TMI Blog1996 (1) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature. It is not a capital loss. It is an incidental to business and amounts to interest paid for financing the business. When the assessee needs working capital for its business, he subscribes in a chitty and when it is convenient, the chitty in bid and the amount utilised for the working capital of the business. In the course of time, the amount is paid in instalments and when the chitty is terminated, if there is any chitty balance, the same is treated as chitty loss and written off in the books. This represents only the interest paid on the chitty less the interest received, and as such, it is only interest paid for availing working capital and is not any capital expenditure as presumed by the Assessing Officer and confirmed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the chits were bid for raising funds, for business purposes of the firm. The chit instalments were being paid on the due dates and when the chitty was terminated, the balance represented interest was treated as chitty loss and written off in the profit and loss account. The object of subscribing to a chitty was to finance the business and not for saving money by the subscriber. Usually the subscriber will join a chitty and after remitting certain instalments he would bid it and the money so obtained would be utilised for the purpose of business. It is a means of raising finance at easy means without paying interest and at a discount and this discount foregone after deducting the discount received for the loss of a subscriber and so it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not allowable. 7. In these days it has become very common for the business class as well as the general investors to contribute to chit fund companies and subscribe to various chits for raising finances. In a chit fund scheme, every member subscribes a certain sum of money periodically by way of instalments over a determined period of time and each subscriber gets a sum determined by a chit fund company during the tenure of the chit or at the time of completion of chit. The subscriber who receives the money in the earlier period receives a lesser amount as compared to the subscribers who receive the amounts in later periods. The scheme of the chit fund companies is covered by the Chit Fund Act, 1982 which enacted to have a control on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fund. While delivering the above judgment, the Punjab and Haryana High Court also referred to a direct decision on the subject in the case of CIT v. Kovur Textiles Co. [1982] 136 ITR 61 in which it was held by the Andhra Pradesh High Court that in case an 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduced below :---- "(a) If any person organises Chit Funds and for this purposes brings 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 debts and the test to be adopted 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 amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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