TMI Blog2012 (4) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor relationship, the question of considering the claim of bad debt under s. 36 of the IT Act did not arise. 2. On appeal before the CIT(A), the said appellate authority viewed that the advancement of money towards the defaulted chit group was part and parcel of the business of the assessee. The first appellate authority further viewed that the sole responsibility of the foreman under the Chit Funds Act was to get the business run by the company. Since the assessee company had to make good the shortfall arising on account of the default of the successful chit holder, the advancing of such fund being part and parcel of the business of running the chit fund, the default committed by the chit holder in meeting his commitment thus gives rise to the claim being treated as a bad debt. On facts, the CIT(A) pointed out that the facts relating to the present assessment years were not different from that of the earlier asst. yrs. 1990 -91 and 1991 -92. Thus, the claim of the assessee was allowable not only under s. 36, but also as a business loss under ss. 28 and 37 of the Act. Aggrieved by the said order, the assessee went on appeal before the Tribunal. A perusal of the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee herein, he pointed out that the amount paid by the assessee has been showed on the liabilities side. It is further stated that whenever any recovery is made, the same was offered as income in the relevant assessment year and in any event, having regard to the circular issued which had been considered in the decision in CIT v. T. Veerabhadra Rao, K. Koteswara Rao Co. (supra) and subsequent thereto, no exception could be taken to the order passed by the Tribunal. Incidentally, he also referred to the fact that while the Tribunal had agreed with the assessees claim that the payment was only to have the business run, it had not, in any manner, raised any question on this aspect. On the other hand, it confined its consideration only as to whether the claim was to be treated as a bad debt. Thus, he submitted that if the claim was not to be treated as bad debt on the understanding that there was no money -lending business by the assessee, nevertheless, having regard to the contractual obligation or the contractual character of the assessee advancing the amount as well as the statutory obligation made under the Chit Funds Act, the assessees claim has to be allowed as a business lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elonging to him. The foreman is responsible for regular collection of subscriptions from a widely scattered body of members. He has to conduct the draws or the auction and maintain accounts. He is under obligation to pay the prize amount on the due date whether or not all the members have paid their subscriptions. In case of defaults, he had often to make good the deficit out of his own resources. If the prized member defaults in his instalments, litigation follows to recover the amount. If the defaulter is a non -prized member, the foreman has to find out a suitable substitute or, in the alternative, has to take over the chit himself and continue the business. Noting the obligation of the foreman, the apex Court pointed out, that the dominant purpose of the Act being to regulate the chit, control the activity of the foreman and protect the interest of the subscribers, the legislature had brought in this special kind of contract. Thus holding that the provisions of the Act are regulatory in nature, the apex Court further pointed out that the Act intends to avoid fraud played on the subscribers by delaying the payment. Dealing with the nature of chit agreement, the apex Court referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red accountant qualified to act as auditor under the Companies Act. In the context of the payment thus made, the question that arises herein is as to whether the activity of the assessee could be termed as falling under the status of a creditor and that on the debt amount advanced, the same could be characterised as a debt for the purpose of treating it under s. 36(2) of the Chit Funds Act (sic). It is a settled position of law as held in T.R.F. Ltd. v. CIT : (2010) 323 ITR 397 (SC) that after the amendment to s. 36(1)(vii) of the IT Act, w.e.f. 1st April, 1989, it is not necessary for an assessee to establish that the debt, in fact, has become irrecoverable and that it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the context of the different stand taken by the Revenue in the year under consideration in contradistinction to the earlier years, the terms of the claim of the assessee in earlier years assume significance. 9. It is not denied by the Revenue that in respect of the earlier years 1990 -91 and 1991 -92, the claim of the assessee for deduction as a bad debt was allowed and in the appeal preferred by the Revenue before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the CIT Delhi -II, New Delhi, Board cannot issue any directions. Thanking you, Yours faithfully Sd/ - Under Secretary of the Government of India. Having regard to the specific observation of treating the unrecovered amount of the subscriber and the debts as bad debts, the Tribunal allowed the case of the assessee that the claim was to be construed as a bad debt, allowable as deduction under s. 36. In the background of the above facts, although we are inclined to dismiss the Revenues appeal, the decision taken by the CIT(A) in respect of the abovesaid claim merits to be noted herein. 11. A perusal of the order of the CIT(A) shows as regards the responsibility of the foreman as listed under the Chit Funds Act. It is admitted by the parties herein that having regard to the obligation under the Chit Funds Act, the assessee had to pump in its own money for the purpose of ensuring that the chit cycle goes on as promised. It is an admitted fact that in respect of shortfall due to nonpayment, the company brought in its own money which was utilised for running the chit business and this did not stand in the way of the statutory obligation of the foreman on get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8th Feb., 2012 in IT Appeal No. 89 of 2011 (reported as CIT v. Shreyas S. Morakhia : (2012) 249 CTR (Bom) 30: (2012) 69 DTR (Bom) 105 - -Ed.), wherein, the Bombay High Court had an occasion to consider the money paid by the stock broker on the default committed by its client. The Bombay High Court held that the liability to pay the brokerage may arise at a point of time anterior to the liability to pay the value of the shares transacted. Nevertheless, it would constitute part of the debt that arises on the same transaction involving the sale or purchase of shares. Since the transactions are part of the same transaction and since both form a component of part of the debt, the requirements of s. 36(2) (i) are fulfilled and the assessee is entitled to treat it as a bad debt. Extending the same logic to the present case herein, going by the obligation of the foreman arising under ss. 21 and 22 of the Chit Funds Act to make good the default to the successful bidder on the subsequent day transaction, the claim was rightly considered by the Tribunal as one allowable under s. 36 of the Act. 14. As far as the reliance placed on the decision in CIT v. Sahib Chits (Delhi) (P) Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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