Deputy Commissioner of income Tax, Circle-3(1), Hyderabad V. M/s. Sriram Chits Private Limited, Hyderabad

ITA 1947/Hyd/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6072 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 30-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C SRINIVAS REDDY
• Keywords: Business expenditure; Bad and doubtful debts
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 1992 & 1993/HYD/2017 ASSESSMENT YEARS: 2013-14 & 2014-15 SHRIRAM CHITS (P) LTD., HYDERABAD. PAN AAFCS 49160 VS. DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1), HYDERABAD. APPELLANT RESPONDENT ITA NOS. 1947 & 1948/HYD/2017 ASSESSMENT YEARS: 2013-14 & 2014-15 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1), HYDERABAD. VS. SHRIRAM CHITS (P) LTD., HYDERABAD. PAN AAFCS 49160 APPELLANT RESPONDENT ASSESSEE BY: SHRI K.C. DEVDAS REVENUE BY: SHRI C. SRINIVAS REDDY DATE OF HEARING: 23/05/2018 DATE OF PRONOUNCEMENT: 08/06/2018 O R D E R PER S. RIFAUR RAHMAN, AM: THESE ARE CROSS APPEALS BY THE ASSESSEE AS WELL AS REVENUE DIRECTED AGAINST THE ORDERS OF CIT(A) 3-, H YDERABAD, ALL DATED 11/09/2017 FOR THE AYS. 2013-14 AND 2014- 15. AS IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THE Y WERE CLUBBED AND HEARD TOGETHER AND THEREFORE A COMMON O RDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2. FIRST WE WILL TAKE UP THE APPEALS OF THE ASSESSE E, IN WHICH, THE ASSESSEE HAS RAISED A COMMON GROUND REGA RDING I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 2 UPHOLDING THE TAXABILITY OF FOREMAN DIVIDEND AT RS. 16,78,75,363/- FOR AY 2013-14 AND RS. 18,60,80,501/ - IN AY 2014-15. 3. THE FACTS RELATING TO RAISE THIS GROUND AS TAKEN FROM AY 2013-14 ARE, THE AO OBSERVED THAT IN THE COMPUTATIO N OF TOTAL INCOME, ASSESSEE COMPANY HAD CLAIMED DIVIDEND INCOM E ON COMPANYS CHIT OF RS. 16,78,75,363/- AS NOT TAXABLE SINCE IT WAS DERIVED FROM THE MUTUAL ASSOCIATION BASED ON TH E DECISION OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF SODA SILICATE & CHEMICAL WORKS, 179 ITR 588. THE ASSESSE E CONTENDS THAT PRINCIPLE OF MUTUALITY IS APPLICABLE IN ITS CASE AND ITS DIVIDEND INCOME IS NOT TAXABLE AS IT IS NOT AN INCOME CHARGEABLE TO TAX, AS THERE IS COMPLETE IDENTITY BE TWEEN THE CONTRIBUTORS AND THE RECEIVERS IN THE CHIT. ON THIS ACCOUNT, THE ASSESSEE CLAIMS DEDUCTION OF FOREMAN DIVIDEND RECEI VED BY IT IN RESPECT OF THE COMPULSORY CHIT. 3.1 THE AO REJECTED THE SUBMISSIONS OF THE ASSESSEE BY REFERRING TO THE SECTION 21 OF THE CHIT FUNDS ACT, 1982 AND RELYING ON FEW CASE LAW AND CLAIM OF FOREMAN DIVID END WAS BROUGHT TO TAX. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A), WHO HAD UPHELD THE ACTION OF THE AO BY RELY ING ON THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR EAR LIER YEARS. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US. 6. BEFORE US, THE LD. AR OF THE ASSESSEE FAIRLY ADM ITTED THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE D ECISION OF THE ITAT IN EARLIER AYS FROM 1995-06 TO 2012-13. IN AY 2012- I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 3 13 IN ITA NO. 1187/HYD/2015 VIDE ORDER DATED 29/04/ 2016, THE COORDINATE BENCH HAS HELD AS UNDER: 6. AS REGARDS GROUNDS 4 & 5 AGAINST THE ORDER OF TH E CIT (A)UPHOLDING THE TAXABILITY OF FOREMAN DIVIDEND AT RS.15,67,25,358, THE LEARNED COUNSEL FOR THE ASSESS EE FAIRLY ADMITTED THAT THIS ISSUE ALSO IS COVERED AGA INST THE ASSESSEE BY THE ABOVE DECISION FOR THE A.Y 2007-08. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HEREUNDER: '9. THE NEXT TWO GROUND NOS. 4 & 5 IN THE ASSESSEE'S APPEAL IN ITA NO.470/HI20L0 IS AS FOLLOWS: 4. THE CIT(A) HYDERABAD ERRED IN UPHOLDING THE TAXABILITY OF FOREMAN DIVIDEND AT RS.L0,59,45,9L5/- 5. THE CIT(A) OUGHT TO HAVE CLEARLY HELD THAT THE FOREMAN DIVIDEND WAS NOT TAXABLE ON THE PRINCIPLES OF MUTUALITY. 10. SIMILAR ISSUES CAME UP FOR CONSIDERED BEFORE THIS TRIBUNAL AND THE TRIBUNAL HAS DECIDED THESE ISSUES IN ASSESSEE'S OWN CASE REPORTED IN 83 LTD 792. RESPECTFULLY FOLLOWING THE SAME RATIO LAID DOWN BY THE TRIBUNAL IN ASSESSEE'S OWN CASE, WE DISMISS THE TWO GROUNDS TAKEN BY THE ASSESSEE ' 7 . RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THE SE TWO GROUNDS OF APPEAL. 6.1 IN THE ABOVE DECISION, THE BENCH HAS RELIED ON THE DECISION OF ASSESSEES OWN CASE WHICH WAS REPORTED IN 83 ITD 792, FOR THE SAKE OF CLARITY, WE REPRODUCE THE SAME : ADMITTEDLY, THE ASSESSEE IS A COMMERCIAL ENTITY FO RMED TO DERIVE PROFITS AND GAINS FROM THE BUSINESS OF CH ITS. IT IS A SETTLED PROPOSITION OF LAW THAT THE PRINCIPLES OF MUTUALITY IS NOT APPLICABLE TO COMMERCIAL ORGANISAT IONS FORMED WITH AN OBJECT OF EARNING PROFIT OF A COMMER CIAL NATURE. IT IS PERTINENT TO NOTE THAT THIS IS A CASE OF A COMPANY, WHICH CARRIES ON THE BUSINESS OF CHIT FUND S AND NOT THAT OF AN ASSESSEE WHO JOINS AS A SUBSCRIB ER TO CHITS FOR PERSONAL SAVINGS OR OTHERWISE. ASSESSEE- COMPANY JOINED THE CHIT GROUPS PROMOTED BY IT EITHE R AS A FOREMAN IN FULFILMENT OF THE REQUIREMENT OF LAW I .E., CHIT FUNDS ACT, 1982 OR IT ENTERED INTO THE SHOES O F DEFAULTING SUBSCRIBERS OR IN SOME CASES TO FILL UP VACANT CHITS AS A MATTER OF NECESSITY OR EXPEDIENCY OF ITS BUSINESS AND NOT BY CHOICE. IT IS NOT THE CASE OF T HE ASSESSEE-COMPANY THAT IT PARTICIPATES IN CHITS PROM OTED I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 4 BY OTHER COMPANIES OR ENTITIES. THE BASIC PRINCIPLE OF MUTUALITY CANNOT BE APPLIED TO INCOME FROM COMMERCI AL PURSUITS. PROFIT EARNING IS THE MOTTO OF THE ASSESS EE- COMPANY. THE PROFITS IN QUESTION ARISE AND ACCRUE F ROM THE TRADE OR VOCATION WHICH IT CARRIED ON. THE BYE- LAWS OF THE COMPANY DO NOT DEMONSTRATE THAT IT IS A MUTU AL ASSOCIATION. 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 BETWEE N THE CONTRIBUTOR AND THE PARTICIPATOR. SEC. 21 OF THE CH IT FUNDS ACT, 1982, DEMONSTRATES THAT THE FOREMAN'S RO LE AND RIGHTS ARE AT VARIANCE WITH THE OTHER PARTICIPA TORS AND CONTRIBUTORS. THE FOREMAN NEED NOT FOREGO DISCO UNT 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 CAN NOT ALSO BE SAID THAT THE PROFIT IS MADE OUT OF ITSELF. THUS, THE PRINCIPLES OF MUTUALITY CANNOT ON THIS COUNT AL SO BE APPLIED TO CHIT FUND COMPANIES. 7. AS THE FACTS AND GROUND RAISED IN AYS 2013-14 AN D 2014-15 ARE MATERIALLY IDENTICAL TO THAT OF EARLIER YEARS, FOLLOWING THE DECISION THEREIN, WE UPHOLD THE ORDER OF CIT(A) IN BOTH THE YEARS UNDER CONSIDERATION AND DISMISS T HE GROUND RAISED BY THE ASSESSEE IN THE AYS UNDER CONSIDERATI ON. 8. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. REVENUE APPEALS 9. IN ITA NO. 1947/HYD/2017 FOR AY 2013-14, THE REV ENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. LD. CIT (A) ERRED ON BOTH LAW AND FACTS OF THE C ASE. 2. THE LD. CIT(A) ERRED IN ALLOWING THE CLAIM OF ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD-DEBTS RELA TING TO RUNNING AND TERMINATED CHITS, WHEN THE ASSESSEE FAILED TO SATISFY THE CONDITIONS LAID DOWN U/S 36(2 ) OF THE IT ACT AMOUNTING TO RS. 45,30,11,346/- 3. THE LD. CIT(A) ERRED IN UPHOLDING THE CLAIM OF ASSESSEE WITH REGARD TO THE COMMISSION ON CANCELLED CHITS AMOUNTING TO RS.1,16,13,700/- . I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 5 4. THE LD. CIT (A) ERRED IN ALLOWING THE CLAIM OF ASSESSEE ON ROYALTY PAYMENT IGNORING THE FACT THAT THE PARENT COMPANY IS NOT RENDERING ANY SERVICES TO ASSESSEE-COMPANY. 5. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIM E OF HEARING. 10. GROUND NOS. 1 & 5 ARE GENERAL IN NATURE, HENCE, NEED NO ADJUDICATION. 11. AS REGARDS GROUND NO. 2 IN AY 2013-14, THE BRIE F FACTS RELATING TO CLAIM OF BAD DEBTS ARE, THE ASSESSEE HA D DEBITED AN AMOUNT OF RS. 47,68,54,048.44 ON ACCOUNT OF BAD DEBTS WRITTEN OFF DURING THE PREVIOUS YEAR RELEVANT FOR T HE AY 2013- 14. OUT OF THIS, BAD DEBTS AMOUNTING TO RS. 28,92,0 9,685.57 PERTAIN TO THE RUNNING CHITS AND BALANCE BAD DEBTS OF RS. 18,76,44,362.87 PERTAIN TO THE TERMINATED CHITS. TH E ASSESSEES SUBMISSIONS WERE EXTRACTED BY THE AO IN HIS ORDER AT PAGES 2 TO 6. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE AO EXHAUSTIVELY DISCUSSED THE ISSUE A T LENGTH BY REFERRING TO THE PROVISIONS OF SECTION 36(1)(VII ), SECTION 22 OF THE CHIT FUNDS ACT, 1982, REFERRING TO CASE LAW AND RESTRICTED THE BAD DEBTS CLAIM OF RS. 47,68,54,048. 44 TO RS. 2,38,42,702.42 AND THE BALANCE AMOUNT OF RS. 45,30,11,346.02 WAS DISALLOWED BY HOLDING THAT IT I S NOT AN ALLOWABLE EXPENDITURE EITHER AS BAD DEBT U/S 36(1)( VII), OR RESIDUARY DEDUCTION U/S 37(1) OR BUSINESS LOSS U/S 28(1). 12. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE CIT(A) AND THE CIT(A) ALLOWED THE ASSESSEES CLAIM OF BAD DEBTS FOLLOWING THE DECISI ON OF THE ITAT IN ASSESSEES OWN CASE FOR EARLIER AYS. I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 6 13. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE I S IN APPEAL BEFORE US. 14. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. ON PERUSAL OF EARLIER YEAR ORDE RS OF ITAT IN ASSESSEES OWN CASE, WE FIND THAT THE ITAT HAS ALLOWED THE ASSESSEES CLAIM OF BAD DEBTS IN AY 2011-12 IN ITA NO. 809/HYD/2014 AND 1210/HYD/2014 VIDE ORDER DATED 29/10/2014, WHEREIN, THE COORDINATE BENCH HAS HELD AS UNDER: 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORDS. IT I S OBSERVED THAT A SIMILAR ISSUE INVOLVING IDENTICAL F ACTS AND CIRCUMSTANCES HAS ALREADY BEEN DECIDED BY THE TRIBUNAL CONSISTENTLY IN FAVOUR OF THE ASSESSEE IN THE EARLIER YEARS, AND IN ONE SUCH DECISIONS RENDERED F OR ASSESSMENT YEAR 2009-10 VIDE ORDER DATED 5.4.2013 PASSED IN ITA NO.651/HYD/2012, A SIMILAR CLAIM OF T HE ASSESSEE FOR DEDUCTION ON ACCOUNT OF CLAIM OF BAD D EBTS IN RESPECT OF RUNNING AND TERMINATED GROUPS HAS BEE N ALLOWED BY THE TRIBUNAL FOR THE FOLLOWING REASONS G IVEN IN PARAGRAPH 10: '10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CRUX OF ARGUMENT OF THE ASSESSEE'S COUNSEL IS THAT IN EARLIER YEARS SIMILAR CLAIM OF THE ASSESSEE HAS BEEN ALLOWED BY THE TRIBUNAL AND ON THAT BASIS THE PRESENT CLAIM IS TO BE ALLOWED. HE RELIED ON THE ORDER OF THE TRIBUNAL DATED 12.10.2012 IN M/S SRI RAM CHITS PVT. LTD. ITA NO. 975/12 FOR A.Y. 2009-10. WHILE DISPOSING THE APPEAL FOR A.Y. 2009-10, THE TRIBUNAL RELIED ON THE EARLIER ORDER OF THE TRIBUNA L 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 CHI T 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 I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 7 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/HYDL 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 TH E ASSESSEE MADE A CLAIM OF BAD DEBT AND WRITTEN' OFF IN THE BOOKS OF ACCOUNT. THUS ON SIMILAR DIRECTION WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO RE-EXAMINE THE ISSUE IN THE LIGHT OF THE ORDER OF EARLIER YEARS I.E., 1995-96, 1997-98, 1998-99 AND 1999-2000 (SUPRA). THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES.' 8. THE ABOVE DECISION RENDERED FOR ASSESSMENT YEAR 200910 HAS BEEN SUBSEQUENTLY FOLLOWED BY THE TRIBUN AL TO DECIDE SIMILAR ISSUE IN ASSESSMENT YEAR 2010-11, VIDE CONSOLIDATED ORDER DATED 6.12.29013 PASSED IN ITA NO.1142/HYD/2013 OF THE REVENUE AND. ITA NO.1049/HYD/2013 OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE ORDERS OF THE TRIBUNAL FOR ASSESSMENT YEAR 2009-10 AND2010-11 IN ASSESSEE'S OWN CASE ON SIMILA R ISSUE, WE UPHOLD THE IMPUGNED ORDER OF THE LEARNED C!T(A) ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUC TION ON ACCOUNT OF BAD DEBTS RELATING TO RUNNING CHITS A ND TERMINATED GROUPS. GROUND NO.2 OF THE REVENUE'S APPEAL IS ACCORDINGLY DISMISSED. 9. AS REGARDS THE ISSUE RAISED IN GROUNDS NO.2 AND 3 OF THE ASSESSEE'S APPEAL RELATING TO ITS ALTERNATIVE C LAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS UNDER 5.28, AS BUSINESS LOSS, IT IS OBSERVED THAT THE SAME IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE MADRAS HIGH COURT IN THE CASE OF CIT V IS. SRI RAM CHITS AND INVESTMENTS LIMITED (83 DTR (MDS) 208), WHEREIN IT WAS HELD THAT CONTRIBUTION OF THE ASSESS EE AS A FOREMAN IN THE PLACE OF A DEFAULTING SUBSCRIBER I S DEDUCTIBLE AS BAD DEBT UNDER 5.37(1) OR AS A BUSINE SS LOSS UNDER S.28 (I) OF THE ACT. RESPECTFULLY FOLLOW ING THE SAID DECISION OF THE HON'BLE MADRAS HIGH COURT IN T HE CASE OF SRI RAM CHITS AND INVESTMENTS LTD. (SUPRA), WE HOLD THAT THE CLAIM OF THE ASSESSEE FOR DEDUCTION O F BAD DEBTS WRITTEN OFF IS ALSO ALLOWABLE ALTERNATIVELY A S BUSINESS LOSS UNDER S.28(I). THE RELEVANT GROUNDS O F THE ASSESSEE ON THIS ISSUE, BEING GROUNDS NO.2 AND 3 IN ITS APPEAL, ARE ACCORDINGLY ALLOWED. I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 8 THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF CIT(A) IN ALLOWING THE ASSESSEES CLAIM OF BAD DEBTS AS HIS D ECISION IS IN CONSONANCE WITH THE DECISION OF THE ITAT AND ACC ORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUN D RAISED BY THE REVENUE ON THIS ISSUE. 15. AS REGARDS THE GROUND NOS. 3 & 4 IN AY 2013-14 AND 2 & 3 IN AY 2014-15,(WHICH ARE COMMON IN BOTH THE YEAR) , THE COMMISSION ON CANCELLED CHITS AND ROYALTY PAYMENT, WE OBSERVE THAT THE CIT(A) ALLOWED BOTH THE ABOVE GROU NDS FOLLOWING THE DECISION OF ITAT IN EARLIER AYS. FOR THE SAKE OF CLARITY, WE REPRODUCE THE FINDINGS OF THE ITAT IN I TA NO. 1224/HYD/2015 (APPEAL BY THE REVENUE) FOR AY 2012-1 3, VIDE ORDER DATED 29/04/2016, AS UNDER: 10. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ORDER OF THE CIT (A) IS IN CONSONANCE WITH THE DIRECTIONS OF ITAT IN THE ASSESSEE'S OWN CASE F OR THE EARLIER A.YS. THE RELEVANT PARAS ARE REPRODUCED HEREUNDER F OR READY REFERENCE: '14. THE GROUND NO.2 IN REVENUE APPEAL IN ITA NO.12 0/H/2010 IS AS FOLLOWS: THE CIT(A) OUGHT TO HAVE APPRECIATED THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION TOWARDS COMMIS SION ON REMOVED CHITS WHICH IS CONTRAVENTION AND NOT PRO PERLY DEALT BY THE ASSESSEE COMPANY AS PER THE GUIDELINES OF SEC.21(3) OF THE ANDHRA PRADESH CHIT FUND ACT, 1971 . 15. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN EARLIER ORDERS FOR THE ASSES SMENT YEARS 1998-99, 1999-2000 IN ITA NOS.471/H/2002 & 1049/H/2 002 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 ASSES SEE'S APPEALS FOR ASSESSMENT YEARS 1998-99 AND 1999-2000. THE DISPUTE IS ABOUT TIME OF ACCRUAL OF THE INCOME BY W AY OF COMMISSION IN RESPECT OF CASES WHERE DEFAULTING NON PRIZED I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 9 SUBSCRIBERS WHO ARE REMOVED FROM THE CHIT AND IN WH OSE PLACE NEW SUBSCRIBERS ARE SUBSTITUTED. ON A CAREFUL CONSIDERATION OF THE ISSUE, WE FIND THAT FROM OUT O F 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. THI S 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 BE EN FINALLY SETTLED TO THE DEFAULTING NON SUBSCRIBER TO OUR MIND APPEARS TO BE THE CORRECT POSITION. OTHERWISE IN CA SE OF A NON PRIZED SUBSCRIBER THE AMOUNT OF 5% WOULD BE DED UCTED FROM THEITA NOS 1224 AND 1187 OF 2015 SRIRAM CHIT F UNDS P LTD HYDERABAD 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 WAS PLACED BY THE REVENUE ON THE SPECIAL B ENCH DECISION OF THE TRIBUNAL IN THE CASE OF SHRIRAM CHI TS & INVESTMENTS P LTD. CHENNAI VS. ACIT (263 ITR (AT) 6 5). THIS DECISION IS NOT APPLICABLE TO THE FACTS OF THIS CAS E. THE COMMISSION/REMUNERATION TO THE FOREMAN IN THAT CASE WAS SOUGHT TO BE RECOGNISED ON THE COMPLETION OF CHIT M ETHOD AND HAD NOTHING TO DO WITH THE TYPE OF ADDITIONAL COMMISSION RECEIVABLE IN CASE OF SUBSTITUTION OF A SUBSCRIBER AS IN THIS CASE. THE NATURES OF INCOME IN BOTH THES E CASES ARE DIFFERENT. THE FURTHER COMMISSION OF 5% RECEIVABLE FROM A DEFAULTING SUBSCRIBER CONSEQUENT TO HIS REMOVAL AND SUBSTITUTION ON A FULL AND FINAL SETTLEMENT OF A DE FAULTING SUBSCRIBER ACCOUNT IS RECOGNISED AS INCOME ON THE FINALISATION OF THE ISSUES. THIS IS NOT AN UNACCEPT ABLE PROPOSITION. WE AGREE WITH THE SUBMISSIONS OF THE L EARNED COUNSEL FOR THE ASSESSEE, WHICH ARE AT PARA 4.11 OF THIS ORDER. IN THE RESULT, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 16. IN VIEW OF THE ABOVE ORDER OF THIS TRIBUNAL, WE DISMISS THIS GROUND TAKEN BY THE REVENUE ON THE SAME LINES. 19. THE GROUND NO.4 IN REVENUE APPEAL IN ITA NO.120 /H/2010 IS AS FOLLOWS: THE CIT(A) OUGHT TO HAVE APPRECIATED THE ACTION OF THE ASSESSING OFFICER IN ADDING ROYALTY PAYMENTS MADE B Y THE ASSESSEE COMPANY WHICH ARE IN CONTRAVENTION UNDER T HE COPY ACT AND AS PER SECTION 37 OF THE IT ACT, 1961. I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 10 20. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL FOR THE ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07. THE TRIBUNAL VIDE ITS ORDER DATED 26.7.2004 IN PARA 20 HELD AS F OLLOWS: 6.7(IV): WE ARE CONVINCED WITH THE ARGUMENTS OF TH E LEARNED COUNSEL FOR THE ASSESSEE. THE BANGALORE BEN CH OF THE TRIBUNAL IN ITA NO.751, 750, 749 & 748/(BANG.)/ 1998 IN THE CASE OF M/S SRIRAM CHITS (BANGALORE) LTD. VS. D CIT (ASSISTANT) SPECIAL RANGE, BANGALORE HELD AS FOLLOW S: '29. WE HAVE CAREFULLY GONE THROUGH THE RECORDS AND CONSIDERATION THE RIVAL CONTENTIONS. M/S SRIRAM CHI TS & INVESTMENT (P) LTD. HAVING REGISTERED OFFICE AT MAD RAS WAS THE ABSOLUTE OWNER OF THE COPY RIGHT RELATING TO EX ISTING ARTISTIC WORK 'SRIRAM CHITS' LOGO REGISTERED AS SUC H UNDER THE PROVISIONS OF THE COPY RIGHT ACT, 1957 WITH THE REGISTRAR OF COPYRIGHTS BEARING REGISTRATION NO.A/49890/88 DA TED 7.7.1988. THE ASSESSEE ENTERED INTO AN AGREEMENT WI TH THE HOLDING COMPANY FOR EXCLUSIVE USE OF THE LOGO OF TH E HOLDING COMPANY IN THE COURSE OF SOLICITING ITS BUSINESS AM ONGST POTENTIAL INVESTORS. THE CONDITIONS OF THE AGREEMEN T PROVIDED THAT THE ASSESSEE SHALL PAY ROYALTY OF 0.5 % ON THE ANNUAL AUCTION TURNOVER OF THE ASSESSEE DETERMINED ON THE BASIS OF ITA NOS 1224 AND 1187 OF 2015 SRIRAM CHIT FUNDS P LTD HYDERABAD VALUE OF AUCTIONS FIXED DURING THE YE AR. IN FACT, THE ASSESSEE HAS USED THE LOGO TO THE BEST AD VANTAGE OF BUSINESS. THE ASSESSEE WAS TO CARRY ON THE BUSIN ESS OF CHIT FUND IN THE STATE OF KARNATKA AND THE HOLDING COMPA NY GRADUALLY STOPPED FLOATING NEW (GROUNDS AS IT DID I N 1984) ALLOWING SUBSIDIARY COMPANY TO EXPAND ITSELF. THE G ROWTH OF BUSINESS OF THE ASSESSEE OVER THE YEARS OF THE ORDE R OF THE CIT(A) IS VERY MUCH RELEVANT. THE RELEVANT PORTION READS: 1. SRIRAM CHITS & INVESTMENTS (P) LTD. COMMENCED OPERATIONS IN KARNATAKA IN THE YEAR 1984. THE BUSINE SS OF THE COMPANY IN KARNATAKA INCREASED OVER THE YEARS UP TO 1990-91 WHEN THE AUCTION TURNOVER TOUCHED RS.80.39 LAKHS. 2. SRIRAM CHITS AND INVESTMENTS (P) LTD. DECIDED TO EXPAND ITS BUSINESS IN KARNATAKA BY FORMING A SUBSIDIARY C OMPANY SRIRAM CHITS (BANGALORE) (P) LTD. 3. IN THE YEAR 1990, SRIRAM CHITS (BANGALORE) (P) L TD. WAS FORMED AND WAS CARRYING ON THE BUSINESS OF CHIT FUN DS IN THE STATE OF KARNATAKA AND SRIRAM CHITS AND INVESTMENTS (P) LTD. GRADUALLY STOPPED FLOATING NEW GROUPS ALLOWING THE SUBSIDIARY COMPANY TO EXPAND. I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 11 4. SRIRAM CHITS (BANGALORE) (P) LTD. SINCE INCEPTIO N CONTINUED TO BOOK NEW BUSINESS BY USING THE LOGO OF ITS HOLDI NG COMPANY. 5. THE BUSINESS GROWTH OF SRIRAM CHITS (BANGALORE) (P) LTD. OVER THE YEARS CAN BE INFERRED FROM THE FOLLOWING F IGURES': FY 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 NO. OF BRANCHES 4 6 7 9 11 19 19 BUSINESS (IN LAKHS) 29.49 66.41 105 81.26 184.01 260.05 359.05 AUCTION TURNOVER 29.49 95.9 181.15 225.69 348.29 542.28 753.23 6. THE RIGHT TO USE THE LOGO FROM THE HOLDING COMPA NY SRIRAM CHITS AND INVESTMENTS (P) LTD. WAS FORMALLY GIVEN TO SRIR AM CHITS (BANGALORE) (P) LTD. THE SUBSIDIARY COMPANY IN THE YEAR 1994 VIDE AN AGREEMENT ENTERED INTO, WHICH PROVIDED FOR THE P AYMENT OF CERTAIN % OF THE AUCTION TURNOVER AS ROYALTY TO SRI RAM CHITS AND INVESTMENTS (P) LTD. 7. BY THE AGREEMENT, SRIRAM CHITS AND INVESTMENTS ( P) LTD., HAS FORMALLY COMMITTED ITSELF TO THE GROWTH AND DEVELOP MENT OF SRIRAM CHITS (BANGALORE) (P) LTD. FOR A FURTHER PERIOD OF 7 YEARS. 8. THE DUTY OF SRIRAM CHIUTS AND INVESTMENTS (P) LT D. DOES NOT END WITH MERELY TRANSFERRING THE RIGHT TO SUE ITS LOGO TO ITS SUBSIDIARY COMPANY. IT ALSO ASSUMES THE RESPONSIBILITY TO ENSU RE THAT THE NAME WHICH IT HAS BUILT UP OVER THE YEARS IS MAINTAINED BY SRIRAM CHITS (BANGALORE) (P) LTD. TOWARDS THI,ITA NOS 1224 AND 1 187 OF 2015 SRIRAM CHIT FUNDS P LTD HYDERABAD SRIRAM CHITS AND INVESTMENTS (P) LTD. HAS PROVIDED FINANCIAL ASSISTANCE TIME AND AGAIN TO SRIRAM CHITS (BANGALORE) (P) LTD. TO HELP ITS WORKING CAPI TAL REQUIREMENTS. 9. WHEN SRIRAM CHITS (BANGALORE) (P) LTD. COMMENCED OPERATIONS, ALL ITS EMPLOYEES WERE FROM SRIRAM CHITS & INVESTME NTS (P) LTD. WHO HAD PRIOR EXPERIENCE IN THIS LINE. EVEN NOW, SR IRAM CHITS (BANGALORE) (P) LTD. LOOKS FOR MANAGERIAL SUPPORT F ROM SRIRAM CHITS AND INVESTMENTS (P) LTD. WHICH IS BEING PROVI DED. IN ADDITION TO THIS, THE ENTIRE SOFTWARE PACKAGE OF SRIRAM CHIT S AND INVESTMENTS (P) LTD. WHICH WAS BEING USED BY IT FOR ITS OPERATI ONS WAS TRANSFERRED TO SRIRAM CHITS (BANGALORE) (P) LTD. FO R CARRYING OUT ITS DAY TO DAY ROUTINES. THE HOLDING COMPANY ALSO HOLDS PERIODICAL MEETINGS WITH THE EXECUTIVES OF THE SUBSIDIARY COMP ANY IN ORDER TO MONITOR ITS ACTIVITIES. 10. THE REASONABILITY OF 0.5% ROYAL. THE USE OF LOG O IS ENHANCING THE GROWTH OF SRIRAM CHITS (BANGALORE) (P) LTD. CAN NOT BE UNDER ESTIMATED.' I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 12 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 SH OWS THAT WHEN THE ASSESSEE COMMENCED ITS OPERATION, ALLS ITS EMPL OYEES WERE FROM HOLDING COMPANY WHO HAD PRIOR EXPERIENCE IN THIS LI NE. IT IS CLAIMED THAT EVEN THE ASSESSEE LOOKS FOR MANAGERIAL SUPPORT , FROM ITS HOLDING COMPANY WHICH IS AGAIN PROVIDED. THE HOLDIN G COMPANY IS ALSO STATED TO HAVE CONDUCTED PERIODICAL MEETINGS W ITH 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 AU CTION TURNOVER FROM WHAT WAS ONLY 29.49 LAKHS IN ASSESSMENT 1990-9 1 TO RS.225.69 LAKHS IN THE ASSESSMENT YEAR 1994-95 AND RS.348.29 LAKHS IN THE ASSESSMENT YEAR 1995-96 AND THE BUSINESS HAS BEEN S UBSTANTIALLY GROWING FROM YEAR TO YEAR. THE FINANCING BUSINESS A ND CONDUCTING OF THE CHIT BUSINESS IS NOT THAT EASY UNLESS IT IS BACKED BY THE PROMOTERS WHO HAVE HIGHEST INTEGRITY AND TRUSTWORTH INESS. M/S SRIRAM CHITS AND INVESTMENTS (P) LTD. MADRAS (HOLDI NG 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 REQUIREMEN TS OF THE ASSESSEE. IN OUR VIEW, THE PAYMENT IS FOR LEGITIMAT E BENEFIT TAKEN IN THE COURSE OF BUSINESS AND FROM ANY STANDARD, IT CA NNOT BE SAID THAT PAYMENT OF RS.1 LAKH AS ROYALTY IS SUFFICIENT TO PR ODUCE 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 SPECIF IC AGREEMENT EXECUTED BY THE PARTIES IS VERY MUCH REASONABLE ITA NOS 1224 AND 1187 OF 2015 SRIRAM CHIT FUNDS P LTD HYDERABAD AND SHOULD HAVE BEEN ACCEPTED AS A BUSINESS EXPENDITURE ALLOWABLE A S DEDUCTION. WE, THEREFORE, DELETE THE DISALLOWANCE FOR THESE TW O YEARS. THE DISALLOWANCE HAS BEEN PRIMARILY BASED ON A SUSPICIO N AND INCORRECT APPRECIATION OF HARD REALITIES OF THE BUSINESS BY T HE REVENUE AUTHORITIES. THE DISALLOWANCE IS ACCORDINGLY DELETE D. 21. RESPECTFULLY FOLLOWING THE SAME AND FOR THE REASONS GIVEN ABOVE BY US WE ALLOW THIS GROUND OF THE ASSESSEE AND DELETE THE DISALLOWANCE MADE ON THIS ACCOUNT BY THE ASSESSING OFFICER. WE D IRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSE E'. 11. RESPECTFULLY FOLLOWING THE SAME, WE REJECT THE REVENUE'S GROUNDS OF APPEAL. AS THE ORDER OF THE CIT(A) IS IN CONSONANCE WITH TH E DIRECTIONS OF ITAT IN ASSESSEES OWN CASE AS ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) IN ALLOWING THE CLAIM OF ASSESSEE WIT H REGARD TO COMMISSION ON CANCELLED CHITS AND CLAIM ON ROYALTY PAYMENT I.T.A. NO. 1992/HYD/2017 AND OTHERS SHRIRAM CHITS (P) LTD., HYD. 13 IN BOTH THE YEARS UNDER CONSIDERATION AND ACCORDING LY, DISMISS THE GROUNDS RAISED BY THE REVENUE ON THESE ISSUES. 16. GROUND NOS. 1 & 4 IN AY 2014-15 ARE GENERAL IN NATURE, NEED NO ADJUDICATION. 17. IN THE RESULT, BOTH THE APPEALS OF REVENUE ARE DISMISSED. 18. TO SUM UP, APPEALS OF THE ASSESSEE AS WELL AS A PPEALS OF THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 8 TH JUNE, 2018. SD/- (D. MANMOHAN) VICE PRESIDENT SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 8 TH JUNE, 2018 KV COPY FORWARDED TO: 1. M/S SHRIRAM CHITS (P) LTD., 3-6-478, III FLOOR, ANAND ESTATE, OPP. INDIAN BANK, LIBERTY ROAD, HIMAYATHNAG AR, HYD. 500 029 2. DCIT, CIRCLE 3(1), HYDERABAD 3. CIT(A) -3, HYDERABAD 4. PR. CIT - 3, HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE