Margadarsi Chit Fund Private Limited, Hyderabad V. Commissioner of Income Tax-IV, Hyderabad

ITA 470/HYD/2014

• Counselvise Citation: 47022514 RSA 2014
• Duration Of Justice: 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 20-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Bad and doubtful debts
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICAL MEMBER ITA.NO.470/HYD/2014 ASSESSMENT YEAR 2009-2010 MARGADARSI CHIT FUND P. LTD., HYDERABAD-500 004. VS. COMMISSIONER OF INCOME TAX-IV, HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. V. SIVA KUMAR FOR REVENUE MR. D. SUDHAKAR RAO DATE OF HEARING 15.07.2014 DATE OF PRONOUNCEMENT 28.08.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER O F LD. CIT-IV, HYDERABAD UNDER SECTION 263 DATED 27.01 .2014 SETTING ASIDE THE ORDER OF A.O. DATED 29.12.2011 ON THE REASON THAT A.O. HAS NOT EXAMINED THE CLAIM OF BAD DEBTS O F RS.53,17,158 ARISING IN THE ASSESSEE CHIT BUSINESS. 2. BRIEFLY STATED FACTS ARE THAT ASSESSEE HAD WRIT TEN OFF THE ABOVE AMOUNT IN THE BOOKS OF ACCOUNTS AND C HARGED TO P & L A/C. ASSESSING OFFICER COMPLETED THE ASSESSME NT UNDER SECTION 143(3) INTER ALIA ALLOWING THE CLAIM. THE LD. CIT WAS OF THE OPINION THAT THE CLAIM OF BAD DEBT ARISING IN C HIT BUSINESS DOES NOT SATISFY THE CONDITIONS OF SECTION 36(2) AN D ACCORDINGLY ISSUED A SHOW CAUSE NOTICE DATED 23.12.2013 WHICH W AS EXTRACTED IN THE ORDER. MAIN THRUST OF THE NOTICE W AS THAT AS PER PROVISIONS OF SECTION 36(2), NO DEDUCTION ON AC COUNT OF BAD 2 ITA.NO.470/HYD/2014 MARGADARSI CHIT FUND P. LTD., HYDERABAD. DEBTS IS ALLOWABLE UNLESS SUCH DEBT OR PART THEREOF WAS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE PREVIOU S YEAR IN WHICH THE ACCOUNT OF SUCH BAD DEBT IS WRITTEN OFF O R OF AN EARLIER PREVIOUS YEAR OR REPRESENTS MONEY LENT IN T HE ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY LENDING, AND ASSESSEE DOES NOT SATISFY THE CONDITIONS, BEING FOREMAN OF C HITS AND NOT LENDING MONEY TO SUBSCRIBERS. 3. IN RESPONSE ASSESSEE SUBMITTED THAT A.O. HAS ENQUIRED THE ISSUE IN THE COURSE OF SCRUTINY AND SI MILAR CLAIMS WERE ALLOWED IN EARLIER YEARS AND ALSO BY ITAT AS E ARLY AS A.Y. 1974-75 AND LD. CIT(A) ALLOWED IN A.Y. 1993-94. FUR THER, IT RELIED ON THE DECISION OF ITAT, SPECIAL BENCH IN TH E CASE OF DCIT VS. SHREYAS S. MORAKHIA AS UPHELD BY HONBLE B OMBAY HIGH COURT REPORTED IN (2012) 342 ITR 285 (BOM.) IT FURTHER RELIED ON THE DECISION OF ITAT IN THE CASE OF SHRIR AM CHITS P. LTD. FOR A.Y. 2009-10 IN ITA.NO.651/HYD/2012. IT FU RTHER SUBMITTED THAT A.O. CALLED FOR DETAILS AND SATISFIE D HIMSELF SO, PROCEEDINGS UNDER SECTION 263 ARE NOT WARRANTED. 4. LD. CIT HOWEVER, SET ASIDE THE ISSUE ON THE REA SON THAT THE A.O. DID NOT EXAMINE THE CLAIM. HIS ORDER IN PARA 3, 4 AND 5 ARE AS UNDER : 3. THE ASSESSEE'S SUBMISSIONS HAVE BEEN CAREFULLY CONSIDERED. IT IS SEEN FROM THE RECORD THAT THE BAD DEBTS CLAIMED MADE BY THE ASSESSEE WAS MECHANICALLY ALLOW ED BY THE A.O. WITHOUT EXAMINING THE ISSUE THOROUGHLY. TH E A.O. HAS NOT EXAMINED WHETHER THE AMOUNT CLAIMED AS BAD DEBT FALLS UNDER SUCH CATEGORY VIS-A-VIS THE NATURE OF T HE BUSINESS OF THE ASSESSEE. THE A.O. HAS NOT OBTAINED THE DETA ILS AS TO WHETHER THE BAD DEBTS UNDER CONSIDERATION RELATED T O THE AMOUNT OF INSTALMENTS RECOVERED FROM THE SUCCESSFUL BIDDERS OR WHETHER IT RELATED TO MONTHLY SUBSCRIPTIONS AS S UCH; IT IS 3 ITA.NO.470/HYD/2014 MARGADARSI CHIT FUND P. LTD., HYDERABAD. CLEAR FROM RECORD THAT THE A.O. FAILED TO EXAMINE W HETHER SUCH BAD DEBTS WERE INCLUDED IN COMPUTING THE INCOM E OF ANY OF THE PREVIOUS YEARS OR OF THE CURRENT YEAR. I T IS ALSO NOT CLEAR AS TO WHETHER ANY CORRESPONDING INCOME WAS OF FERED FROM THE INSTALMENTS PAID BY THE SUCCESSFUL CHIT BI DDERS, IN CASE, IF THE BAD DEBT RELATED TO THE PAYMENTS RECEI VABLE FROM SUCH BIDDERS. 4. FURTHER, THE A.O. HAD FAILED TO VERIFY WHETHER THE SAID AMOUNT WAS ACTUALLY WRITTEN OFF IN THE BOOKS O F ACCOUNT AND IF NO RECOVERY WAS POSSIBLE. IT IS COMMON KNOWL EDGE THAT IN CHIT BUSINESS, THE FOREMAN NORMALLY OBTAINS COLLATERAL SURETY OR OTHER SECURITIES INCLUDING THI RD PARTY SURITIES AT THE TIME OF ARRANGING CHIT AMOUNTS TO T HE SUCCESSFUL BIDDERS. IN SUCH A CASE, IT CANNOT BE SA ID THAT THE AMOUNT RECEIVABLE HAS BECOME BAD. IN SUCH EVENTUALI TY, IT CANNOT BE CLAIMED THAT THE DEBT HAS BEEN WRITTEN OF F FROM THE BOOKS OF ACCOUNTS. AS LONG AS THE ASSESSEE MAIN TAINS THE RIGHT AND HOLDS ON TO SECURITIES OBTAINED, IT I S NOT CONSIDERED AS WRITTEN OFF IN THE BOOKS. THE A.O. HA D NOT MADE ANY ATTEMPT TO VERIFY THE PENDENCY OF ACTION I NITIATED BY THE ASSESSEE TO RECOVER THE DEBTS OR ANY ACTION CONTEMPLATED TO RECOVER SUCH AMOUNTS. IN THE INSTAN T CASE, THESE ASPECTS HAVE NOT BEEN EXAMINED DURING THE ASS T. PROCEEDINGS. THUS, IT IS SEEN FROM THE RECORD THAT NO ATTEMPT WAS MADE TO ASCERTAIN FULL DETAILS RELATING TO THE CLAI M MADE IN THE RETURN OF INCOME. HAVING TAKEN UP THE C ASE FOR SCRUTINY, IT WAS THE DUTY OF THE AO TO COLLECT ALL THE DETAILS RELATING TO THE ISSUES INVOLVED AND MAKE NECESSARY ENQUIRY BEFORE DECIDING THE CASE. 5. FROM THE ABOVE DISCUSSION, IT IS VERY CLEAR THA T THE AO. HAS NOT EXAMINED THE CLAIM OF THE ASSESSEE IN PROPER PERSPECTIVE AND COMPLETED THE ASSESSMENT. TH E AO SHOULD EXAMINE THE NATURE OF CLAIM AND THE FACTS INVOLVED IN SUCH CLAIM. THEN HE SHOULD PROCEED TO EXAMINE ITS ALLOWABILITY AS PER LAW. WITHOUT APPLIC ATION OF MIND, THE AO COMPLETED THE ASSESSMENT MECHANICALLY . 5. AFTER PERUSING THE ARGUMENTS OF THE LD. COUNSEL AND LD. D.R. AND EXAMINING THE PAPER BOOK PLACED ON RECORD, WE ARE OF THE OPINION THAT THE ORDER OF LD. CIT UND ER SECTION 263 CANNOT BE UPHELD. AS FAR AS THE LEGAL PRINCIPLE S ARE 4 ITA.NO.470/HYD/2014 MARGADARSI CHIT FUND P. LTD., HYDERABAD. CONCERNED, THE CLAIM IS ALLOWABLE UNDER SECTION 36( 2) AS A BAD DEBT. IN ASSESSEES OWN CASE IN EARLIER YEARS AS WE LL AS IN THE CASE OF SHRIRAM CHITS P. LTD., (SUPRA), IT WAS HELD THAT THE DEBTS ARISING IN THE CHITS BEING CONDUCTED BY ASSES SEE ARE ALLOWABLE AS BAD DEBT/ LOSS. EVEN IF THE SAME ARE T O BE CONSIDERED AS LOSS IN BUSINESS, THERE IS NO PREJUDI CE CAUSED TO REVENUE ON THAT. AS FAR AS EXAMINATION BY A.O. IN T HE COURSE OF ASSESSMENT IS CONCERNED, THE A.O. DID ASK THE AS SESSEE THE DETAIL OF BAD DEBTS CLAIMED AND ASSESSEE FURNISHED DETAILS VIDE LETTER DATED 24.11.2011 AS ITEM 3 WITH FOLLOWING EX PLANATION. IN CONTINUATION OF THE HEARING HELD ON 9 TH NOVEMBER, 2011 AND AS REQUIRED BY YOU DURING THE SAID HEARING , WE ARE SUBMITTING HEREWITH THE FOLLOWING INFORMATION F OR THE ABOVE SAID ASSESSMENT YEAR. 1. . .. 2. . 3. BAD DEBTS OF RS.53,17,158/- WRITTEN OFF INCLUDES ARREARS OUTSTANDING BELOW RS.300/- OVER A PERIOD OF 12 MONTHS IN CHIT CLOSED SERIES AND DOUBTFUL DEBTS IN SUITS FILED IN CIVIL COURTS OF RESPECTIVE JURISDICT ION. DETAILS FOR SUCH DEBTS BRANCH-WISE IS HEREWITH ENCLOSED. 6. ON PERUSAL OF ENCLOSED DETAILS RUNNING INTO PAG ES 15 (2-16 IN PAPER BOOK) REVEAL THAT ASSESSEE HAS FU RNISHED COMPLETE DETAILS TO A.O. IN THE COURSE OF ASSESSMEN T PROCEEDINGS. JUST BECAUSE A.O. HAS NOT DISCUSSED IS SUE IN ASSESSMENT ORDER, IT DOES NOT MEAN THAT A.O. HAS NO T APPLIED HIS MIND AND MECHANICALLY ALLOWED THE CLAIM. 7. BOTH ON FACTS AND ON LAW, THE PROCEEDINGS INITI ATED BY LD. CIT UNDER SECTION 263 CANNOT BE SUSTAINED. T WIN CONDITIONS REQUIRED FOR INITIATING THE PROCEEDINGS ARE (1) ORDER 5 ITA.NO.470/HYD/2014 MARGADARSI CHIT FUND P. LTD., HYDERABAD. IS ERRONEOUS AND (2) PREJUDICIAL TO THE INTEREST OF REVENUE HAVE NOT BEEN SATISFIED. SINCE A.O. ENQUIRED AND ALLOWED THE CLAIM, THE CONTENTION OF LD. CIT THAT A.O. ALLOWED MECHANI CALLY CANNOT BE SUPPORTED. FOR THESE REASONS, WE SET ASID E THE ORDER OF LD. CIT AND RESTORE THE ORDER OF A.O. DATED 29.1 2.2011 ON THIS ISSUE. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 28.08.2014. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 28 TH AUGUST, 2014 VBP/- COPY TO 1. MARGADARSI CHIT FUND P. LTD., 5-10-195, FATEH MA IDAN ROAD, HYDERABAD 500 004. 2. COMMISSIONER OF INCOME TAX-IV, HYDERABAD. 3. COMMISSIONER OF INCOME TAX, HYDERABAD. 4. ADDL. CIT, RANGE-16, HYDERABAD 5. D.R. B BENCH, ITAT, HYDERABAD.