TaxTMI 
TaxTMI 
2006 (1) TMI 72
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...."deposit linked incentive scheme" for the purpose of raising additional funds to extend her business. Under the scheme, as noticed by the first appellate authority, the public are invited to become members by making deposits with the assessee and on the making of such deposits, goods dealt with by the assessee of the value of about 75 per cent, of the deposit would be given free to the members as incentive/gift. The deposits so made by the members were returnable to the members without interest after the expiry of 5 to 10 years depending on the nature of the goods involved. Based on this scheme, deposits were accepted from the members and goods and articles of the members' choice were given to them as gift or incentive. The price of the article was credited as and when the issues were made in the scheme and a like amount was debited as incentive in the profit and loss account. The assessee debited the value of the goods supplied to the customers in a sum of Rs. 27,27,191 for the relevant assessment year in her profit and loss account and claimed the same as expenses towards "deposit linked incentive scheme" and the same amount was also credited by the assessee to the sales accou....
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....the purposes of business? I think not. The expenditure has clearly been set out wholly and exclusively for the purposes of business." Feeling aggrieved by the aforesaid order passed by the first appellate authority, the assessee as well as the Revenue had filed separate appeals before the Income-tax Appellate Tribunal. The Tribunal by its common order dated March 5, 1996 has allowed the assessee's appeal and has rejected the Revenue's appeal, holding that the entire expenditure claimed by the assessee is in the nature of business expenditure and requires to be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Though the Revenue in its application filed under section 256(1) of the Act had requested the Tribunal to state the case and refer four questions of law, the Tribunal has thought it fit to refer only one question of law said to be arising out of the orders passed by the Tribunal in ITA No. 1654/1989 dated March 5, 1996 for the assessment year 1985-86 for our consideration and decision. The same is as under: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in l....
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....and they are as under: In Bijli Cotton Mills' case [1964] 15 STC 656, the apex court has stated as under: "Mr. Desai, learned counsel for the respondent, objects to this order being relied on by Mr. Sastri on various grounds. He further says that on a true interpretation of the order, it does not apply to the case of the assessee. The question then arises whether we are entitled to take into consideration the 1962 order. Learned counsel has cited various cases and has argued that this being an appeal by special leave from a reference, we should not take the order into consideration. It is unnecessary to refer to the cases because the point is concluded by a judgment of this court in CST v. Bijli Cotton Mills [1964] 15 STC 656 Shah J., speaking for the court, observed, as follows: 'Undoubtedly the Tribunal called upon to decide a taxing dispute must apply the relevant law applicable to a particular transaction to which the problem relates, and that law normally is the law applicable as on the date on which the transaction in dispute has taken place. If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in....
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....ore, the expenditure incurred by the assessee is purely for business purpose and, therefore, the allowance or deduction claimed in respect of such expenditure requires to be allowed as revenue expenditure in spite of the insertion of the Explanation to section 37 of the Act by the Finance (No. 2) Act, 1998 with effect from April 1, 1962. In reply, learned counsel for the Revenue, would submit, that the "deposit linked incentive scheme", which the assessee had floated for the purpose of her business activities is nothing but "money circulation scheme", which was not only deprecated by the apex court in the case of Registrar of Firms, Societies and Chits v. Secured Investment Co. [1988] 63 Comp Cas 383; AIR 1988 SC 492 but also had declared that such schemes are prohibited by law and, therefore, the assessee in view of the Explanation inserted by the Finance (No. 2) Act, 1998 is not eligible and entitled to claim deduction or allowance of such expenditure as an expenditure for the purpose of business or profession. After hearing learned counsel for the parties to the lis, the question of law referred by the Income-tax Appellate Tribunal requires to be refrained as under: "I.....
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....ee is nothing but a "money circulation scheme" which is prohibited by law and therefore, in view of the language employed in the scheme, the expenditure is deemed to have been incurred for a purpose which is prohibited by law and therefore, no deduction or allowance could be made in respect of such expenditure. In our view, the reliance placed by learned counsel for the Revenue may not assist him much in the fact situation of the present case, for the reason, in Secured Investment Co.'s case [1988] 63 Comp Cas 383; AIR 1988 SC 492, the Supreme Court was considering a case of "prize chit" and what are the ingredients, which constitutes a "prize chit" for the purpose of section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. In our view, the case law which is nearer to the issue which has fallen for our consideration, is the decision of the apex court in the case of State of West Bengal v. Swapan Kumar Guha [1983] 53 Comp Cas 114; AIR 1982 SC 949. In this case, the expression "money circulation scheme" on which heavy reliance is placed by learned counsel for the Revenue, came up for consideration. While explaining the concept of "money circulation sch....
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.... matter is really not in doubt: only the form of the definition is likely to create some doubt as to the meaning of the expression which is defined and, therefore, I have made a formal modification in the definition without doing violence to its language and indeed, without even so much as altering a comma. 8. There is another aspect of the matter which needs to be underscored, with a view to avoiding fruitless litigation in future. Besides the prize chits, what the Act aims at banning is money circulation schemes. It is manifestly necessary and indeed, to say so is to state the obvious, that the activity charged as falling within the mischief of the Act must be shown to be a part of a scheme for making quick or easy money, dependent upon the happening or non-happening of any event or contingency relative or applicable to the enrolment of members into that scheme. A 'scheme', according to the dictionary meaning of that word, is 'a carefully arranged and systematic programme of action', a 'systematic plan for attaining some object', 'a project', 'a system of correlated things', (see Webster's New World Dictionary, and Shorter Oxford English Dictionary, Vol. II). The systematic pr....
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....member is required to provide two guarantors preferably by Government/bank/public sector employees. The free present item would be given only after acceptance of membership and the security deposit. If for any reason, the item as per the choice of the member cannot be supplied within a reasonable period, the security amount would be refunded in full less Rs. 10 as processing charges. Now the question is, whether such a scheme floated by the assessee is a scheme which is prohibited by law as envisaged under the provisions of "the Prize Chits and Money Circulation Schemes (Banning) Act, 1978"? The preamble to the Act makes clear the object of the Act. It is an Act to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto. Section 2 of the Act is the interpretation clause. Clause (c) of section 2 of the Act defines "money circulation scheme" to mean any scheme, by whatever name called for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the....
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.... to the facts of this case, in the previous year relevant 22 to the assessment year, the assessee had received deposits of Rs. 41,92,920 from its members and as against this, the assessee had distributed articles worth Rs. 27,27,191 by way of gift/free present items and under this scheme, the assessee could retain a sum of Rs. 14,65,729 for a period of five years, use it the way she wants it, and return thereafter the depositors' money without any interest. In our view, this scheme has all the basic ingredients of a money circulation scheme, which is banned under section 3 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and therefore, the expenditure incurred by the assessee is an expenditure prohibited by law and therefore, in view of the Explanation inserted by the Finance (No. 2) Act, 1998 to section 37(1) of the Act, which has come into force with effect from April 1, 1962, the expenditure shall not be deemed to have been incurred for the purpose of business and therefore, no deduction or allowance can be made in respect of such expenditure in computing the income chargeable under the head "Profits and gains of business or profession". This amendment is gi....