1990 (5) TMI 73 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of Rs. 3,78,405 from bid expenses.
2. Taxability of income from own chits.
3. Allowability of expenses on own chits.
4. Mutuality principle in chit fund transactions.

Detailed Analysis:

1. Deletion of Rs. 3,78,405 from Bid Expenses:
The revenue objected to the deletion of Rs. 3,78,405, an addition made by the Assessing Officer (AO) from the bid expenses. The AO disallowed the loss claimed by the assessee, a limited company in the chit fund business, on the basis that the loss or profit could only be determined upon the completion of each chit. The CIT(A) disagreed, holding that the loss accrued at the point of each bid and thus disallowing the loss was improper.

2. Taxability of Income from Own Chits:
The assessee claimed that the receipts from own chits, including commission and dividend, were taxable as business income. The revenue, however, argued that neither the income nor the expenses related to own chits should be taxable or allowable. The tribunal noted that the company, acting as the foreman, also participated in the chit auctions and retained a 5% commission from the discount amount. The tribunal emphasized that the foreman, under the chit agreement, could obtain the chit amount at the specified instalment without any auction, which implied a mutual relationship among the subscribers and the foreman.

3. Allowability of Expenses on Own Chits:
The assessee argued that the expenses incurred on its own chits, specifically the bid amount, should be allowable as deductions from business income. The tribunal examined the provisions of the Madras Chit Funds Act, 1961, and the Delhi Chit Fund Rules, 1964, which govern the chit fund business. It was noted that the foreman could bid on behalf of any subscriber with written instructions and that the foreman could also be a subscriber. However, the tribunal found that the company's practice of bidding on its own chits and suffering a 25% discount was not a prudent business decision, especially given the company's financial situation, which indicated a shortage of liquid funds.

4. Mutuality Principle in Chit Fund Transactions:
The tribunal extensively discussed the principle of mutuality, which applies to transactions where there is mutual participation and benefit among members of an association. The tribunal observed that the chit fund business operated on a mutual basis, with the company acting as the foreman and the subscribers being the members. The tribunal referred to various judicial precedents, including the Andhra Pradesh High Court's decision in CIT v. Margadarsi Chit Funds (P.) Ltd. and the Punjab & Haryana High Court's decision in Soda Silicate & Chemical Works, to conclude that the transactions involving the company's own chits were mutual in nature. Consequently, the income from own chits was not taxable, and the expenses related to own chits were not allowable as deductions.

Conclusion:
The tribunal set aside the order of the CIT(A) and allowed the revenue's appeal. It held that the bid amount on own chits of Rs. 5,68,500 and the commission amounts of Rs. 1,90,095 and Rs. 94,750 were related to mutual transactions and thus outside the ambit of the Income-tax Act. Therefore, neither the expense claimed was allowable nor the income shown to this extent was taxable. The appeal was allowed, and the deletion of Rs. 3,78,405 from bid expenses was reversed.