THE COMMISSIONER OF INCOME TAX, V. SHRIRAM CHITS (KARNATAKA) PVT LTD

ITA/920/2008

AI Insights

The case involves two Income Tax Appeals (ITA No. 920/2008 and ITA No. 922/2008) filed by the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax against Shriram Chits (Karnataka) Pvt. Ltd. The appeals were related to the assessment year 2003-04 and concerned the disallowance of bid-loss, bad debts, and royalty claims by the assessee. The primary legal contention was whether the Tribunal was correct in allowing the bid-loss claimed by the assessee under the Completed Contract Method of accounting, and whether the claims for bad debts and royalty were justifiably allowed by the Appellate Authorities. The High Court found that the Tribunal's decision on bid-loss was premature without sufficient evidence and remanded the matter for further examination. However, it upheld the decisions on bad debts and royalty in favor of the assessee.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 736281 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 09-01-2015
• Assessment Year: misc
• Other Referred Cases: Bilhari Investments (P) Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: G SARANGAN
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment year 2003-04; Bad debts; Bid Loss; Completed contract method; Income tax appeal; Royalty; Scrutiny
• Section: 40A(3); 244A; 143(1)(a); 36(1)(vii); 36(2); 40A(2); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 9TH DAY OF JANUARY, 2015 PRESENT THE HON' BLE MR. JUSTICE N. KUMAR AND THE HON' BLE MR. JUSTICE B. VEERAPPA ITA No. 920/2008 C/w. ITA No. 922/2008 ITA NO.920/2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-12(2), C.R. BUILDING, QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI. K V ARAVIND, ADV.) AND: SHRIRAM CHITS (KARNATAKA) PVT., LTD., ‘AKSHODAYA’ No.259/31 1ST FLOOR, 10TH CROSS WILSON GARDEN BANGALORE-560 027. ... RESPONDENT (BY SRI G. SARANGAN, SENIOR COUNSEL FOR SRI BALARAM R. RAO, ADV.) 2 THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 23.05.2008 PASSED IN ITA NO. 601/BNG/2007, FOR THE ASSESSMENT YEAR 2003- 04, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA No.601/BNG/2007, DATED 23-05-2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO.922/2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-12(2), C.R. BUILDING, QUEENS ROAD, BANGALORE. .. APPELLANTS (BY SRI K V ARAVIND, ADVOCATE) AND: SHRIRAM CHITS (KARNATAKA) PVT., LTD., ‘AKSHODAYA’ No.259/31 3 1ST FLOOR, 10TH CROSS WILSON GARDEN BANGALORE-560 027. ... RESPONDENT (BY SRI G. SARANGAN, SENIOR COUNSEL FOR SRI BALARAM R. RAO, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 23.05.2008 PASSED IN ITA NO. 891/BNG/2007, FOR THE ASSESSMENT YEAR 2003- 04, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA No.891/BNG/2007, DATED 23-05-2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE- 12(2), BANGALORE IN THE INTEREST OF JUSTICE AND EQUITY. THESE INCOME TAX APPEALS COMING ON FOR HEARING THIS DAY, N. KUMAR, J., DELIVERED THE FOLLOWING: JUDGMENT As a common question of law is involved in these appeals and the assessee being the same and a common order is passed in respect of different assessment years, they 4 are taken up for consideration together and disposed of by this common judgment. 2. The assessee, a private limited company, engaged in the business of conducting chits was assessed to income tax by the ACIT (Assessment), Circle, Bangalore. The assessee filed the returns of income on 28.11.2003 for the assessment year 2003-04 declaring a loss of Rs.7,85,38,305/-. The return was processed under Section 143(1)(a) on 13.02.2004 granting a refund of Rs.49,04,076/- including interest under Section 244A. The case was selected for scrutiny. After hearing the assessee, the assessment was concluded. The Assessing Authority disallowed the amount claimed under the heads royalty, bad-debts and bid-loss. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) who deleted the disallowances of royalty as well as bad-debts, but confirmed the finding of the 5 Assessing Authority in respect of bid-loss, on the ground that in spite of sufficient opportunity being given during the assessment proceedings, remand-report proceedings and even before the First Appellate Court, the assessee has failed to furnish the information, as the principles of the chit-wise number of optional- tickets subscribed to, chit-wise dividend income received, chit-wise amount prized amounts obtained, chit-wise discount suffered, what part of the prized amount used for its chit-fund-business, whether the bid-loss claimed is on accrual basis and how the amount of bid-loss claimed was quantified. Aggrieved by the part of the order the assessee preferred an appeal to the Tribunal. 3. The Tribunal by the impugned order held that the assessee is following consistent system of accounting which has been accepted by the Court. It is first time, that, the assessee has incurred bid-loss. The 6 assessee had to wait till the completion of the chit period for each individual chit running during the course of year for determining the actual amount of bid- loss. The completed chits, therefore, suffered a loss which was recognized as loss in the impugned assessment year. Under the completed contract method, the revenue is not recognized until the contract is complete and under this method costs are accumulated during the course of contract and the profit and loss account established in the last accounting period for transfer to profit and loss account in the impugned year. This method determines results only when the contract is complete. It further observed the learned CIT(A) in spite of the details furnished by the assessee was constrained to hold and sustain the disputed disallowances of bid-loss, without finding any fault in the accounting of bid-loss as furnished before him in accordance with the direction of the Hon’ble 7 Apex Court in the case of Bilhari Investments (P) Limited and therefore the Tribunal set aside the order and directed the Assessing Authority to allow the claim of the bid-loss granting a sum of Rs.7,20,32,155/-. Aggrieved by the said order, the revenue is in appeal. 4. The substantial questions of law that arise for our consideration in these appeals are as under: “IN ITA No.920/2008 Whether the Tribunal was correct in holding that a sum of Rs.7,20,32,155/- should be allowed as a bid loss since the assessee was following Completed Contract Method of accounting without considering the nature of loss on account of which the Assessing Officer and the Appellate Commissioner had disallowed the claim? IN ITA NO.922/2008 1. Whether the Appellate Authorities were correct in holding that the assessee’s claim of bad debts is an allowable deduction 8 as per Section 36(1)(vii) r.w.s.36(2) of the Act without taking into account the actual nature of the transaction and the debt claimed to be bad was on account of non payment of subscription amount in chit fund transaction? 2. Whether the Appellate Authorities were correct in holding that the royalty paid by the assessee to its parent company M/s. Sriram Chits and Investments Ltd., Chennai was not excessive or unreasonable and the provisions of section 40A(2) & (3) of the Act would not be applicable?” 5. The accounting practice maintained by the assessee is not found fault with by the Assessing Authority. When the assessee was claiming for the first time a huge amount of Rs.7,20,32,155/- as bid-loss, the Assessing Authority wanted the assessee to produce authentic evidence and explain how this amount was arrived at. The Assessing Authority also wanted to know, how the bid-loss is occurred when there are 9 various safety measures adopted in the agreement by the assessee company. All that the assessee did was, filed a written submission on 03.02.2006 stating that as the tickets have been bid at the early stage of the duration of respective chit groups, when there will be high competition, the assessee has been foregoing a higher amount of bid loss. This is due to the principle of the discounted auction flow where one has to forego a higher rate of discount and obtain a specified amount of money rather than at a later date. In other words, the assessee was explaining the principle followed by them, which results in bid loss. What the Assessing Authority wanted was to give evidence that the assessee actually incurred the said loss in following the said principle, which was not furnished. Therefore he disallowed the said bid loss. In appeal, remand was sought before the First Appellate Court. Even in the course of such remand proceedings, assessee has not produced the 10 said evidence. Therefore, the First Appellate Court was constrained to observe that, inspite of sufficient opportunity given during the assessment proceedings remand-report-proceedings and even before him, the assessee has failed to furnish the factual information as set out in his order except explaining as to the manner of sustaining the said loss and therefore he affirmed the said findings recorded by the Assessing Authority. In appeal, the Tribunal observed that the assessee produces all these particulars before the First appellate Authority, which the First Appellate Authority declined to take note of and proceeded to affirm the findings of the Assessing Authority. From that observation it is clear that, the assessee did not produce requisite information before the Tribunal. The assessee did not produce requisite information even before the First Appellate Authority. Therefore, the said findings recorded by the Tribunal that particulars were produced 11 before the First Appellate Authority that the first Appellate Authority has not taken note of is erroneous. All that, the Assessing Authority wanted to know was, how the said figure of Rs.7,20,32,155/- was arrived and the evidence for the same. Therefore, the Tribunal was not justified in setting aside the well considered order passed by the First Appellate Authority. In that view of the matter, the impugned order cannot be sustained. However, if the assessee is able to substantiate the said claim by producing acceptable evidence, in law the assessee would be entitled to the benefit of deduction. Therefore, it is appropriate that the matter be remanded to the Assessing Authority to give one more opportunity to the assessee to produce the relevant materials as set out by the authority and substantiate the deduction under the head business loss, so that the Assessing Authority on consideration of said material can pass an appropriate order. 12 6. The matter is remanded to the Assessing Authority to decide the claim of business loss claimed by the assessee. 7. Insofar as, the claim regarding bad debts and royalty is concerned, in view of the judgment in assessee’s case in ITA NO.338/2003 of this Court, where it has been held in favour of the assessee and against the revenue, therefore the said questions are answered in favour of the assessee and against the revenue. Hence, appeals are partly allowed to the aforesaid extent. Sd/- JUDGE Sd/- JUDGE Sbs* "