AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (4) TMI 630
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....chit group was part and parcel of the business of the assessee. The first appellate authority further viewed that the sole responsibility of the foreman under the Chit Funds Act was to get the business run by the company. Since the assessee company had to make good the shortfall arising on account of the default of the successful chit holder, the advancing of such fund being part and parcel of the business of running the chit fund, the default committed by the chit holder in meeting his commitment thus gives rise to the claim being treated as a bad debt. On facts, the CIT(A) pointed out that the facts relating to the present assessment years were not different from that of the earlier asst. yrs. 1990 -91 and 1991 -92. Thus, the claim of the assessee was allowable not only under s. 36, but also as a business loss under ss. 28 and 37 of the Act. Aggrieved by the said order, the assessee went on appeal before the Tribunal. 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.....
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....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 du....
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....nt 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 credi....
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.... 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 m....
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....ard 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 succ....