1996 (1) TMI 155 - AT - Income Tax

Summary

Issues:
1. Allowability of chitty loss as an expenditure.

Detailed Analysis:
The appeal was filed against the order disallowing chitty loss as an allowable expenditure. The assessee contended that the chitty loss is revenue in nature and not capital expenditure. It was argued that chitty loss represents interest paid for availing working capital and is not a capital expenditure. The Assessing Officer and the Dy. CIT(Appeals) relied on a decision of the Punjab and Haryana High Court to disallow the chitty loss. The Kerala High Court, in a separate case, held that chit funds primarily operate as a scheme for advancing loans and providing credit facilities. The chit fund concept was also argued to be based on the principle of mutuality, where all members contribute to the fund and share the prize money. The Punjab and Haryana High Court had a different view, stating that no member of a chit fund can incur a loss or earn gain due to mutual participation. Additionally, a Tribunal decision from New Delhi allowed chitty loss as a business expenditure if the chit amount was used for business purposes.

The issue for consideration was whether the loss incurred in subscribing to chit funds for business purposes is an allowable deduction. The Tribunal analyzed various judgments, including those of the Kerala High Court, Andhra Pradesh High Court, and a Tribunal decision from New Delhi. The Central Board of Direct Taxes issued instructions stating that if a person organizes chit funds and earns profits, it is income from business, and any loss incurred can be treated as a business loss. The instructions also addressed the taxation of surplus amounts received by subscribers as interest. The CBDT upheld the position that if chit fund money is used for business purposes, any resulting loss is allowable as a business expenditure. In line with the judgments and instructions, the Tribunal concluded that if a subscriber incurs a loss in subscribing to a chit fund for business purposes, such a loss is an allowable deduction. Consequently, the appeal was allowed, and the chitty loss was considered an allowable expenditure.