Not specified in the document V. Not specified in the document

ITTA/104/2004

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The case involves an appellant who is a trader and assessee under the Income Tax Act, 1961, who subscribed to chits to pool resources for business. For the assessment year 1993-94, the appellant posted a net loss of Rs.53,813/- due to the discontinuation of two chits. The Assessing Officer denied the deduction of this amount, but the Commissioner (Appeals) reversed this decision. However, the Tribunal restored the Assessing Officer's decision. The High Court, referencing a previous decision (CIT v. KOVUR TEXTILES & CO), found that the appellant was entitled to the deduction as the chits were subscribed for business purposes and the dividends were taxed, thus meeting the conditions for deduction of the loss incurred from the chit subscriptions.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 676008 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 11-12-2014
• Assessment Year: misc
• Other Referred Cases: CIT v. KOVUR TEXTILES & CO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: A V KARTIKEYA
• Keywords: Assessment Year; Business loss; Chit Fund; Deduction; Income Tax
• Section: 260A

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY and THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM ITTA No.104 of 2004 JUDGMENT: (per LNR, J) The appellant is a trader and assessee under the Income Tax Act, 1961. To pool resources for its business, it has subscribed to certain chits. For the assessment year 1993-94, it has posted a sum of Rs.53,813/- as net loss, stating that the chit fund companies, in which, two chits have been subscribed, have discontinued their business and abandoned the chits. The Assessing Officer did not allow the deduction of that amount. The Commissioner (Appeals) allowed the appeal filed by the appellant herein and granted relief. Revenue filed ITA.No.790/HYD/1996, before the Visakhapatnam Bench of the Income Tax Appellate Tribunal, and the same was allowed through order, dated 18.05.2001. Hence, this appeal is filed under Section 260A of the Income Tax Act, 1961 by the assessee. Heard Sri A.V.Siva Kartikeya, learned counsel for the appellant and Sri J.V.Prasad, learned Standing Counsel for the respondent. There is no denial of the fact that the appellant subscribed to chits, to pool resources for its business. However, it has posted loss to the extent of Rs.53,813/- referable to two chits, stating that the respective agencies have closed up their business and did not pay the amount. The Assessing Officer took the view that the subscriptions were made as part of business and thereby, the resultant loss cannot be taken into account. The appellant placed reliance upon the order passed by this Court in CIT v. KOVUR TEXTILES & CO[1]. The Commissioner agreed with that contention, but the order passed by the Commissioner was reversed by the Tribunal. In the context of allowing deduction of loss on account of chit transactions, two factors become necessary. The first is that it is only when the subscription of chit by an assessee is for the purpose of its business, that the loss can be taken into account. If it emerges that the assessee has invested in the chits only as a measure of earning income in the form of dividends and not for mobilizing resources for its business activity, the loss, even if accrues out of it, cannot be recognized for deduction. The second is that if the dividends received from a chit transaction by an assessee are shown in the profit and loss accounts and tax has been paid thereon, the loss, if accrues at a later stage, qualifies for deduction. Conversely, if the assessee did not reflect the dividends in his profit and loss account and did not pay tax thereon, he cannot claim deduction of the loss, even if the chit was subscribed for the purpose of its business. In the instant case, the Assessing Officer himself observed that the chits were subscribed to pool resources for the business of the appellant. Thereby, the first condition is complied with. As regards the second condition also, it is not in dispute that the appellant reflected the dividends in its profit and loss account year after year and paid tax thereon. Therefore, the appeal is allowed and the order passed by the Assessing Officer, insofar as it denied the deduction of Rs.53,813/- is set aside. The appellant shall be entitled for deduction of that amount, in accordance with law. No order as to costs. Miscellaneous Petitions, if any pending in this appeal shall stand closed. _________________________ L.NARASIMHA REDDY, J 11th DECEMBER, 2014. _________________________ CHALLA KODANDA RAM, J Note: L.R. Copy be marked. kvni [1] 136 ITR 61 "