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Issues involved:
The judgment deals with the issues of accounting method adopted by the assessees, taxability of dividend income, allowance of chit loss as a deduction, and the application of principles of deferred expenditure in the context of chit funds. Accounting Method: The assessees, private limited companies subscribing to chits, maintained their accounts on a mercantile basis. They claimed that the discount arose when the prized chit amount was received and was a statutory and contractual liability. The Assessing Officer rejected this method and taxed the dividend in the year of receipt and allowed chit loss on a proportionate time basis. The Commissioner of Income-tax (Appeals) also rejected the completed contract method. The High Court held that income derived during a previous year by way of chit dividend should be assessed in that year following the principles of mercantile/accrual system of accounting. Taxability of Dividend and Chit Loss: The Income-tax Appellate Tribunal relied on instructions by the Central Board of Direct Taxes and a Supreme Court decision to dismiss the appeals by the assessees. However, the High Court found that the discount loss claimed should be allowed in the year of its accrual. The dividend income was to be taxed based on its accrual, and the discount was to be allowed in full in the year of accrual itself. The completed contract method was rejected, and the discount should not be spread over the remaining period of the chit on a proportionate basis. Deferred Expenditure Principles: The Tribunal applied deferred expenditure principles to the appellant's case, even though there was no deferred benefit. The High Court clarified that in chit transactions, there was no correlation between the discount amount and future instalments, and the discount was not a deferred expenditure. The discount was to be allowed in the year of accrual, as there was no deferred benefit in chit transactions. Conclusion: The High Court disposed of the tax case appeals, answering the first question of law in favor of the Revenue and against the assessee, and the second question against the Revenue and in favor of the assessee. The third question, being academic, was not addressed. No costs were awarded in this judgment.
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