TMI Blog2014 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... oreman's dividend was rejected and addition under reference was made - there is no applicability of "mutuality" on this income – the order of the CIT(A) confirming the taxability of foreman’s dividend in the hands of the assessee upheld – Decided against assessee. Commission on cancelled chit funds – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that from out of the amount that is payable to the defaulting subscriber consequent to his replacement by another person the company is entitled to deduct 5% as commission - This has nothing to do with the regular commission Income of the assessee - the commission Income accrues when the accounts have been finally settled to the defaulting non subscriber to our mind appears to be the correct position - 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 in case of substitution of a subscriber - The natures of Income In both these cases are different - The further commission of 5% receivable from a defaulting subscriber consequent to his removal and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chits and after obtaining certificate of commencement, the company conducts auctions. As per the provisions of the bye-laws and chit agreement, each subscriber in his term as determined by lot or by auction shall be entitled to prize amount. The minutes of the proceedings of the auction will be recorded and such minutes will be filed with registrar as per the provisions of the Act. The prized subscriber is paid prize money after the process of verification and submission of sureties. The company derives 5% of the chit value as Foreman Commission . 5. The return of income for the year under consideration was filed by the assessee on 19.9.2011 declaring a total income of ₹ 12,04,63,030. In the Profit Loss Account filed alongwith the return, a sum of ₹ 28,30,96,460 was debited by the assessee on account of bad debts written off which pertained to the running chits and terminated chits. Following the view taken on a similar issue in the assessments made for the earlier years, the Assessing Officer restricted the claim of the assessee for bad debts to 5% of the amounts due from the prized subscribers, which is the foreman s commission as the same alone was offered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the earlier order of the Tribunal for A.Ys. 1995-96 to 1999- 2000, 2002-03 to 2006-07 and 2008-09. In earlier year, the Tribunal remitted the issue for computing the bad debts relatable to running chits. We have no dispute with regard to the findings of the Tribunal on earlier occasion. The amount of loss incurred by the assessee has to be allowed on both running and terminated chits if irrecoverable if the prized chit amount has gone out of the hands of the assessee. In other words, bad debts can be allowed to the extent of instalments defaulted by the prized subscribers and written off as bad debt in the books of the assessee. Accordingly, we direct the Assessing Officer to decide the issue in the light of the order of the Tribunal for A.Ys. 1995-96, 1997-98, 1998- 99 and 1999-2000 in ITA No.500/Hyd/1999 and 506/Hyd/1999 (1995-96), 294/Hyd/2010 and 327/Hyd/ 2001 (1997-98), 471/Hyd/2002(1998-99), 1049/Hyd/2002 (1999-2000) in assessee's own case dated 26.7.2004 wherein the Tribunal remitted the issue back to the file of the Assessing Officer to see whether the assessee made a claim of bad debt and written off in the books of account. Thus on similar direction we remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee company in its hands. On appeal, the learned CIT(A) upheld the action of the Assessing Officer on this issue following the decision of the Tribunal in assessee s own case reported in 83 ITD 792. 12. At the time of hearing before us, the learned representatives of both sides have agreed that this ground is squarely covered in favour of the Revenue and against the assessee by the decisions rendered by the Tribunal in assessee s own case for the earlier years. In one such decisions rendered for assessment year 2009-10 vide order dated 5.4.2013, cited supra, the Tribunal discussed similar issue against the assessee vide paragraph 11 to15 of its order, which read as follows- 11. The next ground (ground No. 4) is with regard to upholding the taxability of foreman dividend at ₹ 8,44,39,492. Brief facts of the issue are that during the assessment proceedings, the Assessing Officer found that the above referred dividend income on company's chits was claimed as not taxable in view of the decision of Hon'ble Punjab and Haryana High Court in the case of Soda Silicate and Chemical Works (179 ITR 588). However, the Assessing Officer concluded that the contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness and not by choice. It was not the case of the assessee-company that it participated in chits promoted by other companies or entities. The basic principle of mutuality cannot be applied to income from commercial pursuits. Profit earning was the motto of the assesseecompany. The profits in question arose and accrued from the trade or vocation which it carried on. The principles of mutuality are based on the concept that no one can make profits out of himself. The essence of mutuality is of complete identity between the contributor and the participator. Under section 21 of the Chit Funds Act, 1982, the foreman 5 role and rights are at variance with the other participators and contributors. The foreman need not forego discount or loss and can take the first instalment. Thus, it cannot be said that there is complete identity between the foreman and other participators in the chit. It cannot also be said that the profit is made out of itself. Thus, the principles of mutuality cannot on this count also be applied to chit fund companies. The assessee was a business concern and its aim was to make profits and, thus, the principles of mutuality could not be applied to it. The issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In ground no.3 of its appeal, Revenue has challenged the action of the learned CIT(A) in deleting the disallowance made by the Assessing Officer on account of commission on cancelled chits. 16. As agreed by the learned representatives of both sides at the time of hearing before us, the issue involved in ground No.3 of the Revenue appeal is squarely covered in favour of the assessee by the orders of the Tribunal passed in assessee s own case for the earlier years. In one such orders passed on 12.10.2012 in ITA No.975/Hyd/2012 for assessment year 2009-10, the Tribunal has discussed and decided similar issue in favour of the assessee, vide paragraphs 9 to 15 thereof, which read as under- 9. Ground No. 3 is directed against the action of the CIT(A) in deleting the disallowance made by the AO towards commission on cancellation chits. 10. The AO had noticed that from the AY 1998-99, the assessee is recognizing the income from 'commission on cancelled chits' on actual payment basis, as against the earlier policy of recognizing the same on removal basis. He noted that when non-prized subscribers make default in payment of later instalments of their subscriptions, new su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s appeal) and 324/Hyd/2012 (assessee's appeal), the Tribunal dismissed similar ground raised by the revenue by observing as under:- 11. In ground No.3, the revenue has challenged the deletion of the amount of ₹ 1,62,45,800/- towards commission on cancelled chits. We find identical issue came up before the ITAT, Hyderabad Bench in assessee's own case passed in ITA No.120/Hyd/2010 the ITAT following its earlier order passed in assessee's own case upheld the order of the CIT (A) in allowing the commission on cancelled chits. The observation of the ITAT in para-15 which is extracted hereunder:- 15. Similar issue came up for consideration before this Tribunal in assessee's own case in earlier orders for the assessment years 1998-99, 1999-2000 in ITA Nos.471/H/2002 1049/H/2002 respectively wherein the Tribunal held in Para 6.3 as follows: 6.3. Time of recognition of Income from commission on cancelled chits. This issue is Involved in the assessee's appeals for 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 where defaulting non prized subscribers who are removed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide consolidated order dated 6.12.2013 passed in ITA No.1142/Hyd/2013 of the Revenue and ITA No.1049/Hyd/2013 of the assessee. Respectfully following the decision of the coordinate benches of this Tribunal in assessee s own case for assessment years 2009-10 and 2010-11, we uphold the impugned order of the learned CIT(A) deleting the disallowance made by the Assessing Officer on account of commission on the cancelled chits. Ground No.3 of the Revenue s appeal is accordingly dismissed. 18. In ground No.4, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance made by the Assessing Officer on account of payment of royalty. 19. As agreed by the learned representatives of both sides at the time of hearing before us, the issue involved in ground No.4 of the Revenue is squarely covered in favour of the assessee by the decision of the Tribunal rendered in assessee s own case for the assessment years 2009-10 and 2010-11, cited supra. In its order passed on 12.10.2012 passed in ITA No.975/Hyd/2012 for assessment year 2009-10, the Tribunal has discussed and decided similar issue in favour of the assessee, vide paragraphs 21 to 22 thereof, which read as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creased over the years upto 1990-91 when the auction turnover touched ₹ 80.39 lakhs. 2. Sriram Chits and Investments (P) Ltd. decided to expand its business In Karnataka by forming a subsidiary company 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 State of Karnataka and Sriram Chits and Investments (P) Ltd. gradually stopped floating new groups allowing the subsidiary company to expand. 4. Sriram Chits (Bangalore) (P) Ltd. since 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 Branches Business 29.49 66.41 105 81.26 184.01 260.05 359.05 (In lakhs) Auction 29.49 95.9 181.15 225.69 348.29 542.28 753.23 Turnover 6. The right to use the logo from the Holding Company Sriram Chits and Investments (P) Ltd. was formally given to Sri ram Chits (8angalore) (P) Ltd. the subsidiary company In the year 1994 vide an agreement entered Into, which provided f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1994-95 and ₹ 348.29 lakhs In the assessment year 1995- 96 and the business has been substantially growing from year to year. The financing business and conducting of the chit business Is not that easy unless it is backed by the promoters who have highest integrity and trustworthiness. M/s Sriram Chits and Investments (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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