2002 (10) TMI 254 - AT - Income Tax

Tribunal allows chit-loss deduction as business expenditure for 1990-91

Assistant Commissioner Of Income-Tax. Versus KS. Shetty & Co.

Assistant Commissioner Of Income-Tax. Versus KS. Shetty & Co. - ITD 87, 259, TTJ 81, 158, ITR - SUPP 263, 71, Issues:1. Treatment of chit-loss as admissible deduction for assessment year 1990-91.Analysis:The appeal filed by the Revenue contested the order of the Commissioner of Income-tax (Appeals) regarding the treatment of chit-loss as a deductible business expenditure for the assessment year 1990-91. The Revenue raised the issue based on the precedent set by the Hon'ble High Court of Punjab & Haryana in a specific case. The assessee, a registered firm, claimed the chit-loss as business expenditure in its return, leading to a dispute with the Assessing Officer. The CIT (Appeals) subsequently deleted the addition made by the Assessing Officer, citing decisions by the Hon'ble Apex Court and other High Courts. The Revenue challenged this decision, emphasizing the nature of chit-business as a mutual accommodation without a direct link to the members' business activities, thus arguing against the allowance of the chit-loss as a business expense under the Income-tax Act.The Departmental Representative contended that the CIT (Appeals) erred in disregarding the recent decision of the Hon'ble High Court of Punjab & Haryana, which was relied upon by the Assessing Officer. This representative supported the Assessing Officer's stance, highlighting the mutual accommodation aspect of chit-business. In contrast, the assessee's representative argued that the funds received from the chit-fund were utilized for the firm's business operations, referencing instructions issued by the Central Board of Direct Taxes (CBDT). These instructions clarified the treatment of surplus amounts received by chit contributors as business income and losses incurred as allowable business expenditures. The assessee's representative emphasized the binding nature of CBDT circulars and instructions, urging the Revenue to adhere to them.Upon evaluating the arguments presented by both parties and examining the relevant legal provisions and precedents, the Tribunal concluded that the chit-loss incurred by the assessee should be considered a business loss. The Tribunal referenced the observations of the Hon'ble Apex Court and the decisions of various High Courts, including the Hon'ble High Court of Punjab & Haryana and the Hon'ble High Court of Kerala. The Tribunal highlighted the principle of mutuality in chit funds and the applicability of business income or expenditure based on the nature of transactions within the fund. Considering the circulars issued by the CBDT and the consistent stance maintained even after the Punjab & Haryana High Court's decision, the Tribunal upheld the view of the CIT (Appeals) and dismissed the Revenue's appeal, deeming it devoid of merit.In conclusion, the Tribunal's judgment clarified the treatment of chit-loss as a business expenditure, emphasizing the legal principles, precedents, and CBDT instructions governing such transactions. The decision underscored the business nature of chit transactions and the relevance of established legal interpretations in determining the tax treatment of chit-related losses.