The Income Tax Appellate Tribunal (ITAT) of Delhi bench has held that loss incurred on chit fund is allowable as a business loss if money is utilized for business purposes.
Nijhawan Travel, the assessee filed a return declaring a total income of Rs. Nil after adjustment of brought forward business loss with the current year income. The tax was paid under the MAT provision on book profit. The case was selected for scrutiny.
The assessee is engaged in the business of running stores and selling branded items like ‘Adidas’, ‘Benetton’ and other brands. The documents and replies filed by the AR of the assessee company in response to various queries raised about the expenses/ income booked in the Profit and Loss account were considered by AO and amongst other disallowances the AO had made disallowance on account of advances return of Rs. 15,19,425/- and loss from Chit Fund Rs. 3,14,000/- and the CIT(A) had sustained the same.
It was submitted that the assessee had entered into a Licence Agreement with THRIFTY dated 01.02.2007 for a non-exclusive licence to use the Licensed system and Marks. As per the initial agreement licence fee of US $90,000 dollars was payable and a renewal fee and short-term and long-term royalties were payable at varied rates.
The assessee had paid the US $ 90,000 dollars and treated the amount equal to Rs. 40,51,800/- as advance to be written off over the period of Licence. An amount of Rs. 25,32,375/- was written off till 31.03.2012 leaving a balance of Rs. 15,19,425/-.
An amendment to the Master Licence Agreement was made reducing the Royalties and Advertising Fund Contribution. It was claimed that as the business was incurring a loss, an agreement was entered to terminate the Licence and payment of Royalty of Rs. 11,841,417/- as was outstanding on 31.03.2012.
It was agreed by the assessee as a licensee to pay THRIFTY the net sum of US $ 31,200 after deducting tax at source of US $ $7,800 being 20% of the gross amount of US $39,000 equivalent to 13 months of Royalty.
It was evident that as per the CBDT Circular no. 1175 of 16.05.1978, it was directed that the members of the Chit fund who get the money earlier from the chit will necessarily have to contribute more which means they incur a loss which is nothing but interest taken for money as an advance.
The two bench members, Shri. N.K. Billaiya,( accountant) and Shri. Anubhav Sharma, (judicial) observed that subject to the satisfaction that the Chit Fund money is utilized for business, it can be allowed as an expenditure. The ITAT restored the matter to the files of AO to inquire into the question of the use of the Chit Fund money for business and to allow the same as business expenditure.
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