TMI Blog2012 (10) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... d chits. The AO held that since the assessee is in chit fund business and not in money lending business, the bad debt to the extent of which is offered as income on accrual basis in the previous year or any earlier previous years shall alone be eligible for deduction u/s 36(1)(xii) of the I.T. Act, 1961 and, therefore, he restricted the claim of bad debt to 5% of amounts due from prized subscribers, which is the Foreman s commission as the same was offered to income either in the previous year or in the earlier previous years. The remaining 95% of the bad debts, not offered as income in the previous year or any other earlier previous year were brought to tax by the AO. The AO, therefore, restricted the bad debts claim of the assessee to ₹ 1,60,80,355/- and the balance amount being ₹ 30,55,26,745/- was disallowed and added back to the total income. 5. Aggrieved, the assessee carried the matter in appeal before the CIT(A). 6. After considering the submissions of the assessee, the CIT(A) directed the AO to allow the bad debts claim of the assessee by holding as under:- 6. I have gone through the submissions of the appellant as also the arguments of the AO put fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hits 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 subscribers were taken in their place. The defaulting non prized subscribers get back their subscriptions after deduction of commission of 5% of the chit value on cancelled chits. He opined that the income by way of commission @5% on the amount payable to the removed subscribers accrues at the time of completion of the series as per the chit agreement and not when the account of the defaulting non-prized subscriber is settled by payment to him, as contended by the assessee. After referring to the provisions of the Andhra Pradesh Chit Fund Act, 1971, decisions of High Court and Supreme Court and the details furnished by the assessee, the AO observed that the amount to which the assessee was entitled as commission from the removed subscribers in respect of the chit series which were completed during the FY 2008-09, @5% of chit value of cancelled chits was ₹ 8,75,71,450/- and out of the same, an amount of ₹ 8,00,92,773/- had been added back to the income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 where defaulting non prized subscribers who are removed from the chit and in whose place new subscribers are substituted. On a careful consideration 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 assessee. Thus the stand of the assessee that 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. Otherwise in case of a non prized subscriber the amount ,of 5% would be deducted from the amounts due to him much before the settlement of his account and recognised as income by way of transfer from current liabilities to profit and loss account. Reliance placed by the Revenue on the Special Bench decision of the Tribunal in the case of Shriram Chits Investments P Ltd. Chennal Vs. ACIT (263 ITR (AT) 65). This decision is not applicable to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their goodwill earned by them on their won in the state of Andhra Pradesh. He further felt that the transaction between the assessee and the Chennai company, which is a major share holder in the assessee company was nothing but a transaction of mutual interest. He also took note of the fact that Shriram Chits and Investment Ltd., Chennai, had no taxable income or any tax liability under the regular provisions of the Act upto the AY 2002-03 and for the assessment year 2005-06. The AO had tabulated the details of their income and the tax payment at pra 6.3 of the Assessment order. He felt that the royalty payment was only meant to reduce the taxable income of the assessee company, without resulting in any additional tax liability of the holding company. Considering that the said payment had no rational or logical basis and could not be considered as arising out of business expediency in any manner, the AO concluded that the royalty payment of ₹ 3,29,63,986/- is not wholly and exclusively incurred for the purpose of business as contemplated u/s 37(1) and, therefore, disallowed the same. 18. On appeal, before the CIT(A), it was pointed out by the AR of the assessee that simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined 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. The assessee was to carry on the business of chit fund In the state of Karnataka and the holding company gradually stopped floating new (grounds as It did In 1984) allowing subsidiary 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. Srlram Chits 8r. Investments (P) Ltd. commenced operations In Karnataka In the year 1984. The business of the company In Karnataka Increased over the years upto 1990-91 when the auction turnover touched ₹ 80.39 lakhs. 2. Srlram Chits and Investments (P) Ltd. decided to expand its business In Karnataka by forming a subsidiary company Srlram Chits (Bangalore) (P) Ltd. 3. In the year 1990, Srlram Chits (Bangalore) (P) Ltd. was formed and was carrying on the business of Chit Funds In the State of Karnataka and Srlram Chits and Investments (P) Ltd. gradually stopped floating new groups allowing the subsidiary company to expand. 4. Srlram Chits (Bangalore) (P) Ltd. since Incept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re software package of Sriram Chits and Investments {P} Ltd. which was7 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 periodical meetings with the executives of the subsidiary Company In order to 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. 30. The record also shows that holding company was providing 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, ails Its employees were from holding company who had prior experience In this line. It Is claimed that even the assessee looks for managerial support, from Its holding company which Is again provided. The holding company Is also stated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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