TMI Blog2017 (12) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the CIT(A) erred in deleting the disallowance of Bid Loss Claimed in the computation of total income in addition to BID Loss claimed in the Profit Loss account, without appreciating that the amount of Bid Loss claimed is incorrect as per the provisions of Section 145(1) of the I. T. Act. Further, it is not in consonance with Board s Notification No.SO 69(E) dt. 25.01.1996 and Accounting Standard AS 22 of ICAI. 3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer be restored. 4. The appellant craves leave to add, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 2. During the course of hearing, the learned counsel for the assessee invited our attention that the impugned issue is squarely covered by the order of the Tribunal in the assessee s own case for the assessment years 2010-11 to 2012-13 in which the Tribunal has followed the judgment of various High Courts and Apex Court while allowing the relief to the assessee. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he factual backdrop, the Andhra Pradesh High Court held that the loss incurred by the assessee in the process of bidding the chit amount could be allowed as a business loss. Of course, the Punjab Haryana High Court in Soda Silicate Chemical Works vs. CIT (1989) 179 ITR 588 (P H) 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. We are unable to agree with the decision of the Division Bench of the Punjab Haryana High Court in Soda Silicate Chemical Works vs. CIT cited supra. The Punjab 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution during that period. Usually the discount, namely, the sum of money which the prized subscriber is required to forgo, will continue to decrease over periods. The person getting money in the last period will receive the full scheme amount. 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 debentureholders 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee companies following the mercantile system of accounting as statutorily required under the Companies Act, have to account for their 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. At this juncture, it is apt to refer to ss. 5 and 145 of the IT 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 person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts of the case, the authorities have found that the assessees are following the mercantile system of accounting. The mercantile system of accounting means, as discussed in Shiva Prasad Gupta vs. CIT AIR 1929 All 823, 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 the 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 CIT(A), 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. The chit transaction is governed by the provisions of the Chit Funds Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 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 . Respectfully following the above decision of the Hon ble Madras High Court and the Co-ordinate Bench decision in the assessee s own case cited supra, we hold that the bid loss incurred on account of lifting the chit in th capacity of subscriber to chit is allowable in full in the year in which the chit was auctioned. Therefore, we dismiss the appeals filed by the revenue. 5. The identical issue was also examined by the Apex Court in the case of Taparia Tools Ltd., Vs. JCIT (supra) in which their Lordship has examined the issue and held that the assessee is entitled for deduction of the entire expenditure. The relevant observation of the Hon ble Supreme Court is extracted hereunder: 17. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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