Court Allows Full Discount Loss on Chits in Year of Occurrence, Rejecting Spread-Out Approach

Get the full picture - access the original judgement of the court order here

Case Name:

Commissioner of Income Tax Vs Bilahari Enterprises (P) Ltd. (High Court of Madras)

Tax Case (Appeal) No.1429 of 2007

Date: 27th November 2007

Key Takeaways

1. Discount loss on chits should be allowed in full in the year it occurs.

2. The court upheld the principle of following the accounting method consistently used by the assessee.

3. Income from chit dividends should be taxed in the year of accrual, not spread over multiple years.

Issue

Was the Income Tax Appellate Tribunal correct in ruling that the discount loss on chits should be allowed in its entirety in the year it occurs rather than spread over the period of the chit?

Facts

1. Bilahari Enterprises (P) Ltd. is in the business of subscribing to chit funds.

2. For the assessment year 2001-02, the company claimed that the loss arising from discounts granted should be allowed at the time of accrual.

3. The Assessing Officer initially revised the working based on a previous Tribunal order.

4. The case went through appeals, reaching the High Court.

Arguments

Bilahari Enterprises argued that the discount loss should be allowed in full in the year it occurs, based on their mercantile system of accounting. The Revenue Department initially contended that the loss should be spread over the chit period.

Key Legal Precedents

1. M/S.BILAHARI INVESTMENTS P.LTD. VS. COMMISSIONER OF INCOME TAX (288 ITR 39): This case, involving the same assessee for earlier assessment years, established that income should be computed according to the accounting system regularly followed by the assessee.

2. Sections 5 and 145 of the Income Tax Act, 1961: These sections were considered in the previous judgment, emphasizing that income received or accrued during the previous year should form part of the total income and be computed according to the assessee's regular accounting method.

Judgement

The High Court dismissed the appeal filed by the Revenue Department, upholding the Tribunal's decision. The court agreed that the discount loss on chits should be allowed in its entirety in the year it occurs, following the reasoning given in the assessee's own case (288 ITR 39).

FAQs

1. Q: What was the main issue in this case?

  A: The main issue was whether the discount loss on chits should be allowed fully in the year it occurs or spread over the chit period for tax purposes.

2. Q: Why did the court rule in favor of Bilahari Enterprises?

  A: The court followed its previous decision involving the same company, which emphasized respecting the assessee's consistent accounting method and recognizing income in the year of accrual.

3. Q: What impact does this decision have on businesses involved in chit funds?

  A: This decision allows businesses to claim the full discount loss on chits in the year it occurs, potentially providing tax benefits in the short term.

4. Q: Does this ruling apply to all types of income for the company?

  A: While the ruling specifically addresses discount loss on chits, it reinforces the principle of following the assessee's regular accounting method for income recognition.

5. Q: Can other companies in similar situations rely on this judgment?

  A: Yes, this judgment can serve as a precedent for other companies dealing with chit funds and similar financial instruments, provided their circumstances are similar.

1. This appeal has been filed against the order of the Income Tax Appellate Tribunal in I.T.A.No.209/Mds/2005 dated 28.2.2005. The relevant assessment year is 2001-02.

2. The substantial question of law formulated for entertainment of the appeal is as follows:

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the discount loss on chits is to be allowed in its entirety in the year it occurs rather than spread it over the period of the chit?

3. The assessee is in the business of subscribing to chit funds. For the assessment year 2001-02, the assessee inter alia claimed that the loss arising on account of discount granted should be allowed at the time of accrual and not to be spread over the period of discount. The Assessing Officer followed the order of the Income Tax Appellate Tribunal in the assessee's own case and revised the working.

4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the appeal. The assessee filed a Second Appeal to the Income Tax Appellate Tribunal, which followed the order of this Court reported in 288 ITR 39 (M/S.BILAHARI INVESTMENTS P.LTD. VS. COMMISSIONER OF INCOME TAX), which is the assessee's own case in respect of Assessment years 1991-92, 1992-93 and 1993-94 and decided that the discount loss should only be allowed in the year of accrual. The Revenue filed the present appeal against that order.

5. Learned counsel appearing for the Revenue fairly submits that the issue is covered as against the Revenue in respect of the assessee's own case reported in 288 ITR 39 (M/S.BILAHARI INVESTMENTS P.LTD. VS. COMMISSIONER OF INCOME TAX), wherein, this Court, after taking into consideration Sections 5 and 145 of the Income Tax Act, 1961, held that the income received or deemed to be received or accruing or arising during the previous year shall form part of the total income of the assessee and such income shall be computed in accordance with the accounting system which the assessee regularly followed. Therefore, when the assessee followed the mercantile system of accounting, as required under the Income Tax Act, and entries were posted in the books of account on the date of transaction, that is, on the date on which rights had accrued or liabilities were incurred irrespective of the date of payment, the income derived during a particular previous year by way of chit dividend had to be reckoned and assessed as income of that year. The dividend income had to be taxed on the basis of its accrual in the year of receipt.

6. In the light of the reasoning given in the assessee's own case reported in 288 ITR 39 (M/S.BILAHARI INVESTMENTS P.LTD. VS. COMMISSIONER OF INCOME TAX), the Tax Case Appeal is dismissed.

(K.R.P.,J.) (C.V.,J.) 27.11.2007

Index: Yes

Internet: Yes

ksv/usk

To:

1. The Commissioner of Income Tax, Chennai.

K.RAVIRAJA PANDIAN, J.

and

CHITRA VENKATARAMAN, J.