2014 (3) TMI 388 - HC - Income Tax

Claim of exemption u/s 28(iii) of the Act Income derived from chit dividend Held that - The assessee is just a subscriber to the Chit Scheme thus, it is difficult to draw the principle of mutuality to hold that the surplus received as by way of dividend was merely distribution of what was contributed by the assessee Relying upon Soda Silicate and Chemical Works vs. CIT 1989 (4) TMI 63 - PUNJAB AND HARYANA High Court - chit transaction being one, where the members of the chit made contributions to the fund by monthly installments and receive lumpsum amount, but at a discount - the discounted amount would be distributed to the members as dividend and the contribution made to the chit fund - the contribution made to the chit fund could not be treated as business expenditure or the receipt of lumpsum amount or the dividend could be regarded as business activity of the assessee - the nature of the business of the assessee, the Court held that the receipt from the Chit fund could not be regarded as income from business activity the order of the Tribunal is upheld in disallowing the assessee s claim of loss in the chit fund during the year. Principle of mutuality Held that - The decision in CIT vs. Bankipur Club Limited 1997 (5) TMI 392 - SUPREME Court followed - the assessee is only a subscriber to a chit run by another concern - thus, the question of invoking the mutuality principle does not arise by the mere chance of other participants subscribing to the chit scheme - the dividend income received over and above what had been subscribed by the assessee liable to be assessed as income of the assessee thus, the order of the ITAT upheld Decided against Assessee.

Summary

Issues:
Assessment of chit dividend as taxable income under Section 28(iii) of the Income Tax Act for the assessment year 1996-97; Claim of exemption based on the principle of mutuality; Interpretation of relevant legal precedents by the Income Tax Appellate Tribunal; Application of the mutuality principle to chit dividend income; Comparison with decisions in similar cases; Determination of whether chit dividend income is assessable as the individual's income.

Analysis:
The case involved an individual assessee appealing against the Income Tax Appellate Tribunal's order assessing chit dividend as taxable income for the assessment year 1996-97 under Section 28(iii) of the Income Tax Act. The assessee claimed exemption based on the principle of mutuality, citing legal precedents. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal rejected the assessee's claim, relying on previous court decisions. The assessee contended that the Tribunal erred in taxing the surplus received as dividend, invoking the mutuality principle from the Supreme Court's decision in CIT vs. Bankipur Club Limited. The Tribunal, however, upheld its decision based on the previous court rulings.

The assessee argued that being a mere subscriber to a chit scheme run by another entity should not result in taxing the surplus dividend income received. The Tribunal and the High Court considered the nature of chit funds as a business and the individual's role as a subscriber. The High Court examined the mutuality principle in detail, emphasizing complete identity between contributors and participators for income to be exempt from taxation. The High Court differentiated the case from a mutual benefit club scenario, concluding that the chit dividend income should be assessed as the individual's income.

In a related unreported case, the Court highlighted that participating in a chit fund did not constitute the individual's business activity, leading to the disallowance of a claim for chit fund loss deduction. The Court reiterated that chit transactions involved contributions to a fund and receiving dividends, not constituting business expenditure. The Court distinguished this case from the present one, emphasizing the nature of the individual's business activities.

Ultimately, the High Court dismissed the Tax Case (Appeal), upholding the Income Tax Appellate Tribunal's decision to assess the chit dividend income as the individual's income. The judgment emphasized the distinction between mutual benefit associations and chit schemes, clarifying that being a subscriber to a chit did not warrant invoking the mutuality principle. The decision highlighted the legal framework of chit funds and the individual's role as a subscriber in determining the taxability of the chit dividend income.