P.K. Bansal, Accountant Member - This appeal has been filed by the Assessee against the order of the CIT (A) Kanpur, dated 30.03.2015 for Assessment Year 2004-05.
2. Ground No. 1 is general in nature therefore does not require any adjudication.
3. Ground Nos. 2 and 3 relate to the disallowance of Rs. 2,15,090/-. The facts relating to this ground are that the Assessing Officer during the course of hearing noted that the assessee has debited a sum of Rs. 2,15,090/- as the chit loss in its Profit & Loss account. The Assessing Officer disallowed the same and added that the same in the income of the assessee.
4. When the assessee went in appeal before Ld. CIT (A), Ld. CIT (A) confirmed the order of the Assessing Officer. In view of the decision of Hon'ble Punjab & Haryana High Court in the case of Soda Silicate & Chemical Works v. CIT [1989] 179 ITR 588/46 Taxman 33.
5. I have heard the rival submissions and carefully considered the same along with the orders of the tax authorities below. No doubt, a chit fund incidentally partake of the nature of saving scheme. Chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to this subscribers, their turns for getting such loans being determined either by auction or by drawing lots.
6. There is no dispute that the assessee incurred the chitty loss of Rs. 2,15,090/- 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.
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 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.
8. 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 installments 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.
9. 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 (AP.) 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.
10. 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] 59 Taxman 367 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.
11. Thus, there are three decisions before me, 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.
12. 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.
13. 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, I set aside the order of the Ld. CIT (A) on this issue and delete the addition of Rs. 2,15,090/-
14. Ground No. 4 relates to the sustenance of the disallowance of Rs. 25,000/- out of the various expenses.
15. After hearing the rival submissions and gone through the order of the tax authorities below. I noted that Assessing Officer disallowed on ad hoc basis Rs. 25,000/- out of the expenses claimed by the assessee under the head conveyance and entertainment by assume that there are disproportionate increase section 37 nowhere empower the Assessing Officer to disallow the expenditure in the manner the disallowance has been made by the Assessing Officer. There is no allegation that the expenses have not been incurred wholly and exclusively for the purpose of business even it is not a case of the revenue that the expenses are personal expenses or capital expenditure. I, therefore, delete the disallowance of Rs. 25,000/-.
16. Ground Nos. 5 and 6 relate to the sustenance of the addition of Rs. 8,30,000/- u/s 68 of the Income-tax Act. The facts relating to this ground are that the Assessing Officer made the addition in the case of the assessee in respect of the following loans received by the assessee:—
| 1. Ms. Sapna Lalwani |
Rs. 1,10,000/- |
2. Sh. Rajiv Maheswari |
Rs. 10,000/- |
3. Ms. Vandana |
Rs. 10,000/- |
4. M/s. Mahadev Enterprises |
Rs. 7,00,000/- |
Total |
Rs. 8,30,000/- |
17. Assessing Officer was not satisfied with the explanation of the assessee in respect of creditworthiness and genuineness of the transactions. He, therefore added a sum of Rs. 8,30,000/- in the income of the assessee. When the matter went before the Ld. CIT (A), Ld. CIT (A) sustained the addition.
18. I have heard the rival submissions and carefully considered the same along with the orders of the tax authorities below. It is better for me to decide each and every loan taken by the assessee independently.
19. So far the sum of Rs. 10,000/- received from Shri Rajiv Maheswari is concerned the said loan has not been received by the assessee during the year. The amount has been received in the earlier year therefore, I delete the said addition as the cash credit does not arise in the impugned assessment year.
20. So far the sum of Rs. 10,000/- received from Ms. Vandana is concerned, I noted that the assessee received a sum of Rs. 16,000/- vide Cheque No. 70335 of Central Bank of India during the impugned assessment year. From the copy of the bank statement of Ms. Vandana Lalwani, I found that she has deposited a sum of Rs. 20,000/- cash as on 01.03.2004 when it was having bank balance at Rs. 8815.49 and out of that accumulate balance she had issued cheque of Rs. 16,000/- to the assessee. At the most since the lender before depositing a sum of Rs. 20,000/- in cash was having bank balance of Rs. 8,815/-. Only a sum of Rs. 8,000/- out of the Rs 16,000/-can be proved to be a genuine one. In respect of which we can say assessee has proved the creditworthiness of the lender. I, therefore, sustain the addition at Rs. 8000/- out of Rs. 10,000/- sustained by the Ld. CIT (A). Thus, out of the loan taken from Ms. Vandana Lalwani addition of Rs. 8,000/- is sustained.
21. Now coming to the addition of Rs. 1,10,000/- in respect of loan taken from Smt. Sapna Lalwani. I have gone through the evidences as has been relied on by the Ld. AR copy of which is available at page no. 4 to 8 of the paper book. I noted that Smt. Sapna Lalwani has earlier also advance a sum of Rs. 1,50,000/- to the assessee in the earlier year which was the opening balance as on 01.04.2003 during the impugned assessment year. The assessee has received a sum of Rs. 1,10,000/- vide Cheque No. 52240 on Central Bank of India Shastri Nagar, Kanpur. The assessee has proved the identity, creditworthiness and genuineness in respect of the sum of Rs. 1,10,000/-. The assessee has submitted the photo copy of the cheque as well as the bank statement of Smt. Sapna Lalwani. From the copy of the bank account filed which is available at page no. 7, it is apparent that Smt. Sapna Lalwani was having a sufficient balance in her bank account amounting to Rs. 1,21,910/- when a cheque of Rs. 1,10,000/- was issued in favour of the assessee. The identity has already been proved, this proves the genuineness of the transaction as well as creditworthiness of Smt. Sapna Lalwani. In view of this fact, I delete the addition of Rs. 1,10,000/- as in my opinion, the assessee has duly discharged his onus.
22. Now coming to the addition of Rs. 7,00,000/-. I noted that this amount has been received by the assessee from M/s. Mahadev Enterprises. In this regard, the assessee has drawn our attention towards page no 16 to 23 of the paper book. From page no. 16, it is apparent that the assessee has received a sum of Rs. 7,50,000/- which consist of Rs. 50,000/-, Rs. 1,00,000/- Rs. 1,00,000 and Rs. 5,00,000/- from M/s. Mahadev Enterprises. The assessee before receiving the said sum has paid on 05.05.2003 a sum of Rs. 2,00,000/- to M/s. Mahadev Enterprises. The assessee has credited to M/s. Mahadev Enterprises on 09.03.2004 by interest amounting to Rs. 1,50,000/-. Thus in net the assessee has received only a sum of Rs. 5,50,000/- during the impugned assessment year not the sum of Rs. 9,00,000/- as has been observed by the Assessing Officer. The Assessing Officer ignored that the credit of Rs. 1,50,000/- has arisen due to the credit being given by the assessee on account of the interest on loan on 09.03.2004. The assessee has submitted a copy of the bank account M/s. Mahadev Enterprises which is available from page no. 17 to 19 of the paper book. From the said account, it is apparent that M/s. Mahadev Enterprises has given the cheque of Rs. 50,000/- on 23.06.2003, Rs. 1,00,000/- on 28.07.2003, Rs. 1,00,000/- on 24.10.2003 and Rs. 5,00,000/- on 03.03.2004. Before the issue all the cheques to the assessee, I noted that there is no cash deposit being made by M/s. Mahadev Enterprises there was sufficient balance in the account of M/s. Mahadev Enterprises. The assessee has also in the earlier year taken loan from M/s. Mahadev Enterprises as there was opening balance of Rs. 4,10,000/- as on 01.04.2003. In the earlier year no addition has been made u/s 68 of the Income-tax Act. Thus, M/s. Mahadev Enterprises is a regular income for assessee having permanent account number. Thus the identity, genuineness of the transaction as payment received through cheque is proved so far creditworthiness of M/s. Mahadev Enterprises, I noted that M/s. Mahadev Enterprises was having sufficient balance in his bank account before the advancing the loan to the assessee. In view of this fact, I am of the view that it is a case where the assessee has submitted sufficient evidence to explain the nature and source of the loan. This discharges, in my opinion, onus which lie from the assessee. I, therefore, set aside the order of the Ld. CIT (A) on this issue and delete the addition of Rs. 7,00,000/-. Thus, the addition of Rs. 8,30,000/- is reduced to Rs. 8,000/-, Ground No. 5 and 6 are partly allowed.
23. In the result, the appeal filed by the Assessee is partly allowed.