Madras High Court
The Commissioner Of Income Tax vs M/S.Shriram Chits Tamilnadu Pvt. Ltd on 4 November, 2024
Author: Anita Sumanth
Bench: Anita Sumanth
2024:MHC:3756
T.C.A.No.185 of 2013
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 04.11.2024
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.A.No. 185 of 2011
The Commissioner of Income Tax
Chennai. .. Appellant
vs
M/s.Shriram Chits Tamilnadu Pvt. Ltd.,
Greams Dugar, 4th & 5th Floor,
149, Greams Road,
Chennai – 600 006. .. Respondent
Prayer in TCA No.185 of 2013: Appeal filed under Section 260A of the
Income Tax Act, 1961 against order of the Income Tax Appellate
Tribunal, Madras 'A' Bench, Chennai dated 24.06.2011 passed in I.T.A.
728/Mds/2010.
For Appellant : Mr.J.Narayanaswamy
Senior Standing Counsel
For Respondent : Mr.R.Sivaraman
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JUDGMENT
(Delivered by Dr. ANITA SUMANTH.,J)
Three substantial questions of law have been raised relating to two
issues. The questions are as follows:
‘Whether on the facts and circumstances of the case,
the Tribunal was right in holding that royalty amounting
to Rs.87,99,445/- is to be allowed as a revenue
expenditure?
2.Whether on the facts and circumstances of the
case, the Tribunal was right in not considering the
amendment made to Section 32 with effect from
01.04.1999 whereby royalty payments had to be
disallowed and depreciation has to be allowed being an
intangible assets?
3.Whether on the facts and circumstances of the
case, the Tribunal was right in deleting the disallowance
made on account of bad debts amounting to
Rs.22,93,94,972/-.’
2.As regards questions 1 and 2 relating to the allowability of
expenditure spent towards royalty, parties cite a decision of the Division
Bench of this Court in the case of the very assessee before us in
TCA.Nos.755 of 2009 and batch dated 30.06.2022. The discussion and
conclusions are as follows:
‘Royalty
7.1. The assessee companies claimed royalty paid to
the holding company M/s.Shriram Chits and Investments
Pvt Ltd as revenue expenses. The assessing officer
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T.C.A.No.185 of 2013disallowed the royalty amount and allowed depreciation at
25% by holding that the expenditure incurred is for
acquiring intangible asset and would thus amount to
capital expenditure. However, the CIT(A) directed the
assessing officer to allow the royalty payment in full as
revenue expenditure, which was also affirmed by the
Tribunal. Feeling aggrieved, the Revenue preferred the
appeals viz., TCA Nos.622/2013, 360 & 361/2014 and
913/2014. Whereas, in the case of Shriram Transport
Finance Co. Ltd relating to AY 2014-15, the assessee
claimed royalty amount of Rs.20,93,93,838/- paid to
shriram Ownership Trust, which was disallowed, after
allowing depreciation @ 25% on Rs.20,93,93,838/- by the
assessing officer. The said order of the assessing officer
was put to challenge before the CIT(A), by filing appeal, in
which, both the grounds relating to disallowance of royalty
for AY 2014-15 and depreciation on royalty amount
disallowed in the earlier assessment years 2008-09 to
2013-14, were raised by the assessee. Though the CIT(A)
decided royalty issue in favour of the assessee, he directed
the AO to withdraw the depreciation granted at 25% on the
royalty payment. The said finding of the CIT(A) was also
confirmed by the Tribunal. Therefore, the assessee is before
this court by filing TCA.No.407/2019, raising a substantial
question of law, whether the Tribunal was right in not
directing the assessing officer to allow depreciation on the
royalty amounts disallowed in the earlier years, without
prejudice to the ground raised in the earlier years that
royalty amount is allowable as revenue expenditure.
7.2. The learned Senior Standing Counsel appearing
for the Revenue would contend that the parent company of
Shriram Group of Companies is in the trade of finance and
investments and they had built a good will and reputation
over several years of operation. The parent company also
had large data base of its existing and past clients, who had
investments and had financial transactions with them.
While so, the assessee companies, with the help of the
parent company, started business by making investment in
land, building etc., and claimed depreciation. In addition,
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the assessee companies also invested for use of trademark
on the parent company, which has to be treated as
investment in capital asset. Further, the assessee companies
were allowed to use the data base of the parent company to
tap them for development of business. Continuing further,
the learned senior standing counsel submitted that the
customers are attracted not only through trust and good
will, but also by the trade mark of the parent company.
Therefore, by allowing the assessee companies to use the
trademark of the parent company, they had the same effect
of investing in the capital assets viz., land, building etc.,
and the said investment/expenditure is towards the profit
making apparatus; and the use of the said trademark had
enabled the assessee companies to get immediate market
presence and commence their business. Thus, according to
the learned Senior Standing Counsel, the expenditure
incurred by the assessee companies in this regard, has to
be treated as capital expenditure and they are entitled to
claim depreciation alone. In other words, the royalty
payment being acquiring an intangible asset, the assessee
companies are entitled only for depreciation under Section
32 of the Act and the depreciation table expressly provides
for 25% depreciation and therefore, the assessee
companies cannot claim it to be revenue expenditure and
get 100% deduction. It is also submitted that the license to
use the trademark is given only to two companies and
hence, the claim of the assessee companies that it is not an
exclusive use, is liable to be rejected; and the further
contention of the assessee companies that the agreement is
only for one year, is also liable to be rejected, as the said
agreement is being renewed for several years. Placing
reliance on the decision of the Apex Court in Honda Siel
Cars (India) Limited v. CIT [(2017) 8 SCC 170], the
learned senior standing counsel ultimately submitted that
without applying the test as to whether the investment on
licence to use trade name and trade mark is capital or
revenue in nature, in the light of the documentary evidence,
especially license agreement, which concedes that the
royalty is paid for capitalizing the good will of the parent
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company, the authorities below erroneously deleted the
disallowance made by the assessing officer by treating the
expenses as revenue in nature and hence, the appeals will
have to be allowed by setting aside the orders of the
authorities below.
7.3. Per contra, the learned Senior counsel
appearing for the assessee companies would submit that
M/s.Shriram Chits & Investments Private Limited is the
owner of the logo and its absolute ownership can be
recognised from the registered trademark. The assessee
companies had obtained permission only to use the logo
and the permission so granted is non -transferable and
non-exclusive. Elaborating further, the learned senior
counsel submitted that as per the agreement between the
parties, no proprietary or exclusive interest has been
acquired by the assessee companies and in the absence of
any ownership in respect of the logo covered by the
trademark, the provisions of section 32(1)(ii) of the Act are
not at all attracted. Further, the document under which the
permission was granted to the assessee companies can be
terminated for breach of contract by either party by giving
60 days notice. Even the payment made by the companies is
not in the capital field and no asset or advantage of an
enduring nature has been acquired by them and therefore,
the expenditure in the form of payment to the principal is a
proper debit in the profit and loss account even after the
introduction of section 32(1)(ii). It is also pointed out that
in this case, royalty is being paid annually from
01.04.2003, which shows that there is no acquisition of any
asset and the payment is only for the use of the asset
without acquiring any interest therein. To substantiate his
contention, the learned senior counsel referred to the
decision of the Hon’ble supreme court in CIT v. Wavin
India Limited [236 ITR 314]. The learned senior counsel
further submitted that only the owners are entitled for
depreciation. Whereas in the present case, the license
agreement confers only the right to use and also imposes
restrictions on such use; and it is non-transferable and
must be renewed after the expiry of 5 years. In this regard,
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reference was made to the decision of the Hon’ble supreme
court in CIT v. Ciba of India Ltd. [(1968) 2 SCR 696]. With
these averments, the learned senior counsel submitted that
the royalty expenditure is revenue in nature and the same
cannot be included in taxable income.
7.4. The learned senior counsel for the assessee
companies also pointed out certain instances, wherein the
department accepted the plea of the assessees and treated
the royalty payment as revenue expenditure, viz., (i)in the
case of Shriram Chits Tamil Nadu Private Limited for the
assessment year 2001-02, the CIT dropped the proceedings
under section 263 accepting the objections raised to treat
the royalty payment as capital expenditure; and for the
assessment years 2004-05 and 2005-06, the CIT(A)
accepted the claim of the company by holding the
expenditure as revenue in nature, which was also accepted
by the department and no further appeal was filed before
the ITAT; (ii)in the case of Shriram City Union Finance
Limited, for the assessment years 2004-05 & 2005-06, the
assessing officer accepted the claim of deduction in respect
of royalty expenditure and did not add the same in the
respective assessment orders; and (iii)in the case of
Shriram Transport Finance Company for the assessment
years 2004-05, 2005-06, 2006-07 and 2007-08, the
assessing officer did not add the royalty expenditure
claimed in the respective assessment orders. Therefore,
according to the learned senior counsel, the orders of the
Tribunal do not require any interference by this court.
7.5. In respect of depreciation on royalty disallowed
in the earlier assessment years from 2008-09 to 2013-14,
the learned senior counsel appearing for the assessee in
TCA No.407/2019, without prejudice to the contention that
royalty claimed is allowable as revenue expenditure,
submitted that the assessing officer disallowed royalty
claimed from AY 2008-09 onwards, treating it as capital
expenditure and allowed depreciation in the assessment
year in which the royalty payment was disallowed, against
which, appeals were filed and are pending at different
stages. As such, it is contended that in case royalty paid is
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not allowed as revenue expenditure, the cumulative
payments made in the past years and the amounts payable
will constitute the cost of acquisition of the asset and
therefore, depreciation is allowable on that sum. However,
the assessing officer did not allow depreciation on the
written down value (WDV) in the subsequent years, as a
result of which, a ground was raised in this regard by the
assessee, in the appeal filed relating to the assessment year
2014-15 before the CIT(A). The CIT(A) in his order dated
28.08.2017 dismissed the said ground as infructuous as the
issue of royalty was decided in the assessee’s favour. The
ITAT also did not decide this issue. Therefore, the learned
senior counsel sought to consider the same and pass
appropriate orders in favour of the assessee.
7.6. This court considered the rival submissions and
perused the materials placed before the same. It is borne
out from the records that the assessee companies had paid
royalty to the parent company for using its logo, based on
the turnover and claimed deduction treating the said
expenses as revenue in nature. Whereas, the assessing
officer rendered a finding that in view of the amendment
made to section 32 with effect from 1.4.1999, the deduction
for royalty payment construing it as revenue expenditure,
has to be disallowed and depreciation at 25% has to be
allowed by treating it as capital expenditure. It was further
observed that though the royalty is paid for the use of logo
for one year, the same is made for acquisition of intangible
assset; and the mode, methodology and duration of
payment is irrevalent. Accordingly, the claim of the
assessee companies under the head ‘royalty’ was disallowed
and depreciation at 25% was allowed. However, following
the earlier orders of the Tribunal as well as the decision of
the Hon’ble supreme court in CIT v. Wavin (India) Ltd
(supra), the CIT(A) allowed the claim of the assessee
companies, which was affirmed by the Tribunal as well.
Therefore, the appeals viz., TCA Nos.622/2013, 360 &
361/2014 and 913/2014 at the instance of the Revenue.
7.7. It is an admitted fact that the assessee companies
had entered into licence agreement with the parent
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company viz., M/s.Shriram Chits & Investments Pvt. Ltd.,
for use of its logo, on payment of royalty based on turnover
and the same is renewable. As already stated, it is the claim
of the assessee companies that the license agreement
confers the right to use the logo with restrictions viz., non-
transferable and non-exclusive; there is no acquisition and
there is only the right to use and not ownership; and
therefore, the royalty payment which is revenue in nature,
falls within the general provisions of section 37(1) and not
under section 32(1)(ii).
7.8. This court is bound by the legal proposition laid
down In the decision in CIT v. Ciba of India Ltd, (supra)
referred to on the side of the assessee companies. In that
case, the Hon’ble supreme court answered the question,
whether the payment made by the assessee to the swiss
company towards technical and research contribution for
the use of its Indian patents and /or trade marks, in
pursuance of an agreement, is an admissible deduction, in
favour of the assessee. Such a conclusion was arrived at,
after a detailed analysis of the terms of the agreement,
nature of the expenditure incurred and the other relevant
factors. The following passage extracted from the said
judgment is important:
In the case in hand, it cannot be said that
the swiss company had wholly parted with its
Indian business. There was also no, attempt to
part with the technical knowledge absolutely in
favour of the assessee.
“The following facts which emerge from
the agreement clearly show that the secret
processes were not sold by the swiss company
to the assessee:(a) the licence was for a period
of five years, liable to be terminated in certain
eventualities even before the expiry of the
period; (b)the object of the government was to
obtain the benefit of the technical assistance for
running the business; (c)the licence was
granted to the assessee subject to rights
actually granted or which may be granted after
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T.C.A.No.185 of 2013the date of the agreement to other persons;
(d)the assessee was expressly prohibited from
divulging confidential information to third
parties without the consent of the swiss
company; (e)there was no transfer of the fruits
of research once for all: the swiss company
which was continuously carrying on research
and had agreed to make it available to the
assessee; and (f) the stipulated payment was
recurrent dependent upon the sales, and only
for the period of the agreement. We agree with
the High Court that the first question was
rightly answered in favour of the assessee.”
However, it is imperative for this court to apply the law laid
down by the Apex Court to the facts of the present case, to
determine the nature of the royalty payment made by the
assessee companies i.e., whether it is revenue or capital
expenditure.
7.9. At this juncture, it is apposite to refer to the
decision of the Hon’ble supreme court in CIT v. Wavin (I)
Ltd. (supra) which was referred to by the Tribunal, while
passing the orders impugned herein and it was held by the
Hon’ble Supreme court as follows:
“The expenditures were incurred to
obtain benefit of research and development
made by the foreign company. The technical
information given to the Indian company was
“non-exclusive” and “non-transferable”. In
other words, this is not an out and out sale of
technical know-how. The assessee was merely
given a nonexclusive and non-transferable right
of user of the technical information.
Expenditures in these facts cannot be said to be
for acquisition of any asset at all.”
7.10. Furthermore, in the judgment of the Supreme
Court in Honda Siel Cars India Ltd v. CIT (supra), it was
held that while deciding, whether royalty payment for
technical know-how is capital or revenue expenditure, the
enduring benefit test has to be applied; and the conditions
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T.C.A.No.185 of 2013to be satisfied for treating the expenditure under technical
collaboration, as capital in nature, are (i)there is no
existing business and (ii)agreement is crucial for setting up
a new manufacturing plant. The relevant passage of the
said judgment of the supreme court is usefully extracted
below:
“19. If the aforesaid factors are taken in isolation,
probably the claim of the assessee may be justified.
Distinction between capital and revenue
expenditure with reference to acquisition of
technical information and know-how has been
spelled out by this Court as well as High Courts in
a series of cases. Primary test which is adopted to
differentiate between capital and revenue
expenditure remains the same, namely, the
enduring nature test. It means where the
expenditure is incurred which gives enduring
benefit, it will be treated as capital expenditure. In
contradistinction to the cases where expenditure of
concurrent and reoccurring nature is incurred and
the later would belong to revenue field. Technical
information and know-how are intangible. They
have a different and distinct character from
tangible assets. When the expenditure is incurred
to acquire a tangible asset, determination as to
whether the said acquisition of tangible asset is of
capital nature or the expenditure is of revenue
nature, may not pose a problem. However, in case
of technical information and know-how, having
regard to their unique characteristic, the questions
that need to be posed for determining the nature of
such an expenditure are also of different nature. In
case where there is a transfer of ownership in the
intellectual property rights or in the licences, it
would clearly be a capital expenditure. However,
when no such rights are transferred but the
arrangement facilitates grant of licence to use
those rights for a limited purpose or limited
period, the Courts have held that in such a
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T.C.A.No.185 of 2013situation, the royalty paid for use of such technical
information or know-how would be in the nature of
revenue expenditure as no enduring benefits is
acquired thereby. This was so held in a classic
case, entitled CIT v. Ciba India Limited (AIR 1968
SC 1131).”
7.11. Thus, it is crystal clear from the aforesaid
decisions of the Hon’ble supreme court that royalty
payment made by the assessee, for use of logo or trademark
for a particular period, for improvement / expansion of
business, would qualify as revenue expenditure. The
Judgment in Honda Siel Cars India Ltd (supra) is of no
assistance to the revenue as in that case, the technical
knowhow was shared pursuant to technical collaboration
agreement and not only technical information was
transferred, but on field complete assistance was given
pursuant to the joint venture agreement. Further, in that
case, the very same business was set up by the transferee
company. However, in the present case, it is not the case.
The grant of licence to use the intellectual property of the
parent company for limited purpose, cannot be treated as
transfer of ownership or title. Though the licence is
renewed periodically, it by itself does not guarantee the
renewal. Similarly, the parent company is always at liberty
to not only cancel the license, but also grants such rights to
any other organization. Further, the findings of the Apex
Court in the above judgment that when the intellectual
property right is not transferred, but permitted to be
utilized for a particular period, would have to be treated as
revenue expenditure, on application to the facts of this
case, tilts the balance in favour of the assessees. Every
expenditure incurred to acquire some right over intangible
asset, cannot be ipso facto termed as capital expenditure.
The nature of the assets, right, information or technical
know-how that is transferred, must be such that without
which the transferee could never commence the business.
As rightly contented by the learned senior counsel
appearing for the assessees, the benefit granted by the
licensor is not enduring in nature in the present cases. The
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assessing officer without appreciating the terms of the
licence agreement and ascertaining the nature of the
expenditure incurred by the assessee companies,
disallowed the deduction of royalty payment and allowed
the depreciation at 25% treating it as capital expenditure.
However, the appellate authorities, while deleting the
disallowances made by the assessing officer, have rightly
treated the royalty payment as revenue expenditure. Once
the payment of royalty is treated as revenue expenditure,
automatically, it goes without saying that the assessees
would be entitled to 100% deduction. Therefore, we need
not interfere with the orders passed by appellate
authorities. Accordingly, the substantial questions of law
relating to royalty, are answered in favour of the
assessees.’
3.In regard to the issue relating to bad debts, that issue has been
considered by a Division Bench in TCA.Nos.996 to 998 of 2005 dated
03.04.2012, and decided in favour of the assessee.
4.After a detailed discussion in regard to the the judgment of the
Supreme Court in Shriram Chits and Investments Private Limited v.
Union of India and others [AIR 1993 SC 2063] which dealt with the
vires of the Chit Funds Act, 1982, the issue of bad debts has been
discussed and concluded in the following terms:
’11.Keeping this declaration of law, when we look into
the provisions of the Chit Funds Act, one may note the
obligation of the foreman, particularly as given under
Section 21. While enumerating the rights of the foreman, the
Act also takes care to impose an obligation on the foreman to
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T.C.A.No.185 of 2013do all acts which may be necessary for the due and proper
conduct of the chit under sub clause (f) which empowers the
foreman to substitute subscriber in the place of defaulting
subscriber. As far as the duties of the foreman as enumerated
under Section 22(2) of the Act is concerned, the Act
stipulates that in the event of default by a prized subscriber,
in respect of the prize amount due in respect of any draw
remaining unpaid until the date of the next succeeding
installment, the foreman shall deposit the prize amount in a
separate account in an approved bank mention in the chit
agreement. The Act also provides that where the prize
subscriber does not collect the prize amount in respect of any
instalment of a chit within a period of two months from the
date of the draw, it shall be open to the foreman to hold
another draw in respect of such instalment. The Section also
provides that the foreman may appropriate to himself the
interest accruing on the amount deposited under the second
proviso to sub-section (1), for which he is entitled.
12. As far as the balance sheet of the company is concerned,
Section 24 enumerates what is required to be stated in the
balance sheet. The Rules therein provide for the format of the
balance sheet. A reading of the schedule, as against the
assets side, shows loans and advances to subscribers as well
as the liabilities as relatable to non-prized subscribers. The
assets side also contains receipt of interest and such other
amount which can be transferred to fall under the caption of
assets. In terms of the provisions thus prescribed in Section
24, the balance sheet and profit and loss account clearly
showed the amount intimated by the company as against the
default committed by the chit holders and the balance sheet
was also audited by the Chartered 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 that on the debt amount
advanced, the same could be characterised as a debt for the
purpose of treating it under Section 36(2) of the Chit Funds
Act.
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13. It is a settled position of law as held in [2010] 323 ITR
397 (SC) (TRF Limited vs. Commissioner of Income Tax) that
after the amendment to Section 36(1)(vii) of the Income Tax
Act, with effect from 01.04.1989, 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
and the consideration in contradistinction to the earlier
years, the terms of the claim of the assessee in earlier years
assume significance.
14. 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 the Tribunal, the Tribunal
referred to the clarification issued by the Board in
F.No.169/21/78/21/78-IT(80) dated 16th May 1997, which
reads as follows:-
“(a) If any person organises Chit Funds and for
this purposes brings the members together,
administers the Chit Funds and thereby earns
commission, etc., profits made by such a person
is income from business and if for any special
reason there is loss then it is business loss.
Normally there should be no loss to the
organiser unless he takes over the liability of
some of the members. In such a case the
unrecovered amount due from such members will
have to be treated as bad debts and the test to be
adopted in usual business assessment for the
allowance of bad debts would be applicable in
such cases also.
(b) In the hands of the subscribers, a few will be
receiving more than what they have subscribed.
This extra amount is in the nature of interest and
as such, taxable. Members who take the money
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T.C.A.No.185 of 2013
earlier from the chit will necessarily have to
contribute more which means that they incur
loss, which is nothing but interest paid for
moneys taken in advance. The claim of such a
loss will have to be considered for the purpose of
allowance according to the provisions of the Act
depending upon how the money was utilised by
the subscriber.”
15. The subsequent clarification issued on 25.03.1992, which
had been extracted in the order of the Tribunal relating to
the assessment years 1990-91 and 1991-92, merits to be
extracted hereunder:-
“Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
25th March 1992
The Chief Commissioner of Income tax II
New Delhi.
Sir,
Subject : CBDT Instruction No.1175 dated May 16, 1973
Liability to assessment Profits made by
subscriber of chit funds Question regarding
1. I am directed to refer to your Letter
F.No.66(II)/HO/Proposal under section 263/91-
92/4101, dated November 15, 1991 on the above
mentioned subject.
2. The issues raised by you have been carefully examined
by the Board. In this regard, I am directed to say, that
Board are of the view that Instruction No.1175 issued
in consultation with M.O.L. cannot be withdrawn on
the basis of decision of Punjab & Haryana High Court
in case of soda Silicate & Chemical Works (supra).
The Board’s Instruction stands.
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3. Regarding proceedings under Section 263 pending
before the Commissioner of Income-tax Delhi-II, New
Delhi,Board cannot issue any directions.
Thanking you,
Yours faithfully
sd/-
Under Secretary of the
Government of India.”
16. 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 Section 36. In the background
of the above facts, although we are inclined to dismiss the
Revenue’s appeal, the decision taken by the Commissioner of
Income Tax (Appeals) in respect of the above-said claim
merits to be noted herein.
17. A perusal of the order of the Commissioner of
Income Tax (Appeals) 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 non-payment, 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 getting the chit cycles
move on as before. Thus with statutory obligation imposed
and well in compliance of the said obligation, that the
company had to pay its own money to have the successful
chit circulated as before, as pointed out by the Apex Court, if
there is an obligation under a special contract between the
defaulted chit holder and the company, even if the amount
due is not treated as a debt within the meaning of the Money
Lenders Act, yet, the contract gives rise to a relationship of a
creditor and debtor. Thus, the Commissioner of Income Tax
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(Appeals) having gone into the requirement of the provisions
under the Chit Funds Act, held that the advancement of the
money is part and parcel of the business, thus giving rise to a
situation that when the defaulter did not make the payment to
the company, the company had to claim it as a bad debt for
the purpose of deduction under Section 36.
18. It may be of relevance herein to note that while
considering the said claim, the Commissioner of Income Tax
(Appeals) pointed out that having regard to the nature of
payment made, the claim has to be considered as intimately
connected with the business, resulting as a case of a bad
debt. Hence, apart from Section 36, the same merited to be
considered as falling under Sections 28 and 37 in the
business expenditure resulting in a loss. As already pointed
out, when the Revenue went on appeal as against the view of
the Commissioner of Income Tax (Appeals) challenging that
it would amount to a bad debt, apparently, no claim was
made on the side of the Revenue to dispute the view of the
Commissioner of Income Tax (Appeals) that the claim might
also fall under the head of business loss under Section 28.
Thus, when the Tribunal rejected the Revenue’s appeal, it
clearly pointed out that it confirmed the view of the
Commissioner of Income Tax (Appeals) as stated above that
the claim is allowable not only as a bad debt, but could also
be considered as a case of business loss under Section 28.
The question raised before this Court thus is relatable to one
part of the Tribunal’s order as to whether the defaulted
amount paid by the assessee could be treated as a bad debt.
19. It is not denied by the Revenue that the payment
made in the course of the business had resulted in a loss of
the chit amount which is also allowable under Section 28.
Given the above-said fact, we have no hesitation in rejecting
the Revenue’s appeal on this question.
20. Learned counsel appearing for the Revenue
brought to our attention the decision of the Bombay High
Court dated 28.02.2012 in T.C.No.89 of 2011, wherein, the
Bombay High Court had an occasion to consider the money
paid by the stock broker on the default committed by its
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T.C.A.No.185 of 2013
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 or part of the
debt, the requirement of Section 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 Sections 21 and 22 of the Chit
Fund 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 Section
36 of the Act.
21. As far as the reliance placed on the decision
reported in [2010] 328 ITR 342 (Commissioner of Income
Tax vs. Sahib Chits (Delhi) (P) Ltd.) is concerned, we do not
find that the Revenue could draw any assistance from the
said decision, since the said decision relates to a totally
different situation. A perusal of the above judgment of the
Delhi High Court shows that it is more on the question of
discount allotted to the members of the chit in the prized chit
disbursed by the various members and the successful bidder
being given the contribution made. Thus the distribution was
not made out of any money borrowed by the assessee to
result in a debt for considering the same as deduction at
source.
22. As far as the decision reported in [1998] 229 ITR
727 (Suman Saving and Investments Pvt. Ltd. vs. CIT) is
concerned, the same also is not of any relevance to the case
herein, considering the amendment to Section 36 and the
nature of business of the assessee herein on the admitted
position that when the Department had not agitated the issue
further in respect of assessment years 1990-91 and 1991-92
and the situation herein is no different from that of the
earlier orders, we have no hesitation in confirming the order
of the Tribunal, thereby dismissing the Revenue’s appeals.’
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T.C.A.No.185 of 2013
5.Accordingly, and following the ratio of the orders above, the
substantial questions of law are answered in favour of the assessee and
adverse to the revenue. TCA.No.185 of 2013 is dismissed. No costs.
[A.S.M., J] [G.A.M., J]
04.11.2024
Index:Yes/No
Neutral Citation:Yes
vs
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T.C.A.No.185 of 2013
DR. ANITA SUMANTH.,J.
and
G. ARUL MURUGAN.,J.
vs
T.C.A.No.185 of 2013
04.11.2024
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20/20