TMI Blog1990 (5) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... el Sh. Manian, filed the copy of the Madras Chit Funds Act, 1961 as was extended to the UnionterritoryofDelhiand also the Delhi Chit Fund Rules, 1964 along with the memorandum and articles of the company, balance sheet, note on bid amount with details thereof. He made reference to his paper book pages 8 to 12, wherein he had placed the submissions in this regard as were made before the CIT(A). He pleaded that, the Act and rules allow a subscriber to raise the discount to a maximum of 30% of the chit amount and thereby, he becomes entitled to claim the balance amount of 70% at the bid. The company reserves the right to appropriate 5% of the chit amount as its commission at each of the bids, which is deducted from the discount of 30% and the balance is distributed to all of the subscribers of the particular chit. The subscriber who has made the successful bid continues to contribute the rest of the instalments of the chit. The company, acts as the conductor of the chit and is therefore called the foreman. The company is also allowed to contribute as any other subscriber and is also entitled to bid at each auction of the chit. The company chooses to bid the chit as a prudent businessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in Soda Silicate Chemical Works [1989] 179 ITR 588/46 Taxman 33 and submitted that, the decision would not apply to the assessee for the reason that in that case, the assessee did not carry on the chits as its business venture. 4. We have given our very careful consideration to the rival submissions and also the documents as were placed before us and relied upon by either side. To appreciate the controversy in view of the nature of business of chit fund which is governed by a separate statute, it would be necessary to go into the provisions of the Madras Chit Funds Act, 1961, as extended to the UnionterritoryofDelhi, for the reason of the company carrying on its chit fund business inDelhi. 4.1 In Chapter 11 of the Act the manner of starting and conducting of the chit fund business has been provided. The bye-laws of the chit fund are required to be filed with the Registrar, duly signed by the foreman and on such certification by the Registrar, the chit fund shall be permitted to commence the business. It defines the foreman " means the person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the fact that, the foreman being the company and the contract being with the members of the chit only, the element of mutuality creeps in. The bye-laws of the company issued in connection with its chit activity under the heading of ' rights of foreman ' are on similar lines as contained in section 13(a) of the Act, i.e., permitting the foreman to subscribe for one ticket as and when he or it needs and further to obtain the chit amount at the instalment specified in the chit agreement without any auction. The words ' without any auction ' are important. This would mean that, as a matter of right, the foreman can obtain any chit at an instalment as specified in the chit agreement without any deduction ford is count on the amount of the chit. To put it in other words, the foreman could take the whole of the chit instalment for himself, which is not permissible to any other subscriber of the chit. 4.4 The terms which are frequently in use in relation to a chit fund, viz., " chit ", " chit agreement ", " discount ", " dividend ", " prize amount ", " prized subscriber ", " subscriber ", " ticket " have been defined in section 2 of the Act. " Chit " has been defined as a transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-prized subscriber, who have paid their instalments in full, and whosoever is successful in that lot is the successful bidder. The Act has used the term " Chit amount " to mean the sum total of the subscriptions payable by all the subscribers for any instalment of a chit without any deduction of discount or otherwise. Since the bye-laws had to be necessarily be in conformity with the Act, the term chit value and chit amount have to be taken to mean the same thing, i.e., sum total of the subscriptions payable by all the subscribers for any instalment of a chit without any deduction of discount or otherwise. The above indicates two situations. One, where the subscribers make a bid and the second, where no one bids. In the former case, the initial discount is 5% and the maximum discount is 30%. In the latter case, the discount remains at 5%, for there are no bidders and no one can force any unwilling bidder to raise the discount. The above also provides that the foreman can make a bid on behalf of any subscriber, only on his written instructions and not otherwise. It has added by way of a note that, in case of monthly chits, the foreman's commission of 5% shall first be deducted fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contra. The amount shown as due from prized subscriber is shown at Rs. 39,21,389/90, which amount is said to be secured to the extent of Rs. 10,47,844 (note No. 6 which is said to explain this security has however not been filed by the respondent). Rs. 19,55,000 being the total of the auction dividend and the prize amount from all of the chits, has been shown as due to chit account by the company as contra items on the Balance Sheet. The credit side of the profit loss account shows Rs. 1,90,095 as dividend on own subscription, commission on own chits Rs. 94,075 and Rs. 2,06,500 as commission received. On the debit side, Rs. 5,68,500 has been claimed as expenses under the head " bid amount on own chits ". The net result of the year as per the profit loss account is the loss of Rs. 6,45,463. The issue in the appeal relates to the three items, two of which are reflected as receipts or income, viz., commission on own chits and dividend on own subscription of Rs. 84,075 and Rs. 1,90,095 respectively and the debit of Rs. 5,68,500. According to the DR, neither the income or receipt on own chits are taxable nor the bid expenses on own chits allowable. The assessee claims that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount at the end of every auction. It is to be appreciated that, to the extent of 30%, there is no dilution of any funds, for they are not paid out but, only adjusted towards the immediately following instalment of the chit subscription. This could be said to be in the nature of overflow of funds and at the time of the next auction, the amount received from the subscribers in the aggregate would be less to the extent of 25% of the chit amount, i.e., the net amount collected would be 75% of the chit amount. The company which is allowed to meet its expenses from out of 5% commission, always has enough funds to meet its expenditures and can never run short of liquid funds. In addition to these factors, it also needs to be borne in mind that, the foreman is expected to provide security to the satisfaction of the Registrar, whenever he happens to be the prized subscriber, as per section 23 of the Act. The security provided to the satisfaction of the Registrar and that too as required under section 12 of the Act, i.e., amount as is held to be sufficient for the realization of the chit amount and in case of there being more than one chit, then in respect of each such chit and which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emain so, might lead itself to the situation of insolvency. The company is very well aware of this position and knowingly why should it do what it purported to have done, i.e., to suffer the discount to the tune of 25% of the chit amount and yet be liable to that extent to the other subscribers. Is the company gratuitous to its subscribers ? The chit bye-laws of the company provides that in the event of none of the subscribers forthcoming for the bid, the discount shall be 5% and if it has to be proceeded on the basis that, none of the subscriber came forward to bid in the 64 auctions held by the company, the discount would have been limited to 5% only, then why should the company bid and lose the additional amount of 25%, and lead itself to insolvency ? These are several questions which need answer to the poser before us, which has not been answered either by the CIT(A) or by the assessing officer. 4.9 The aspect of mutuality has also not been touched upon by the CIT(A). Section 28(iii) of the I.T. Act, 1961 provides for the treating of receipts by mutual associations in respect of specific services rendered by it to its members. The assessee-company is a mutual association is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition advanced by the company. The ruling of the Punjab Haryana High Court in the case of Soda Silicate Chemical Works the issue of discount on bidding of chits claimed as a business loss was examined and it was held that, there existed the element of mutuality amongst the contributors and the participators of the chit and therefore, the discount is not allowable as a business loss. They further observed that, neither the income could be brought to tax nor the loss could be allowed as a deduction. To this ruling, the counsel for the assessee had pointed out that, the decision would have no application to the assessee's case, for the assessee was existing for the sole purpose of carrying on the chit fund business. We are of the view that, though there is no dispute to the fact that, the assessee does carry on the chit fund business, and the receipt for specific services is taxed u/s. 28(iii) of the I.T. Act, but its activity which involve contributing to own chits, bidding of own chits and suffering losses on own chits are all related to mutual transactions between itself and the other subscribers and therefore, the Punjab Haryana High Court would be applicable on all fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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