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TMI Blog2019 (9) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... feel it proper to restore back the matter to the file of ld. CIT(A) for fresh decision after examining these additional evidences and if the assessee is able to establish that the money raised through chit was utilized for the purpose of business, then the loss incurred in the chits being net of chit discount (-) chit dividend should be allowed as revenue expenditure. Even if the assessee is not able to establish that the money raised through chit was used for business purpose then also, disallowance should be of net amount of chit discount (-) chit dividend and not of gross amount of chit discount. - Appeals filed by the assessee are allowed for statistical purposes. - ITA Nos. 2382 & 2383/Bang/2018 - - - Dated:- 20-9-2019 - Shri Arun Kumar Garodia, Accountant Member And Shri Pavan Kumar Gadale, Judicial Member For the Assessee : Smt. Suman Lunkar, CA For the Revenue : Shri Vikas Suryavamshi, Addl. CIT (DR) ORDER PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER Both these appeals are filed by the assessee and these are directed against two separate orders of ld. CIT(A)-3, Bangalore b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in confirming the same. The orders as passed being bad in law and are liable to be quashed. 2. The learned Assessing Officer had erred in disallowing the claim of deduction of ₹ 2,70,500/- as loss on Chit and the learned Commissioner of Income tax (Appeals) has erred in confirming the same. The action of authorities below being wholly erroneous both on facts and law are to be negated. 3. The learned Assessing Officer had erred in holding that the Chit discount is capital in nature and the learned Commissioner of Income tax (Appeals) had erred in holding that the Chit funds were not utilized for business purposes. The amount drawn from Chits were utilised solely for the purpose of business only and therefore the loss on Chit being the revenue expenditure in nature and having been incurred for the purpose of the business used to allowed as the deduction and the disallowance is to be deleted. 4. In any case and without prejudice and in the alternative, it is submitted that in case the disallowance of Chit loss is sustained, then the income from Chit dividend be also reduced from the income. 5. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.05.2013. She submitted that this is an additional evidence being filed by the assessee which should be admitted because these evidences goes to the root of the matter. She further pointed out that on page no. 136 of the paper book is the copy of bank statement for the relevant period and amount of ₹ 4.66 Lakhs was credited in the bank account and thereafter, funds were transferred to Attur Steels Pvt. Ltd. of ₹ 60 Lakhs and ₹ 50 Lakhs on two dates for business purpose. Thereafter she submitted that on page no. 138 of the paper book is the ledger copy of Kopparam Chits Pvt. Ltd. and as per the same, chit discount is of ₹ 25,000/- and chit dividend received is ₹ 53,440/- and an amount of ₹ 4.75 Lakhs was received on 21.01.2014 and this amount was credited in the bank account as per the bank statement available on page no. 141 of the paper book and various cheques were issued from this bank account for business purpose and hence, the funds raised from the chit was used for business purpose. She further pointed out that on page no. 151 of the paper book is the ledger copy of Chalam Chits (P) Ltd. and as per the same, chit discount is ₹ 35,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have considered the rival submissions. We find that as per the assessment order para no. 4.1 for Assessment Year 2014-15, this is the stand of the AO that the assessee company is making investment in chits and the chit money is used to create assets and increase capital base of the company and hence, any loss related to investment in chit fund should not have been claimed as revenue expenditure. As per ledger copy of this account available on page no. 28 of the paper book, the assessee has claimed chit discount of ₹ 20.28 Lakhs and as per page no. 29 of the paper book, the assessee has offered for tax ₹ 15,35,770/- on account of chit dividend received. At this juncture, we feel it proper to reproduce para nos. 3 to 13 of the Tribunal order rendered in the case of Kamal Raheja Vs. ITO (supra). These paras are as under. 3. Ground No. 2 and 3 relate to the disallowance of ₹ 2,15,090/-. The facts relating to this ground are that the Assessing Officer during the course of hearing noted that the assessee has debited a sum of ₹ 2,15,090/- as the chit loss in its Profit Loss account. The Assessing Officer dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of a saving scheme also. But, unless amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there will be no income derived either by way of interest or by way of amounts forgone, by the bidders at the auction. Thus, the chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to the subscribers, their turns for getting such loans being determined either by auction or by drawing lots. The Tribunal was, therefore, perfectly right in holding that, in conducting the chit funds, the assessee was providing credit facilities to its members and that the income earned by the assessee from the said business is entitled to deduction under section 80P(2)(a)(i) of the Act. In the above referred case, the point involved was a deduction by the Co-operative Bank under section 80P(2)(a)(i) of the Act. However, the Punjab and Haryana High Court took a different view in the above referred case and held that the loss so incurred is not allowable. 8. In these days it has become very common for the business class as well as the general investors to contribute to chit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee subscribes to a chit fund by joining in a chit group and after paying few instalments, bids the chit and claims the difference between the total payments towards the chit and the prize for which it was bid as business loss, then the assessee is entitled to the same if the chit fund money is utilised for business purposes and the chit is only a method of funding the business needs just like any other borrowing. However, the above judgment of the Andhra Pradesh High Court did not find favour with the Punjab Haryana High Court and it proceeded to consider the aspect of mutuality and came to the conclusion that neither a member of a chit fund company is entitled to any loss on account of shortfall of the prize received by him over the payments made by him nor any income on account of excess receipt by him is liable to be taxed as income in his hands. 10. It may not be out of place to point out here that on a similar issue a decision has been delivered by the Tribunal, New Delhi, in the case of ITO v. Singh Radio Co. (India) (P.) Ltd. [1991] 41 TTJ (Delhi) 296 in which it has been held that in case the chit amount is used for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 and in the pending assessments, it started refusing the claim of loss on account of a chit. However, in one of the cases, the Commissioner in proceedings under section 263, having been satisfied about the allowability of the claim on the basis of the judgment of Andhra Pradesh High Court as well as the Board's Instruction No. 1175 on the subject, referred the matter again to the CBDT for issuing the necessary guidelines. The CBDT has recently issued instructions to all the Commissioners vide letter dated March 25, 1992 holding that the existing Instruction No. 1175 on the subject cannot be withdrawn on the basis of the judgment of Punjab Haryana High Court. In a way, the CBDT has upheld the position that in case the amount of chit fund money is utilised for the purposes of business, any loss incurred out of the same is allowable as business expenditure. 13. In accordance with the above referred three decisions and the Instruction No. 1175 issued by the CBDT, it is obvious that if a subscriber incurs loss in subscribing to the chit fund to raise funds to use them in his business or for the business purpose, such a loss is an allowable deduction. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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