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TMI Blog2002 (1) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany carrying on the business of chits. One of its main activities is to form/promote hundreds of chit groups, with fixed number of subscribers with fixed amount of subscription and for a fixed period. The number of subscribers and the period of the chit are identical i.e. if there are 50 subscribers then the period of chit will be for 50 months only. The monthly subscription varies from group to group depending upon the value of the total chit, the number of subscribers etc. 5. The modus operandi of the chit business can be explained by way of this example, given below. If the chit group promoted by the company is Rs. 50,000 prize money for 50 months then 50 subscribers join this chit group and each one of them are supposed to contribute Rs. 1,000 per month. Every month there will be an auction of this chit and the successful bidder will get the prize money less discount offered by him. Thus, if subscriber-A were to bid Rs. 50,000 for Rs. 40,000, he will be offering a discount of Rs. 10,000. He will get the prize amount of Rs. 40,000 only. The Foreman will be getting 5 percent of Rs. 50,000 as commission i.e. Rs. 2,500 which will be paid from out of the discount of Rs. 10,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer rejected the contention of the assessee and subjected the dividend earned to tax rejecting the place that the income is derived from mutual association. While doing so fie relied on the jurisdictional High Court's judgment in the case of CIT v. Kovur Textiles [1982] 136 ITR 61 (AP). The assessee relied on the judgment of the Hon'ble Punjab Haryana High Court in the case of Soda Silicate Chemical Works v. CIT [1989] 179 ITR 588. The Ld. CIT(A) upheld the addition made by the Assessing Officer relying on the unreported judgment of the jurisdictional High Court in CIT v. Sri Purushotham Reddy in the Case Referred No. 36 of 1985. It was the view of the Ld. CIT(A) that since the jurisdictional High Court has held that the chit loss was a business loss, on the same reasoning the dividend income from chits should be taken also as business income. Ld. CIT(A) has relied on the judgment of the Hon'ble Kerala High Court in the case of M. George Bros. Chitty Fund v. CIT [1984] 150 ITR 333 and the decision of the Madras High Court in the case of CIT v. Dr. Chinna Oomen [1984] 150 ITR 583. Aggrieved of this order, the assessee is in appeal before us. 8. Before the commencement of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DT dated 25-3-1992 is extracted in these proceedings. The CBDT in its proceedings dated 25-3-1992 declined to give instructions to the CITs regarding reopening of assessments under section 263 on the ground of mutuality. He submitted that in other words, the considered stand of the CBDT is that the CITs are entitled to pass 263 orders to implement the mutuality principle as propounded in the Punjab Haryana High Court's judgment in Soda Silicate Chemical Works Ltd.'s case. In these circumstances, he submitted that it is no more open to the department to contend as an absolute proposition of law that the principles of mutuality is not applicable to chit fund transactions. 10. Ld. counsel for the assessee further argued that the decisions referred to and followed by the Ld. CIT(A) in Kovur Textiles' case, George Bros. Chit Fund's case and in Dr. Chinna Oomen's case as also the unreported judgment in Shri. Purushotham Reddy's case are distinguishable as in none of the above decisions, the principle of mutuality has been raised or argued. He vehemently argued that the above four decisions cannot be considered as precedent on the question of mutuality. For this proposition, he reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be able to participate in surplus. He submitted that this view has been approved by the judgment of the Hon'ble Supreme Court in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97 the relevant passage is at page 103 which is extracted hereunder: "The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves; it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects." Thus in the light of the above submission the applicant prayed for relief. II. As regards the decision relied upon by the revenue authorities, Ld. counsel for the assessee submits that the decision in Purushotham Reddy's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant's counsel. This finding of the Supreme Court is binding on all courts in India in view of Article 141 of the Constitution of India. He further argued that it is a settled proposition of law that the High Court can only answer those questions which are referred to it and it cannot answer new questions which has not been so referred vide the following cases: (a) CIT v. Maharajadhiraja Kameswar Singh of Darbhanga [1933] 1 ITR 94 (b) Sir Rajendra Narayan Bhanja Deo v. CIT [1940] 8 ITR 495 (PC) (c) Kusumben D. Mahadevia v. CIT [1960] 39 ITR 540 (SC) (d) B.B. Irani v. CIT [1966] 60 ITR 437 (SC:) (e) CIT v. Smt. Anusuya Devi [1968] 68 ITR 750 (SC) (f) CIT v. Krishna Sons [1968] 70 ITR 733 (SC) The Hon'ble Supreme Court in Krishna Sons' case observed as under: "The jurisdiction of Supreme Court arising over judgment of High Court on a reference under the Income-tax Act is also advisory. The Supreme Court can only record its opinion on questions which are referred and not questions which could have been but have not been referred. In Krishna Sons' case, the question as to whether omnibus permit was a capital asset though considered by the Tribunal was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iature Bulb Industries [1981] 130 ITR 41 (All.). In the light of the above submission and case law ld. counsel for the assessee submits that the ratio of Their Lordships of the Punjab Haryana High Court rendered in Soda Silicate Chemical Works' case and followed by ITAT, New Delhi should be applied to the appellant's case so as to hold that the net dividend received by the appellant is not to be taxed on grounds of mutuality. 12. Summing up his arguments, the ld. counsel for the assessee, as to whether chit fund companies are entitled to relief, submits that a businessman can earn non-taxable income vide pp. 47-48, 113 127 of Palkhivala on Income-tax Vol. I., 8th Edition, in CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 at pp. 458 and 459, Their Lordship of the Supreme Court have held that when a sugar company cultivates sugarcane for the purpose of manufacturing sugar, the profits referable to agricultural activities are exempt. At page 48 of Palkhivala on Income tax 8th Edition Vol. 1, it is digested as under: "The exemption is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient." The ld. c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 at page-2 of the Tribunal's order, wherein it was observed thus: "The submission of the assessee was that the surplus arising to a mutual association is not taxable either in the hands of the association or in those of the members thereof. According to the assessee this is based on the principles that no person can make profit but of himself." He further took this bench to paragraph-10 at page-5 of that order, wherein it was held thus: "The matter came to be considered more elaborately by the special Bench in HO v. Kosamattam Chitty Fund Investments (Selected orders of the Tribunal Vol. III page 16) and it was categorically held that veethapalisa in the hands of the foreman since in his case it arose out of a business transaction was clearly income." He argued that the principles of mutuality was very much considered by this bench of the Tribunal in Shri Purushotham Redddy's case and the statement of facts before the Hon'ble High Court amply reflected these findings which were approved. He argued that the Hon'ble A.P. High Court had considered the statement of facts and also the judgment of this Tribunal while deciding the matter and hence it is not correct for the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chit Funds Act, 1982 (Central Act 40 of 1982) or on the assessee-company entering into the shoes of defaulting subscribers or in some cases to fill up vacant chits as a matter of necessity or expediency of its business and not by choice. It is not the case of the assessee-company that it participates in chits promoted by other companies or entities. The basic principle of mutuality cannot be applied to income from commercial pursuits. Profit earning is the motto of the assessee-company. The profits in question arise and accrue from the trade or vocation which it carried on. 16. The judgment of the Delhi Tribunal in Muthoot M. George Chits (India) Ltd.'s case so heavily relied on by the assessee's counsel does not come to its rescue as in that case the fact that the assessee-company was a mutual association was not in dispute. The Bye-laws of this company do not demonstrate that it is a mutual association. The judgment of the Hon'ble Punjab and Haryana High Court, in the case of Soda Silicate Chemical Works also to our mind, is distinguishable on facts, as there, the Hon'ble High Court was considering the case of an assessee who is a subscriber in a chit fund and not of the chi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that there is complete identity between the Foreman and other participators in the chit. It cannot also be said that the profit is made out of itself. Thus, the principles of mutuality cannot on this count also be applied to chit fund companies. 18. The Hon'ble Kerala High Court in the case of M. George Bros. Chitty Fund, in the head note held as follows: "(ii) that the assessee was a business firm and its aim was to make profits. It was in the course of carrying on the business it had become a subscriber to the chitties. Thus, it had made it clear that it was in the habit of adopting other ways also to acquire a gain. The way in which the assessee was conducting the business indicated that the receipt of "veethapalisa" was inseparably connected with the ownership of the business." This judgment is in favour of revenue and squarely applies to the case on hand. We respectfully follow the same. We do not want to go into the other case law relied upon by the ld. counsel for the assessee to establish his case that the income in question is governed by the principles of mutuality, as we have held that the assessee was a business concern and its aim was to make profits and thus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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