2012-VIL-779-MAD-DT

MADRAS HIGH COURT

Tax Case (Appeal) Nos. 996 to 998 of 2005

Date: 02.04.2012

COMMISSIONER OF INCOME TAX

Vs

SHRIRAM CHITS AND INVESTMENTS LTD.

For The Petitioner : T. RAVIKUMAR And V.D. Gopol

BENCH

CHITRA VENKATARAMAN AND K.RAVICHANDRA BABU, JJ

JUDGMENT

A perusal of the order of the Tribunal, particularly para 22, shows that the contribution of the assessee as a foreman in the place of a defaulting subscriber was in the interest of managing the business and to protect the interest of the non -prized subscribers. Hence, being a pure commercial prudence to take note of the business requirements, the said payments were made. Thus, the payment made has to be treated as a loss or an expenditure. In so holding, the Tribunal referred to the decision in CIT v. Natnitcd Bank Ltd. : (1966) 62 ITR 638 (SC). The Tribunal further pointed out that whenever the amount is recovered either by substituting the defaulting subscriber or by enforcing the security offered by the prized subscribers, the same was admittedly offered for taxation in the year in which it was recovered. Thus, the Tribunal confirmed the view of the CIT(A). Aggrieved by this, the Revenue is on appeal before this Court.

3. Learned standing counsel appearing for the Revenue pointed out that considering the decision of the apex Court in CIT v. Nainital Bank Ltd. (supra), when the nature of business of the assessee is not one of money -lending, it stands to reason that the claim of the assessee as regards bad debt in respect of the payment made to make good the default of the prize winner, could not be brought under s. 36(2) to fit in with the understanding of bad debt. In this connection, he placed reliance on the decisions in CIT v. Sahib Chits (Delhi) (P) Ltd. : (2010) 328 ITR 342 (Del) as well as Suman Savings & Investments (P) Ltd. v. CIT : (1998) 229 ITR 727 (AP), only to impress on the nature of business carried on by the assessee.

4. Countering the claim of the Revenue and supporting the order of the Tribunal, learned counsel appearing for the respondent took us through the decision of the apex Court in Shriram Chits & Investments (P) Ltd. v. Union of India & Ors. : AIR 1993 SC 2063 and the context in which the said decision was reached as well as the decision of the apex Court in CIT v. T. Veerabhadra Rao K. Koteswara Rao & Co. : (1985) 155 ITR 152 (SC) as regards the allowability of a claim under s. 36(2) made by a company and submitted that when the assessee company had subscribed to the defaulted instalments, this was in tune with the provisions of the Chit Funds Act. Taking us through the provisions of law, particularly ss. 21 and 24 and the balance sheet of Hire assessee herein, he pointed out that the amount paid by the assessee has been showed on the liabilities side. It is further stated that whenever any recovery is made, the same was offered as income in the relevant assessment year and in any event, having regard to the circular issued which had been considered in the decision in CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. (supra) and subsequent thereto, no exception could be taken to the order passed by the Tribunal. Incidentally, he also referred to the fact that while the Tribunal had agreed with the assessees claim that the payment was only to have the business run, it had not, in any manner, raised any question on this aspect. On the other hand, it confined its consideration only as to whether the claim was to be treated as a bad debt. Thus, he submitted that if the claim was not to be treated as bad debt on the understanding that there was no money -lending business by the assessee, nevertheless, having regard to the contractual obligation or the contractual character of the assessee advancing the amount as well as the statutory obligation made under the Chit Funds Act, the assessees claim has to be allowed as a business loss.

Thus the order of the Tribunal as well as the order of the CIT(A) had considered elaborately on this issue and no exception could be taken on this. In any event, he pointed out that the Department having accepted the position during 1990 -91 and 1991 -92 and the order in the appeal preferred by the Revenue before the Tribunal in ITA Nos. 1128 and 1129 of 1995 having thus attained finality and no appeal had been preferred against that order, there are no special circumstances to distinguish the present case with that of the earlier decision of the Tribunal, to take a different view. In the 'circumstances, he submitted that the appeals be dismissed.

5. Heard learned counsel appearing on both sides and considered the material placed on record.

6. In order to decide on the rival contentions made, it is necessary to get into the decision of the apex Court in Shriram Chits & Investments (P) Ltd., v. Union of India & Ors. (supra), a decision which dealt with the vires of the Chit Funds Act. The present assessee company, apart from similarly placed chit companies, challenged the validity of the Chit Funds Act, that the regulatory measures over the business of the chit companies were in violation of Art. 19(1)(g) of the Constitution of India. While upholding the provisions of the Chit Funds Act, in the decision in Shriram Chits & Investments (P) Ltd. v. Union of India & Ors. (supra), the apex Court pointed out that the dominant purpose of the Act is to regulate the chit, control the activity of the foreman and protect the interests of the subscribers. The apex Court further pointed out that the pith and substance of the Act was to deal with special contract and consequently, it fell within Entry 7 of List III of the Third Schedule to the Constitution. In para 13 of the judgment of the apex Court, it pointed out that s. 6 of the Act specifically refers to chit agreement to be entered into between the subscribers and the foreman. The Act provided for, how the contract has to be implemented and acted upon between the parties to the contract and that it could not be treated as a money -lending business. The agreement entered into as per s. 6 provides for distribution of the chit amount. The foreman brings the subscribers together. The Act provides for payment of commission for the services rendered by the foreman and the foreman does not lend any money belonging to him. The foreman is responsible for regular collection of subscriptions from a widely scattered body of members. He has to conduct the draws or the auction and maintain accounts. He is under obligation to pay the prize amount on the due date whether or not all the members have paid their subscriptions. In case of defaults, he had often to make good the deficit out of his own resources. If the prized member defaults in his instalments, litigation follows to recover the amount. If the defaulter is a non -prized member, the foreman has to find out a suitable substitute or, in the alternative, has to take over the chit himself and continue the business. Noting the obligation of the foreman, the apex Court pointed out, that the dominant purpose of the Act being to regulate the chit, control the activity of the foreman and protect the interest of the subscribers, the legislature had brought in this special kind of contract. Thus holding that the provisions of the Act are regulatory in nature, the apex Court further pointed out that the Act intends to avoid fraud played on the subscribers by delaying the payment. Dealing with the nature of chit agreement, the apex Court referred to the decision of the Kerala High Court in Janardhona Median v. Gangadaran : AIR 1983 Ker 178 (FB), holding that the chit transaction is not a money -lending transaction within the meaning of Money Lenders Act and there is no creditor and debtor relationship, for the purpose of it being treated as a money -lending transaction.

7. Keeping this declaration of law, when we look into the provisions of the Chit Funds Act, one may note the obligation of the foreman, particularly as given under s. 21. While enumerating the rights of the foreman, the Act also takes care to impose an obligation on the foreman to do all acts which may be necessary for the due and proper conduct of the chit under sub -cl. (f) which empowers the foreman to substitute "subscriber" in the place of "defaulting subscriber". As far as the duties of the foreman as enumerated under s. 22(2) of the Act are concerned, the Act stipulates that in the event of default by a prized subscriber, in respect of the prize amount due in respect of any draw remaining unpaid until the date of the next succeeding installment, the foreman shall deposit the prize amount in a separate account in an approved bank mentioned in the chit agreement. The Act also provides that where the prize subscriber does not collect the prize amount in respect of any instalment of a chit within a period of two months from the date of the draw, it shall be open to the foreman to hold another draw in respect of such instalment. The section also provides that the foreman may appropriate to himself the interest accruing on the amount deposited under the second proviso to sub -s. (1), for which he is entitled.

8. As far as the balance sheet of the company is concerned, s. 24 enumerates what is required to be stated in the balance sheet. The rules therein provide for the format of the balance sheet. A reading of the schedule, as against the assets side, shows loans and advances to subscribers as well as the liabilities as relatable to non -prized subscribers. The assets. side also contains receipt of interest and such other amount which can be transferred to fall under the caption of assets. In terms of the provisions thus prescribed in s. 24, the balance sheet and P&L a/c clearly showed the amount intimated by the company as against the default committed by the chit holders and the balance sheet was also audited by the chartered accountant qualified to act as auditor under the Companies Act. In the context of the payment thus made, the question that arises herein is as to whether the activity of the assessee could be termed as falling under the status of a creditor and that on the debt amount advanced, the same could be characterised as a debt for the purpose of treating it under s. 36(2) of the Chit Funds Act (sic).

It is a settled position of law as held in T.R.F. Ltd. v. CIT : (2010) 323 ITR 397 (SC) that after the amendment to s. 36(1)(vii) of the IT Act, w.e.f. 1st April, 1989, it is not necessary for an assessee to establish that the debt, in fact, has become irrecoverable and that it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. In the context of the different stand taken by the Revenue in the year under consideration in contradistinction to the earlier years, the terms of the claim of the assessee in earlier years assume significance.

9. It is not denied by the Revenue that in respect of the earlier years 1990 -91 and 1991 -92, the claim of the assessee for deduction as a bad debt was allowed and in the appeal preferred by the Revenue before the Tribunal, the Tribunal referred to the clarification issued by the Board in F. No. 169/21/78/21/78 -IT(80), dt. 16th May, 1978, which reads as follows:

(a) If any person organises chit funds and for this purpose 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 he takes over the liability of some of the members. In such a case the unrecovered amount due from such members will have to be treated as bad debts and the test to be adopted in usual business assessment for the allowance of bad debts would be applicable in such cases also.

(b) In 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.

10. The subsequent clarification issued on 25th March, 1992, which had been extracted in the order of the Tribunal relating to the asst. yrs. 1990 -91 and 1991 -92, merits to be extracted hereunder:

Government of India

Ministry of Finance

Department of Revenue, CBDT

The Chief CIT -II dt. 25th March, 1992

New Delhi.

Sir,

Sub.: CBDT Instruction No. 1175, dt, 16th May, 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(II)/HO/proposal under s. 263/1991 -92/4101, dt. 15th Nov., 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 High Court in case of Soda Silicate & Chemical Works (supra). The Boards instruction stands.

3. Regarding proceedings under s. 263 pending before the CIT Delhi -II, New Delhi, Board cannot issue any directions.

Thanking you, Yours faithfully

Sd/ -

Under Secretary of the Government of India.

Having regard to the specific observation of treating the unrecovered amount of the subscriber and the debts as bad debts, the Tribunal allowed the case of the assessee that the claim was to be construed as a bad debt, allowable as deduction under s. 36. In the background of the above facts, although we are inclined to dismiss the Revenues appeal, the decision taken by the CIT(A) in respect of the abovesaid claim merits to be noted herein.

11. A perusal of the order of the CIT(A) shows as regards the responsibility of the foreman as listed under the Chit Funds Act. It is admitted by the parties herein that having regard to the obligation under the Chit Funds Act, the assessee had to pump in its own money for the purpose of ensuring that the chit cycle goes on as promised. It is an admitted fact that in respect of shortfall due to nonpayment, the company brought in its own money which was utilised for running the chit business and this did not stand in the way of the statutory obligation of the foreman on getting the chit cycles move on as before. Thus with statutory obligation imposed and well in compliance of the said obligation, that the company had to pay its own money to have the successful chit circulated as before, as pointed out by the apex Court, if there is an obligation under a special contract between the defaulted chit holder and the company, even if the amount due is not treated as a debt within the meaning of the Money Lenders Act, yet, the contract gives rise to a relationship of a creditor and debtor. Thus, the CIT(A), having gone into the requirement of the provisions under the Chit Funds Act, held that the advancement of the money is part and parcel of the business, thus giving rise to a situation that when the defaulter did not make the payment to the company, the company had to claim it as a bad debt for the purpose of deduction under s. 36.

12. It may be of relevance herein to note that while considering the said claim, the CIT(A) pointed out that having regard to the nature of payment made, the claim has to be considered as intimately connected with the business, resulting as a case of a bad debt. Hence, apart from s. 36, the same merited to be considered as falling under ss. 28 and 37 in the business expenditure resulting in a loss. As already pointed out, when the Revenue went on appeal as against the view of the CIT(A) challenging that it would amount to a bad debt, apparently, no claim was made on the side of the Revenue to dispute the view of the CIT(A) that the claim might also fall under the head of business loss under s. 28. Thus, when the Tribunal rejected the Revenues appeal, it clearly pointed out that it confirmed the view of the CIT(A) as stated above that the claim is allowable not only as a bad debt, but could also be considered as a case of business loss under s. 28. The question raised before this Court thus is relatable to one part of the Tribunals order as to whether the defaulted amount paid by the assessee could be treated as a bad debt.

It is not denied by the Revenue that the payment made in the course of the business had resulted in a loss of the chit amount which is also allowable under s. 28. Given the abovesaid fact, we have no hesitation in rejecting the Revenues appeal on this question.

13. Learned counsel appearing for the Revenue brought to our attention the decision of the Bombay High Court dt. 28th Feb., 2012 in IT Appeal No. 89 of 2011 (reported as CIT v. Shreyas S. Morakhia : (2012) 249 CTR (Bom) 30: (2012) 69 DTR (Bom) 105 - -Ed.), wherein, the Bombay High Court had an occasion to consider the money paid by the stock broker on the default committed by its client. The Bombay High Court held that the liability to pay the brokerage may arise at a point of time anterior to the liability to pay the value of the shares transacted. Nevertheless, it would constitute part of the debt that arises on the same transaction involving the sale or purchase of shares. Since the transactions are part of the same transaction and since both form a component of part of the debt, the requirements of s. 36(2) (i) are fulfilled and the assessee is entitled to treat it as a bad debt. Extending the same logic to the present case herein, going by the obligation of the foreman arising under ss. 21 and 22 of the Chit Funds Act to make good the default to the successful bidder on the subsequent day transaction, the claim was rightly considered by the Tribunal as one allowable under s. 36 of the Act.

14. As far as the reliance placed on the decision in CIT v. Sahib Chits (Delhi) (P) Ltd. (supra) is concerned, we do not find that the Revenue could draw any assistance from the said decision, since the said decision relates to a totally different situation. A perusal of the above judgment of the Delhi High Court shows that it is more on the question of discount allotted to the members of the chit in the prized chit disbursed by the various members and the successful bidder being given the contribution made. Thus the distribution was not made out of any money borrowed by the assessee to result in a debt for considering the same as deduction at source. As far as the decision in Suman Savings & Investments (P) Ltd. v. CIT (supra) is concerned, the same also is not of any relevance to the case herein, considering the amendment to s. 36 and the nature of business of the assessee herein on the admitted position that when the Department had not agitated the issue further in respect of asst. yrs. 1990 -91 and 1991 -92 and the situation herein is no different from that of the earlier orders, we have no hesitation in confirming the order of the Tribunal, thereby dismissing the Revenues appeals.

In the result, the tax case appeals stand dismissed. No costs.

 

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