THE COMMISSIONER OF INCOME TAX -III, HYDERABAD V. M/S SHRIRAM CHITS PVT LTD, HYDERABAD

ITTA/154/2006

AI Insights

The case involves three appeals by the Commissioner of Income Tax-III, Hyderabad against M/s. Shriram Chits Pvt. Ltd., Hyderabad, concerning the assessment years 1998-99, 1999-2000, and 2000-01. The appeals challenged the decisions of the Income Tax Appellate Tribunal, Hyderabad, which had allowed the assessee's claims on bad debts, royalty payments, and commission on cancelled chits. The main legal issues revolved around the interpretation and application of Section 36(1)(vii) of the Income Tax Act, 1961, concerning the deductibility of bad debts, and the treatment of royalty payments and commissions as business expenditures. The High Court, after examining the arguments and relevant legal provisions, upheld the Tribunal's decisions, emphasizing the binding nature of CBDT circulars and the proper application of the law by the Tribunal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 720168 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 09-06-2023
• Assessment Year: misc
• Other Referred Cases: CIT v. Girish Bhagwatprasad, Oriental Kuries Limited v. Lissa, Wavin (India) Limited v. CIT, Honda Siel Cars India Limited v. CIT, Khyati Realtors Private Limited v. CIT
• Laws Referred To: Income Tax Act, 1961, Chit Funds Act, 1982
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: R V EASWAR
• Assessee Lawyers: J V PRASAD
• Keywords: Bad debts; Commission on cancelled chits; Income Tax Tribunal Appeal; Royalty Payments
• Section: 143(3); 260A; 36(1)(vii); 36(2)

Judgement Text

"[ 32es ] IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD FRIDAY THE NINTH DAY OF JUNE TWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDY ITTA NoS: 307 OF 2005. AND 92 and 154 ol 2llqo ITTA NO: 307 OF 2005 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ' B', Hyderabad in ITA p.a71lHydl2o22, for Assessment Year 1998-99 daled 26-07-2004, preferred against the Order of the Commissioner of lncome Tax (Appeals)lV, Hyderabad' Appeal No.359/JCSR-4/C|T(A)|V/01-02 dated 28-03-2002, preferred against the Order of the Joint Commissioner of lncome Tax (Assts.) Special Range-4 Hyderabad, PAN/GlR No.S122 dated 30/03/2001) Between: The Commissioner of lncome Tax-lll, Hyderabad, Hyderabad ...APPELLANT AND M/s. Shriram Chits Pvt, Ltd, Hyderabad ...RESPONDENT INCOME TAX TRIBUNAL APPEAL NO: 92 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'B', Hyderabad in ITA No.1049/Hydl20O2, for Assessment Year 1999-2000, dated 26-07-2005, preferred against the Order of the Commissioner of lncome Tax (Appeals)-lV, Hyderabad, ITA No.94/DC-3(1yClT(A)-lV/2OO2-03, dated 26-11-2002, preferred against the Order o{ the lncome Tax officer, PAN/GIR No.AAFCS49l6D S-22, dated 28-03-2022) Between: The Commissioner of lncome Tax-lll, Hyderabad, Hyderabad ...APPELLANT AND M/s. Shriram Chits Pvt, Ltd, Hyderabad ...RESPONDENT INCOME TAX TRIBUNAL APPEAL NO: 154 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-,q of the lncome Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench'B ', Hyderabad in ITA No.1 1751{yd12003. for Assessment Year 2000-01, dated 30-07- 2004, preferred against the Order of the Commissioner of lncome Tax (Appeals)lV, Hyderabad, ITA No. 79lDC-3(1yClT(A)-lV/2003-04 dated 18-09-2003,, preferred againsl the Order of the lncome Tax Officer, PAN/GIR No.AAFCS49l6DlS-122, dated 31-03-2003.) Between: The Commissioner of lncome Tax-lll, Hyderabad, Hyderabad ...APPELLANT AND M/s. Shriram Chits Pvt, Ltd, Hyderabad ...RESPONDENT Counsel for the Appellant: SRl. J. V. PRASAD (SC FOR INCOME TAX) Dept., Counsel for the Respondents: SRI R.V.EASWAR,SENIOR COUNSEL FOR SRI. MAHESWARA RAO KUNCHEAM The Court made the following: COMMON JUDGMENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHIIYAN AND THE HON'BLE SRI JUSTICE C.V.BTIASKAR REDDY I.T.T.A. Nos.307 of 2OO5 and 92 and L54 of 2006 Substantial questions of Iaw raised in the three appeals being identical, the appeals were heard together and are being disposcd of by this common judgment and order. 2. The three appeals have been filed by the Revenue as the appellant under Section 2604 of the Income Tax Act, 196l (briefly, 'the Act' hereinafter) assailing va-r10us orders passed by the Income Tax Appellate Tribunal which would be advcrted to in the succeeding paragraphs of this judgment. 3. We have heard Mr. J.V.Prasad, learned Standing Counsel for the Income Tax Department representing the appellant and Mr. R.V.Easwar, learned Senior Counsel for Mr. Maheswara Rao Kunchem, learned counsel for the respondent/ asscssee. COMMON JUDGMENTi eer the Hon'ble the Chief Justice Uljal Bhuyan) l 4. I.T.T.A.No.307 of 2005 has been preferred by the Revenue as the appel)ant assailing the order dated 26.O7.2OO4 passed by the lncome Tax Appellate Tribunal. Hyderabad Bench-B, Hyderabad (briefly, 'the Tribunai' hereinafter) in I.T.A. No.471/Hyd l2OO2 for the assessment year 1998-99 5. Likeu,ise I.T.T.A.No.92 of 2006 has been preferred by the Reverrue against the order dated 26.A7.2004 passed by the Tribunal in I.T.A.No.fia9 IHyd12002 for the assessment year 1999 2000 6. Finally, I.T.T.A.No.154 of 2006 has been preferred by the Revenue against the order dated 3O.07.2004 passed by the Tribunal in i.T.A.No.l175lHydl2O03 for the assessment year 2000 01. 7. In all the threc appcals, the respondent/ assessee is M/s.Shriram Chits l.imited, Hyderabad which subsequently came to bc knou'n as M/s.Shrirarn Chits Private Limited, Hyderabad. J 8. Respondent is the assessee under the Act having the status of a company. Assessee is engaged in the chit fund business regurlated under the Chit Funds Act, 1982. For the assessment year 1998-99, assessee filed return of lncome admitting a Ioss of Rs.1,14,76,024.OO and deemed income of Rs.26,96,890.00 under Section 11sJA of the Act. The case was selected for scrutiny, whereafter order of assessment was passed on 30.03.2001 under Section 143(3) of the Act. Assessee had debited an amount of Rs.5,72,83,854.00 to the profit and loss account towards bad debts. Assessing officer on the grounds and reasons mentioned in the order of assessment took the view that the amount claimed as bad debts could not be allowed as a deduction having regard to the provisions of Section 36(1)(vii) read with Section 36(21 of the Act. Accordingly, the said amount was added to the income of the assessee. That apart, the decision of the assessee in advancing the point of recognition as bad debt to four months of default which resulted in an additional amount of arrears to the extent .l of Rs.3,91,93,724.OO u'as held to be unreaiistic and accordingly'*'as disallowed 8.1\" Assessing officer noticed that the assessee had recognised the income on commission on cancelled chits on actual pa)-ment basis as against the earlier policl' of removal basrs and claimecl that but for this change in the accounting policy, the profit would have been higher by Rs.1,25,15,338.00. Assessing officer was of the view that change in the accounting policy was without any basis and not on sound principles. This was done to shift the profit of one year to another year r,t'hich would be an incorrect metl-rod of computing profits. Accordingly, the arrrount of Rs. 1,25,15,338.00 was added to the income of the assessee and brought to tax. 8.2. In appeal before the Commissioner of Income Tax (Appeals) IV, Hyderabad (briefly, 'CIT(A)' hereinafter), the first appellate authority upheld the decision of the assessing officer by holding that the bad debts claimed by the assessee were not allou'able deduction. As to change in the method of accounting CIT(A) also affirmed the vieu' I t ) taken by the assessing officer. As regards commlssron on cancelled chits, view taken by the assessing officer was upheld, thus appeal filed by the assessee was dismissed vide the order dated 28.03.2OO2. 8.3. Aggrieved thereby assessee preferred further appeal before the Tribuna,l which was registered as I.T.A.No.47 1 / Hyd I 2002. 9. For the assessment year 1999-2OOO, assessing oflicer vide the assessment order dated 28.O3.2OO2 passed under Section 143(3) of the Act disallowed the claim of bad debts of the assessee on terminated chits to the extent of Rs.2,87,38,141.00 and added the same to the income of the assessee. Insofar claim of bad debts amounting to Rs.6,98,39,496.OO pertaining to running chits, assessing officer was of the view that the change in the method of recognition of bad debts was unrealistic and it was only a method to defer payment of taxes. Accordingly, the said claim of bad debts was also disallowed. As regards commrsslon on cancelled chits claimed by the assessee to the tune of Rs.58,58,658.O0, 6 assessing ofl-icer was of the view that change in the accounting policy u'as ',r ithout any basis and not on sound princrples. Accordrngly, the said amount was added to the income of the assessee and brought to tax. In this assessment year, there was an additional claim of the assessee i.e., royalty to the extent of Rs.2,49,05,065.00. Royaltv n,as being paid to the holding company by the assessee for the licence to use its logo as per agreement. This claim of royalty was disallowed by the assessing officer as according to the assessing officer, assessee had lailed to prove the nexus as to whether the expenditure was incurred wholly and exclusively for the purpose of business. Assessing officer took the view that the transactiotr was of mutual convenience prompted by extraneous considerations rather than any commercial expediency, the payment made was for a mere altruistic consideration with a view to avoid tax liability without any genuine pllrpose or reason. 9.1. Aggrieved by the aforesaid order of assessment, assessee preferred appeal before CIT(A). By the appellate 7 order dated 26.11.2002, CIT(A) held that all bad debts were not allowable deduction and accordingly upheld the view taken by the assessing officer. Likewise, preponing the default to bad debts after four months period was held to be unrealistic, not reflecting the correct profits of the business. Therefore, order of the assessing officer was upheld on this ground as well. Insofar commission on cancelled chits is concerned, CIT(A) affirmed the decision of the assessing officer and dismissed this ground of appeal of the assessee. Similarly, on the claim of royalty payment, CIT(A) held that assessee had failed to establish that the expenditure was for the purpose of business dictated by commercial expediency. Therefore, it was held that assessing officer was justified 1n disallowing the expenditure and adding the same to the income of the assessee. 9.2. Assessee thereafter preferred further appeal before the Tribunal which was registered AS I.T.A.No.1049/ Hyd/2OO2. This appeal was heard by the Tribunal along with the appeal filed by the assessee for the assessment 8 yea-r 1998-99 being I.T.A.No.471lHydl2OO2 and four other appeals 10. By the commor-I order dated 26.O7 -2004, the aforesard tr.l.o appeals of the assessee for the assessment year 1998-9!r and 1999-2000 were allowed in part. On the question of liability of bad debts, Tribunal noticed that there were two aspects relating to the claim; firstly, whether the claim for deduction as bad debt was allowable under Section 36(1)(vii) of the Act, and second was the point of time a1 rvhich such deduction becomes allowed. 10.1. Insofar first aspect concerned, Tribunal noted that Central Board of Direct Taxes (CBDT) had issued instruction No.1175 dated i6.05.1978 wherein it was clearly providt:d that if anv person organises chit funds and for this purpose brings the members together, administers the chit funds ar-rd thereby earns commissron etc, profits made by such a person is income from business. If for any specral reason, there is loss, then it is business loss. Normally, there should be no loss to the 9 organisers unless it takes over the iiability of some of the persons. In such a case, the unrecovered amount due from such persons will have to be treated as bad debts' Tribunal also took note of subsequent clarification of the CBDT dated 25.03.1992 reiterating the instruction No.1175. Thus, Tribunal following the instructions of the CBDT held that when the organiser takes over the liability of some of the members and when such amounts remained unrecovered, the same should be treated as bad debts. Instructions and clarification of CBDT clearly settles this issue. Tribunal also referred to certain judgments of the Supreme Court to highlight the binding nature of instructions and circulars issued by the CBDT on the revenue authorities and held that Revenue was bound to take the view that the amount recoverable from a defaulting ptized subscriber by the foreman is a debt' 10.2. As to the second aspect, Tribunal noted the amendment to Section 36(1)(vii) of the Act with effect from 01.04.1989. Applying the decision of the Gujarat ll t0 High Court in CIT v. Girish Bhagwatprasadl, Tribunal found that the claim for bad debt was made on completion of the chit. The decision u,hether the debt has become bad or not has to be viewed with a dispassionate attitude axd the fact that the assessee had not taken steps by way of legal proceedings against the debtor would not automaticall5, justify treating him as not entitled to write off the amount as a bad debt. Thereafter, Tribunal held that the amount of loss can definitely be a_llowed to the extent that the foreman has put in his funds and has come to a conclusion that his funds are not recoverable due to the account becoming sticky and to the extent he has taken an honest decision for writing of the same in his books. In other words, all debts can be allowed to the extent of the instalments defaulted by the prized, subscriber and written off as bad debt in the books by the assessee. But for the future instalments that are likely and yet to be defaulted no claim can be allowed. Assessing officer cannot replace the judgment of the t (2002) 256ITR :-72 II assessee. The fact that assessee has written off as bad debt when prized subscribers defauited for four consecutive months did not affect his claim as this was based on past experience of the assessee in his business. The Tribunal did not find anything amiss in adopting this policy. However, to allow the claim to the extent indicated above, Tribunal noted that fresh collection of facts and figures would be required. Thus, Tribunal set aside the order of the assessing officer and remanded the matter back to the file of the assessing officer for considering the claim afresh. 10.3. As regards commission on calcelled chits is concerned, Tribunal found that from out of the amount payable to the defaulting subscriber consequent to his replacement by another person, the assessee is entitled to deduct five per cent as commission. This amount has nothing to do with the regular commission income of the assessee. Tribunal accepted the stand of the assessee that the commission income accrues when the accounts had been finally settled to the defaulting non-subscriber. ). On this ground, Tribunal set aside the order of the assessing off:cer as affirrned by CIT (A) 10.4. Finally insofar rovalty payment is concerned, Tribunal was of the vieu' that the assessee had paid royalty to M/s.Shriram Chits and Investments I-imited for use of their name and logo in its chit business. Tribunal held that asscssee r.r,as cntitled to treat the royalty payment as a business expenditure. Such expenditure was held to br: revenue income and was thus allowed. I 1. Insofar assessment 1-ear 2000-01 is concerned, the appeal hled by the assessee being LT.A.No.1175/ Hyd/ 2003 'vvas allowed 1>v the Tribunal by following its previous orders. As to claim of bad debts, Tribunal heid that this issue r,r'as covercd bv its order dated 26.07.2OO4 passed 1n I.T A.No.471 I llyd l2OO2 for the assessment year 1998-99 filed by the assessee itself. As regards altowability of commission on carcelled chits, Tribunal followed its earlier decisiorr dated 26.07 .2006 passed in I.T.A.Nos.471 r:Lnd 1049 of Hyd/2OO2 for the assessment years 1998 99 and 1999 2000. Finally on the point of 13 liabitity of royalty payment, Tribunal a.lso followed its earlier order dated 26.07.204 in the appeal of the assessee itsetf for the assessment year 1999-2000 being I.T.A.No.1O49/Hyd/ 2002. Thus, appeal of the assessee was partly allowed vide the order dated 3O.O7.2OO4. 12. Against the aforesaid orders of the Tribunal, the three appeals have been preferred by the Revenue under Section 260A of the Act as mentioned supra. In a-11 the three appeals, Revenue has proposed the following questions as substantial questions of law: 1. Whether on the facts and in the circumstances of the case, when the assessee did not satisfy the conditions under Sections 36(1)(vii) read with Section 36(2) of the Act with regard to his claim of bad debts, whether the ltnding of the Tribunal dismissing the appeal preferred by the Revenue and upholding the claim of the assessee in toto, is sustainable in law? 2. Whether the failure of the Tribunal to note that the CBDT circular dated 16.05. 1978 relied on by the assessee with regard to its claim of deduction of bad debts, since cannot supplant to the statutory requirements under Section 36 of the Act, its (' l4 findings relying on thc said CBDT circular are sustainable in larv? 3. Whcn thc assessce is not doing the bankrng business and thc bad debts claimed by it were not sho\"r'n as income in thc profit ald loss account arrd it did not comply u'rth other condiLions under Section 36(1)(vii) read t'rth Section 36(2) ofthe Act, is il enl itled to clairn the same as deduction as erroneously hcld by thc Tribunal is sustainable in 1aw? 4. Whether the hndtr-rg of the Tribunal upholding the clarm of the assessce wlth regard to royalty payments without considering the concurrent - reasons o[ the authoritics rs sustainable in 1aw? 5. wh,rther the finding of the Tribunal upholding the claim of the assessee with regard to \"commission on remor,ed chits\" without appreciating the cot-tc urrent reasonitrg of t]le department is sustainatrle in law? 12.1. While question Nos. 1, 2 and 3 pertain to the claim of bad debts, question No.'l pertains to the claim as to royalty payments, whcreas question No.5 pertains to the claim of the assessee u'ith regard to commlsslon on removed or cancelled chits. t5 13. Mr. J.V.Prasad, learned Senior Counsel, Income Tax Department has assailed the orders of the Tribunal on all the three issues. Insofar the claim of bad debts is concerned, he submits that Tribunal did not appreciate Section 36(1)(vii) read with Section 36121 of the Act in proper perspective. ln support of such a contention, he has placed reliance on a recent decision of the Supreme Court in Principal Commisslouer of Income Tax v. Khyati Realtors Private Limited2. He submits that to allow the claim of bad debts, the same has to be written off as irrecoverable in the accounts of the assessee for the previous year; such bad debt or part of it written off as irrecoverable in the accounts of the assessee cannot include any provision for bad and doubtful debts made in the accounts of the assessee; no deduction is allowable unless debt or part of it has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off; and the assessee is obliged to prove to the assessing officer that the case satisfies the ingredients of ' 441 ITR t67 :2022 scc onLine sc Io82 16 Section 36(1)(vii) as well as Section 36(2) of the Act' Insofar the claim of commission on cancelled chits and royalty payment are concerned, learned Standing Counsel has supported the orders of the assessing officer as affirmed b1 the CIT (A). 14. Per contro., Mr. Easu'ar, learned Senior Counsel for the respondetlt/ assessee has argued in support of the orders of the Tribunal. He has submitted a compilation of judgments and instructions of CBDT to contend that findings of the Tribunal are valid and unexceptionable ' Similar claim lor deduction of bad debts in chit business has been allon'ed by the Nladras High Court and by the Karnataka High Court in se veral appea-ls He has also placed reliance on the decision of the Supreme Court in TRF Limited v. CIT3 as wcll as instruction No' 1 175 of CBDT which was subsequently clarified by CBDT on 25.03. 1992.ln support of his submission, learned Senior , t 323 I'I'n 391 t7 Counsel has also placed relialce on the decision of the Supreme Court in oriental Kuries Limited v. Lissaa 14.1. On the question of royalty payment, he submits that this issue is squarely covered by the decision of the Madras High Court in CIT v. Wavin (Iadta| Limiteds which was affirmed by the Supreme Court in CIT v. Wawln (Indlaf Limlted6 as well as by a recent decision of the Madras High Court dated 30.06.2022 in Shriram Transport Finance Company Limited v. Income Tax Oflicer (T.C.A.No.755 of 2009 and batch). He has also placed reliance on the decision of the Supreme Court in Hoada Siel Cars India Limited v. CIT7. 14.2. Insofar commission on removed chits is concerned, learned Senior Counsel adverted to and supported the decision of the Tribunal. He, therefore, submits that there is no error or infirmity in the view taken by the Tribunal. No substantial questions of law arise under the three appeals. o 1zoto1 to scc tlz 'iteet; r+: lrR 2El (Mad) o 230 ttn : t+ 'lzorzy t scc tzo l8 14.3. Mr. Easrvar. learned Senior Counsei also submits that I.T.T.A.No.199 of 2OO5 filed by the Revenue under Section 260A of the Act against the same order of the Tribunal d,ated, 26.07 .2OO4 in I T.A.No.506 lHydl1999 fot the assessment year 1995-96 was dismissed by this Court vide the order datecl 28.12.2022 as the tax effect in the said appetrl was found to be below the monetary limit for filing appeal in the High Court' Likewise, I.T.T.A.No.183 of 2005 filed by the Revenue against the same order of the Tribunai dated 26.O7 '2014 in I.T.A.No.327 lHydl2OOl for the assessment year 7997-98 was dismissed by this Court vide the order dated 28.12.2OO2 as the ta-x effec t in the said appeal was found to be belo\"r' the monetary limit for filing appeal in the High Court. He, therefore, seeks dismissal of the present three appeals on merit as rvell. 15. Submissions made bv learned counsel for the parties have received the due consideration of the Court' I9 16. Since LT.T.A.No.3O7 of 2005 was argued as the lead case, we may refer to the order passed by the Tribunal which has been assailed in the said appeal. 17. First, let us take up the issue of bad debts. As already noted above, there are two aspects insofar the issue of bad debts is concerned. The first issue is whether the claim for deduction as bad debt is allowable under Section 36(1)(vii) of the Act? The second aspect is the point of time at which such deduction is allowable. I7.I.On the issue of allowability of the claim as bad debt, Tribunal held as follows: 6.6 (i) We first examine the allowability of the claim as bad debt. The Honble Andhra Pradesh High Court .in the case of Goverdhau Upadhyan v. Aekelle Kameswar Rao (died) and others (1996 (4) ALT 1) held as follows: \"The relationshiP between the prized subscriber and the foreman is of a debtor and creditor when the prized subscriber receives the amount and undertakes to Pay the subsequent instalments due to the foreman.' A ful1 discussion on the issue is at pages 6 & 7 of the reported judgment wherein the judBTnent of the Honble Madras High Courr in the case of 20 Angammal v. R. Sankaranarayanan (AIR 1989 Madras 53) was rcferred to. IIr its;udgment i.n the case of Shriram Chits & Investments (P) Limited v' Union of India & others (AIR 19q3 SC 2063) the l{onble Suprcmc Court was t:onsidering the constitutional validity of an enactmrlnt and had no occasion to consider the relationship which arises between foreman and the prized subscriber when he defaults. The jurisdictional High Court judgment in strarght on this Point 6.6 (ii) l'hatever mav be the interpretation placcd by Courts on this issue. thc CBDT has placed its interpretation on the isslte. 6.6 (iii) The insLructiotrs issued by the Central Board of Direct Tzrxcs vide Instruction No l 175 under Order F.No.21i 78-lT (80) dated 16th May, 1978 read as under: \"(a) [f any person organizes Chit Funds and firr this purllose bt ings the members togelhor, adminislers thc Chit Funds anrl thercbv earns contmission etc. profits made bv such a person ts income from business and if ior any special reason there is loss then it is br-tsiness loss Normally, there should bt: no loss to thc orgainlscr lLnless he takes over the lialtilitl' of some oI thc members ln such nt due from A CA SE the unrecovered amou such members will have to be ted as bad clebtq and the test lo be adopted in usual business assessmcnl for the allowance of bad cletrts uoulcl be appirr:allle in such cases also 2t (b) [n 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 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. Subsequently the Board issued clarifrcation on a query from the Chief Commissioner of Income Tax II, New Delhi on 25th March 1992 which is as follows: Subject: CBDT Instruclion No. 1175, dated May 16, 1978 Liability to assessment - Profits made by subscriber of chit funds Question regarding. 1. I am directed to refer to your letter F. No.66(ll)/ HO/ proposal under Section 263/91-9214101, 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 of Soda Silicate & High Court in case Chemical Works (supra). The Board's instruction stands.\" I In this regarcl, it is clcarly stated that when the orgamze r takes over the liabilily of some of the memhers and whcn such amounts remain unrecovcred, the same should be treated as bad debt. Thus the circular of the Board settles the ltrst controvc rsv. 6.6 (iv) 'lhe Honble Su1;reme Court in the case o[ Ranadey Micro Nutrients v' CCE I$996 97 ELT 19] observecl as follorvs: 'One should ha 'o thought an officer of the Min isl4' oI Finanr:e lvould have greater respect for circulars such as these issued by the Board, rvhich also operates as these issucd by the Boarcl, which also, operates under the aegts of 1he Ministry of Finance, for it is the board rr hLclt is b-!- statute, entrusted with lhe task of classrfying excisable goods Lrnilbrmly. The wfrolc objective of such circrlars is to adopt a rtnilorm practice and to rnform the lrade ils to how a particular pro(luct will be treated for the purposes of excisc dut]'. ll docs rrot lre in the mouth of the Rcvenue to repudiate a circular issued by the Boarrl on thc basis ttrat it is inconsistent with a slatutory provision Consistency and discLpline arc oI far greater importance than thc 'r,inning or-losirrg o[ court proceedings \" 6.6 (v) The binding nalule of the circular issued by the Boarrl of Direct Trlxes on the Revenue ofhcials nced. rlot be reiteraterl. As the Central Board of Direct T:rxes has placed its interpretation on the 23 issue, the same has to be necessarily applied by all the income tax authorities though the interpretations may have otherwise been made by the courts and this proposition is laid down by the Hon trle Supreme Court in the case of Collector of Central Excise v. Dhiren Chemical Industries (259 ITR 554 at 557) wherein it is held as follows: \"We need to make it clear that regardless of interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding on the Revenue.\" Similar was the view of the Hontlle Supreme Court in the case of K.P.Varghese (131 ITR 597 (SC)). The Apex Court held as follows, at page 612 of the Report: \"The two circulars of the CBDT to which we have just referred are Iegally binding on the revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of sub-section (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri v, K.K.Sen, (AAC (1965) 56 ITR 198) and the other in Ellerman Lines LiErited v. CIT [(1971) 82 ITR 913] that circulars issued by the CBDT under Section 119 of the Act are binding on all ofhcers and persons employed in the execution of the Act a 1 ) ev('n if thev devialc lrom the provisions oI the 6.6 (vd The Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706 (SC)) at page 732 obscn'ed as follows: \"Ln the teeth r)I this clariflcation, the assessing ttfficer chose to ignore the guidelines arld sl)('r)l their time, talent and encrgv on lhe conscquential matters, ive think that the Ccntral Board of Direct Taxes was justificd in issuittg \"appropriate' direction vidr: Circular No 78() (see l2OOOl 243 ITR (St.) 571 under its por'''r'rs under Section 119, to set things on coLrrs(' bl etiminating avoidable wastage of timc, lillcnt and energr of the asscssing officer discha-rging the onerous pr.rblic duty of collection of revenue.\" All the arguments of lhc learned Standing Counsel on the isstte of CBDT t:trcular are answered by the Hon'ble Supreme Coult in this case (263 ITR 706) and thus we necd not spt:cifically deal wrth them \" 6.6 (vii) 1-hus the Rer enue has to apply the interpretiltion laid dor'.I.l by the Central Board of Direct Taxes on this isslle in the circular issued in this regard. Thus rvc hold that the Revenue is bound to take a view that the arnount recoverable from a dcfaulting prizccl subscriber by the foreman is a debt. 6.6 (viii) Various consistently taken benches of the Tribunal have asscsscc is maintrinabic as bad debt a r ie.,r' that a claim of the . It is not the 25 case of the Revenue that the transaction in question was not bona ftde or that the assessee has attempted to conceal taxable income or that this is a device for evasion of payment of tax. Only the legality of the claim under Section 36(1)(vii) and point of time of the claim are being disputed by the Revenue on the ground that this would lead to postponement of tax due to the government. Based on tJle foregoing discussion, we uphold the claim of the assessee and hold that the Revenue should follow the CBDT circular and take a view that the claim of the assessee is maintainable as bad debt. 17.2. Thus, Tribunal followed the decision of the jurisdictional High Court in the case of Goverdhan Upadhyan v. Aekelle Kameswar Raoe. Thereafter, Tribunal referred to and followed instruction No. 1 175 dated 16.05.1978 issued by the CBDT which was later on clarified by the CBDT itself on 25.03.1992. As per the instructions of CBDT, if any person organised chit funds and 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 ' teo6 1a; nLT t )6 it takes over the iiability of some of the members. In such a case, the. unrecovercd amounts due from such members would have to be treated as bad debt. The test to be adopted in usual business assessment for the allorvance of bad debts 'u'ould be applicable in such case also. In the clarification dated 25.O3-1992, CBDT reiterated the view taken in instruction No.1175 dated 16.05.1978. After referring to various Supreme Court decisions, Tribunal heid that instructions and circulars issued by CBDT are binding on revenue authorities' Therefore, there was no reason for the revenue authorities not to follou' the instructions of CBDT' Further, Tribtrnal obsen,ed that there was no reason to deny the claim of the assessee of bad debt. It is not the case of the Revenue that tl-re transaction in question was not bona fidet or that the assessee had attempted to conceal taxable income or 1.hat the claim was a device for evasion of palment of ta-x Only the legality of the claim under Section 36(1)(vii) of the Act and the point of time of that claim were being disputed by the Revenue on the ground that this would lead to postponement of tax due 27 to the government. On due consideration, Tribunal upheld the claim of the assessee and held that the Revenue should follow CBDT instruction and took the view that the claim of the assessee is maintainable as bad debt. 17.3. Insofar the second aspect is concerned, Tribunal noted that earlier the assessee was making claim for bad debts in respect of defaulting prized subscribers at the closure of the chit. Later on, the assessee claimed deduction in the year of default itself. According to the Tribunal, what was required to be considered was whether the assessee had taken an honest and bona fide decision. Tribunal noted that during the assessment proceedings assessee had frled details of the bad debts showing proof of suits frled as well as suits filed in subsequent years, the details of which were examined by the assessing officer. After considering the decisions of the Mumbai and Chennai Benches of the Tribunal in similar matters as well as the decision of the Gujarat High Court in the case of Girlsh Bhagwatprasad (supra), 28 Tribunal took the view that under Section 36(1)(vii) of the Act as it stood after the amendment with effect from 01.04.1989, u.riting off in the books of accounts of a bad debt is sufficient and the assessing officer has no option of deciding the year in u,hich the debt had become bad debt. 17.4. With regard to the case of assessee, Tribunal noted that for the assessment vears 1995-96 and 1997-98, the claim for bad debt was allowed by the first appellate authority i.e., CIT(A) against which Revenue was in appeal. Tribunal did not find any infirmity in the orders of the first appellate authority as the assessee had given details of the claim u,hich were examined by the assessing officer. Being a voluntary payment in discharge of a legal obligation, assessee would be entitled to have the amount cleducted as a bad debt in the year of write off. The decision whether the debt has become bad or not has to be viewed dispassionately. The fact that the assessee had not taken steps by way of iegal proceedings against the debtor would not automatically justify the 'I 29 finding that he would not be entitled to write off the amount as a bad debt. Honesty of the assessee is relevant. What is required to be seen is whether a bona ,fide assessment has been made by the assessee to the effect that realisation of the debt is not possible' Revenue cannot insist on any demonstrable and infallible proof that the debt has become bad debt. For the assessment years 1995-96 and 1997-98, the view taken by the first appellate authority was affirmed and Revenue's appeals on the issue of bad debts were dismissed. 18. Coming to the assessment years 1998-99 and L999-2OOO, Tribunal was of the view that the issue was the sarne. Only difference was that in the earlier assessment years, assessee was making the claim of bad debt in respect of the prized subscribers on the closure of the chit i.e., the year in which the chit was closed' From the assessment year 1998-99 onwards, assessee made its claim after the default was made by the prized subscriber in payment of four instalments. Tribunal held as follows: _10 6.6 (x\"-i) Now we consrder the appeals of the assessec for the assessmcnt years 1998-99 and 1999-2000 on the same issue. The crucial difference in the <:laim of the asscssee for these two years is that tht: assessee s,as r:arlier making thc clarm for such b:rd debt in respcct of the prized subscribers on the close of the chit i.c., the year in which tJre chit is closed. From thc assessment year 1998-99, the asst:ssee made rts i:laim after default was made by the prized subscnber in payment of four instalmcnts. 6.6 (xvii) Though we have held that the decision of the asscssee to write off a particular sticky debt cannot be questioned by the Revenue, when it is a honest