Commissioner of Income-tax v. Shriram Chits (Karnataka) Pvt. Ltd
[Citation -2015-LL-0109-2]

Citation 2015-LL-0109-2
Appellant Name Commissioner of Income-tax
Respondent Name Shriram Chits (Karnataka) Pvt. Ltd.
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 09/01/2015
Judgment View Judgment
Keyword Tags system of accounting • method of accounting • allowable deduction • accrual basis • business loss • chit fund
Bot Summary: The substantial questions of law that arise for our consideration in these appeals are as under: In I. T. A. No. 920 of 2008 Whether the Tribunal was correct in holding that a sum of Rs. 7,20,32,155 should be allowed as a bid loss since the assessee was following completed contract method of accounting without considering the nature of loss on account of which the Assessing Officer and the Appellate Commissioner had disallowed the claim In I. T. A. No. 922 of 2008 1. Whether the appellate authorities were correct in holding that the royalty paid by the assessee to its parent company, M/s. Shriram Chits and Investments Ltd., Chennai, was not excessive or unreasonable and the provisions of section 40A(2) and of the Act would not be applicable The accounting practice maintained by the assessee is not found fault with by the assessing authority. The first appellate court was constrained to observe that, in spite of sufficient opportunity given during the assessment proceedings remand report proceedings and even before him, the assessee has failed to furnish the factual information as set out in his order except explaining as to the manner of sustaining the said loss and he affirmed the said findings recorded by the assessing authority. In appeal, the Tribunal observed that the assessee produces all these particulars before the first appellate authority, which the first appellate authority declined to take note of and proceeded to affirm the findings of the assessing authority. If the assessee is able to substantiate the said claim by producing acceptable evidence, in law the assessee would be entitled to the benefit of deduction. The matter is remanded to the assessing authority to decide the claim of business loss claimed by the assessee. In so far as the claim regarding bad debts and royalty is concerned, in view of the judgment in the assessee's case in I. T. A. No. 338 of 2003 of this court, where it has been held in favour of the assessee and against the Revenue the said questions are answered in favour of the assessee and against the Revenue.


JUDGMENT judgment of court was delivered by N. Kumar J.-As common question of law is involved in these appeals and assessee being same and common order is passed in respect of different assessment years, they are taken up for consideration together and disposed of by this common judgment. assessee, private limited company, engaged in business of conducting chits was assessed to income-tax by ACIT (Assessment), Circle, Bangalore. assessee filed returns of income on November 28, 2003, for assessment year 2003-04 declaring loss of Rs. 7,85,38,305. return was processed under section 143(1)(a) on February 13, 2004, granting refund of Rs. 49,04,076 including interest under section 244A. case was selected for scrutiny. After hearing assessee, assessment was concluded. assessing authority disallowed amount claimed under heads "royalty, bad debts and bid loss". Aggrieved by said order assessee preferred appeal to Commissioner of Income-tax (Appeals) who deleted disallowances of royalty as well as bad debts but confirmed finding of assessing authority in respect of bid loss on ground that in spite of sufficient opportunity being given during assessment proceedings, remand report proceedings and even before first appellate court, assessee has failed to furnish information, as principles of chit-wise number of optional tickets subscribed to, chit-wise dividend income received, chit-wise amount prized amounts obtained, chit-wise discount suffered, what part of prized amount used for its chit fund-business, whether bid-loss claimed is on accrual basis and how amount of bid-loss claimed was quantified. Aggrieved by part of order assessee preferred appeal to Tribunal. Tribunal by impugned order held that assessee is following consistent system of accounting which has been accepted by court. It is first time that assessee has incurred bid loss. assessee had to wait till completion of chit period for each individual chit running during course of year for determining actual amount of bid loss. completed chits, therefore, suffered loss which was recognised as loss in impugned assessment year. Under completed contract method, revenue is not recognised until contract is complete and under this method costs are accumulated during course of contract and profit and loss account established in last accounting period for transfer to profit and loss account in impugned year. This method determines results only when contract is complete. It further observed learned Commissioner of Income- tax (Appeals) in spite of details furnished by assessee was constrained to hold and sustain disputed disallowances of bid loss, without finding any fault in accounting of bid loss as furnished before him in accordance with direction of hon'ble apex court in case of Bilhari Investments (P.) Ltd. and, therefore, Tribunal set aside order and directed assessing authority to allow claim of bid loss granting sum of Rs. 7,20,32,155. Aggrieved by said order, Revenue is in appeal. substantial questions of law that arise for our consideration in these appeals are as under: In I. T. A. No. 920 of 2008 "Whether Tribunal was correct in holding that sum of Rs. 7,20,32,155 should be allowed as bid loss since assessee was following completed contract method of accounting without considering nature of loss on account of which Assessing Officer and Appellate Commissioner had disallowed claim?" In I. T. A. No. 922 of 2008 "1. Whether appellate authorities were correct in holding that assessee's claim of bad debts is allowable deduction as per section 36(1)(vii) read with section 36(2) of Act without taking into account actual nature of transaction and debt claimed to be bad was on account of non-payment of subscription amount in chit fund transaction? 2. Whether appellate authorities were correct in holding that royalty paid by assessee to its parent company, M/s. Shriram Chits and Investments Ltd., Chennai, was not excessive or unreasonable and provisions of section 40A(2) and (3) of Act would not be applicable?" accounting practice maintained by assessee is not found fault with by assessing authority. When assessee was claiming for first time huge amount of Rs. 7,20,32,155 as bid loss, assessing authority wanted assessee to produce authentic evidence and explain how this amount was arrived at. assessing authority also wanted to know, how bid loss is occurred when there are various safety measures adopted in agreement by assessee-company. All that assessee did was, filed written submission on February 3, 2006, stating that as tickets have been bid at early stage of duration of respective chit groups, when there will be high competition, assessee has been foregoing higher amount of bid loss. This is due to principle of discounted auction flow where one has to forego higher rate of discount and obtain specified amount of money rather than at later date. In other words, assessee was explaining principle followed by them, which results in bid loss. What assessing authority wanted was to give evidence that assessee actually incurred said loss in following said principle, which was not furnished. Therefore, he disallowed said bid loss. In appeal, remand was sought before first appellate court. Even in course of such remand proceedings, assessee has not produced said evidence. Therefore, first appellate court was constrained to observe that, in spite of sufficient opportunity given during assessment proceedings remand report proceedings and even before him, assessee has failed to furnish factual information as set out in his order except explaining as to manner of sustaining said loss and, therefore, he affirmed said findings recorded by assessing authority. In appeal, Tribunal observed that assessee produces all these particulars before first appellate authority, which first appellate authority declined to take note of and proceeded to affirm findings of assessing authority. From that observation it is clear that, assessee did not produce requisite information before Tribunal. assessee did not produce requisite information even before first appellate authority. Therefore, said findings recorded by Tribunal that particulars were produced before first appellate authority that first appellate authority has not taken note of is erroneous. All that assessing authority wanted to know was, how said figure of Rs. 7,20,32,155 was arrived and evidence for same. Therefore, Tribunal was not justified in setting aside well considered order passed by first appellate authority. In that view of matter, impugned order cannot be sustained. However, if assessee is able to substantiate said claim by producing acceptable evidence, in law assessee would be entitled to benefit of deduction. Therefore, it is appropriate that matter be remanded to assessing authority to give one more opportunity to assessee to produce relevant materials as set out by authority and substantiate deduction under head business loss, so that assessing authority on consideration of said material can pass appropriate order. matter is remanded to assessing authority to decide claim of business loss claimed by assessee. In so far as claim regarding bad debts and royalty is concerned, in view of judgment in assessee's case in I. T. A. No. 338 of 2003 of this court, where it has been held in favour of assessee and against Revenue, therefore, said questions are answered in favour of assessee and against Revenue. Hence, appeals are partly allowed to aforesaid extent. *** Commissioner of Income-tax v. Shriram Chits (Karnataka) Pvt. Ltd
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