TMI Blog2006 (6) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of chits terminating in a particular previous year, following completed contract method. 4. Before the assessing officer, the assessees claimed that the discount arose at a particular point of time when the prized chit amount was received and the discount was a statutory and contractual liability incurred by the subscriber as a consideration for obtaining the sum total of all the contributions by way of subscription in an accelerated manner. According to the assessees, the discount was not an amount paid in advance like rent or interest, but was a single amount giving rise to a single liability not only legally enforceable but also actually enforced by the Foreman by deducting it from the chit amount and by paying only the balance to the prized subscriber as the prized amount. The assessees further claimed that once the prized subscriber offered the highest bid, his liability for discount became crystallized, adjusted and totally discharged and the chit discount which was payable and adjusted against the bid amount leaving only the prized amount to be disbursed to the prized subscriber did not leave any scope for showing a part of the discount as an advance referabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in applying the principles of deferred expenditure to the appellant's case where there is no deferred benefit and concluding that chit discount should be allowed spreading it over the remaining period of the chit on proportionate basis ? (c) Whether the Income-tax Tribunal is right in law in not following the Central Board of Direct Taxes instruction dated May 16, 1978 on the issue of taxability of dividend and allowance of chit loss as a deduction? 9. The submissions of the learned counsel appearing for the assessees are as follows : 10. The completed contract method followed by the assessee is the most ideal one for recognizing the dividend income in a chit transaction. The assessees were adopting the completed contract method regularly and it was also accepted by the department during the previous assessments. Therefore, the accounting of dividend and chit loss arises only at the end of the termination of chit period and not earlier. 11. The measure of discount was not time based. The claim for adjustment of the discount against the chit dividend was allowable in the very year under appeal. The liability by way of discount arises in full measure the moment the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this Act, unless the context otherwise require,- (d) 'chit amount' means the sum-total of the subscriptions payable by all the subscribers for any installment of a chit without any deduction of discount or otherwise; (g) 'discount' means the sum of money or the quantity of grain which a prized subscriber is, under the terms of the chit agreement, required to forego and which is set apart under the said agreement to meet the expenses of running the chit or for distribution among the subscribers or for both; (h) 'dividend' means the share of the subscriber in the amount of discount available under the chit agreement for rateable distribution among the subscribers at each installment of the chit; (m) 'prize amount' means the difference between the chit amount and the document, and in the case of a fraction of a ticket means the difference between the chit amount and the discount proportionate to the fraction of the ticket, and when the prize amount is payable otherwise then in cash, and value of the prize amount shall be the value at the time when it becomes payable. 17. In the scheme of chit funds, every member agrees to pay a fixed amount on monthly basis for a fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the chit amount could be allowed as a business loss. 22. Of course, the Punjab and Haryana High Court in Soda Silicate and Chemical Works v. CIT [1989] 179 ITR 588 took a contra view that where the assessee secured a chit on discount and claimed deduction of discount amount while computing its assessable income, the loss incurred thereon was not incidental to the business and therefore, disallowed the assessee's claim during the year in question. 23. We are unable to agree with the decision of the Division Bench of Punjab and Haryana High Court in Soda Silicate and Chemical Works v. CIT [1989] 179 ITR 588. The Punjab and Haryana High Court held that the discount amount is not allowable as business loss on the ground that the transaction involved did not give rise to any income assessable to income-tax, nor any revenue loss in respect of which any deduction could be claimed. The judgment of the Punjab and Haryana High Court has no relevance to the facts of the present case, as, in this case, business loss occurred during the previous year relevant for the assessment year and the discount is found to be connected with the business activities of the assessees, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that period. Usually the discount, namely, the sum of money which the prized subscriber is required to forego, will continue to decrease over periods. The person getting money in the last period will receive the full scheme amount. 27. On the other hand, the debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate and also carrying interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specified amount with interest. A debenture is unsecured in the sense that there are no liens or pledges on specific assets. It is however, secured by all properties not otherwise pledged. In the case of bankruptcy the debenture holders are considered general creditors. When a company issues debentures at a discount, the debenture holders are required to pay a lesser sum than the face value and the company incurs a liability to pay a larger amount than what it has borrowed, at a future date. The liability to pay the discounted amount over and above the amount received for the debentures is a liability which has been incurred by the company for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee companies following mercantile system of accounting as statutorily required under the Companies Act, have to account for its income or loss as per the mercantile system of accounting and not otherwise. In other words, the income or loss of the assessees accruing during the relevant accounting year has to be considered for the purpose of income-tax assessment. When the assessees are in the business of subscribing to chits and deriving income out of it during a particular year, it is not possible or permissible to defer its assessability till the completion of the entire cycle of the chit. 31. At this juncture, it is apt to refer to Sections 5 and 145 of the Income-tax Act. "5.Scope of total income.- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which ___ (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly following. Here, on the facts of the case, the authorities have found that the assessees are following mercantile system of accounting. The mercantile system of accounting means, as discussed in Shiva Prasad Gupta v. CIT AIR 1929 All. 819, the amounts that have become recoverable are shown as the income actually received and the liabilities incurred are shown as amounts actually disbursed in any particular year. Therefore, when the assessees are following mercantile system of accounting, in which entries are posted in the books of account on the date of the transaction, that is, on the date on which rights accrue or liabilities are incurred irrespective of the date of payment, they have to account for their income or loss as per the mercantile system of accounting and not otherwise. Therefore, as rightly found by the Commissioner of income-tax (Appeals), the income derived during a particular previous year by way of chit dividend has to be reckoned and assessed as income of that year following the principles of mercantile/accrual system of accounting, particularly when the assessees are companies following the mercantile system of accounting. 33. The chit transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred and both accrued instantaneously. Hence, the discount is allowable in the very same year of accrual. In this view of the matter, the dividend has to be taxed in the year of accrual; so also, the discount has to be allowed in full in the year of accrual itself. The Appellate Tribunal is right in rejecting the completed contract method of accounting adopted by the assessees and at the same time, it is not correct in holding that the discount should be allowed spreading it over the remaining period of the chit on a proportionate basis. 36. For the foregoing reasons, we hold that the dividend income has to be taxed on the basis of its accrual and accordingly, we answer the first question in favour of the Revenue and against the assessee. 37. As regards the second question, we hold that the discount loss claimed should be allowed in the year of its accrual and hence, we answer the second question in favour of the assessee and against the Revenue. 38. With regard to the third question, since the question is academic in nature, we need not go into the same. 39. In the result, the first question of law is answered in favour of the Revenue and against th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
