1982 (2) TMI 105

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..... d arrived at settlements with several parties and in the process incurred a loss of Rs. 16,318. It claimed the said loss as bad debt while computing the income from the business carried on by it. The ITO disallowed the claim on the ground that the assessee was not carrying on banking or money-lending business and that a director of the assessee-company was also a director of the company running the chit funds and no legal steps were taken for recovering the amount written off and finally a loan of Rs. 35,000 was taken in the previous year by the assessee and so there was no reason as to why the assessee should suffer a loss. 2. The assessee appealed to the AAC, who observed that the assessee-company was not authorised to carry on business .....

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..... he chit funds as income from business and they have been so taxed. During the year under consideration, the assessee came to know that the financial position of the organiser had become bad. Hence, the assessee wanted to get out of the scheme in order to avoid paying the future 12 instalments. In doing so, the assessee had to pay to other creditors certain amounts because they threatened to sue the organiser. He stated another fact, namely, that the assessee had received a sum of Rs. 17,500 from two of the funds as the highest bidder. However, they were not received as outright payment but were regarded as loans given to the assessee. As a consequence, the assessee was legally liable to repay those amounts to the organiser in case the latte .....

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..... chit funds explained before me, I find that it is essentially a device to raise funds on payment of interest. There is no question of any profit or prize involved in the scheme. What is called the discount offered by the bidder is in reality the interest offered by him for the use of the funds taken by him. It is true that these amounts shown as dividends from the chit funds in the profit and loss account of the assessee have been taxed under the head "Profits and gains of business or profession" in the earlier years, but, that was a clear mistake. Those amounts actually represented sums to be deducted against the discount that the assessee would inevitably pay in a month in which the gross amounts were handed over to it and the net amount .....

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