Income Tax Appellate Tribunal - Cochin
Rajees vs Income-Tax Officer on 8 January, 1996
Equivalent citations: [1997]63ITD330(COCH)
ORDER
1. The assessee-firm has filed this appeal against the order of the Dy. CIT(Appeals), Trivandrum, dated 17-1-1992 on the only ground that he was erred not justified in not allowing the chitty loss of Rs. 2,97,573 as allowable expenditure.
2. I have heard the learned representative of the assessee, Sri Kulathu and the learned departmental representative, Sri. T. John George. Their arguments are taken into consideration.
3. The learned representative for the assessee submitted that the assessee incurred chitty loss and it is revenue in nature. It is not a capital loss. It is an incidental to business and amounts to interest paid for financing the business. When the assessee needs working capital for its business, he subscribes in a chitty and when it is convenient, the chitty in bid and the amount utilised for the working capital of the business. In the course of time, the amount is paid in instalments and when the chitty is terminated, if there is any chitty balance, the same is treated as chitty loss and written off in the books. This represents only the interest paid on the chitty less the interest received, and as such, it is only interest paid for availing working capital and is not any capital expenditure as presumed by the Assessing Officer and confirmed by the Dy. CIT (Appeals). It was also submitted that the Assessing Officer as well as the Dy. CIT (Appeals) erred in relying only on the decision of the Punjab and Haryana High Court in the case in Soda Silicate & Chemical Works v. CIT[1989] 179 ITR 588/46 Taxman 33. According to the assessee, there are other various decisions holding that income from chitty is not capital receipt and as such expenditure by way of chitty loss will also not be capital expenditure. Therefore, it was submitted to allow the chitty loss as claimed by the assessee.
4. According to the learned departmental representative, the chitty loss is capital in nature and, therefore, it cannot be allowed as a revenue expenditure. According to the learned departmental representative, the Assessing Officer as well as the Dy. CIT(Appeals) have rightly held that it is not an allowable loss and, therefore, the assessee's appeal should be dismissed.
5. In view of the rival submissions, the only point which has arisen for my consideration is whether the loss incurred in subscribing to chit funds and taking bids by losing certain part of the total chit fund is an allowable deduction. There is no dispute that the assessee incurred the chitty loss of Rs. 2,97,573 and claimed the same as deduction. The Assessing Officer disallowed it holding as a capital expenditure relying on the decision of the Punjab and Haryana High Court in the case of Soda Silicate & Chemical Works (supra). 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.
6. 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 monthly instalments. A chit fund does, no doubt, incidentally partake of the nature of a saving scheme also. But, unless amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there will be no income derived either by way of interest or by way of amounts forgone, by the bidders at the auction. Thus the chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to the subscribers, their turns for getting such loans being determined either by auction or by drawing lots. The Tribunal was, therefore, perfectly right in holding that, in conducting the chit funds, the assessee was providing credit facilities to its members and that the income earned by the assessee from the said business is entitled to deduction under section 80P(2)(a)(i) of the Act."
In the above referred case, the point involved was a deduction by the Co-operative Bank under section 80P(2)(a)(i) of the Act. However, the Punjab and Haryana High Court took a different view in the above referred case and held that the loss so incurred is not allowable.
7. In these days it has become very common for the business class as well as the general investors to contribute to chit fund companies and subscribe to various chits for raising finances. In a chit fund scheme, every member subscribes a certain sum of money periodically by way of instalments over a determined period of time and each subscriber gets a sum determined by a chit fund company during the tenure of the chit or at the time of completion of chit. The subscriber who receives the money in the earlier period receives a lesser amount as compared to the subscribers who receive the amounts in later periods. The scheme of the chit fund companies is covered by the Chit Fund Act, 1982 which enacted to have a control on the operation of Chit Fund Companies and to protect the interests of the subscribers to a chit fund company.
8. It was contended that there is a concept of mutuality in subscribing to the chit fund. The nature of chit fund companies suggests that all the members participate together and make contributions to the chit fund and the company distributes the prize money amongst the members in a prescribed manner. The identity of all the contributors of the Chit Fund is established and it can be presumed that the chit fund concept is based on the concept 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; (ii) CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC), (iii) 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 case an assessee subscribes to a chit fund by joining in a chit group and after paying few instalments, bids the chit and claims the difference between the total payments towards the chit and the prize for which it was bid as business loss, then the assessee is entitled to the same if the chit fund money is utilised for business purposes and the chit is only a method of funding the business needs just like any other borrowing. However, the above judgment of the Andhra Pradesh High Court did not find favour with the Punjab & Haryana High Court and it proceeded to consider the aspect of mutuality and came to the conclusion that neither a member of a chit fund company is entitled to any loss on account of shortfall of the prize received by him over the payments made by him nor any income on account of excess receipt by him is liable to be taxed as income in his hands.
9. It may not be out of place to point out here that on a similar issue a decision has been delivered by the Tribunal, New Delhi, in the case of ITO v. Singh Radio Co. (India) (P.) Ltd. [1991] 41 TTJ (Delhi) 296 in which it has been held that in case the chit amount is used for the purposes of business, the loss, if any, incurred on account of the shortfall of the receipt over the subscription is allowable as business expenditure.
10. Thus, there are three decisions before us, one is of Kerala High Court in Kottayam Co-operative Bank Ltd's case (supra), another is Andhra Pradesh High Court and the third is the decision of the Tribunal Delhi Bench, on the point of allowing the loss incurred in subscribing to the chit fund and utilising the funds raised from such chit for the purpose of business is an allowable expenditure.
11. The Central Board of Direct Taxes also issued instructions in this connection. However, in all the above mentioned judgments, Instruction No. 1175 issued by the CBDT under order F. No. 169/21/78-IT (80) dated May 16, 1978 was not taken into account. The gist of the instructions is reproduced below :-
"(a) If any person organises Chit Funds and for this purposes brings the members together, administers the Chit Funds and thereby earns commission, etc., profits made by such a person is income from business and if for any special reason there is loss then it is business loss. Normally there should be no loss to the organiser unless he takes over the liability 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 Commissioner in proceedings under section 263, having been satisfied about the allowability of the claim on the basis of the judgment of Andhra Pradesh High Court as well as the Board's Instruction No. 1175 on the subject, referred the matter again to the CBDT for issuing the necessary guidelines. The CBDT has recently issued instructions to all the Commissioners vide letter dated March 25, 1992 holding that the existing Instruction No. 1175 on the subject cannot be withdrawn on the basis of the judgment of Punjab & Haryana High Court. In a way, the CBDT has upheld the position that in case the amount of chit fund money is utilised for the purposes of business, any loss incurred out of the same is allowable as business expenditure.
12. In accordance with the above referred three decisions and the Instruction No. 1175 issued by the CBDT, it is obvious that if a subscriber incurs loss in subscribing to the chit fund to raise funds to use them in his business or for the business purpose, such a loss is an allowable deduction. In this view of the matter, the appellant succeeds and the appeal is allowed.