The DCIT Circle 3(1), Hyderabad v. M/s. Shriram Chits P. Ltd, Hyderabad

ITA 720/HYD/2010 | 2007-2008
Pronouncement Date: 11-03-2011 | Result: Dismissed

Appeal Details

RSA Number 72022514 RSA 2010
Assessee PAN AAFCS4916D
Bench Hyderabad
Appeal Number ITA 720/HYD/2010
Duration Of Justice 10 month(s)
Appellant The DCIT Circle 3(1), Hyderabad
Respondent M/s. Shriram Chits P. Ltd, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 11-03-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 11-03-2011
Date Of Final Hearing 02-03-2011
Next Hearing Date 02-03-2011
Assessment Year 2007-2008
Appeal Filed On 11-05-2010
Judgment Text
ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.490/H/2010 ASSESSMENT YEAR 2007-08 M/S SHRIRAM CHITS (P) LTD. HYDERABAD. (PAN AAFCS 4916 D) VS THE ADDITIONAL CIT RANGE - 3 HYDERABAD. APPELLANT RESPONDENT ITA NO.720/H/2010 ASSESSMENT YEAR 2007-08 THE DCIT RANGE - 3 (1) HYDERABAD. VS M/S SHRIRAM CHITS (P) LTD. HYDERABAD. (PAN AAFCS 4916 D) APPELLANT RESPONDENT APPELLANT BY : SHRI K.C. DEVADAS RESPONDENT BY : SHRI A. BASKAR REDDY ORDER PER CHANDRA POOJARI ACCOUNTANT MEMBER: THESE TWO CROSS APPEALS PREFERRED BY THE ASSESSEE AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE COMMON ORDER PASSE D BY THE CIT(A) - IV DATED 26.2.2010 AND PERTAINS TO THE ASSESSMENT YEAR 2007-08. 2. FIRST WE WILL TAKE UP THE ASSESSEES APPEAL IN ITA NO.490/H/2010. THE ASSESSEE RAISED THE FOLLOWING G ROUNDS: 2. THE ORDER OF THE CIT(A) OUGHT TO HAVE ALSO HELD THA T THE DEDUCTION OF IRRECOVERABLE AMOUNTS IN RESPECT OF RU NNING AND TERMINATED CHITS WAS DEDUCTIBLE U/S28 OF THE IT ACT 1961 AS A LOSS ARISING IN THE COURSE OF CARRYING ON BUSINESS BY THE ASSESSEE. ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 3. THE CIT(A) FAILED TO NOTE THAT THE ASSESSING OFFICE R FOR THE EARLIER YEARS FOLLOWING THE DIRECTIONS OF ITAT ALLO WED THE DEDUCTION FOR BAD DEBTS IN RESPECT OF RUNNING CHITS AND THEREFORE ERRED IN GIVING THE DIRECTIONS ONCE AGAIN TO COMPUT E THE IRRECOVERABLE AMOUNTS IN RESPECT OF RUNNING CHITS INSTEAD OF DIRECTING ITS DIRECTION ABSOLUTELY. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN CHIT BUSINESS. THE ASSESSEES GROUNDS IS WITH R EGARD TO DISALLOWANCE OF RS.38 52 87 420/- UNDER THE HEAD BAD DEBT ALTERN ATIVELY CLAIMED U/S 28(1)/37(1) OF THE ACT. THE ASSESSEE DURING THE Y EAR UNDER CONSIDERATION HAD DEBITED AN AMOUNT OF RS.40 55 65 704.86 ON ACCO UNT OF BAD DEBTS WRITTEN OFF OUT OF WHICH RS.24 44 98 431.20 PERTAI NED TO THE RUNNING CHITS WHILE RS.16 10 67 273.66 PERTAINED TO THE TERMINATE D CHITS. THESE BAD DEBTS HAVE BEEN CLAIMED IN TERMS OF THE METHOD ADOP TED BY THE ASSESSEE FROM ASSESSMENT YEARS 1998-99 ONWARDS. 3.1. REFERRING TO PROVISIONS OF SECTION 36(1)(V II) 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 PRIZ ED SUBSCRIBER IS NOT A RELATIONSHIP OF CREDITOR AND DEBTOR. FOR THIS PROP OSITION HE RELIED ON THE DECISION OF THE FULL BENCH OF HONBLE KERALA HIGH C OURT IN THE CASE OF JANARDHANA MALLAN AND OTHERS VS. GANGADHARAN & OTHE RS (AIR 1983 (KERALA) 178) AS ALSO THAT OF THE MADRAS HIGH COURT IN P.N. RAGHAVAN VS. S. ARRUGHAM (AIR 1935: MADRAS 385). THE ASSESSING OFF ICER AFTER A DETAILED ANALYSIS IN THE ASSESSMENT ORDER CONCLUDED THAT HON BLE APEX COURT HAVE ALSO HELD IN THE CASE OF SHRIRAM CHITS AND INVESTME NTS P LTD. VS. UNION OF INDIA (AIR 1993 (SC) 2003) THAT CHIT FUND BUSINESS IS NOT MONEY LENDING BUSINESS AND CHIT AGREEMENT IS NOT A MONEY LENDING TRANSACTION AND FURTHER THAT THERE IS NO RELATIONSHIP OF DEBTOR AND CREDITO R IN SUCH TRANSACTIONS. THE ASSESSING OFFICER ALSO REFERRED TO THE DECISION S OF HONBLE KARNATAKA HIGH COURT IN V. VENKAT MUNIAPPA VS. SUDERSHAN TRA DING CO. LTD. & ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. OTHERS (1992) (73 COMPANY CASES 407) SHIVKUMAR VS . TRADING CO. LTD. (1984) (ILR-2 KAR 914) IN THIS REGARD AS ALSO THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN MARGADARSI CHIT FUND P LTD. VS. KRISHNA MURTHY (1980) (2 ALT 52) (NRC). 3.2 THE ASSESSING OFFICER FURTHER STATED THAT TH E ASSESSEE CANNOT TAKE THE SHELTER OF BOARDS INSTRUCTION NO.1175 DT. 16.5.1978 ALSO FOR A BLANKET ALLOWANCE OF BAD DEBTS WITHOUT SATISFYING THE CONDITIONS LAID DOWN IN THIS REGARD. EVEN AS PER BOARDS INSTRUCTIONS T HE UNRECOVERED AMOUNT DUE FROM THE MEMBERS WHOSE LIABILITIES HAVE BEEN TA KEN OVER BY THE CHIT ORGANIZER COULD BE TREATED AS BAD DEBTS SUBJECT T O THE STIPULATION THAT THE TEST TO BE ADOPTED IN USUAL BUSINESS ASSESSMENT FOR THE ALLOWANCE OF BAD DEBTS WOULD BE APPLICABLE IN SUCH CASES ALSO. THE ASSESSING OFFICER CONCLUDED THAT THE TREATMENT BY THE ASSESSEE OF AMO UNTS DUE FROM ANY DEFAULTER AS BAD DEBTS IN THE FOURTH MONTH ITSELF I S WITHOUT ANY MERIT. 3.4 THE ASSESSING OFFICER FURTHER REFERRED TO THE METHOD OF ACCOUNTING TO BE ADOPTED BY THE CHIT FUND COMPANIES IN TERMS OF THE CHIT FUND ACT & AP CHIT FUNDS ACT. READING THE SAME WIT H CIRCULAR NO.1175 OF THE BOARD NO CREDENCE COULD BE AFFORDED TO THE ASS ESSEES BELIEF REGARDING EXISTENCE OF A DEBTOR AND CREDITOR RELATIONSHIP AS THE SUBSCRIPTIONS RECEIVED FROM A CUSTOMER HAVE TO BE CREDITED TO THE PERSONAL ACCOUNT OF THE CUSTOMER AND DO NOT FORM PART OF THE TURNOVER OF THE ORGANIS ATION. THE ASSESSING OFFICER ARGUED THAT IT IS FOR THIS REASON THAT THE DEFINITION OF DEPOSIT IN CLAUSE (BB) TO SECTION 451 OF THE RBI ACT 1934 EXC LUDES ANY AMOUNT RECEIVED BY WAY OF SUBSCRIPTIONS IN RESPECT OF A CH IT. 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 TOWA RDS FUTURE INSTALMENTS IS NOT A DEBT ESPECIALLY WITHIN THE ME ANING OF AP AGRICULTURAL INDEBTEDNESS (RELIEF) ACT. ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 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 B USINESS 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 F OR DEDUCTION U/S 36(1)(XII) OF THE IT ACT 1961 AND THEREFORE RESTRICTED THE CLA IM OF BAD DEBT TO 5% OF AMOUNTS DUE FROM PRIZED SUBSCRIBERS WHICH IS THE F OREMANS COMMISSION AS THE SAME WAS OFFERED TO INCOME EITHER IN THE PRE VIOUS YEARS. THE REMAINING 95% OF THE BAD DEBTS NOT OFFERED AS INCO ME IN THE PREVIOUS YEAR OR ANY OTHER EARLIER PREVIOUS YEAR WERE BROUGHT TO TAX. 3.6 WITH REGARD TO THE ALTERNATIVE CLAIM OF THE BA D DEBTS U/S 37(1) IT IS OBSERVED THAT SINCE BAD DEBTS FALL U/S 36(1) (VII) THE SAME COULD NOT BE CONSIDERED UNDER THE RESIDUARY SECTION 37. RELIANC E IN THIS REGARD WAS PLACED ON THE DECISIONS IN THE CASES OF MALWA VANAS PATHY & CHEMICAL CO. LTD. VS. CIT (154 ITR 655) (MP) CIT VS. CARBORANDO M UNIVERSAL LTD. (110 ITR 621) (MAD.) AS ALSO NAQMAL BUNKET LAL PARI & CO . VS. CIT (122 ITR 168) (AP). THE ASSESSING OFFICER FELT THAT THE WORD USED IN SECTION 37(1) IS DESCRIBED AND NOT COVERED AND THEREFORE IF ANY PARTICULAR EXPENDITURE FALLS UNDER ANY OF THE SECTION 30 TO 36 SECTION 36(1)(VI I) IN THE PRESENT CASE AS IS FOUND NOT FULFILLING THE CONDITIONS FOR ALLOWANCE A S LAID OUT UNDER THOSE SECTIONS THE SAME CANNOT BE CLAIMED UNDER THE RESI DUARY SECTION. 3.7. WITH REGARD TO THE FURTHER ALTERNATIVE CLAIM OF ALLOWANCE OF BAD DEBTS AS BUSINESS LOSS U/S 28 THE ASSESSING OFFICE R FELT THAT EVEN IF THE COMPANY HAS A REMOTE CHANCE OF RECOVERY THE DEBT C ANNOT BE CLAIMED AS LOSS AS THE PROOF REQUIRED FOR CLAIMING THE SAME A S LOSS IS MORE STRINGENT THAN THAT APPLICABLE FOR BAD DEBTS. THE ASSESSING O FFICER FURTHER REFERRED TO ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F BADRIDAS DAGA VS ABDULLAH BHAL ABDUL KHADER (41 ITR 545) AND CIT VS SC KOTHARI (82 ITR 794) TO CONCLUDE THAT THE CLAIM OF BUSINESS LOSS CO ULD BE ENTERTAINED ONLY WHEN THERE IS NO SPECIFIC PROVISION IN RESPECT OF A CLAIM UNDER SECTIONS 30 TO 43C. 3.8. THE CLAIM OF BAD DEBT WAS NOTHING BUT A CONT INGENT LOSS AND WHETHER IT WILL BE A BUSINESS LOSS OR NOT WILL DEP END ON WHETHER THE COMPANY COULD NOT RECOVER ANY AMOUNT NEITHER FROM T HE DEFAULTING SUBSCRIBERS NOR FROM THE GUARANTORS WHEREAS SUFFI CIENT SECURITY AND SURETY INCLUDING COLLATERAL SECURITY IS BEING TAK EN AS PER THE CHIT ARGUMENTS IN RESPECT OF SUCH AMOUNTS FROM THE PRIZE S SUBSCRIBERS FOR THE DUE PAYMENT OF FUTURE SUBSCRIPTIONS AS PER CLAUSE 20 OF THE AGREEMENT OF CHIT. THE ASSESSING OFFICER NOTED THAT WHILE SUFF ICIENT SECURITY AND SURETY FOR THE DUE PAYMENT OF FUTURE SUBSCRIBERS WAS BEING TAKEN PRIZED MONEY WAS TO BE RELEASED ONLY AFTER OBTAINING SUCH SECURI TY AND SURETY. BESIDES THE ASSESSEE HAD ALSO THE DISCRETION TO CONDONE THE DELAY AND ACCEPT THE FUTURE SUBSCRIPTIONS THOUGH THE DEFAULT MAY BE FOR MORE THAN 4 INSTALMENTS. SURETY IN THE FORM OF IMMOVABLE URBAN PROPERTY WAS ALSO BEING TAKEN FOR FUTURE LIABILITY OF OVER RS.1 LAKH. THE ASSESSEE ALSO HAD THE POWER TO CANCEL AND DELIVER ALL THE SUBSEQUENT INST ALMENTS DUE. THIS AS PER THE ASSESSING OFFICER SHOWED THAT THE INSTALMEN TS 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 POSS IBLE FROM THE DEFAULTED SUBSCRIBERS OR THE GUARANTORS EVEN AFTER PASSING A DECREE BY A COURT OF LAW. THEREFORE THE ASSESSEE COMPANY COULD NOT HAVE CLAI MED LOSS IMMEDIATELY WHEN A DEFAULTED PRIZED SUBSCRIBER DID NOT PAY 6 IN STALMENTS CONSECUTIVELY. 3.9. REFERRING TO THE DECISION OF HONBLE APEX CO URT IN THE CASE OF MADAN GOPAL BAGLA VS. CIT (30 ITR 174) THE ASSESSI NG OFFICER NOTED THAT THE AMOUNT ADVANCED BY THE COMPANY TO THE PRIZED SU BSCRIBERS IS THE AMOUNT POOLED FROM THE MEMBERS OF THE CHIT AND THER EFORE DOES NOT ENTIRELY ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. BELONG TO THE ASSESSEE. THE ASSESSEE IS ONLY THE G UARANTOR TO CONDUCT CHIT AND THEREFORE ANY LOSS SUFFERED BY THE REASON OF H AVING TO PAY A DEBT BORROWED FOR THE BENEFIT OF ANOTHER WOULD BE A CAPI TAL LOSS OF THE ASSESSEE AND NOT A BUSINESS LOSS. THE ASSESSING OFFICER OBS ERVED THAT THE DEBT CONCERNED WAS TO BE DISTRIBUTED AMONG THE SUBSCRIBE RS AS THE ASSESSEE WAS RUNNING A CHIT FUND AND IN NO WAY IT WAS A DEBT DIR ECTLY ATTRIBUTABLE TO THE COMPANY AND HENCE COULD NOT BE ALLOWED AS A BUSINES S LOSS. 3.10. ACCORDINGLY THE CLAIM OF BAD DEBTS WAS RES TRICTED TO RS.2 02 78 285/- AND BALANCE AMOUNT BEING RS.38 52 87 420/- WAS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME AS T HE SAME WAS NOT ALLOWABLE EITHER AS BAD DEBT U/S 36(1)(VII) OR UNDE R THE RESIDUARY PROVISIONS OF SECTION 37(1) OR AS A BUSINESS LOSS U/S 28(1). 4. ON APPEAL THE CIT(A) HELD THAT THE BAD DEBTS RE LATABLE TO TERMINATED CHITS ARE TO BE ALLOWED IN VIEW OF THE O RDER OF THIS TRIBUNAL DATED 26.7.2004 IN ITA NOS. 500 506/H/2009 ITA NO.294 327/H/2001 ITA NO.471 & 1049/H/2004. HOWEVER IN THE CASE OF RUNN ING CHITS HE HAS SET ASIDE THE MATTER TO THE FILE OF ASSESSING OFFICER W ITH A DIRECTION TO COMPUTE THE BAD DEBTS RELATABLE TO RUNNING CHITS AS PER THE DIRECTIONS CONTAINED IN THE ORDER OF THIS TRIBUNAL DATED 26.7.2004 IN ITA N OS.500 506/H/2009 ITA NO.294 327/H/2001 ITA NO.471 & 1049/H/2004 FOR T HE ASSESSMENT YEARS 1995-96 1997-98 AND 1999-2000 WHEREIN THE TR IBUNAL HAS GIVEN ITS FINDINGS IN PARA NO. 6.6(XX) AND 6.6 (XXI): 6.6 (XX). ON THESE FACTS A CLAIM OF LOSS WITHOUT C ORRESPONDING INFLOW OF FUNDS FROM THE FOREMAN WHICH IS A DEFINIT E POSSIBILITY IN THIS METHOD OF CLAIM CANNOT BE UPHELD. THE AMOUNT OF LOSS CAN DEFINITELY BE ALLOWED TO THE EXTENT THAT THE FOREMA N HAS PUT IN HIS FUNDS AND HAS COME TO A CONCLUSION THAT HIS FUN DS 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 ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 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 FACTS THAT THE ASSESSEE HAS WRITTE N OFF AS BAD DEBT WHEN PRIZED SUBSCRIBERS DEFAULTED FOR FOUR CON SECUTIVE MONTHS DOES NOT TO OUR MIND AFFECT HIM CLAIM AS THI S IS BASED ON PAST EXPERIENCE OF THE ASSESSEE IN HIS BUSINESS AND IS IN TUNE WITH THE CURRENT RBI NORMS FOR NFBCS AS WELL AS FOR BANK ING COMPANIES. THESE DECISIONS HAVE BECOME A PRUDENTIA L NORM IN THE FINANCIAL SECTOR. THUS THERE IS NOTHING WRONG IN 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 TH E ASSESSEE HAS MADE THE CLAIM AS INDICATED ABOVE NO PREJUDICE WOU LD BE CAUSED TO HIM BY SETTING ASIDE THE MATTER. SIMILARLY NO P REJUDICE WOULD BE CAUSED TO REVENUE ON THIS COUNT AS IT CAN EXAMIN E THE CLAIM AFRESH. TO ALLOW THE CLAIM TO THE EXTENT INDICATED ABOVE FRESH COLLECTION OF FACTS AND FIGURES ARE REQUIRED AND TH US 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 N EED NOT TO BE SET ASIDE FOR FRESH CONSIDERATION OF THE ASSESSING OFFICER. 6. ON THE OTHER HAND THE LEARNED DEPARTMENTAL R EPRESENTATIVE HAS RELIED ON THE ORDER OF THE CIT(A). 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. SIMILAR ISSUES CAME UP FOR CO NSIDERATION ON EARLIER OCCASIONS BEFORE THIS TRIBUNAL. THE TRIBUNAL HAS C ONSIDERED THIS ISSUE VIDE ITS ORDER DATED 26.7.2004 IN ITA NOS.500 506/H/19 99 ITA NOS.294 327/H/2001 AND ITA NOS.471 & 1049/H/2002 FOR THE AS SESSMENT YEAR ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. YEARS 1995-96 1997-98 1998-99 AND 1999-2000 WHERE IN THE TRIBUNAL HELD IN PARA 4 AS FOLLOWS: 4. COMING TO THE GROUNDS IN THE REVENUE APPEALS T HESE 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.294 327/HYD/2001 AND ITA NOS.471/HYD/2002 & 1049/HYD/2002 FOR THE AS SESSMENT YEARS 1995-96 1997-98 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 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 W OULD BE CAUSED TO REVENUE ON THIS COUNT AS IT CAN EXAMINE THE CLAIM A FRESH. TO ALLOW THE CLAIM TO THE EXTENT INDICATED ABOVE FRESH COLLE CTION OF FACTS AND FIGURES ARE REQUIRED AND THUS WE SET ASIDE THE ISSU E 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 ASS ESSMENT 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 OR DER OF THE CIT(A) AND THEREFORE THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE BAD DEBTS RELATABLE TO RUNNING CHITS AS PER THE DIR ECTIONS OF THE ITAT IN ITS ORDER CITED SUPRA AS IN THE EARLIER YEARS. A CCORDINGLY THIS GROUND RAISED BY THE ASSESSEE AS WELL AS REVENUE IS DISMISSED. 8. IN VIEW OF THE ABOVE ORDER OF THIS TRIBUNAL WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME I S CONFIRMED. ACCORDINGLY THESE TWO GROUNDS RAISED BY THE ASSESSEE ARE DISMIS SED. 9. THE NEXT TWO GROUND NOS.4 & 5 IN THE ASSESSEE S APPEAL IN ITA NO.470/H/2010 IS AS FOLLOWS: 4. THE CIT(A) HYDERABAD ERRED IN UPHOLDING THE TAXAB ILITY OF FOREMAN DIVIDEND AT RS.10 59 45 915/- 5. THE CIT(A) OUGHT TO HAVE CLEARLY HELD THAT THE FORE MAN DIVIDEND WAS NOT TAXABLE ON THE PRINCIPLES OF MUTUALITY. 10. SIMILAR ISSUES CAME UP FOR CONSIDERED BEFORE THIS TRIBUNAL AND THE TRIBUNAL HAS DECIDED THESE ISSUES IN ASSESSEES OWN CASE REPORTED IN 83 ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. ITD 792. RESPECTFULLY FOLLOWING THE SAME RATIO LAI D DOWN BY THE TRIBUNAL IN ASSESSEES OWN CASE WE DISMISS THE TWO GROUNDS TAK EN BY THE ASSESSEE. 11. THE NEXT TWO GROUND NOS.6 & 7 IN THE ASSESSE ES APPEAL IN ITA NO.470/H/2010 IS AS FOLLOWS: 6. THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF F INANCE CHARGES AT RS.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 ASS ESSEE BEFORE THE TRIBUNAL AND THEREFORE THESE TWO GROUNDS ARE DISMIS SED AS NOT PRESSED. 13. THE NEXT TWO GROUNDS IN ASSESSEES APPEAL A RE RELATED TO LEVY OF INTEREST U/S 234D & 234B WHICH ARE MANDATORY AND CO NSEQUENTIAL IN NATURE. ACCORDINGLY THESE TWO GROUNDS RAISED BY T HE 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 COMMIS SION ON REMOVED CHITS WHICH IS CONTRAVENTION AND NOT PRO PERLY DEALT BY THE ASSESSEE COMPANY AS PER THE GUIDELINES OF SEC.21(3) OF THE ANDHRA PRADESH CHIT FUND ACT 1971 . 15. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEF ORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER ORDERS FOR THE ASSES SMENT YEARS 1998-99 1999-2000 IN ITA NOS.471/H/2002 & 1049/H/2002 RESPE CTIVELY WHEREIN THE TRIBUNAL HELD IN PARA 6.3 AS FOLLOWS: ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 6.3. TIME OF RECOGNITION OF INCOME FROM COMMISSION 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 ACCRUAL OF THE INCOME BY WAY OF COMMISSION IN RESPECT OF CASES WHE RE DEFAULTING NON PRIZED SUBSCRIBERS WHO ARE REMOVED FROM THE CHIT AN D IN WHOSE PLACE NEW SUBSCRIBERS ARE SUBSTITUTED. ON A CAREFUL CONS IDERATION 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 ASS ESSEE. THUS THE STAND OF THE ASSESSEE THAT THE COMMISSION INCOME AC CRUES WHEN THE ACCOUNTS HAVE BEEN FINALLY SETTLED TO THE DEFAULTIN G NON SUBSCRIBER TO OUR MIND APPEARS TO BE THE CORRECT POSITION. OTHER WISE IN CASE OF A NON PRIZED SUBSCRIBER THE AMOUNT OF 5% WOULD BE DEDUCT ED FROM THE AMOUNTS DUE TO HIM MUCH BEFORE THE SETTLEMENT OF HI S ACCOUNT AND RECOGNISED AS INCOME BY WAY OF TRANSFER FROM CURREN T LIABILITIES TO PROFIT AND LOSS ACCOUNT. RELIANCE WAS PLACED BY TH E REVENUE ON THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF SHRIRAM CHITS & INVESTMENTS P LTD. CHENNAI VS. ACIT (263 ITR (AT) 6 5). THIS DECISION IS NOT APPLICABLE TO THE FACTS OF THIS CASE. THE COMMISSION/REMUNERATION TO THE FOREMAN IN THAT CASE WAS SOUGHT TO BE RECOGNISED ON THE COMPLETION OF CHIT METHOD AND HAD NOTHING TO DO WITH THE TYPE OF ADDITIONAL COMMISSION RECEIVABLE I N CASE OF SUBSTITUTION OF A SUBSCRIBER AS IN THIS CASE. THE NATURES OF INCOME IN BOTH THESE CASES ARE DIFFERENT. THE FURTHER COMMIS SION OF 5% RECEIVABLE FROM A DEFAULTING SUBSCRIBER CONSEQUENT TO HIS REMOVAL AND SUBSTITUTION ON A FULL AND FINAL SETTLEMENT OF A DE FAULTING SUBSCRIBER ACCOUNT IS RECOGNISED AS INCOME ON THE FINALISATION OF THE ISSUES. THIS IS NOT AN UNACCEPTABLE PROPOSITION. WE AGREE WITH THE SUBMISSIONS 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. 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 A SSESSING OFFICER IN MAKING ADDITION TOWARDS BAD DEBTS KEEPING IN VIEW T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MADAN GOPAL GA BLA VS. CIT (1956) 30 ITR 174 (SC) AND AS PER THE LAW THE BENEFIT OF D EDUCTION 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 ASSESSEES APPEAL IN GROUND NOS.2 & 3 IN ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. EARLIER QUOTED PARAS THIS GROUND OF THE REVENUE BE COMES 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 ASSE SSEE COMPANY WHICH ARE IN CONTRAVENTION UNDER THE COPY ACT AND AS PER SECTION 37 OF THE IT ACT 1961. 20. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFO RE THIS TRIBUNAL FOR THE ASSESSMENT YEARS 2004-05 2005-06 AND 2006-07. THE TRIBUNAL VIDE ITS ORDER DATED 26.7.2004 IN PARA 20 HELD AS FOLLOWS: P AGE 136 137 138 OF PB. 6.7(IV): WE ARE CONVINCED WITH THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE. THE BANGALORE BENCH OF THE TRIBUNAL IN IT A NO.751 750 749 & 748/(BANG.)/1998 IN THE CASE OF M/S SRIRAM CHITS (BA NGALORE) LTD. VS. DCIT (ASSISTANT) SPECIAL RANGE BANGALORE HELD AS FOLLOWS : 29. WE HAVE CAREFULLY GONE THROUGH THE RECORDS AND C ONSIDERATION THE RIVAL CONTENTIONS. M/S SRIRAM CHITS & INVESTMENT (P) LTD. HAVING REGISTERED OFFICE AT MADRAS WAS THE ABSOLUTE OWNER OF THE COPY RIGHT RELAT ING TO EXISTING ARTISTIC WORK SRIRAM CHITS LOGO REGISTERED AS SUCH UNDER THE PR OVISIONS OF THE COPY RIGHT ACT 1957 WITH THE REGISTRAR OF COPYRIGHTS BEARI NG REGISTRATION NO.A/49890/88 DATED 7.7.1988. THE ASSESSEE ENTERED IN TO AN AGREEMENT WITH THE HOLDING COMPANY FOR EXCLUSIVE USE OF THE LOGO OF T HE HOLDING COMPANY IN THE COURSE OF SOLICITING ITS BUSINESS AMONGST POTENTIAL INV ESTORS. THE CONDITIONS OF THE AGREEMENT PROVIDED THAT THE ASSESSEE SHALL PAY ROYA LTY OF 0.5% ON THE ANNUAL AUCTION TURNOVER OF THE ASSESSEE DETERMINED ON THE BASIS OF VALUE OF AUCTIONS FIXED DURING THE YEAR. IN FACT THE ASSESSE E HAS USED THE LOGO TO THE BEST ADVANTAGE OF BUSINESS. THE ASSESSEE WAS TO CARR Y ON THE BUSINESS OF CHIT FUND IN THE STATE OF KARNATKA AND THE HOLDING COMPAN Y GRADUALLY STOPPED FLOATING NEW (GROUNDS AS IT DID IN 1984) ALLOWING SUBSI DIARY COMPANY TO EXPAND ITSELF. THE GROWTH OF BUSINESS OF THE ASSESSEE OVER THE YEARS OF THE ORDER OF THE CIT(A) IS VERY MUCH RELEVANT. THE RELEVANT PORTION READS: 1. SRIRAM CHITS & INVESTMENTS (P) LTD. COMMENCED OPERAT IONS IN KARNATAKA IN THE YEAR 1984. THE BUSINESS OF THE COM PANY IN KARNATAKA INCREASED OVER THE YEARS UPTO 1990-91 WHEN THE AUCTIO N TURNOVER TOUCHED RS.80.39 LAKHS. ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 2. SRIRAM CHITS AND INVESTMENTS (P) LTD. DECIDED TO EXPLAND I TS BUSINESS IN KARNATAKA BY FORMING A SUBSIDIARY COMPANY SRIRAM CHI TS (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 STAT E OF KARNATAKA AND SRIRAM CHITS AND INVESTMENTS (P) LTD. GRADUALLY S TOPPED FLOATING NEW GROUPS ALLOWING THE SUBSIDIARY COMPANY TO EXPAND . 4. SRIRAM CHITS (BANGALORE) (P) LTD. SINCE INCEPTION CON TINUED TO BOOK NEW BUSINESS BY USING THE LOGO OF ITS HOLDING COMPANY. 5. THE BUSINESS GROWTH OF SRIRAM CHITS (BANGALORE) (P) L TD. 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 SRIRA M CHITS AND INVESTMENTS (P) LTD. WAS FORMALLY GIVEN TO SRIRAM CHI TS (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 INVE STMENTS (P) LTD. 7. BY THE AGREEMENT SRIRAM CHITS AND INVESTMENTS (P) LTD. HAS FORMALLY COMMITTED ITSELF TO THE GROWTH AND DEVELOPMENT OF SRIRA M 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 IT S SUBSIDIARY COMPANY. IT ALSO ASSUMES THE RESPONSIBILITY TO ENSURE 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) LT D. HAS PROVIDED FINANCIAL ASSISTANCE TIME AND AGAIN TO SRIRAM CHITS ( BANGALORE) (P) LTD. TO HELP ITS WORKING CAPITAL REQUIREMENTS. 9. WHEN SRIRAM CHITS (BANGALORE) (P) LTD. COMMENCED OPERAT IONS ALL ITS EMPLOYEES WERE FROM SRIRAM CHITS & INVESTMENTS (P) L TD. WHO HAD PRIOR EXPERIENCE IN THIS LINE. EVEN NOW SRIRAM CHIT S (BANGALORE) (P) LTD. LOOKS FOR MANAGERIAL SUPPORT FROM SRIRAM CHITS AN D INVESTMENTS (P) LTD. WHICH IS BEING PROVIDED. IN ADDITION TO THIS T HE ENTIRE SOFTWARE PACKAGE OF SRIRAM CHITS AND INVESTMENTS (P) LTD. WHICH WAS BEING USED BY IT FOR ITS OPERATIONS WAS TRANSFERRED TO SR IRAM CHITS (BANGALORE) (P) LTD. FOR CARRYING OUT ITS DAY TO DAY R OUTINES. THE HOLDING COMPANY ALSO HOLDS PERIODICAL MEETINGS WITH THE EXECUTIVES OF THE SUBSIDIARY COMPANY IN ORDER TO MONITOR ITS ACTIV ITIES. 10. THE REASONABILITY OF 0.5% ROYAL. THE USE OF LOGO I S ENHANCING THE GROWTH OF SRIRAM CHITS (BANGALORE) (P) LTD. CANNOT BE UNDER ESTIMATED. ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 30. THE RECORD ALSO SHOWS THAT HOLDING COMPANY WAS PROVIDIN G FINANCIAL ASSISTANCE TIME AND AGAIN TO THE ASSESSEE TO HELP IN ITS WORKING CAPITAL REQUIREMENTS. THE RECORD FURTHER SHOWS THAT WHEN THE ASSESSEE COMMENCED ITS OPERATION ALLS ITS EMPLOYEES WERE FROM HOLDING COMPANY WHO HAD PRIOR EXPERIENCE IN THIS LINE. IT I S CLAIMED THAT EVEN THE ASSESSEE LOOKS FOR MANAGERIAL SUPPORT FROM ITS HOLDING COMPANY WHICH IS AGAIN PROVIDED. THE HOLDING COMPANY IS ALSO ST ATED TO HAVE CONDUCTED PERIODICAL MEETINGS WITH THE EXECUTIVES OF THE ASSESSEE IN ORDER TO MONITOR ITS MEETINGS. ALL THESE AND THE TABLE EXTRACTED ABOVE SHOWS THAT THERE HAS BEEN A SUBSTANTIAL INCREASE IN THE NEW BUSINESS AS ALSO AUCTION TURNOVER FROM WHAT WAS ONLY 29.49 L AKHS IN ASSESSMENT 1990-91 TO RS.225.69 LAKHS IN THE ASSESSMENT YEAR 1994-95 AND RS.348.29 LAKHS IN THE ASSESSMENT YEAR 1995-96 AND THE BUSINESS HAS BEEN SUBSTANTIALLY GROWING FROM YEAR TO YEAR. THE FIN ANCING BUSINESS AND CONDUCTING OF THE CHIT BUSINESS IS NOT THAT EASY UN LESS IT IS BACKED BY THE PROMOTERS WHO HAVE HIGHEST INTEGRITY AND TRUSTW ORTHINESS. M/S SRIRAM CHITS AND INVESTMENTS (P) LTD. MADRAS (HOLDING COMPANY HAS BEEN IN THE NAMES FOR ITSELF WITH THE INVESTORS IN T HE SOUTH. WE ARE THEREFORE OF THE CONSIDERED OPINION THAT THE PAYMENT OF ROYALTY AT 0.5% OF HAVING REGARD TO THE BUSINESS REQUIREMENTS OF T HE ASSESSEE. IN OUR VIEW THE PAYMENT IS FOR LEGITIMATE BENEFIT TA KEN IN THE COURSE OF BUSINESS AND FROM ANY STANDARD IT CANNOT BE SAID THAT PAY MENT OF RS.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 BUS INESS OUTFLOW PROPERTY UNDER A SPECIFIC AGREEMENT EXECUTED BY THE PAR TIES IS VERY MUCH REASONABLE AND SHOULD HAVE BEEN ACCEPTED AS A BUSIN ESS EXPENDITURE ALLOWABLE AS DEDUCTION. WE THEREFORE DEL ETE THE DISALLOWANCE FOR THESE TWO YEARS. THE DISALLOWANCE H AS BEEN PRIMARILY BASED ON A SUSPICION AND INCORRECT APPRECIATION OF AHRD RE ALITIES OF THE BUSINESS BY THE REVENUE AUTHORITIES. THE DISALLOWANCE IS ACCORDINGLY DELETED. 21. RESPECTFULLY FOLLOWING THE SAME AND FOR THE R EASONS 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 T HE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. 22. RESPECTFULLY FOLLOWING THE ABOVE RATIO LAID DOWN BY THE ABOVE ORDER OF THIS TRIBUNAL THE GROUND TAKEN BY THE REV ENUE STANDS DISMISSED. ITA.490 & 720/H/2010 M/S SRIRAM CHITS P LTD. HYD. 23. IN THE RESULT THE ASSESSEES APPEAL IN IT A NO.490/H/2010 IS PARTLY ALLOWED AND THE REVENUE APPEAL IN ITA NO.720 /H/2010 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT O N: 11.3. 2011 SD/- SD/- G.C. GUPTA CHANDRA POOJA RI VICE PRESIDENT ACCOUNTANT MEMBE R DATED THE 11 TH MARCH 2011 COPY FORWARDED TO: 1. M/S SRIRAM CHITS (P) LTD. 3-6-478 3 RD FLOOR ANAND ESTATE OPP. INDIAN BANK LIBERTY ROAD HIMAYATNAGAR HYDERABAD. 2. THE ADDL. CIT RANGE 3 HYDERABAD 3. CIT(A) IV HYDERABAD 4. THE CIT HYDERABAD 5. THE DR HYDERABAD NP