M/S. Shriram Chits Pvt, Ltd, Hyderabad v. Prasad [(Sc For Income ][Tax) ][Dept

IN THE HIGH COURT FOR THE STATE AT HYDERABAD FRIDAY THE NINTH DAY OF JUNETWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF ANDTHE HONOURABLE SRI JUSTICE C.V. 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, againstthe 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 AND M/s. Shriram Chits Pvt, Ltd, Hyderabad ...APPELLANT ...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 SRI. MAHESWARA RAO KUNCHEAM The Court made the following: COMMON JUDGMENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHIIYANANDTHE HON'BLE SRI JUSTICE C.V.BTIASKAR REDDYI.T.T.A. Nos.307 of 2OO5 and 92 and L54 of 2006 COMMON JUDGMENTi eer the Hon'ble the Chief Justice Uljal [Bhuyan)] Substantial questions of Iaw raised in the threeappeals being identical, the appeals were heard togetherand are being disposcd of by this common [judgment ]andorder. 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) assailingva-r10usorders passed by the Income Tax Appellate Tribunalwhich 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]asscssee.respondent/ 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 the appellant under Section 2604 of the Income Tax Act,196l (briefly, 'the Act' hereinafter) assailingva-r10usorders passed by the Income Tax Appellate Tribunalwhich 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]asscssee.respondent/ 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. 8. Respondent is the assessee under the Act havingthe status of a company. Assessee is engaged in the chitfund business regurlated under the Chit Funds Act, 1982.For the assessment year 1998-99, assessee filed return oflncomeadmitting a Ioss of Rs.1,14,76,024.OO anddeemed income of Rs.26,96,890.00 under Section 11sJAof the Act. The case was selected for scrutiny, whereafterorder of assessment was passed on 30.03.2001 underSection 143(3) of the Act. Assessee had debited anamount of Rs.5,72,83,854.00 to the profit and lossaccount towards bad debts. Assessing officer on thegrounds and reasons mentioned in the order ofassessment took the view that the amount claimed asbad debts could not be allowed as a deduction havingregard to the provisions of Section 36(1)(vii) read withSection 36(21 of the Act. Accordingly, the said amountwas added to the income of the assessee. That apart, thedecision of the assessee in advancing the [point ][of]recognition as bad debt to four months of default whichresulted in an additional amount of arrears to the extent 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 bythe assessee were not allou'able deduction. As to changein the method of accounting CIT(A) also affirmed the vieu' taken by the assessing officer. As regards commlssron oncancelled chits, view taken by the assessing officer wasupheld, thus appeal filed by the assessee was dismissedvide the order dated 28.03.2OO2. 8.3. Aggrieved thereby assessee preferred further appeal before the Tribuna,l which was registeredasI.T.A.No.47 1 / Hyd I 2002. 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 bythe assessee were not allou'able deduction. As to changein the method of accounting CIT(A) also affirmed the vieu' taken by the assessing officer. As regards commlssron oncancelled chits, view taken by the assessing officer wasupheld, thus appeal filed by the assessee was dismissedvide the order dated 28.03.2OO2. 8.3. Aggrieved thereby assessee preferred further appeal before the Tribuna,l which was registeredasI.T.A.No.47 1 / Hyd I 2002. 9. For the assessment year 1999-2OOO, assessingoflicer vide the assessment order dated 28.O3.2OO2passed under Section 143(3) of the Act disallowed theclaim of bad debts of the assessee on terminated chits tothe extent of Rs.2,87,38,141.00 and added the same tothe income of the assessee. Insofar claim of bad debtsamounting to Rs.6,98,39,496.OO pertaining to runningchits, assessing officer was of the view that the change inthe method of recognition of bad debts was unrealisticand it was only a method to defer payment of taxes.Accordingly, the said claim of bad debts was alsodisallowed. As regards commrsslon on cancelled chitsclaimed by the assessee to the tune of Rs.58,58,658.O0, was of the view [that ][change ][in ][the]assessing ofl-icer 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] order dated 26.11.2002, CIT(A) held that all bad debtswere not allowable deduction and accordingly upheld theview taken by the assessing officer. Likewise, preponingthe default to bad debts after four months period washeld to be unrealistic, not reflecting the correct profits ofthe business. Therefore, order of the assessing officer wasupheld on this ground as well. Insofar commission oncancelled chits is concerned, CIT(A) affirmed the decisionof the assessing officer and dismissed this ground ofappeal of the assessee. Similarly, on the claim of royaltypayment, CIT(A) held that assessee had failed to establishthat the expenditure was for the purpose of businessdictated by commercial expediency. Therefore, it was heldthat assessing officer was [justified]1n disallowing theexpenditure and adding the same to the income of theassessee. 9.2. Assessee thereafter preferred further appeal beforethe Tribunal which was registeredAS I.T.A.No.1049/Hyd/2OO2. This appeal [was ]heard by the Tribunal alongwith the appeal filed [by the ][assessee ]for the assessmentthe Tribunal which was registeredAS I.T.A.No.1049/Hyd/2OO2. This appeal [was ]heard by the Tribunal alongwith the appeal filed [by the ][assessee ]for the assessment yea-r 1998-99 being I.T.A.No.471lHydl2OO2 and [four]other appeals 9.2. Assessee thereafter preferred further appeal beforethe Tribunal which was registeredAS I.T.A.No.1049/Hyd/2OO2. This appeal [was ]heard by the Tribunal alongwith the appeal filed [by the ][assessee ]for the assessmentthe Tribunal which was registeredAS I.T.A.No.1049/Hyd/2OO2. This appeal [was ]heard by the Tribunal alongwith the appeal filed [by the ][assessee ]for the assessment 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 aspectconcerned, Tribunal notedthat 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 organisers [unless ][it ][takes ][over ][the ][iiability ][of some of the]In such [a ][case, ][the ][unrecovered ][amount ][due]persons. 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 ] 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] High Court in CIT v. Girish Bhagwatprasadl, Tribunal foundthat the claim for bad debt was made on completion ofthe chit. The decision u,hether the debt has become bador not has to be viewed with a dispassionate attitude axdthe fact that the assessee had not taken steps by way oflegal proceedings against the debtor would notautomaticall5, justify treating him as not entitled to writeoff the amount as a bad debt. Thereafter, Tribunal heldthat the amount of loss can definitely be a_llowed to theextent that the foreman has put in his funds and hascome to a conclusion that his funds are not recoverabledue to the account becoming sticky and to the extent hehas taken an honest decision for writing of the same inhis books. In other words, all debts can be allowed to theextent of the instalments defaulted by the prized,subscriber and written off as bad debt in the books bythe assessee. But for the future instalments that arelikely and yet to be defaulted no claim can be allowed.Assessing officer cannot replace the judgment of thet (2002) 256ITR :-72 assessee. The fact that assessee has written off [as ][bad] assessee. The fact that assessee has written off [as ][bad] debt when prized subscribers defauited for fourconsecutive 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 thispolicy. However, to allow the claim to the extent indicatedabove, Tribunal noted that fresh collection of facts andfigures would be required. Thus, Tribunal set aside theorder of the assessing officer and remanded the matterback to the file of the assessing officer for considering theclaim afresh. 10.3. As regards commission on calcelled chits isconcerned, Tribunal found that from out of the amountpayable to the defaulting subscriber consequent to hisreplacement by another person, the assessee is entitledto deduct five per cent as commission. This amount hasnothing to do with the regular commission income of theassessee. Tribunal accepted the stand of the assesseethat the commission income accrues when the accountshad 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]passed1n 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 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 assesseewas partly allowed vide the order dated 3O.O7.2OO4. 12. Against the aforesaid orders of the Tribunal, thethree appeals have been preferred by the Revenue underSection 260A of the Act as mentioned supra. In a-11 thethree appeals, Revenue has proposed the followingquestions as substantial questions of law: 1. Whether on the facts and in the circumstancesof the case, when the assessee did not satisfy theconditions under Sections 36(1)(vii) read withSection 36(2) of the Act with regard to his claim ofbad debts, whether the ltnding of the Tribunaldismissing the appeal preferred by the Revenue andupholding the claim of the assessee in toto, [is]sustainable in law? 2. Whether the failure of the Tribunal to note thatthe CBDT circular dated 16.05. 1978 relied on by theassessee with regard to [its ]claim of deduction of baddebts, since cannot [supplant ]to the statutoryrequirements under Section 36 of the Act, its - findings relying on thc said [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?] - findings relying on thc said [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.] 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, hehas placed reliance on a recent decision of the SupremeCourt 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 theassessing officer that the [case ]satisfies the [ingredients ][of] ' [441 ][ITR t67 :2022 ][scc ][onLine ][sc ][Io82] 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 ] [(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 [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. ] [as ][wcll ][as instruction ][No' ][1 ][175 ][of]CBDT which [was ][subsequently ][clarified ][by ] [on]25.03. 1992.ln [support ][of ][his ][submission, learned ][Senior] , [t ]323 I'I'n 391 Counsel has also placed relialce on the decision of theSupreme Court in oriental Kuries Limited v. Lissaa , [t ]323 I'I'n 391 Counsel has also placed relialce on the decision of theSupreme Court in oriental Kuries Limited v. Lissaa 14.1. On the question of royalty payment, he submitsthat this issue is squarely covered by the decision of theMadras High Court in CIT v. Wavin (Iadta| Limiteds whichwas affirmed by the Supreme Court in CIT v. Wawln (IndlafLimlted6 as well as by a recent decision of the MadrasHigh Court dated 30.06.2022 in Shriram TransportFinance Company Limited v. Income Tax Oflicer(T.C.A.No.755 of 2009 and batch). He has also placedreliance on the decision of the Supreme Court in HoadaSiel Cars India Limited v. CIT7. 14.2. Insofar commission on removed chits is concerned, learned Senior Counsel adverted to and supported thedecision of the Tribunal. He, therefore, submits that thereis 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; o 230 ttn [r+: ]: t+[lrR ][2El ][(Mad)]'lzorzy [t ][scc ][tzo]'iteet; o 230 ttn [r+: ]: t+[lrR ][2El ][(Mad)]'lzorzy [t ][scc ][tzo] 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'] 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 theclaim as bad debt. The Honble Andhra PradeshHigh 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] 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 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] 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 ] [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]A CA SEthe unrecovered amount due fromsuch members will [have][to ][be]ted as badclebtq and the test [lo ][be ][adopted ][in ][usual]business assessmcnl [for the ][allowance ][of ][bad]cletrts uoulcl [be ][appirr:allle ][in ][such ][cases ][also] (b) [n the hands of the subscribers, a fewwill be receiving more than what they havesubscribed. This extra amount is in thenature of interest and as such taxable.Members who take the money earlier from thechit will necessarily have to contribute morewhich means that they incur loss, which isnothing but interest paid for moneys taken inadvance. The claim of such a loss will have tobe considered for the purpose of allowanceaccording to the provisions of the Actdepending upon how the money was utilisedby the subscriber. Subsequently the Board issued clarifrcation ona query from the Chief Commissioner of Income TaxII, New Delhi on 25th March 1992 which is asfollows: Subject: CBDT Instruclion No. 1175, datedtoMay 16, 1978 Liability assessment - Profits made bysubscriber of chit fundsQuestion [regarding.] 1. I am directed to refer to your letterF. No.66(ll)/ HO/ proposal under Section263/91-9214101, dated November 15, 1991on the above mentioned subject. 2. The issues raised by you have beencarefully examined by the Board. In thisregard, I am directed to say, that Board are ofthe view that Instruction No.1175 issued inconsultation with M.O.L cannot be withdrawnon the basis of decision of Punjab & HaryanaHigh Court in caseof Soda Silicate &Chemical Wo[rks](supra). The Board'sinstruction stands." 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' ] I$996\ [97 ] [19]]observecl as follorvs: 2. The issues raised by you have beencarefully examined by the Board. In thisregard, I am directed to say, that Board are ofthe view that Instruction No.1175 issued inconsultation with M.O.L cannot be withdrawnon the basis of decision of Punjab & HaryanaHigh Court in caseof Soda Silicate &Chemical Wo[rks](supra). The Board'sinstruction stands." 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' ] I$996\ [97 ] [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 or-losirrg [o[ ][court ][proceedings "]'r,inning 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] 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 beenissued by the Central Board of Excise [and]Customs which place a differentinterpretation upon the said phrase, thatinterpretation will be binding on [the]Revenue." Similar was the view of the Hontlle Supreme Courtin 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 ] [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 notin accordance with the correct interpretationof 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 EllermanLines LiErited v. CIT [(1971) 82 913] [that]circulars issued by the under [Section]119 of the Act are binding on all [ofhcers and]persons employed in the [execution ]of the [Act] a 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 ] [706](SC)) at page 732 obscn'ed as [follows:] a 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 ] [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 [(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) Variousbenches of the Tribunal [have]consistently takena r ie.,r' that [a][claim ][of ][the]asscsscc is maintrinabic as [bad ][debt]. It is not the case of the Revenue that the transaction in [question]was not bona ftde or that the assessee hasattempted to conceal taxable income or that this is adevice for evasion of payment of tax. Only thelegality of the claim under Section 36(1)(vii) andpoint of time of the claim are being disputed by theRevenue on the ground that this would lead topostponement of tax due to the government. Basedon tJle foregoing discussion, we uphold the claim ofthe assessee and hold that the Revenue shouldfollow the CBDT circular and take a view that theclaim of the assessee is maintainable as bad debt. 17.2. Thus, Tribunal followed the decision of thejurisdictional High Court in the case of GoverdhanUpadhyan v. Aekelle Kameswar Raoe. Thereafter, Tribunalreferred to and followed instruction No. 1 175 dated16.05.1978 issued by the CBDT which was later onclarified by the CBDT itself on 25.03.1992. As per theinstructions of CBDT, if any person organised chit fundsand brings the members together, administers the chitfunds and thereby earns commission etc., profits madeby such a person is income from business and if for anyspecial reason, there is loss then it is business loss.Normally, there should [be ][no ][loss ]to the organiser unless' [teo6 ]1a; [nLT ][t] 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, ] 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 theground that this would lead to postponement of tax due to the government. On due consideration, Tribunalupheld the claim of the assessee and held that theRevenue should follow CBDT instruction and took theview that the claim of the assessee is maintainable as baddebt. 17.3. Insofar the second aspect is concerned, Tribunalnoted that earlier the assessee was making claim for baddebts in respect of defaulting prized subscribers at theclosure of the chit. Later on, the assessee claimednoted that earlier the assessee was making claim for baddebts in respect of defaulting prized subscribers at theclosure of the chit. Later on, the assessee claimeddeduction in the year of default itself. According to theTribunal, what was required to be considered waswhether the assessee had taken an honest and bona fidedecision. Tribunal noted that during the assessmentproceedings assessee had frled details of the bad debtsshowing proof of suits frled as well as suits filed insubsequent years, the details of which were examined bythe assessing officer. After considering the decisions ofthe Mumbai and Chennai Benches of the Tribunal insimilar matters as well as the decision of the GujaratHigh Court in the case of Girlsh Bhagwatprasad (supra),decision. Tribunal noted that during the assessmentproceedings assessee had frled details of the bad debtsshowing proof of suits frled as well as suits filed insubsequent years, the details of which were examined bythe assessing officer. After considering the decisions ofthe Mumbai and Chennai Benches of the Tribunal insimilar matters as well as the decision of the GujaratHigh Court in the case of Girlsh Bhagwatprasad (supra), Tribunal took the view that under Section 36(1)(vii) of theAct as it stood after the amendment with effect from01.04.1989, u.riting off in the books of accounts of a baddebt is sufficient and the assessing officer has no optionof deciding the year in u,hich the debt had become baddebt. 17.4. With regard to the case of assessee, Tribunal notedthat for the assessment vears 1995-96 and 1997-98, theclaim for bad debt was allowed by the first appellateauthority i.e., CIT(A) against which Revenue was inappeal. Tribunal did not find any infirmity in the ordersof the first appellate authority as the assessee had givendetails of the claim u,hich were examined by theassessing officer. Being a voluntary payment in dischargeof a legal obligation, assessee would be entitled to havethe amount cleducted as a bad debt in the year of writeoff. The decision whether the debt has become bad or nothas to be viewed dispassionately. The fact that theassessee had not taken steps by way of iegal proceedingsagainst the debtor would not automatically justify the'I 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:] 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:] 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 ]subscriberson 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 thereis another angle to thls issue. The clarm [proceeds ]onthe 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 theforemal. This premi-^es is not true. The [chit]contributions of the other subscribers are handedover to the prized subscriber on an auction after theforeman deducts his commission. 6.6 (xviii) The funds of the foreman are involved onlyto the cxtent of defaults both by the prized and non-prized subscribers. Thc clarm of the foreman to theextent h1s funds are in'.'olved can be considered [as]an allowable claim. A luture liability that ma1. arise 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 for24 months ald in the 2nd month of the chit onesubscriber bids and ta-kes Rs.24O0 - the loss ofRs.96O - commission @ 5% Rs. 12O i.e. Rs.1,320/-and defaults for four consequent months and thereis no other defaulter, the money put in by theforeman is Rs.40O against Rs. 1,32O/ [- ]due from thedefaulting subscriber. So against Rs.400 put in bythe foreman due to lega.l requirements, at the end of4 months. he is not entitled to write off Rs. i.320/-and claim the same as a bad debt. This is notpermissible. ln other words, the foreman in thiscase would be writing off a future possible liability ofRs.92O that may or may not arise. A loss may beclaimed without bringing in funds. This factor isalso explained in the Technical Guide on Accountingand Auditing for Chit Fund Business published bythe Research Cornmittee of the Institute ofChartered Accountants of India, New Delhi which atpage 19 under the head Accounting Standard (AS)4, Contingencies and Events occurring after theBalance Sheet date at para 3.11 and 3.12 read asfollows: '3.11. In a Chit Fund Business, it is [possible]that some prized subscribers may not [pay ]theirinstalments aftcr receiving the prized amount. [The]toss arising on account of non-payment [of]instalments by a pr2ed subscri