY IT HAS ENTERED INTO BUSINESS OF CONSUMER DURABLE FINANCE BY ENT ERING INTO MOU WITH THE SRIRAM CITY UNION FINANCE LTD (SCUF). UNDER THIS MOU THE ASSESSEE RECOMMENDS CUSTOMER WHO ARE DESIROUS TO PURCHASE CONSUME R DURABLE ARTICLES FROM SCUF FOR LOANS. UNDER THE MO U THE ASSESSEE WAS REQUIRED TO IDENTIFY THE CUSTOMERS RECOMMENDED TH EM TO SCUF 9.1 THE CONTENTION OF THE ASSESSEE COUNSEL IS THAT THE L OSSES CLAIMED AS PER THE MOU. LOSS ARISING ON ACCOUNT OF A D EFAULT OF THE CUSTOMER THE ASSESSEE MADE TO PAY PUTTING THE SAME TO SCU F AND THE LOSS WAS ARISING IN THE COURSE OF CARRYING ON BUSINESS. HE DREW OUR ATTENTION TO THE CLAUSE NO.4.5 OF THE AGREEMENT DATED 2.4.2003 WITH MOU. 10. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE CIT(A). 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE MOU DATED 2.4.20 03 PLACED AT PAPER BOOK NO.59-60. 8 8 THE CLAUSE 4 AND 5 OF THE SAID MOU READS AS FOLLOWS: 4. OBLIGATIONS OF SCI: 4.1. SCI SHALL IDENTIFY PROSPECTIVE PERSONS REQUIR ING FINANCIAL ASSISTANCE AND SHALL ASCERTAIN THEIR CREDIT WORTHINESS. SCI SHALL RECOMMEND SUCH PERSONS TO SCUF FOR DIRECT LANDING BY SCUF. 4.2. SCI SHALL ARRANGE THE EXECUTION OF ALL NECESS ARY DOCUMENTS REGARDING THE LOAN BY THE CUSTOMER AS PER REQUIREMENTS OF SCUF AN D SHALL ALSO FURNISH A PHOTOGRAPH OF THE CUSTOMER AND A COPY OF THE RATION CARD/DRIVING LICENSE OF THE CUSTOMER TO SCUF. SCI WILL ALSO GIVE LETTER CE RTIFYING THE BONA FIDES OF THE CUSTOMER HIS REPAYMENT CAPACITY AND THAT THE PARTI CULARS GIVEN IN THE LOAN DOCUMENTS ARE TRUE TO THE BEST OF THEIR KNOWLEDGE. 4.3. WHEREVER APPLICABLE SCI SHALL ENSURE THAT TH E ENDORSEMENT IN THE RC BOOK IN FAVOUR OF SCUF IS MADE AND A COPY OF THE RC BOOK WITH THE ENDORSEMENT IS DELIVERED TO THE SCUF WITHIN 3 MONTH S FROM THE DATE OF ADVANCE SCI WILL ALSO DELIVER THE ORIGINAL INVOICE COPY OF THE RC BOOK WITH THE LIEN NOTED INSURANCE POLICY COPY OF THE PERMIT IF ANY AND LETTER OF POSSESSION TO SCUF WITHIN 3 MONTHS FROM THE DATE OF ADVANCE. 4.4. SCI SHALL PERIODICALLY COLLECT THE INSTALMENTS FROM THE CUSTOMER AND REMIT THE SAME TO SCUF AS PER THE DUE DATES IN THE AGREEM ENT ENTERED INTO BETWEEN SCUF AND THE CUSTOMER. 4.5. IN THE EVENT OF THE CUSTOMER DEFAULTING IN ANY INSTALLMENT SCI SHALL MAKE GOOD THE DEFAULT BY PAYING THE SAME TO SCUF. 5. PROFIT SHARING: 5.1. IN CONSIDERATION OF SCI AGREETING TO PROVIDE THE SERVICES MENTIONED ABOVE TO SCUF SCUF AGREES TO SHARE THE PROFITS IT OBTAINS FROM THIS BUSINESS WITH SCI AS DETAILED BELOW: I) IN CASE OF INCOME OF SECURITIZATION 70% TO SCI AND 30% TO SCUF. II) IN CASE OF FINANCE CHARGES RECEIVED ON THE SECURITI ZED CONTRACTS UP TO THE DATE OF SECURITIZATION I.E. THE DATE OF FIR ST PDC SECURITIZED 9 9 SCUF WILL RETAIN THE INCOME AT THE COST OF 3% OF IR R AND THE BALANCE WILL BE SHARED TO SCI. III) IN CASE OF FINANCE CHARGES RECEIVED ON NON SECURITI ZED CONTRACTS SCUF WILL RETAIN THE INCOME AT THE COST OF 3% OF IR R AND THE BALANCE WILL BE SHARED TO SCI. IV) IT IS MUTUALLY AGREED THAT THE INCOME WILL BE RECOG NIZED BASED ON EFFECTIVE IRR WHICH IS ARRIVED AFTER CONSIDERING PR OCESSING FEE FINANCE CHARGES DEALER DISCOUNT AND MANUFACTURER DISCOUNT ETC. V) ALL EXPENSES INCURRED BY SCI AT THEIR BRANCHES/HO I N PROVIDING SERVICES UNDER THIS AGREEMENT SUCH AS BANK CHARGES BROKERAGE (INCLUDING PAID BY SCUF ON BEHALF OF SCI) WOULD HAV E TO BE BORNE BY SCI. VI) ALL EXPENSES INCURRED BY SCUF IN ARRANGING THE MONE Y FOR BUSINESS SUCH AS BANK CHARGES INTEREST COST ETC. ARE TO THE ACCOUNT OF SCUF. AS SEEN FROM THE ABOVE THE CLAUSE 4.5. OF THE MOU I N THE EVENT OF THE CUSTOMER DEFAULTING IN ANY INSTALLMENT THE ASSESSEE HAS TO MAKE GOOD THE DEFAULT BY PAYING SAME TO THE SCU. HOWEVER IT IS SEEN THAT THE SAID CLAUSE APPEARS BELOW CLAUSE 4.4. WHICH SPEAKS OF THE O BLIGATION OF THE ASSESSEE TO PERIODICALLY COLLECT THE INSTALLMENT FROM THE CUSTOMERS AND REMIT THE SAME TO SCUF AS PER DUE DATES IN THE AGR EEMENT ENTERED INTO BETWEEN SCUF AND THE CUSTOMER. AS SUCH THE LIABILIT IES SPECIFIC IN CLAUSE 4.5 IS LIMITED TO MAKING GOOD OF THE DEFAULT IN A PARTICULAR INSTALLMENT ON A DUE DATE SO AS TO MAINTAIN THE FUND FLOW REGULARLY AND DOES NOT IN ANY WAY CAST ANY OBLIGATION ON THE PART OF THE ASSESSEE TO BEAR THE ENTIRE LOSS IN RESPECT OF THE TRANSACTION. ON THE OTHER HAND IT WAS RIGHTLY OBSERVED BY THE CIT(A) THAT THE ASSESSEE HAS B EEN SHOWING ONLY 70% OF THE INCOME IN RESPECT OF THESE TRANSACTIONS T HEREFORE SHOULD BEAR ONLY 70% OF THE LOSSES OF THIS TRANSACTIONS. THE DI SALLOWANCE ON THIS ISSUE JUSTIFIED AND THE CIT(A) ORDER IS CONFIRMED. ACCORDINGLY THE GROUND TAKEN BY THE ASSESSEE IS DISMISSED. 10 10 13. THE NEXT COMMON GROUNDS IN ASSESSEE APPEALS IN ITA NOS.630/08 927/08 541/HYD/2009 FOR THE ASSESSMENT YEARS 2004-05 2005-06 AND 2006-07 IS THAT CIT(A) ERRED IN DIRECTIN G THE ASSESSING OFFICER TO VERIFY THE CONTENTION OF THE ASSESSEE THAT THE INTEREST ON IT REFUND WAS NOT TAXABLE AND WHILE ON THE CONTRARY THE FINAL ASSESSMENT RESULTED IN HUGE DEMAND AND PAYMENT OF INTEREST U/S 23 4D OF THE IT ACT. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE CIT(A) HAS GIVEN DIRECTION TO ASSESSING OFFICER TO VERIFY THE CONTENTION OF THE ASSESSEE REGARDING INTER EST ON REFUND AND WORK OUT THE INTEREST LIABILITY AS PER LAW WHILE PASSI NG GIVE EFFECT ORDER WE DO NOT FIND ANY INFIRMITY IN THIS DIRECTION OF THE CIT(A) SINCE THE INTEREST U/ S 234B AND 234D IS MANDATORY AND CONSEQUENTI AL IN NATURE AND THE SAME IS CONFIRMED. ACCORDINGLY THIS GROUND BY T HE ASSESSEE IS DISMISSED. 15. THE NEXT GROUND IN ITA NO.927/HYD/2008 FOR TH E ASSESSMENT YEAR 2005-06 RELATING TO DISALLOWANCE U/S 40(A) (IA). IN THE COURSE OF HEARING THE ASSESSEE COUNSEL NOT PRESSED THIS GROUND . ACCORDINGLY THIS GROUND IS DISMISSED AS NOT PRESSED. 16. THE NEXT GROUND IN ITA NOS.630/08 927/08 541 /HYD/2009 FOR THE ASSESSMENT YEARS 2004-05 2005-06 AND 2006-07 IS RELATING TO DENIAL OF INTEREST U/S 234D. THIS GROUND DOES NOT EMANATE FROM THE ORDER OF THE CIT(A). MOREOVER THE CIT(A) HAS GIVEN DIRECTION TO VERIFY THE CONTENTION OF THE ASSESSEE REGARDING INTEREST ON REFU ND AND WORK OUT LIABILITY AS PER LAW WHILE GIVING EFFECT TO HIS OR DER AND COMPUTE THE INTEREST LIABILITY U/S 243B AND 243D. IN THIS OBSERVA TION OF THE CIT(A) WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CI T(A) AND ACCORDINGLY THE GROUNDS IN THESE APPEALS TAKEN BY THE ASSESSEE ARE DI SMISSED. 11 11 17. THE NEXT GROUND IN ASSESSEE APPEAL IN ITA NO. 541/HYD/2009 FOR THE ASSESSMENT 2006-07 IS RELATING TO DI SALLOWANCE OF LEGAL CHARGES. DURING THE COURSE OF HEARING THE AUT HORISED REPRESENTATIVE NOT PRESSED THIS GROUND AND ACCORDINGLY T HIS GROUND IS DISMISSED AS NOT PRESSED. 18. THE NEXT GROUND IN REVENUE APPEAL IN ITA NOS.1 53/HYD/07 ITA.152/HYD/0 852/HYD/08 1117/HYD/08 AND 655/HYD/09 ARE RELATING TO ALLOWING THE COMMISSION ON CANCELLED CHITS. THE ASSESSING OFFICER IS OF THE OPINION THAT THE ASSESSEE IS ENTITLED TO RECEIVE T HE SAID AMOUNT AS COMMISSION AT 5% FROM THE REMOVED SUBSCRIBERS IN RESPECT OF CHIT SERIES. 19. AFTER HEARING BOTH THE PARTIES WE ARE OF THE OPINION THAT THIS ISSUE WAS COVERED BY THE ORDER OF THIS TRIBUNAL B BENCH DATED 26.7.2004 IN ITA NOS.500 506/HYD/1999 ITA NOS.294 3 27/HYD/2001 AND ITA NOS.471/HYD/ AND 1049/HYD/2002 FOR THE ASSESSMENT YEARS 1995-96 1997-98 1998-99 AND 1999-2000 AND WHEREIN IT WAS HELD AS FOLLOWS: 6.3: TIME OF RECOGNITION OF INCOME FROM COMMISSI ON ON CANCELLED CHITS: THIS ISSUE IS INVOLVED IN THE ASSESSEES APPEALS FO R ASSESSMENT YEARS 1998- 99 AND 1999-2000. THE DISPUTE IS ABOUT TIME OF ACC RUAL OF NON PRIZED SUBSCRIBERS WHO ARE REMOVED FROM THE CHIT AND IN WH OSE PLACE WE FIND THAT FROM OUT OF THE AMOUNT THAT IS PAYABLE TO THE DEFAU LTING SUBSCRIBER CONSEQUENT TO HIS REPLACEMENT BY ANOTHER PERSON THE COMPANY IS ENTITLED TO DEDUCT 5% AS COMMISSION. THIS HAS NOTHING TO DO WI TH THE REGULAR COMMISSION INCOME OF THE ASSESSEE. THUS THE STAND OF THE ASSESSEE THAT THE COMMISSION INCOME ACCRUES WHEN THE ACCOUNTS HAVE BE EN FINALLY SETTLED TO THE DEFAULTING NON SUBSCRIBER TO OUR MIND APPEARS T O BE THE CORRECT POSITION. OTHERWISE IN CASE OF A NON PRIZED SUBSCRIBER THE AM OUNT OF 5% WOULD BE DEDUCTED FROM THE AMOUNTS DUE TO HIM MUCH BEFORE TH E SETTLEMENT OF HIS ACCOUNT AND RECOGNIZED AS INCOME BY WAY OF TRANSFER FROM CURRENT LIABILITIES TO PROFIT AND LOSS ACCOUNT. RELIANCE WAS PLACED BY THE REVENUE ON THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF SHRIR AM CHITS & INVESTMENT (P) LTD. CHENNAI VS. ACIT (263 ITR (AT) 65). THIS DEC ISION IS NOT APPLICABLE TO THE FACTS OF THIS CASE. THE COMMISSION REMUNERATIO N TO THE FOREMAN IN THAT CASE WAS SOUGHT TO BE RECOGNIZED ON THE COMPLETION OF CHIT METHOD AND HAD 12 12 NOTHING TO DO WITH THE TYPE OF ADDITIONAL COMMISSIO N 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 SUBSCRIBER ACCOUNT IS RECOGNIZED AS INCOME ON THE FINALIZATION OF THE ISS UES. THIS IS NOT AN UNACCEPTABLE PROPOSITION. WE AGREE WITH THE SUBMIS SIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE WHICH ARE AT PARA 4.1.1 O F THIS ORDER. IN THE RESULT THIS GROUND OF THE APPEAL OF THE ASSESSEE IS ALLOWE D. RESPECTFULLY FOLLOWING THE ABOVE RATIO LAID DOWN BY A BOVE ORDER OF THE TRIBUNAL WE INCLINED TO DISMISS THIS GROUND TAKEN REV ENUE. 20. THE NEXT COMMON GROUNDS IN REVENUE APPEAL IN IT A NOS.153/HYD/02 152/07 852/08 1117/09 AND 655/HYD/ 09 ARE RELATING TO ALLOWABILITY OF ROYALTY. THIS ISSUE ALSO CO VERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL COVERED BY THE ORDER OF THIS TRIBUNAL B BENCH DATED 26.7.2004 IN ITA NOS.500 5 06/HYD/1999 ITA NOS.294 327/HYD/2001 AND ITA NOS.471/HYD/ AND 1049/HYD/ 2002 FOR THE ASSESSMENT YEARS 1995-96 1997-98 1998-99 AND 1999- 2000 AND WHEREIN IT WAS HELD AS FOLLOWS: 6.7(IV): WE ARE CONVINCED WITH THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THE BANGALORE BENCH OF THE TRIBUNAL IN I TA NO.751 750 749 & 748/(BANG.)/1998 IN THE CASE OF M/S SRIRAM CHITS (B ANGALORE) LTD. VS. DCIT (ASSISTANT) SPECIAL RANGE BANGALORE HELD AS FOLLOW S: 29. WE HAVE CAREFULLY GONE THROUGH THE RECORDS A ND CONSIDERATION THE RIVAL CONTENTIONS. M/S SRIRAM CHITS & INVESTMENT (P) LTD . HAVING REGISTERED OFFICE AT MADRAS WAS THE ABSOLUTE OWNER OF THE COPY RIGHT RELATING TO EXISTING ARTISTIC WORK SRIRAM CHITS LOGO REGISTERED AS SUC H UNDER THE PROVISIONS OF THE COPY RIGHT ACT 1957 WITH THE REGISTRAR OF COPY RIGHTS BEARING REGISTRATION NO.A/49890/88 DATED 7.7.1988. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH THE HOLDING COMPANY FOR EXCLUSIVE USE OF THE L OGO OF THE HOLDING COMPANY IN THE COURSE OF SOLICITING ITS BUSINESS AM ONGST POTENTIAL INVESTORS. THE CONDITIONS OF THE AGREEMENT PROVIDED THAT THE A SSESSEE SHALL PAY ROYALTY OF 0.5% ON THE ANNUAL AUCTION TURNOVER OF THE ASSES SEE DETERMINED ON THE BASIS OF VALUE OF AUCTIONS FIXED DURING THE YEAR. IN FACT THE ASSESSEE HAS USED THE LOGO TO THE BEST ADVANTAGE OF BUSINESS. T HE ASSESSEE WAS TO CARRY ON THE BUSINESS OF CHIT FUND IN THE STATE OF KARNAT KA AND THE HOLDING COMPANY GRADUALLY STOPPED FLOATING NEW (GROUNDS AS IT DID I N 1984) ALLOWING SUBSIDIARY COMPANY TO EXPAND ITSELF. THE GROWTH OF BUSINESS O F THE ASSESSEE OVER THE YEARS OF THE ORDER OF THE CIT(A) IS VERY MUCH RELEV ANT. THE RELEVANT PORTION READS: 1. SRIRAM CHITS & INVESTMENTS (P) LTD. COMMENCED OPERA TIONS IN KARNATAKA IN THE YEAR 1984. THE BUSINESS OF THE CO MPANY IN 13 13 KARNATAKA INCREASED OVER THE YEARS UPTO 1990-91 WHE N THE AUCTION TURNOVER TOUCHED RS.80.39 LAKHS. 2. SRIRAM CHITS AND INVESTMENTS (P) LTD. DECIDED TO EX PLAND ITS BUSINESS IN KARNATAKA BY FORMING A SUBSIDIARY COMPA NY SRIRAM CHITS (BANGALORE) (P) LTD. 3. IN THE YEAR 1990 SRIRAM CHITS (BANGALORE) (P) LTD . WAS FORMED AND WAS CARRYING ON THE BUSINESS OF CHIT FUNDS IN THE S TATE OF KARNATAKA AND SRIRAM CHITS AND INVESTMENTS (P) LTD. GRADUALLY STOPPED FLOATING NEW GROUPS ALLOWING THE SUBSIDIARY COMPANY TO EXPAN D. 4. SRIRAM CHITS (BANGALORE) (P) LTD. SINCE INCEPTION C ONTINUED TO BOOK NEW BUSINESS BY USING THE LOGO OF ITS HOLDING COMPA NY. 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 C HITS (BANGALORE) (P) LTD. THE SUBSIDIARY COMPANY IN THE YEAR 1994 V IDE AN AGREEMENT ENTERED INTO WHICH PROVIDED FOR THE PAYMENT OF CER TAIN % OF THE AUCTION TURNOVER AS ROYALTY TO SRIRAM CHITS AND INV ESTMENTS (P) LTD. 7. BY THE AGREEMENT SRIRAM CHITS AND INVESTMENTS (P) LTD. HAS FORMALLY COMMITTED ITSELF TO THE GROWTH AND DEVELOP MENT 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 ENS URE THAT THE NAME WHICH IT HAS BUILT UP OVER THE YEARS IS MAINTAINED BY SRIRAM CHITS (BANGALORE) (P) LTD. TOWARDS THI SRIRAM CHITS AND INVESTMENTS (P) LTD. HAS PROVIDED FINANCIAL ASSISTANCE TIME AND AGA IN TO SRIRAM CHITS (BANGALORE) (P) LTD. TO HELP ITS WORKING CAPITAL RE QUIREMENTS. 9. WHEN SRIRAM CHITS (BANGALORE) (P) LTD. COMMENCED OP ERATIONS ALL ITS EMPLOYEES WERE FROM SRIRAM CHITS & INVESTMENTS (P) LTD. WHO HAD PRIOR EXPERIENCE IN THIS LINE. EVEN NOW SRIRA M CHITS (BANGALORE) (P) LTD. LOOKS FOR MANAGERIAL SUPPORT FROM SRIRAM CHITS AND INVESTMENTS (P) LTD. WHICH IS BEING PROVIDED. IN A DDITION TO THIS THE ENTIRE SOFTWARE PACKAGE OF SRIRAM CHITS AND INVESTM ENTS (P) LTD. WHICH WAS BEING USED BY IT FOR ITS OPERATIONS WAS TRANSFERRED TO SRIRAM CHITS (BANGALORE) (P) LTD. FOR CARRYING OUT ITS DAY TO DAY ROUTINES. THE HOLDING COMPANY ALSO HOLDS PERIODIC AL MEETINGS WITH THE EXECUTIVES OF THE SUBSIDIARY COMPANY IN ORDER T O MONITOR ITS ACTIVITIES. 10. THE REASONABILITY OF 0.5% ROYAL. THE USE OF LOGO IS ENHANCING THE GROWTH OF SRIRAM CHITS (BANGALORE) (P) LTD. CANNOT BE UNDER ESTIMATED. 14 14 30. THE RECORD ALSO SHOWS THAT HOLDING COMPANY WAS PROV IDING FINANCIAL ASSISTANCE TIME AND AGAIN TO THE ASSESSEE TO HELP I N ITS WORKING CAPITAL REQUIREMENTS. THE RECORD FURTHER SHOWS THA T WHEN THE ASSESSEE COMMENCED ITS OPERATION ALLS ITS EMOPLOYE ES WERE FROM HOLDING COMPANY WHO HAD PRIOR EXPERIENCE IN THIS LI NE. IT IS CLAIMED THAT EVEN THE ASSESSEE LOOKS FOR MANAGERIAL SUPPORT FROM ITS HOLDING COMPANY WHICH IS AGAIN PROVIDED. THE HOLDING COMPA NY IS ALSO STATED TO HAVE CONDUCTED PERIODICAL MEETINGS WITH T HE EXECUTIVES OF THE ASSESSEE IN ORDER TO MONITOR ITS MEETINGS. ALL THESE AND THE TABLE EXTRACTED ABOVE SHOWS THAT THERE HAS BEEN A SUBSTA NTIAL INCREASE IN THE NEW BUSINESS AS ALSO AUCTION TURNOVER FROM WHAT WAS ONLY 29.49 LAKHS IN ASSESSMENT 1990-91 TO RS.225.69 LAKHS IN T HE ASSESSMENT YEAR 1994-95 AND RS.348.29 LAKHS IN THE ASSESSMENT YEAR 1995-96 AND THE BUSINESS HAS BEEN SUBSTANTIALLY GROWING FRO M YEAR TO YEAR. THE FINANCING BUSINESS AND CONDUCTING OF THE CHIT B USINESS IS NOT THAT EASY UNLESS IT IS BACKED BY THE PROMOTERS WHO HAVE HIGHEST INTEGRITY AND TRUSTWORTHINESS. M/S SRIRAM CHITS AND INVESTME NTS (P) LTD. MADRAS (HOLDING COMPANY HAS BEEN IN THE NAMES FOR ITSELF WITH THE INVESTORS IN THE SOUTH. WE ARE THEREFORE OF THE CONSIDERED OPINION THAT THE PAYMENT OF ROYALTY AT 0.5% OF HAVING REGAR D TO THE BUSINESS REQUIREMENTS OF THE ASSESSEE. IN OUR VIEW THE PAY MENT IS FOR LEGITIMATE BENEFIT TAKEN IN THE COURSE OF BUSINESS AND FROM ANY STANDARD IT CANNOT BE SAID THAT PAYMENT OF RS.1 LA KH AS ROYALTY IS SUFFICIENT TO PRODUCE THE BUSINESS OF THE MAGNITUDE PROCURED BY THE ASSESSEE OVER THE YEARS. THE HOLDING COMPANY HAS E NTERED INTO SIMILAR AGREEMENTS WITH OTHER SUBSIDIARY COMPANIES AND THE CIT(A) HAS CONSIDERED THE SAME TO BE REASONABLE BUSINESS O UTFLOW PROPERTY UNDER A SPECIFIC AGREEMENT EXECUTED BY THE PARTIES IS VERY MUCH REASONABLE AND SHOULD HAVE BEEN ACCEPTED AS A BUSIN ESS EXPENDITURE ALLOWABLE AS DEDUCTION. WE THEREFORE DELETE THE DISALLOWANCE FOR THESE TWO YEARS. THE DISALLOWANCE HAS BEEN PRIMARI LY BASED ON A SUSPICION AND INCORRECT APPRECIATION OF AHRD REALIT IES OF THE BUSINESS BY THE REVENUE AUTHORITIES. THE DISALLOWANCE IS AC CORDINGLY DELETED. RESPECTFULLY FOLLOWING THE SAME AND FOR THE REASONS GIVEN ABOVE BY US WE ALLOW THIS GROUND OF THE ASSESSEE AND DELETE THE DI SALLOWANCE MADE ON THIS ACCOUNT BY THE ASSESSING OFFICER. WE DIRECT THE AS SESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE SAME RATIO LAID DOWN BY TH E ABOVE ORDER OF THIS TRIBUNAL THE GROUND TAKEN BY IS REVENUE DISMI SSED. 21. THE NEXT GROUND TAKEN BY THE REVENUE IN ITA NO.852/HYD/08 AND 1117/HYD/08 ARE RELATING TO ALLOWAB ILITY OF LEGAL CHARGES. THE CONTENTION OF THE DEPARTMENTAL REPRESENTA TIVE THAT THE ASSESSEE HAD EARNED DIVIDEND AND EARNED CERTAIN OTHER EX EMPT INCOME FROM INVESTMENTS. IT HAD ALSO INCURRED CERTAIN EXPENDI TURE FOR MAKING SUCH INVESTMENTS WHICH ARE INCLUDED IN THE LEGAL CHARGES. THE 15 15 EXPENDITURE IN RESPECT OF SUCH INVESTMENTS WERE NOT TO BE ALLOWED AS INCOME RESULTING THERE FROM HAD BEEN CLAIMED AS EXEMPT SINCE THE LEGAL CHARGES SO INCURRED FOR MAKING THE IMPUGNED ASSESSMENTS COU LD NOT BE BIFURCATED ON ESTIMATE BASIS 5% OF THE TOTAL LEGAL CHARG ES WERE DISALLOWED ON ESTIMATE BASIS. HOWEVER CIT(A) PLACED RE LIANCE ON THE ORDER OF THE TRIBUNAL HYDERABAD B BENCH DATED 16. 11.2007 IN THE CASE SPECTRA SHARES AND SECURITIES FOR THE ASSESSMENT YEARS 20 02-03 IN ITA NO.504/505 AND ALLOWED THE APPEAL OF THE ASSESSEE. AS SUCH HE SUBMITTED THAT THE FINDINGS OF THE CIT(A) TO BE REVER SED. 22. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. ADM ITTEDLY THE ASSESSEE IS HAVING TWO KINDS OF INCOME ONE IS EXEMPTED INCOME AND THE OTHER ONE IS TAXABLE INCOME. THE LEGAL CHARGES IN CURRED ARE ATTRIBUTABLE TO EARN BOTH THE INCOME. IN OUR OPINIO N IT IS FAIR TO APPORTION THE LEGAL CHARGES ON INCOME BASIS PROPORTION ATELY. ACCORDINGLY THE TOTAL LEGAL CHARGES TO BE SEGREGATED I NTO TWO I.E. ONE IS ATTRIBUTABLE TO TAXABLE INCOME AND THE OTHER ONE IS A TTRIBUTABLE TO EXEMPTED INCOME ON PROPORTIONATE BASIS. AS SUCH INSTEAD OF ESTIMATED DISALLOWANCE WE DIRECT THE ASSESSING OFFICER TO DISALLOW TH E SAME ON PROPORTIONATE BASIS ATTRIBUTABLE TO EXEMPTED INCOME. THIS GROUND TAKEN BY THE REVENUE IS PARTLY ALLOWED. 23. IN THE RESULT THE ASSESSEE AS WELL AS REVENUE APPE ALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT: 30.4.2010 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 30 TH APRIL 2010 16 16 COPY FORWARDED TO: 1. M/S SRIRAM CHITS (P) LTD. 3-6-478 III FLOOR ANA ND ESTATE OPP. INDIAN BANK LIBERTY ROAD HIMAYATNAGAR HYDERA BAD- 29. 2. DCIT CIRCLE 3 (1) HYDERABAD ADDL.CIT RANGE 3 HYDERABAD 3. CIT(A)-IV HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. 17 17