Participation in Chit Fund for Raising Fund: Difference b/w Subscription Amount Paid and Prize money received allowable as Income/Loss, rules ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi bench has held that when the assessee participated in chit funds for raising funds for the purpose of business, the difference between the subscription amount paid and the prize money received shall be allowable as business income or loss for the purpose of the Income Tax Act, 1961.

The assessee company engaged in the business of manufacturing sweets, Namkin, and running restaurants. While filing its return for the relevant year, the assessee claimed a loss of Rs.2,57,000/- and Rs.90,000/- on chit fund for these two years respectively and claimed that they have participated in the chit funds for the requirement of the funds for running of the company. The Assessing Officer, however, rejected the claim noting that there is a number of options for the requirement of funds other than Chit funds.

Before the Tribunal, the assessee relied on the CBDT issued instructions to all Commissioners of Income-tax vide letter dated 25.03.1992 stating that instruction No. 1175 holds good.

In Instruction No. 1175 issued by the CBDT at paragraph No. (b), it was stated that in the hands of the subscribers, a few will be receiving more than what they have subscribed and this extra amount is in the nature of interest and as such, taxable. It is further clarified that Members who take the money earlier from the chit will necessarily have to contribute more which means that they incur a loss, which is nothing but the interest paid for money taken in advance and the claim of such a loss will have to be considered for the purpose of allowance according to the provisions of the Act depending upon how the money was utilized by the subscriber.

The bench comprising Accountant Member O P Kant and Judicial Member K Narasimha Chary noted several Tribunal decisions where it was held that when for the purpose of raising the funds to be utilized in the business, the assessee participated to the Chits, the loss arising on account of the difference between the amount contributed and the bid amount is an allowable deduction.

“While respectfully following the same, we are of the considered opinion that if the purpose of assessee’s participation in the chit is for the purpose of raising funds, and if the assessee utilized the said funds for the purpose of business, then the difference in the subscription paid by the assessee and the prize amount received shall be treated as business income/loss. We, therefore, set aside the impugned order and remand the issue to the file of ld. Assessing Officer for the purpose of this fact verification. If the purpose of participation in the chit and utilization of funds is for the purpose of business, Ld. Assessing Officer will allow the difference between the subscription amount paid and the prize money received, if it is loss, as business loss,” the Tribunal concluded.

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