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The Tax Publishers AMQ Agro India (P) Ltd. v. Asstt. CIT [ITA No. 666/Del/2014, dt. 29-4-2016] : 2016 TaxPub(DT) 2207 (Del-Trib) Allowability of bad debt in chit fund business Foreman dividend whether principle of mutuality is available thus exempt from tax Foreman commission on defaulting non-prized subscribers - when does it accrue Royalty paid to parent company for the group brand logo - allowability *Facts:* Assessee chit fund had the following issues raised in cross appeals from their end as well as from the department. By the assessee: Assessee had claimed the bad debt towards unpaid subscriptions. This was of two parts on terminated chits and on running chits. On running chits those subscribers who defaulted from paying installments beyond 4 months was claimed as bad debt. The whole bad debt was restricted by the assessing officer at 5% as a portion of the foremans commission also on the plea that they were not into money lending business thus subscribers were not debtors. On appeal Commissioner (Appeals) partly allowed the same on terminated chits in full on continuing chits following earlier ITAT orders of the same assessee where in for future installments of likelihood default no bad debt can be allowed. Since this required a check it was remanded for check on quantum for factual losses sustained. Foremans dividend was not taxable on principles of mutuality following Soda Silicate and Chemical works 179 ITR 588. This was held taxable by assessing officer/Commissioner (Appeals) again based on earlier cases of assessee. By the department: The point of foremans commission of 5% (over and above normal foreman commission) income accruing on defaulting non-prized subscribers of chit who are replaced with new subscribers was in dispute. Department taxed this upfront. Assessees plea was to tax is only upon settlement with the defaulting subscriber as only then one will get to know the quantum of commission and the fact of whether this will have a settlement or not itself will be known. In other words though assessee was following mercantile system this income part can be taxed only on completed contract basis. This was objected by department and held against by the Commissioner (Appeals) who read it as taxable only on settlement in favour of the assessee. Thus case went in appeal. Royalty was paid by the company @ 0.5% of the total income earned to the brand royalty owner Shriram trust, this was disallowed by the assessing officer/negated by the Commissioner (Appeals), thus went in appeal: Held as under: Points of the assessee against them in favour of the revenue - the bad debt on running chits require remand for factual check as in earlier years. There is no mutuality principle on foremans dividend as the collections are from the subscribers, the distribution is with the shareholders of the company as dividend. No mutuality can arise in this. Points of the department were read against them in favour of the assessee - the foremans commission on non-prized defaulting subscribers are taxable only on settlement basis. The royalty is an allowable expenditure as it was demonstrated that the brand did have a reputation and has contributed to branch expansion and business development. Note: 83 ITD 792 of same assessee referred to also to refer the two additional ITAT decisions on same assessee similar topic.

The Tax Publishers

AMQ Agro India (P) Ltd. v. Asstt. CIT [ITA No. 666/Del/2014, dt. 29-4-2016] : 2016 TaxPub(DT) 2207 (Del-Trib)

Allowability of bad debt in chit fund business

Foreman dividend whether principle of mutuality is available thus exempt from tax

Foreman commission on defaulting non-prized subscribers - when does it accrue

Royalty paid to parent company for the group brand logo - allowability

Facts:

Assessee chit fund had the following issues raised in cross appeals from their end as well as from the department.

By the assessee:

Assessee had claimed the bad debt towards unpaid subscriptions. This was of two parts on terminated chits and on running chits. On running chits those subscribers who defaulted from paying installments beyond 4 months was claimed as bad debt. The whole bad debt was restricted by the assessing officer at 5% as a portion of the foremans commission also on the plea that they were not into money lending business thus subscribers were not debtors. On appeal Commissioner (Appeals) partly allowed the same on terminated chits in full on continuing chits following earlier ITAT orders of the same assessee where in for future installments of likelihood default no bad debt can be allowed. Since this required a check it was remanded for check on quantum for factual losses sustained.

Foremans dividend was not taxable on principles of mutuality following Soda Silicate and Chemical works 179 ITR 588. This was held taxable by assessing officer/Commissioner (Appeals) again based on earlier cases of assessee.

By the department:

The point of foremans commission of 5% (over and above normal foreman commission) income accruing on defaulting non-prized subscribers of chit who are replaced with new subscribers was in dispute. Department taxed this upfront. Assessees plea was to tax is only upon settlement with the defaulting subscriber as only then one will get to know the quantum of commission and the fact of whether this will have a settlement or not itself will be known. In other words though assessee was following mercantile system this income part can be taxed only on completed contract basis. This was objected by department and held against by the Commissioner (Appeals) who read it as taxable only on settlement in favour of the assessee. Thus case went in appeal.

Royalty was paid by the company @ 0.5% of the total income earned to the brand royalty owner Shriram trust, this was disallowed by the assessing officer/negated by the Commissioner (Appeals), thus went in appeal:

Held as under:

Points of the assessee against them in favour of the revenue - the bad debt on running chits require remand for factual check as in earlier years. There is no mutuality principle on foremans dividend as the collections are from the subscribers, the distribution is with the shareholders of the company as dividend. No mutuality can arise in this.

Points of the department were read against them in favour of the assessee - the foremans commission on non-prized defaulting subscribers are taxable only on settlement basis. The royalty is an allowable expenditure as it was demonstrated that the brand did have a reputation and has contributed to branch expansion and business development.

Note: 83 ITD 792 of same assessee referred to also to refer the two additional ITAT decisions on same assessee similar topic.