TaxTMI 
TaxTMI 
2019 (9) TMI 918
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....ficer had erred in disallowing the claim of deduction of Rs. 20,28,200/- as loss on Chit and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The action of authorities below being wholly erroneous both on facts and law are to be negated. 3. The learned Assessing Officer had erred in holding that the Chit discount is capital in nature and the learned Commissioner of Income tax (Appeals) had erred in holding that the Chit funds were not utilized for business purposes. The amount drawn from Chits were utilised solely for the purpose of business only and therefore the loss on Chit being the revenue expenditure in nature and having been incurred for the purpose of the business used to be allowed as the deduction and the disallowance is to be deleted. 4. In any case and without prejudice and in the alternative, it is submitted that in case the disallowance of Chit loss is sustained, then the income from Chit dividend be also reduced from the income. 5. The appellant denies the liability to pay interest. The interest having been levied erroneously is to be deleted. 6. In view of the above and on other grounds to be adduced at the time of hearing i....
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.... show cause as to why these amounts should not be treated as expense of capital nature. The assessee made submission before the AO and AO was not satisfied and he made the additions in both the years. Being aggrieved the assessee carried the matter in appeal before the ld. CIT(A) in both the years but without success. Now the assessee is in further appeal before us. 5. Various arguments were made by ld. AR of assessee. He also submitted that on pages 30 to 33.3 of the paper book is the Tribunal order rendered in the case of Kamal Raheja Vs. ITO as reported in [2016] 75 taxmann.com 274 (Lucknow-Trib.) and in this case also, this was one of the issues in dispute as to whether the loss incurred by the assessee in subscribing to chit fund to raise funds to use them in his business or for business purpose, such a loss is an allowable deduction or not and this issue was decided by the Tribunal in favour of the assessee. Our attention was drawn to para nos. 3 to 13 of this Tribunal order available on pages 32 to 33.1 of the paper book. 6. At this juncture, the bench wanted to know as to how the funds raised by the assessee by way of chit has been used by the assessee and in reply, it wa....
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.... Paranthama Chits (P) Ltd. as per which there is chit discount of Rs. 50,200/- and chit dividend received is Rs. 69,900/- and an amount of Rs. 4,69,500/- was received on 19.10.2013 on account of chit auction and the same was credited in the bank account available on page no. 174 of the paper book, thereafter, various cheques were issued from this bank account for business purpose. She again pointed out that on page no. 175 of the paper book is the ledger copy of Sri Paranthama Chits (P) Ltd. as per which there is chit discount of Rs. 27,000/- and chit dividend received is Rs. 50,200/- and an amount of Rs. 4.73 Lakhs was received on 12.12.2013 which has been credited in the bank account available on page no. 178 of the paper book. Thereafter various cheques were issued from this bank account for business purposes. She submitted that from these additional evidences, it is apparent that the funds received by the assessee through chit was used for business purpose and in addition to chit discount claimed by the assessee in respect of various chits, the assessee has earned income of chit dividend also which is offered to tax. It was her submission that either chit discount should be al....
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..... The assessee subscribed to various chitties and the chits were bid for raising funds, for business purposes of the firm. The chit instalments were being paid on the due dates and when the chitty was terminated, the balance represented interest was treated as chitty loss and written off in the profit and loss account. The object of subscribing to a chitty was to finance the business and not for saving money by the subscriber. Usually the subscriber will join a chitty and after remitting certain instalments he would bid it and the money so obtained would be utilised for the purpose of business. It is a means of raising finance at easy means without paying interest and at a discount and this discount foregone after deducting the discount received for the loss of a subscriber and so it was a business loss. 7. The Kerala High Court in the case of CIT v. Kottayam Co-operative Bank Ltd. [1974] 96 ITR 181 held that - "The dominant motive which prompts most people to join chit fund schemes is to avail themselves of the facility of bidding the kuris when they are in urgent need of finance so that they may receive the chit amount in lump as a loan with the facility of repaying it in mon....
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....oncept of mutuality. These principles derive support from the judgment of the Andhra Pradesh High Court in the case of (i) CIT v. Merchant Navy Club [1974] 96 ITR 261; CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC), Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504/37 Taxman 38 (Guj.) and (iv) CIT v. Nataraj Finance Corpn. [1988] 169 ITR 732/ [1987] 35 Taxman 280 (AP). Based on these principles of mutuality, the Punjab and Haryana High Court in the case of Soda Silicate & Chemical Works (supra) has held that the surplus sum received from a chit fund cannot be treated as income in the hands of the participants. The Court has further held that in case there is a loss to a chit fund holder by way of participation in the chit, the same cannot be allowed as business expenditure, since, the principle of mutuality is applicable and no member of the chit fund can incur a loss/or earn gain from mutual participation in the fund. While delivering the above judgment, the Punjab and Haryana High Court also referred to a direct decision on the subject in the case of CIT v. Kovur Textiles & Co. [1982] 136 ITR 61 in which it was held by the Andhra Pradesh High Court that in....
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....of some of the members. In such a case the unrecovered amount due from such members will have to be treated as bad debts and the test to be adopted in usual business assessment for the allowance of bad debts would be applicable in such cases also. (b) In the hands of the subscribers, a few will be receiving more than what they have subscribed. This extra amount is the nature of interest and as such, taxable. Members who take the money earlier from the chit will necessarily have to contribute more which means that they incur loss, which is nothing but interest paid for moneys taken in advance. The claim of such a loss will have to be considered for the purpose of allowance according to the provisions of the Act depending upon how the money was utilised by the subscriber." After the judgment of the Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works (supra), the Income-tax Department in Delhi started reopening several completed assessments by invoking the provisions of section 263 or section 147 of the Income-tax Act, 1961 and in the pending assessments, it started refusing the claim of loss on account of a chit. However, in one of the cases, the Commissio....