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Tax Publishers
Bad debt claim in Chit fund funds on terminated
chits
Facts:
Assessee was into Chit fund business. They claimed bad
debts of substantial amounts. When questioned the assessee explained that the
claim of bad debt was two fold, those subscribers to chits who failed to pay
their instalments was a bad debt and those amounts in terminated chits which
they ought to pay in future was also claimed as a bad debt. Revenue did not
relish the second point of the amounts what ought to be paid by the subscribers
can be claimed as a bad debt. Their plea was in chit fund business neither the
foreman nor the subscribers have a creditor/debtor relationship and that what
is not paid is claimable as a bad debt while what is to be collected in future
on terminated chits could not be an allowable claim. On appeal the CIT(A)
allowed the stand of the assessee basing their own cases of Madras high court
and at other high courts. On higher appeal -
Held against the revenue that the claim of bad debt on
terminated chits was an allowable expenditure.
Ed. Note: Chit fund
scheme is a money circulation scheme where in subscribers join with the lead
player as the foreman. Generally the foreman takes the first instalment of the
subscribers as the cost of running the chit and their commission. Thereafter
the subscribers auction and claim the money to their needs. Earlier auctioneers
loose money as interest compensation for the earlier drawing of the money and
those people who contribute less gain more as interest income for their
non-auctioning of their money over the tenure of the chit fund. Thus if a
subscriber withdraws money or refuses to pay an instalment it becomes a bad
debt definitely if not recoverable. To complete the double entry the future
instalments also need to be accounted on periodical basis in mercantile system.
Thus the future instalments not paid also become a bad debt in one way or
other. If not claimable as a bad debt but as a business expenditure under
section 37(1).
The decision also refers to the CBDT circular on this
business.
Case: Dy. CIT v.
Shriram Chits (P) Ltd. 2024 TaxPub(DT) 1700 (Chen-Trib)
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