Income Tax Appellate Tribunal - Delhi
Sarvpriya Chits (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 10 February, 1997
Equivalent citations: [1997]60ITD674(DELHI)
ORDER
R. Swarup, JM
1. This appeal, by the assessee is directed against the CIT(A)'s order dated 6-3-1995 relating to the assessment year 1991-92.
2. The assessee vide application dated 2-9-1996 had required to admit the following additional ground :-
"Without prejudice to the ground of appeal raised in the memo of appeal before Tribunal, the loss of Rs. 2,57,407 deserves to be allowed as short term capital loss."
The learned D.R. did not oppose this ground seriously. Accordingly, the additional ground raised by the assessee is admitted.
3. The only ground raised in this appeal revolves round the issue whether the CIT(Appeals) was justified in confirming the disallowance out of interest loss on chits amounting to Rs. 2,57,407.
4. Briefly stated the facts of the case, as found out from the orders of the authorities below, are that the assessee derives income from chit fund business. On an examination of the books of account, maintained by the assessee, the Assessing Officer, inter alia, observed that in the profit and loss account the assessee had debited a sum of Rs. 2,63,032 on account of interest loss on chits. The assessee's explanation before the Assessing Officer in this regard was that the assessee company was engaged in the business of operating chit groups and loss on chit was a normal business expenditure of every chit fund company and as such the loss on chit suffered by the assessee, who was engaged in chit fund business, was an admissible expenses. The Assessing Officer, however, observed that the nature of transaction as reflected by the assessee, show that loss had been sustained on account of participation in its own business. According to Assessing Officer, since the assessee had not parted with any amount utilised in transaction, the loss sustained from self-business did not apparently appear to be reasonable or incidental to business. Relying upon the decision of the Hon'~ble Jurisdictional High Court in the case of Soda Silicate & Chemical Works v. CIT[1989] 179 ITR 588/46 Taxman 33 (Punj. & Har.), the Assessing Officer rejected the explanation of the assessee and consequently disallowed the claim of the assessee.
4.1 On appeal, the CIT(Appeals) confirmed the action of the Assessing Officer by, inter alia, observing as under :
"In this case the loss, if any, he has suffered when he participated as a subscriber to chit fund company of other concern. The participation in chit in other companies was not incidential to business or for running of the business and in accordance with the decision of the Punjab and Haryana High Court in the case of Soda Silicate, no loss is to be allowed. In case the appellant has contributed to the chits of his own company, there is no loss as he has only made an investment to ensure that the group continues. In fact, every 5th draw of the group is for the foreman of the chit which in this case is the appellant. For recovering that money the foreman does not contribute anything whereas all the other members give full amount and the appellant got full value of the chit. Thus there can be no question of loss if he himself contributes to ensure the running of the group. It is, therefore, not understood as to how the appellant claimed this loss. The Assessing Officer was, therefore, justified in rejecting the claim of the appellant on this ground."
Feeling aggrieved against the aforesaid order of the CIT(Appeals) the assessee has come up in second appeal before the Tribunal.
5. The authorised representative of the assessee has reiterated the same submissions as were advanced before the authorities below orally as well as in writing. He contended that the authorities below have misconstrued the facts of the case in rejecting the claim of the assessee. According to learned A.R. the facts of the instant case are distinguishable from the facts before the Hon'~ble Jurisdictional High Court in the case of Soda Silicate & Chemical Works (supra), on the following points :-
(a) The assessee is a chit fund company and is engaged in the business of organising and participating in the chit groups whereas in the case of Soda Silicate & Chemical Works (supra) it was not the business of the assessee to contribute the chit funds;
(b) In the instant case amounts were advanced to the prizing subscribers through a scheme of competitive bidding whereas it was not so in the case before the Hon'~ble Jurisdictional High Court. In the aforesaid case the Hon'~ble High Court has observed that unless amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there would be no income derived either by way of interest or by way of amounts ~forgone by the bidders at the auction. It would mean that the Hon'~ble Court meant that in a case where the assessee partakes in any chit where drawing is by way of competitive bidding or by drawing lots, a loss is incurred into the process and the same would be an allowable expenditure. The assessee in the instant case has obtained the prized chits through a scheme of competitive bidding or draw of lots and in the process has incurred loss as the money prized by the chit fund to the assessee was less than the money paid by the assessee to those chit fund companies in instalments. The aforesaid fact was never taken into consideration by the authorities below.
5.1 The learned authorised representative further contended that the CBDT has issued a Circular dated 25-3-1993 against Instruction No. 1175 dated 16-5-1978. In the instant case the assessee was running of his own chit fund and also he was the member of such chit fund companies run by other companies and this fact stands proved by the number of transactions entered into by the assessee. In support of his contention the assessee has filed details of loss on chits for the year ending 31st March 1991, appearing at page 6 of the assessee's paper book. He also drew our attention to article (1) of the Memorandum of Association which reads as under :
"To establish, promote, encourage chit funds and other schemes to promote chit funds."
According to learned A.R., the aforesaid fact clearly shows that it was the business of the assessee company to run its own chit fund and also to subscribe or participate in the chits of other companies. He further contended that the assessee had utilised the monies received from such companies on competitive bidding for making payments to prized subscribers of chit groups run by the assessee itself, i.e., the funds were used for the purpose of business. According to him apart from clause 1, other clauses of memorandum, particularly clauses 6, 7, 8, 9 and 15 also show the subscription to chit funds of other companies from the business of the assessee. According to him in the case before the Hon'~ble High Court in Soda Silicate & Chemical Works' case (supra), the assessee was not engaged in the running of the chit funds and as such the instant case is clearly distinguishable from the facts of the case before the Hon'~ble High Court.
5.2 The learned A.R. further contended that the Hon'~ble Punjab and Haryana High Court had not taken into consideration the CBDT instruction no. 1175 dated 16-5-1978. He further stressed that subsequent to the decision of the Hon'~ble Jurisdictional High Court in the case of Soda Silicate & Chemical Works' case (supra), the Board had issued another instruction dated 25-3-1993 wherein the Board has confirmed that the Instruction given on the point of chit loss vide instruction No. 1175 dated 16-5-1978 could not be withdrawn in view of the decision rendered in the case of Soda Silicate & Chemical Works (supra). Accordingly to A.R. the aforesaid instructions, therefore, still holds good. He urged that the CBDT Instructions clarify that any loss incurred by any person due to participation in a chit group would be allowed as business expenditure provided the amount received against the chit is utilised by the person for its business purposes. He stressed that the assessee has fulfilled all the conditions contained in the CBDT Instruction.
5.3 The learned A.R. further contended that in the case of CIT v. Mothooram Premchand [1980] 121 ITR 59/[1979] 2 Taxman 331 (Punj. & Har.), the Hon'~ble Jurisdictional High Court has held that :
"It is settled proposition of law that the Circular issued by the Central Board are binding on Officers and persons employed in the execution of the Income-tax Act."
He further contended that it is settled law that benevolent circulars supplant the law and do not supplement it and even if the Circulars are relied on for the first time before the High Court during the course of hearing, the assessee would be entitled to the benefit of the Circular and the court is bound to take note of the Circular. In support of this proposition the learned authorised representative relied upon the decisions in the following cases :-
(a) Jaikishan Gopikishan & Sons v. CIT[1989] 178 ITR 481/44 Taxman 230 (MP); and
(b) CWT v. Gammon India (P.) Ltd. [1981] 130 ITR 471/[1980] 4 Taxman 246 (Bom.).
5.4 It is further contended that the chit fund companies in which the assessee had subscribed were all private limited companies and the principle of mutuality did not arise. In support of this contention the learned A.R. relied upon the decision of the Tribunal Delhi Bench 'C' in the case of ITO v. ~Muthoot M. George Chits (India) Ltd. [IT Appeal No. 3960 (Delhi) of 1987 dated 15-4-1991] available at pages 19 to 28 of the assessee's paper book which order was followed in ITA No. 5737/Del/88 for assessment year 1985-86, in the case of the very same assessee, available at pages 29 to 34 of the assessee's paper book wherein the Tribunal has also referred that the above order of the Tribunal in assessee's own case for assessment year 1983-84 had been accepted by the Department. Accordingly, the learned A.R. urged that the facts of the present case are quite distinguishable from the facts of the case in Soda Silicate & Chemical Works (supra) decided by the Jurisdictional High Court and as such the loss incurred in running of chits should have been allowed as business loss.
6. On the other hand, the learned D.R. strongly placed reliance on the orders of the authorities below on the issue in question. He contended that no doubt the Central Board of Direct Taxes has issued instructions subsequent to the decision of the Hon'~ble Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works (supra), in favour of the assessee, yet the decision of the Hon'~ble Jurisdictional High Court is binding in the case of the assessee and as such the authorities below were perfectly justified in their decisions in rejecting the claim of the assessee.
7. We have considered the submissions of the parties and have gone through the ratio of decisions relied upon by the parties. The assessee has distinguished the decision of the Punjab and Haryana High Court by raising detailed arguments. It is evident from the submission of the learned A.R. that in the case of Soda Silicate & Chemical Works (supra), decided by the Hon'~ble Jurisdictional High Court, the assessee was only a subscriber wherein in the instant case the assessee is an ~organisor and had also participated. It is also established that the chit business is run as a business proposition by the assessee. It is open for a chit company that to ascertain the profit each chit runs its full course or in the alternative to take into account the loss on account of discount allowed and the profits on account of commission and dividend on own chits every year. Either way the correct income would be reflected. The assessee has chosen the second method which should be accepted. The ITAT Delhi Bench 'C' in ~Muthoot M. George Chits (India) Ltd.'s case (supra) in paras 12 and 13 of its order dated 15-4-1991 has discussed the identical issue in great detail, as reproduced below :
"12. The Tribunal's decision was mainly based on the ruling of the Punjab and Haryana High Court in the case of Soda Silicate & Chemical Works 179 ITR 588. Therein, the High Court has held dealing with a chit subscriber, that a chit fund is a mutual society and neither the payment could be allowed as a deduction nor the receipt could be taxed. The decision given by the Tribunal was based on this authority. We are concerned in this case with a person, who runs chits as a business. From the decision of the Punjab and Haryana High Court it is not very clear whether the person who was running the chit was a mutual society or a limited company. In this case, we are concerned with a limited company. The principles governing mutuality are very well settled. We may, in this connection, refer to the decision of the Supreme Court in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241. At page 246, the Supreme Court has pointed out that companies limited by shares stand on a different footing for this purpose. They quoted therein the observations in the case of CIT v. Royal Western India Turf Club [1953] 24 ITR 551 as follows :
'The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per ~se to prevent a company from making a profit out of its own members. Thus, a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members.' This principle should be applied in the assessee's case to find out whether they would be a mutual society. Now, the contributors to the chits are not contributors to a mutual society. When the chit is run as a business proposition the surplus goes to the assessee only. It does not go to the subscribers. What the subscribers get is only the discount allowed by the bidder minus 5% which goes to the foreman. This is the only amount available to the subscribers. The rest of it is the profit for the assessee. Participation in these profits is by the shareholders of the assessee company not the subscribers of the chits. Therefore, in this case, the principle of mutuality will not apply. Once this is accepted, the assessee's claim for deduction of the notional loss at the same time offering for taxation the notional commission and dividend is reasonable and legal.
13. We may also in this connection, refer to the decision of the Delhi High Court in the case of DLF Housing & Constructions (P.) Ltd. v. CIT [1982] 9 Taxman 207, at page 225, the High Court was discussing about a question whether a subsequent Bench of the Tribunal should follow the earlier Bench's decision :
'31. Counsel for the parties did not address any argument on this question. Since Delhi Bench 'B' was concerned with a different assessment year although it was subsequent to the assessment year dealt with by Delhi Bench 'C', we do not think that any legal obligation was cast on the former to follow the view expressed by the latter either as a precedent of otherwise. Of course, there can be no doubt that it had persuasive value in the sense that the Bench dealing with the subsequent year should not have ordinarily departed from the view taken earlier. We have already observed that Delhi Bench 'B' has given cogent and sound reasons For taking a different view of the matter. So, the question of want of any propriety of desirability does not arise'."
7.1 The case of the assessee is on all fours to the above case decided by 'C' Bench of the Tribunal in the case of ~Muthoot M. George Chits (India) Ltd. (supra) for assessment year 1983-84, which as observed by the Tribunal for assessment year 1985-86 in the case of very same assessee, has since been accepted by the Department. Accordingly, we hold that there was no mutuality between the subscribers and the assessee. In the instant case also the assessee is a private limited company engaged in the business of chits by organising its own chit groups as well also by participating the same. The assessee's contention is that the loss was incurred in obtaining the prized chits through competitive bidding or draw of lots, which is a normal feature of such business and the amount so obtained was utilised in its own business and as such the loss incurred in the process was a business loss. Considering the totality of facts and circumstances of the case we accept the contention of the assessee. Accordingly, orders of the authorities below on the issue in question are quashed and the Assessing Officer is directed to allow the claim of the assessee on the issue in question. The aforesaid order covers the whole controversy in question. Therefore, we do not think it necessary to deal with the additional ground raised by the assessee.
8. In the result, appeal stands allowed.