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

[ 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 <lecision and though we have given a finding that the dccisron is a honcst decision viewed from a businessman's point ol ric\:, we observe that there is another angle to thls issue. The clarm proceeds on the premises that thc money lifted by the prized subscriber at arr au(t1on is out of the funds plougherl in due to thc lcga1 requirements as the foremal. This premi-^es is not true. The chit contributions of the other subscribers are handed over to the prized subscriber on an auction after the foreman deducts his commission. 6.6 (xviii) The funds of the foreman are involved only to the cxtent of defaults both by the prized and non- prized subscribers. Thc clarm of the foreman to the extent h1s funds are in'.'olved can be considered as an allowable claim. A luture liability that ma1. arise

3l to the foreman due to continuing default in paytng instalments by a prized subscriber cannot be claimed at this point of time. This factor carr best be explained by the following example. 6.6 (xix) In a chit there are 24 subscribers and if each one of them contributes Rs.lO0 per month for 24 months ald in the 2nd month of the chit one subscriber bids and ta-kes Rs.24O0 - the loss of Rs.96O - commission @ 5% Rs. 12O i.e. Rs.1,320/- and defaults for four consequent months and there is no other defaulter, the money put in by the foreman is Rs.40O against Rs. 1,32O/ - due from the defaulting subscriber. So against Rs.400 put in by the foreman due to lega.l requirements, at the end of 4 months. he is not entitled to write off Rs. i.320/- and claim the same as a bad debt. This is not permissible. ln other words, the foreman in this case would be writing off a future possible liability of Rs.92O that may or may not arise. A loss may be claimed without bringing in funds. This factor is also explained in the Technical Guide on Accounting and Auditing for Chit Fund Business published by the Research Cornmittee of the Institute of Chartered Accountants of India, New Delhi which at page 19 under the head Accounting Standard (AS) 4, Contingencies and Events occurring after the Balance Sheet date at para 3.11 and 3.12 read as follows: '3.11. In a Chit Fund Business, it is possible that some prized subscribers may not pay their instalments aftcr receiving the prized amount. The toss arising on account of non-payment of instalments by a pr2ed subscriber is borne by the

1) Forenran. Accordingll', in respect of the instalments which have become cltrc on the balance sheet date br-rt not by the prized st]bscribers as well as the instalments which have not become due on the balanr:e sheet date bul the prized subscriber has defaulted in respect of thc instalments which have become due, a proviston has to be created or a contingent liability has to be discloscd keeping in vicw the requiremenls of paragraphs 10 and I 1 of AS 4 reproducecl belou' "10. The amoulrt of a contingent loss should be providerl for by a charge in the statement of Profit and loss if: (a) it is probable that future events rvill confirm that, after taking into account any related Probable recovery, an asset has br:en impaired or a liability has been incurred as at the balance sheet date, alrd (b) a reasonablc' estimate o[ the amount oI the resulting loss can be made 11. The existence of a contingent loss should be disclosed in the financial stat.ments if eithcr of the conditions in paragraph l0 is trot met, unless the possibility of a loss is remote." 3.12. The amounl of the provision for loss in respect of the defaultLng prized subscribers can be estimated on the basis of, amongst other things, the past experience oI the enterprise, information about the ability of the individual subscribers to pay, zrnd the apl)raisal of the uncollectibles based on the current business envirottment of the business of the rel(\.ant subscribcrs For instance, n'here lhe

33 past experience of a particular Chit Fund business indicates that the prized subscribers do not generally pay after a continuous default of paying, say, three instalments, it may be appropriate to make a provision for the entire amount outstanding. [n estimating the amount of the provision for loss, the realisable value of the security lodged with the Foreman should also be considered." 6.6 (xx) On these facts a claim of loss without corresponding . inflow of funds from the foreman, which is a definite possibility in this method of claim, carrnot be upheld. The amount of loss cart defrnitely be allowed 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 off the same in his books. In other words, bad 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 insta.lments that are likely and yet to be defaulted, no claim can be allowed. The assessing officer calnot replace the judgmcnt of lhe businessman. The facts that the assessec has written off as bad debt when prized subscribers defaulted for four consecutive months does not to our mind aJIect his claim as this is based on past experience of ttre assessee in his business and is in tune with the current RBI norms for NBFCs as well as for banking comparries. These decisions have become a

l4 prudcntial norm in the hnancial sector. Thus there is nothing u.rong itr adopting this guide[ne or policy. 6.6 (xxi) We have to mention that this issue has not come r-rp during the course of arguments of the case. If the assessee has made the claim as indicated above. no prejudice would be caused to him b1 setting asjde the matter. Similarly no prejudir:e woutd be caused to revenue on this count as it czrn examiue the claim afresh. To allow the claim to the extcnt inclicated above fresh collcction of facts and hgures ant: requrred and thus we set asrde the issue to thc file of the assessing ofhcer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for tJ e assessment years 1998-99 ar,d \999 -2OO0 on this ground of allowab ity' of bad debt is allowed for statistical purposes. 18. i. Thus, the view taken by the Tribuna-l was that bad debts could 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 likel1' and yet to be defaulted no claim can be nllowed. Hou'ever, Tribunal was of the view that full facl s and figures were , not available and therefore, the rnatter rl,as remanded back to the file of the

35 assessing officer for considering the claim afresh. Accordingly, the orders of the assessing officer for the assessment years 1998-99 and 1999-2000 on the issue of allowability of bad debt as affirmed by the CIT(A) were set aside and the matter was remanded back to the f,rle of the assessing officer for consideration afresh. 19. We may now advert to Section 36(1)(vii) of the Act which is relevant. It may be mentioned that this provision had undergone amendment with effect from 01.04.1989. Prior to 01.04.1989, Section 36(1Xvii) read as under: 36. Other deductloas:- (1) The deductions provided for in ttre following clauses shall be allowed in respect of t}re matters dealt with therein, in computing the income referred to in Section 28- (i) to (vi) -. (vii) . subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is established to have become a bad debt in the previous year. After the amendment with effect from 01.04.1989, Section 36(1)(vii) now reads as follows: 36. Other deductions:- (1) The deductions provided for in the following clauses shall be allowed in

l(r respecl of the matters dealt with therein, in compuiing the income referred to in Section 28- (ii to (vi) .- (vii) subject to thc provisions of sub-section (2), thc amount o[ any debt or part thereof, which is written off as irrecoverable in the accounts of the assessoe for the previous year'. 19. 1. Thus, what is noticeabie is that prior to the amendment, the amount of any debt or part thereof which was estabiished to have become a bad debt in the previous year was al-r allowable deduction while computing the income in terms of Section 28 of the Act However, this was subj ect to sub-section (2) of Section 36. After the amendment, the requirement of establishing a debt as a bad debt has been done away with. Whereafter, the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year becarne an a-llowable exemption 19.2. This provision, pre and post amendment with effect from 01.04.1989 was considered by the Supreme Court in tnr Limited (supra). Whereafter, it was held that after

37 01.04.1989 it is not necessary for the assessee to establish that the debt in fact has become irrecoverable' It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee 20. Before we proceed further it would be apposite to advert to sub-section (2) of Section 36 and Section 37 of the Act 20.1. As per sub-section (2) of Section 36, in making any dediction for a bad debt or a part thereof, the provisions contained therein shall be applied, such as, no such deduction shall be allowed unless such debt or part thereof 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 or of an earlier previous year or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee; if the amount ultimately recovered on arry such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the dehciency sha.ll be

i r,t deductible in the previous year in which the ultimate recovery is made; any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous order, but the assessing officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; etc. 20.2. Thus, what sub-section (2) of Section 36 says is that the deductions claimed under sub-seqtion (i)(vii) of Section 36 w,oulcl be subject to fulfilment of the conditions mentioned in sub section (2). 21 . On the other hand, Section 37(l) provides that any expenditure other than capital expenditure or persoual expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in calculating the income chargeable under the head "profits and gains of business or profession'.

39 22. In oriental Kurles Limited (supra), the issue which had arisen for consideration before the Supreme Court was with respect to the jural relationship between a chit fund entity and the subscribers created by the chitti agreement; the related question was whether it is a debt 1n praesenti or a promise to discharge a contractual obligation. After an elaborate analysis, Supreme Court has held that the relationship between a chit subscriber and the chit foreman is a contractual obligation which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consotidated amount of future subscriptions from the defaulting subscriber in a lump sum. Supreme Court has held as follows: 10. We do not agree with the view expressed by the Division Bench. When a pized subscriber is allowed to draw the chit amount, which is in the nature of a grant of a loan to him from the common fund in the hands of the foreman, with the concessional facility of effecting repalrnent in instalments; this is subject to the stipulation that the concession is liable to be withdrawn in the event of default being committed in payment of any of the instalments. The chit subscriber at the time of subscription, incurs a debt

+0 which rs payable in instalments. If a subscriber is permittcd to withdrau' the collected sum on his turn, \vithout being llound to pay the future instalments, it rvould jcopardise the interest of all other srrbscribcrs, ar't<l thc entire mechalism of the chit fund system would collaPse. 1 1. A pr:nrsal of thc pr-ovisions of Chapter V of the 1982 At:t makes it clcar that if a prized subscriber defaults in making Pavmen t of an instalment, the chit forr:man has thr-' rigl'rt to recover the amount covering all future subsr:riptions from the defaulting subscriber as a consolidated amount. Section 32 of the 1982 Act emporvcrs the foreman to recover the consolidated payment of all future subscriptions forthwith in tl-e case ol' a default. Chapter V of the Chit Funds Act, 1982 prescribes the rights and duties of prized subscritrers. Sections 31 to 33 in Chapter V read as [o1]ou's: "3L. Prized subscriber to Juntish securitg.-Evcn' prrzeri subscriber shall, if he has not offered to.le(luct the amount of all future subscriptions lrom the prize amount due to him, lurnish, atrd a foreman shall take, suffrcient security for thc due payment of all luture subscriptions :rnd, i[ the foreman is a prizt:d subscriber, l.re shall give security for thc due Payment of all the future subscriptions to thc satisfaction of the Registrar. 32. Prized subscriber to Pag subscriptions regularlg.-Euery prized subscnber sirall pQU his subscriptions reguiarlg on tLte (1olt's end times and qt the

4l place mentioned in the chit agreement and, on his failure to do so, he shall be liable to make a consolidated pagment of all the future sub scip tions forthuit h. 33. Foreman to demand future subscriptlons by writaen nottce.-(l) A foreman shall not be entitled to claim a consolidated. payment from a defaulting prized subsciber under Section 32 unless h.e makes a demand to that elfect in writing. (2) Where a dispute is raised under this Act by a foreman for a consolidated payment of future subscriptions from a defaulting prized subscriber and if the subscriber pays to the foreman on or before the date to which the dispute is posted for hearing the arrears of subscriptions till that date together with the interest thereon at the rate provided for in the chit agreement and the cost of adjudication of the dispute, the Registrar or his nominee hearing the dispute shall, notwithstanding any contract to the contrary, make an order directing the subscriber to pay to the foreman the future subscriptions on or before the dates.on which they fall due, and that, in case of any default of such payments by the subscriber, the foreman shall be at liberty to realise, in execution of that order, all future subscriptions and interest together with the costs, if any, less the amount, if any, already paid by the subscriber in respect thereof: Provided that if any such dispute is on a promissory note, no order shall be passed under this sub-section unless such promissory note expressly states that the r

12 anount due un(lcr the promissory note is towards the paymenl oI subscriptions to the chit. (.j) Any persor.r rvho holds any interest in the property fu|nishcd as security or part thereof, shall be entitled to make the payment und er su b-section l2). (4) All consolirlated payments of future subscriptions rcaiised by a foreman shall be cleDosrted b-y him in an approved bank me ntioned in the r;hit agreement before the darc of the succe<:ding instalment and the arrount so depositt:d shall not be withdrawn ex( cpl for Pal'm('nt oI fi]ture subscriptions' (5) Whcrc an\ property is obtained as ser uriry in Iieu ot 'hn consolidated payment of futurc subscriptions, it shall remain as security for the due payment of future sul)scriptions. " (emphasis suPPlied) 12. The object is to empower the foreman to recover the arnount in a lump sum from a defaulting subscriber, so as to sc'curc the interest of the other subscribers, artd ensure smooth functioning of the chit lun(i. Such a pror ision would not amount to a penaltY. 13. The rclationship 1;ets'cen the foreman and the subscribers in a chit fund transaction is of such a nature that there is a necessity and justifrcation for making stringcnt provisions to safeguard the interest of the other sttbscribers, and the foreman. If a prized subscriber dr:faults in payment of his subscriptions, the foremal will be obliged to obtain

43 the equivalent arnount from other sources, to meet the obligations for payment of the chit amount to the other members, who pize the chit on subsequent draws. For raising such an amount, the foreman may be required to pay high rates of interest. 14. The stipulation of empowering the foreman to recover the entire balance anount in a lump sum, in the event of default being committed by a prized subscriber, is to ensure punctua-l payment by each of the individual subscribers of the chit fund. Without punctual paJrments, the system would become unworkable, and the foreman would not be in a position to discharge his obligations to the other members of the chit fund. 15. In view of the aforesaid discussion, the relationship between a chit subscriber and the chit foreman is a contractua,l obligation, which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum. 23 . In Khyati Realtors Private Limited (supra), on which much reliance has been placed by Mr. Prasad, learned Standing Counsel, a three-Judge Bench of the Supreme Court took the view that merely stating a debt as an irrecoverable write off without appropriate treatment in { t the accounts as well as known compliarce with the

.1+ conditions mentioned in Section 36(1)(vii) and 36(2) of the Act would not entitle the asscssee to claim a deduction as a bad debt. Referring Lo the earlier decision of the Supreme Court in TRF Limited (suPra), which had a corarn of two Hon'ble Judges, Supreme Court in Khyati Realtors Private Limited (supra) observed that in TRF Limited (supra) the Court did not examine the impact of Section 36(2). According primacy to its decision in Southern Technicalities Limited v' Joint CITe and Catholic Syrian Bank Limited v. clTlo, Supreme Court held as follows: - 18. It is r:vident from the above rulings of this court' that: (i) The arnount of ar-ry bad (lebt or part thereof has to be written-off as irrecovcrable in the accounts of the assessee for the Prcviot ts vearl (ii) Suctr bad debt ol pa-rt of it written-off as irrecoverable in the accout.tts of the assessee cannot include any prouision for bad and doubtful debts made in lhe accounLs of the assessee; (iii) No clcrluction is allou'able unless the de bt or part of it "has been taken into account in computing the incone o./ lhe assesse e of the preuious gear in '(zoto):zo ITR 577 (sc) 'n (2012) 343 lrR 270 (sc) \

45 uhich the amount of such debt or part thereof is uitten off or of an earlier preuious geor", ot represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee; (iv) The assessee is obiiged to prove to the AO that the case saLishes the ingredients of Section 36(l)(vii) as well as Section 36(2) o[ the Act. 23.1. However, Supreme Court has clarified that even if a claim for deduction under Section 36(1) is not allowed, the possibility of its exclusion under Section 37 cannot be ruled out in as much as the heads of expenditure that can be claimed as deduction are not exhaustive, that being the precise reason for existence of Section 37. Therefore, in a given case, even if the expenditure relates to business and the claim for its treatment under other provisions are unsuccessful, application of Section 37 is per se not excluded. 24. After a thorough consideration, we are of the view that decision of the Supreme Court in Khyati Realtors Private Limited (supra) does not rea-lly undermine or rr render the decision of the Tribunal unsustainable

.16 Tribunal has given good reasons as to why the claim of bad debt is an al1ou'able deduction under Section 36(1)(vii) of the Act. That apart, Tribunal 1s6k fhs view that bad d ebts can be allowed to the extent of the instalments clefaulted bv the prized subscriber and written off as bad debt in the books by the assessee, but at the same time clarifying that for future instalments that are likely and yet to be defaulted no claim for bad debt can be al1owed. Horvever, to allow such a claim to the extent indicated, Tribunal observed that more facts and figures rvere required and therefore, relegated the matter back to the file of Lhe assessing officer. We see no error or infirmity in the vieu' taken by the Tribunal on the issue of bad debts covering both the facets. 25. That brings us to the next issue as to royalty payment. While deleting the disallowance made on this count by the assessing officer and allowing the claim of the assessee. Tribunal took note of the fact that the only ground for the disallou'ance was . that in the prior assessment yea-rs no such payment was made. However,

47 the undisputed fact is that the logo and the words 'shriram Chits' is owned by M/s.Shriram Chits and Investments (Private) Limited. Assessee had used the logo and the above words while carrying on its business. 25. 1. This issue is no longer res integra. In the case of wavin (India) Limited (supra), Madras High Court examined such a claim in the context of amount paid to a foreigl collaborator as contribution towards research and development expenditure. Madras High Court held that such expenditure could not be regarded as capital expenditure. It being a business expenditure, assessee was entitled to claim deduction. This decision of the Madras High Court was upheld by the Supreme Court in Waven (India| Limited (supra) wherein Supreme Court agreed with the reasoning given by the Madras High Court while upholding the expenditure to be of revenue nature. The expenditures were incurred to obtain benelit of development and research made by the foreign company; such an expenditure could not be said to be for I acquisition of any asset at all.

.18 26. In Honda Siel Cars India Limited (supra), Supreme Court once again examined the distinction between capital ancl revenue expenditure. Referring to its earlier decision in cIT v. Ciba of India Limitedrr, Supreme Court' held that royalty paid for use of technical information or knowhow woLlld be in the trature of revenue expenditure as no enduring benefit is acquired thereby' Supreme Court held as follows: 19. If the aforesaid fhclors a-re taken in isolation, probabll' the clarm of tlle assessee may be justifred Distinction between capital arld revenue expendilure with relcrence to acquisition of technical information nnd know-how has been spclled rut b1' this Court [Ed.: A few such cases are CtTv. wavin (I) Ltd., (1998) 8 SCC 585, Jonas Woodhead & Sons Ltd. v. CIT, (1997) 10 SCC 119; ald Alembic Chemical works co. Ltd. v. CIT, (1989) 3 SCC 329 (Alembtc ca.se discussed below).] as well as thc High Courts in serics of cases. Prima-ry test which is adopted to differenLiate between capital and rer.enue expenditure remains the same, namely, the cnduring nature test. It means where the expenditurc is incurred which gives enduring beneht. rt wrll be trcatcd as capital expenditure. In contradisti;rction to thc cases where expenditure of concurrent artd reoccurrtng nature is incurred and " AIR 1968 SC I I3l :0e68) 69 It'R 691

49 the latter would belong to revenue field. Technical information and la:row-how are intangible. They have different and distinct character from tangible assets. When the expenditure is incurred to acquire a tangible asset, determination as to whether the sard acquisition of tangible asset is of capita.l 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 ttreir unique characteristic, the questions that need to be posed for determining the narure of such al 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 tralsferred but the arra.ngement facilitates grant of licence to use those rights for a limited purpose or [mited period, the Courts have held that in such a situation, the roya-lty 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 of India Ltd. (AIR 1968 SC I 131 : (1968) 69 rTR 692) 26. 1. This decision of the Supreme Court has been followed by the Madras High Court in shrlram Traasport Flnance company Limlted (supra). Madras High Court has r , held that royalty payment made by the assessee for use (

-i0 of logo or trademark lor a particular period for improvement/ expansion o[ business would qualify AS revenue expenditure. Thus, Madras High Court held as follows: 7. i 1 . Thus, it is crysta1 clear from the aforcsard decisions of t}.re Hontrle Supreme Court that royalty pa)'mcnt rnade by the assessee' for use of logo or traclemark for a particular period, for improvement/ cxparsion of business, would qualify as revenue expcnditurt:. 1'he judgment in Honda SieI Cars lnrlia Limited {su pra) is of no assistance to the revenue as in that czrsc, the technical know-how was sharcd pursuanl to technical collaboration agreement and not only tcchnical information was transferlerl, but on fielcl complete assistance was given p,]rsuartt to thc joint venture agreement' Further, in that casc, 1he very same business was set up by thc transferee company. However, in the present ,:ase, it is not tlle case. The grant of licence to use the intcllcctrtal property of the parent comp.rnJ. for limited I)urllose, cannot be treated as transfer of owncrship or tit1e. Though t]re licence is renewed periodically, it by itself does not guarantee the rencwal. Simila.r h, the parent company is always at liberty to not onlv calcel the license, but also grants such rights to any other organization' Further, the findings of the Apex Court in the above judgmenl that when the intellectual property right is not transferred, but pcrmitted to be utilized for a particular- period. u'oulcl have to be treated as

5I revenue expenditure, on application to the facts of this case, tilts the balance in favour of the assesses. 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 asessees, the benefit granted by the licensor is not enduring in nature in tJ.e present case. The assessing officer without appreciating the terms of the licence agreement ald ascertaining the nature of the expenditure incurred by the assessee companies, disallowed the deducLion of royalty payment and allowed the depreciation at 25o/o 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 paJment of royalty is treated as revenue expenditure, automatically, it goes without saying that the assesses would be entitled to IOO% 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 ASSESSCCS. 27. We are in respectful agreement with the view I expressed by the Madras High Court as extracted supra. I

52 Therefore, we have no hesitation in ansu'ering this issue in favour of tl-re assessee 28 . The last issue is tl-rat of the claim relating to commission on removecl chits. Tribunal decided this issue in favour of the assessee. This was what the Tribunal held: 6.3. Time of recognition of income from Commisslon on cancelled chits: This issue is involved in thc assess(lc's appcals for assessmet-rt years 1 99t3-99 and 1!)9!)-2000. The dispute is about time o[ accrual of thc itrcome by u'ay of comr-nission in respect o[ cases s'here defaulting non-prized subscribers who are removed from the chit and in whose place t-rew subsr--ribers are substituted On a careful considcration of the issue, we frnd that from out of the iunount that is payable to the defaulting subscribcr consequent to his replacement by another person the company is entitled to deduct 5%o as commission. Tl]is )ras nothing to do with the regular t ornmission income of the assessee Thus the stan d of the asscssec that the commission income accrues whelr tlle accounts have been linally settled to the defaulting non-subscriber to our mind appeaJs 1o be thc corre(rt l)osition. Otherwise in case of a non-prized subscriber the amount of 57o would be dedu<:ted. from tl.re a,nounts due to him much belore the seltlcment ()l llis account and recognized as income by way of trilllsfcr from current liabilities

53 to proflt and loss account. Reliance was placed by the Revenue on the Special Bench decision of t1le Tribuna-l il the case of shrLam chits aad ltrvestrEent Prlvate Linited, chenrai v. Acfi 1263 ITR (AT) 651. This decision is not applicable to the facts of this case. The commission/remuneration to the foreman in that case was sought to be recognized on the compleLion of chit method and had nothing to do with ttre type of additional commission receivable in case of substutution of a subscriber as in this case. The nature of income in both these cases are different. The further commission of 57o receivable from a defaulting subscriber consequent to his removal a-rrd substitution on a full and linal settlement of a defaulLing subscriber account is recognized as income on the finalization of the issues. This is not an unacceptable proposition. We agree with the submission of the learned counsel for the assessee, which are atpara4.Il of this order. In the result, this ground of appeal of the assessee is allowed. 28.1. Thus, according to the Tribuna,l, from out of the arnount that is payable to the defaulting subscriber, subscription to his replacement by another person, the assessee is entitled to deduct 57o as commission. This commission arnount has got nothing to do with the regular commission income of the assessee. Stand of the assessee that the commission income accrues when the

To, 51 accounts have been finall1, settled with the defaulting non-subscriber is the correct position 29. We are in agrcement r.r,ith the view expressed by the Tribunal on this isstre- Tlrus. this issue is also answered in favour of the assessee 30. Therefore, on a thorough cxamination of all aspects of the matter. \\re ans\4rer- the questions proposed by the Revcnue as substantial q uestions of law against the Revenue and in favour of the assessee 31. Resuitar tiy, the appcals fail and are accordingly dismissed. No costs //TRUE COPY// ---.4 Sd/- B.S.CHIRANJEEVI JOINT REGISTRAR /c -lD) SECTION OFFICER 1. The lncome Tax Appellate Tribunal, Hyderabad Bench ' B', Hyderabad 2. The Joint Commissioner of lncome Tax (Assts') Special Range-4 Hyderabad' 3. The Commissioner of lncome Tax (Appeals)-lV, Hyderabad 4. The lncome Tax Offlcer, Hyderabad. 5. One CC to SRl. J V. PRASAD (SC FOR INCOIME TAX) DEPT , [OPUC] 6. One CC to Mr. MAHESWARA RAO KUNCHEAM, Advocate [OPUC] 7. Two CD CoPies D

HIGH COURT DATED:09/06/2023 COMMON JUDGMENT J ITTA NO: 307 OF 2005, ANO 92 and 154 of 2006 DISMISSING THE APPEALS y1f. S f A14: r\') (i o 2 B JlJil 2$n (', il + G: ( tl rr"\ {!. 4d,Ns