S.S Sodhi, J.:— The assessee, Soda Silicate and Chemical Works, Amritsar, derives its income from the manufacture and sale of soda silicate and also by dealing in articles like sodium.

2. During the relevant assessment year 1980-81, the assessee-firm joined a chit fund and made contributions to it. It secured a chit at a discount of Rs. 14,398 and in respect of this amount, it sought a deduction while computing its net assessable income. The Income-tax Officer disallowed the deduction holding that as it was not the business of the assessee to contribute towards chit funds, the loss incurred was neither incidental to the business nor even remotely related to the business. The Appellate Assistant Commissioner, however, allowed the deduction on the ground that as the loan raised from the chit fund was invested in business, it was incidental and related to the business of the assessee. When the matter came up before the Tribunal, the order of the Income-tax Officer was restored, it being held that contributions to the chit fund could not be treated as revenue expenditure and, similarly, the lump sum received from it, would not be income and, therefore, the dividends too were neither income nor a revenue loss. It was observed in this behalf: “It is very difficult to imagine that the activity of raising finance by taking a chit from a chit fund can yield any income which can be brought to tax.” It is in this factual background that the following question of law came to be referred to this court for its opinion:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in disallowing the assessee's claim of loss of Rs. 14,398 in the chit account during the previous year relevant to the assessment year 1980-81?”

3. In order to answer the question posed, regard must be had to the nature and working of the chit fund, in the context of the assessee, with particular reference to the fact that running a chit fund or being a member of such fund, was not the business of the assessee. The transactions concerned here are contributions made to the fund by the assessee and the lump sum received by it, though at a discount and the subsequent distribution and receipt of amounts amongst the participants as premia or dividend. There is clearly mutuality amongst the contributors and the participants of the chit fund with their identity being known and established. When such is the case, contributions made to the chit fund cannot be treated as revenue expenditure nor indeed could the payment and receipt of any amount to and from the chit fund be treated to be the business activity of the assessee. The test of mutuality in this behalf, as laid down in CIT v. Nataraj Finance Corporation, [1988] 169 ITR 732 (AP), is that the entity would be a mutual benefit association if all the participators to the common fund are also contributors and their identity is established. The contributors to the common fund and the participators in the surplus must be an identical body. The court went on to observe that this does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. A similar view was expressed in Sports Club of Gujarat Ltd. v. CIT, [1988] 171 ITR 504 (Guj), where it was held that one of the essentials of mutuality is that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participators and the contributors. Once such identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself.

4. Reference may next be made to CIT v. Kottayam Co-operative Bank Ltd., [1974] 96 ITR 181 (Ker). This concerned a co-operative society which was doing banking business and also running a chit fund. In the context of its claim for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), it was observed that the dominant motive which prompts most people to join chit fund schemes is to avail themselves of the facility of bidding for the chits when they are in urgent need of finance so that they may receive the chit amount in a lump sum as a loan with the facility of repaying it in monthly instalments. A chit fund, it was observed, does, no doubt, incidentally partake of the nature of a saving scheme also. But, unless amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there will be no income derived either by way of interest or by way of amounts forgone by the bidders at the auction. Thus, the chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to the subscribers, their turns for getting such loans being determined either by auction or by drawing lots.

5. Finally, there is the judgment of the High Court of Madras in Board of Revenue v. North Madras Mutual Benefit Co. Ltd., [1922] 1 ITC 172, where it was held that the operations of a chit fund cannot be said to bring any profit to its subscribers as a body and the income represented by premia was thus not assessable to income-tax.

6. Mr. B.K Jhingan, counsel for the assessee, on the other hand, sought to contend that the amount received by a subscriber from a chit fund, in excess of the contributions made by him, must be deemed to be a revenue receipt and correspondingly the excess of contributions over receipts to the fund would be revenue loss. To support this contention, he sought to rely upon CIT v. Kovur Textiles and Co., [1982] 136 ITR 61 (AP), where the Income-tax Officer allowed the difference between the chit amount and the price for which it was bid as a business loss to the assessee. This was disallowed by the Commissioner, but the Tribunal found as a fact that the assessee had entered the chit fund only for the purpose of finding finance for his business and the chit amount bid had been utilised only for the purpose of the business. It was consequently held that the loss incurred by the assessee could be allowed as an admissible deduction in computing its income.

7. On the face of it, the judgment in Kovur Textiles and Co.'s case, [1982] 136 ITR 61 (AP), does, indeed support the assessee's contention, but it will be seen that that is a decision arrived at without any discussion or reasoning to support it. What is significant is that the aspect of mutuality which is of prime importance in such cases was not even adverted to.

8. Reference was next made by counsel for the assessee to CIT v. Dhampur Sugar Mills Ltd., [1988] 171 ITR 675 (All). The assessee here had invested in State Development Bonds at the behest of the district authorities for maintaining goodwill and good relations with them. When the crushing season approached, the assessee, a sugar mill, sold the bonds and thereby incurred a loss, which it later claimed as a business loss. This claim was accepted on the ground that the purchase of the bonds had been made in connection with the business of the assessee. The fact that the purchase of the bonds was found to be connected with the business of the assessee clearly distinguishes this case from the facts of the present case.

9. The two other cases sought to be relied upon, namely, Patnaik and Co. Ltd. v. CIT, [1986] 161 ITR 365 (SC) and Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT, [1965] 56 ITR 52 (SC), bear no resemblance to the point in issue here and, therefore, call for no discussion. Faced with this situation, counsel for the assessee sought to contend that the nature of a chit fund was not raised in the question referred and, therefore, the court was precluded from going into this matter. This is, indeed, a contention wholly devoid of merit as the very basis and foundation of the point in issue is founded upon the nature and quality of a chit fund and the transactions involved therein.

10. In the circumstances, there can be no escape from the conclusion that the transactions involved did not give rise to any income assessable to income-tax nor any corresponding revenue loss in respect of which any deduction could be claimed. This being so, the question referred, has of necessity, to be answered in the affirmative, in favour of the Revenue and against the assessee. This reference is disposed of accordingly. There will, however, be no order as to costs.