Weather prize under prize chit is liable to income-tax. - Income Tax - 1175/CBDT

INSTRUCTION NO. 1175/CBDT Dated : May 16, 1978 Section(s) Referred: 143 ,144 Statute: Income - Tax Act, 1961 A question has been raised as to whether the profits by a subscriber/organiser as a result of the auction of the chit amount or by a member who succeeds in the draw to get a prize under a prize chit is liable to income-tax. 2. Board have examined the matter in consultation with the Ministry of Law and are advised that the correct legal position with regard to the liability of assessments on profit made by organisers and subscribers to chit funds would be as follows:- a). If any person organises chit funds and for this purpose bring the members together, administers the chit funds and thereby earns commission etc., profits made by such a person is income from business and if for any special reason there is loss then it is business loss. Normally there should be no loss to the organiser unless he takes over the liability of some of the members. In such a case the unrecovered amount due from such members will have to be treated as bad debt and the test to be adapted in usual business assessment for the allowance of bad debts would be applicable in such cases also. b)In the hands of the subscribers a few will be receiving more than what they have subscribed. This extra amount is in the nature of interest and as such taxable. Members who take the money earlier from the chit will necessarily have to contribute more which means that they incur loss, which is nothing but interest paid for moneys taken in advance. The claim of such a loss will have to be considered for the purpose of allowance according to the provisions of the Act depending upon how the money was utilised by the subscriber.