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Commissioner Of Income-Tax, Andhra Pradesh-Iii v. Kovur Textiles & Co.

Andhra Pradesh High Court

Jan 24, 1980

Judgment

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Factual and Procedural Background

The reference was made by the Commissioner of Income-tax under s. 256(1) of the I.T. Act, 1961, seeking this Court's opinion on whether the loss incurred by the assessee could be allowed as a deduction for the assessment year 1971-72. The assessee, a limited company, contributed Rs. 25,000 to a chit fund called Rajarajeswari Financiers, paid eleven instalments by September 1969, and 'did the chit' for Rs. 20,000 on June 20, 1970; by that date it had paid eleven instalments and executed a promissory note for Rs. 14,000, and accounts of the chit fund showed the company received Rs. 1,437 as discount money from bids. The company also contributed to another chit fund for Rs. 5,000 with monthly instalments of Rs. 250, paid ten instalments and bid for Rs. 4,480.

On assessment, the ITO allowed the difference between the chit amount and the amount for which the assessee had bid, treating the difference and the discount received as a business loss. The Commissioner, invoking s. 263 of the I.T. Act, 1961, held that such a loss should not be allowed. On appeal, the I.T. Appellate Tribunal found as a fact that the assessee had entered the chits for the purpose of finding finances for business and that the chit amounts bid had been utilised only for the business. The Court answered the referred question in favour of the assessee.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the loss incurred by the assessee can be allowed as an admissible deduction in computing the income for the assessment year 1971-72?

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis is concise: having regard to the facts found (including the I.T.A.T.'s finding that the assessee entered the chits to obtain business finance and that the amounts obtained were used for business), the loss characterized by the ITO as the difference between the chit amount and the bid amount, together with discount received, was treated as an allowable business loss. The Court accepted the factual findings and applied them to the tax question referred under s. 256(1).

Holding and Implications

The question is answered in the affirmative: the loss is allowed in favour of the assessee.

Implications: The direct effect is that the loss incurred by the assessee in respect of the chit transactions is allowed as a deduction for assessment year 1971-72, in favour of the assessee and against the revenue. The opinion does not discuss broader implications or purport to establish a new precedent.

Show all summary ...

1. This reference is made at the instance of the Commissioner of Income-tax under s. 256(1) of the I.T. Act, 1961 (43 of 1961), for opinion of this court on the following questio :

"Whether, on the facts and in the circumstances of the case, the loss incurred by the assessee can be allowed as an admissible deduction in computing the income for the assessment year 1971-72 ?"

2. The assessee is a limited company. It had contributed to a "chit fund" known as Rajarajeswari Financiers for Rs. 25,000 and by September, 1969, had paid eleven instalments. Finally, the company did the chit for Rs. 20,000 on June 20, 1970. The company by that date had paid eleven instalments and had executed a promissory note for Rs. 14,000. In the further facts found, the company as per accounts of the chit fund had received Rs. 1,437 as discount money in the bids made by other contributors.

3. The company contributed to another "chit fund" for Rs. 5,000 with monthly instalment of Rs. 250 and paid ten instalments and bid for Rs. 4,480.

4. The ITO allowed the difference between "the chit" amount and for which it had bid. The difference amount and discount received was allowed as a business loss of the company. The Commissioner, however, in exercise of his jurisdiction under s. 263 of the I.T. Act, 1961 (43 of 1961), held that such a loss of the company was not to be allowed. The I.T. Appellate Tribunal on appeal found as of fac : "The assessee had entered the chits only for the purpose of finding finances for business... (and) the chit amounts bid had been utilised only for the business...".

5. On the above facts, the question referred can be and is answered only in the affirmative, in favour of the assessee and against the revenue. No order as to costs.