TMI Blog2012 (5) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully considered the assessee's submissions. The submission of the Assessee is not tenable as per law due to the following reasons :- i) As per Section 36(1) (vii) read with sub-section 36(2), for allowing bad debt the following conditions should be satisfied. a) Assessee should have offered this amount as income either during the current assessment year or in the earlier assessment years. b) Assessee should have incurred these debts during the course of carrying on the business activities of money lending or banking. The first condition not at all apply to the assessee as it did not offer the above debt as income either in this year or in the earlier years. As stated in the second condition the assessee has not incurred these debts during the course of carrying on the business activities of money lending or banking as the assessee's business is chit business. As the assessee has not satisfied the conditions for allowance of bad debt, the assessee is not entitled for this claim. ii) The Hon' ble Supreme Court in the case of Shriram Chits and investments, cited in AIT 1993 SC 2063, has held that chit business is not money lending activity. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he receives as in the case of chit fund company when the chit is paid to the members, it does not fall within the meaning of section. 40 A(8)(iv) Explanation(c). Here, in the context explanation is talking about the definition of a funding company. As such, the court has clearly ruled that chit fund company does not form part of a 'financial company'. The same logic can be applied here also. vi) The assessee has stated that in the assessee's own case, the Hon'ble Tribunal has allowed the bad debt claim for different assessment years and hence requested to allow the claim. The department has not, accepted the decision of the Hon'ble ITAT and has filed reference appeals before the Hon'ble High Court. As such the issue has not reached finality. For the reasons stated above, the assessee s claim of bad debt is disallowed. 4. The CIT(A) allowed the claim of the assessee following this Tribunal s order in I.T.A. No. 1632/Mds/2003 order dated 28.09.2006 for the assessment year 2000-01, wherein this Tribunal allowed the claim for deduction of bad debts claimed by the assessee by dismissing the Revenue s appeal. 5. At the time of hearing both the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of the subscriber who is paying the subscription regularly. 19. We have also carefully gone through the provisions of Chit Fund Act, 1982. Section 2(1) of the Chit Fund Act defines defaulting subscriber . According to this section, a subscriber who has defaulted in the payment of subscription due in accordance with the terms of the chit agreement, would be treated as defaulting subscriber. Section 16 of the Chit Fund Act provides for the method of conducting draw. Section 17 requires the foreman to prepare the minutes of the proceedings and the same has to be filed before the Registrar within 21 days from the date of draw as required under Section 18 of the Chit Fund Act. Section 22 provides that the foreman shall pay the prize amount to the prized subscriber on furnishing sufficient security for the due payment of future subscriptions. The payment shall be made within seven days from the date of draw or before the date of next succeeding instalment whichever is earlier. Therefore, it is very clear that there is a statutory obligation on the part of the foreman to pay the prize amount to the prized subscriber within seven days from the date of draw. Section 21 enables the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a bad debt. This amount may, be a loss, as observed by CBDT, in carrying on the chit fund business and is similar to the loss that is claimed by a person who guarantees recovery of repayment of loan to a bank. The assessee as foreman in their interest to maintain the chit fund business and in the interest of maintaining the chit of particular group of members and keeping them together and keeping t e chit alive, has paid as guarantor the subscription f the defaulting subscriber. Therefore, this contribution which was incurred by the assessee is clearly a business loss or trading loss. It has got no connection to a bad deb. Bad debt normally requires the assessment of income on accrual basis in the earlier years and in case the assessee as any problem or difficulty in recovering the said amount, the amount so included in the total income may be allowed as bad debt under Section 36(1)(vii) read with section 36(2). The amount of contribution made by the assessee i place of the defaulting subscriber is in the interest of the maintaining the business and to protect the interest of the non-prized subscribers. Therefore, it is clearly a loss incurred by the assessee. In the event of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. The other condition as per Section 36(2) is that the amount so advanced should have been included in the income of the previous year or earlier previous years. It is no body's case that the amount so contributed by the assessee on behalf of the defaulting subscribers was included in the total income of the assessee in any of the previous years. The provisions of Section 36(2) was not examined by the CBDT while issuing instructions to allow the amount paid by the foreman as bad debt. However, it is pertinent to note, the CBDT observed that the foreman may suffer loss when the liability of defaulting subscriber was taken over. Therefore, the CBDT impliedly accepted the commercial expediency with regard to payment of subscription of the defaulting subscriber. 22. In a chit fund business, as discussed in the earlier paragraphs, there is a provision for auctioning, which auction results in the prize being given to the higher bidder. The defaulting subscriber or by enforcing the security offered by the priced subscriber, the same was admittedly offered for taxation in the year in which it was recovered. Therefore, in our considered opinion, the first Appellate Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/ income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. Therefore, in view of the Hon ble Bombay High Court s decision (supra), we, set aside the orders of the lower authorities and direct the Assessing Officer not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned payment was made to Shriram Chits Investments Pvt. Ltd for the non-exclusive user of the logo based on turnover and was not a lump sum payment. The assessee had no other rights including the right to transfer the use of the logo. Shriram Chits Investments Pvt. Ltd has given the right of user to other companies also which include Shriram Chits Tamilnadu Pvt. Ltd, Shriram Chits (Bangalore) Pvt. Ltd and Shriram Chits Pvt. Ltd. In assessment year 2001-02, the CIT wanted to treat the payment as capital expenditure in the case of Shriram Chits Tamilnadu Pvt. Ltd, but after hearing the assessee s objections, he dropped the proceedings initiated u/s 263 of the Act. In the case of Shriram Chits Tamilnadu Pvt. Ltd, the ld. CIT(A) has accepted the claim of the assessee by holding that this expenditure as revenue in nature and the Department has accepted this finding of the ld. CIT(A) and has not filed further appeal before the ITAT for assessment years 2004-05 and 2005-06. 18. The ld.DR has relied on the decision of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs CIT, 224 ITR 342, in support of his ground. The ld.AR has supported the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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