2019 (9) TMI 918 - AT - Income Tax

Deduction as loss on Chit - Whether the Chit discount is capital in nature OR revenue expenditure? - Whether disallowance of Chit loss is sustained, then the income from Chit dividend be also reduced from the income? - Chit income be reduced from the income - net amount v/s gross amount - HELD THAT - In CIT Vs. Kottayam Cooperative Bank Ltd. 1974 (4) TMI 2 - KERALA HIGH COURT and also CIT Vs. Merchant Navy Club 1971 (9) TMI 59 - ANDHRA PRADESH HIGH COURT and ITO Vs. Singh Radio Co. (India) (P.) Ltd. 1991 (7) TMI 144 - ITAT DELHI-D it was held that the loss incurred in subscribing to chit fund is allowable if funds raised from such chit is utilized for the purpose of business. On this aspect, there is no finding of authorities below. Before us, the assessee has brought certain additional evidences on record in the form of ledger account of various chits as well as copy of bank statements and it is being claimed before us that the money raised through chit was used for the business purpose. Under these facts, we feel it proper to restore back the matter to the file of ld. CIT(A) for fresh decision after examining these additional evidences and if the assessee is able to establish that the money raised through chit was utilized for the purpose of business, then the loss incurred in the chits being net of chit discount (-) chit dividend should be allowed as revenue expenditure. Even if the assessee is not able to establish that the money raised through chit was used for business purpose then also, disallowance should be of net amount of chit discount (-) chit dividend and not of gross amount of chit discount. - Appeals filed by the assessee are allowed for statistical purposes.

Issues Involved:
1. Disallowance of claim of deduction as loss on Chit.
2. Determination of whether Chit discount is capital in nature.
3. Consideration of Chit funds utilization for business purposes.
4. Alternative submission regarding reduction of Chit income from the total income if Chit loss disallowance is sustained.
5. Liability to pay interest levied erroneously.

Detailed Analysis:

1. Disallowance of Claim of Deduction as Loss on Chit:
The assessee challenged the disallowance of ?20,28,200/- for AY 2014-15 and ?2,70,500/- for AY 2015-16 as loss on Chit, arguing that the loss incurred should be allowed as a deduction. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] both disallowed the claim, considering the Chit discount as a capital expenditure. The Tribunal referred to the case of Kamal Raheja Vs. ITO, where it was held that if the loss incurred by subscribing to a chit fund is for raising funds for business purposes, such a loss is an allowable deduction.

2. Determination of Whether Chit Discount is Capital in Nature:
The AO held that the Chit discount is capital in nature, asserting that the assessee used the Chit funds to create assets and increase the capital base of the company. The Tribunal, however, noted that if the funds raised through the Chit were used for business purposes, the loss should be treated as revenue expenditure. The Tribunal cited several judgments, including the Kerala High Court in CIT v. Kottayam Co-operative Bank Ltd. and the Andhra Pradesh High Court in CIT v. Merchant Navy Club, supporting the view that such losses are allowable if used for business purposes.

3. Consideration of Chit Funds Utilization for Business Purposes:
The Tribunal examined additional evidence provided by the assessee, including ledger accounts and bank statements, to establish that the funds raised through Chits were used for business purposes. The Tribunal found that the assessee had utilized the Chit funds for business transactions, as evidenced by the transfer of funds to business accounts and the issuance of cheques for business purposes.

4. Alternative Submission Regarding Reduction of Chit Income from Total Income:
The assessee alternatively submitted that if the disallowance of Chit loss is sustained, the Chit income (dividend) should be reduced from the total income. The Tribunal agreed that if the funds raised through Chits were not used for business purposes, the disallowance should be of the net amount (Chit discount minus Chit dividend) and not the gross amount of Chit discount.

5. Liability to Pay Interest Levied Erroneously:
The assessee denied the liability to pay interest, arguing that it was levied erroneously. The Tribunal did not specifically address this issue in the judgment but indicated that the matter should be reconsidered by the CIT(A) in light of the new findings and additional evidence.

Conclusion:
The Tribunal restored the matter to the file of the CIT(A) for a fresh decision, instructing the CIT(A) to examine the additional evidence and determine if the funds raised through Chits were used for business purposes. If established, the loss incurred should be allowed as revenue expenditure. If not, the disallowance should be of the net amount. The CIT(A) was directed to pass a reasoned and speaking order after providing a reasonable opportunity of being heard to both sides. The appeals filed by the assessee were allowed for statistical purposes.

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