Chennai 18 v. The Commissioner Of Income Tax, Company Circle, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 01.12.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANAND THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) Nos.2638 to 2643 and 2649 to 2654 of 2006 M/s.Bilahari Investments (P) Ltd.,45, Poes Road, II Floor, Chennai-18...Appellant in TC.[A] Nos.2638/2006to 2643/2006. M/s.Arabhi Investments [P] Ltd.,46, Poes Road, I Floor,Chennai 18. Chennai 18...Appellant in TC.[A] Nos.2649/2006to 2654/2006.Vs.The Commissioner of Income Tax,Company Circle, Chennai...Respondent in all the appeals. T.C. Appeals filed against the common order of the Income-taxAppellate Tribunal dated 26.5.2006 made in I.T.A. Nos.993/MDS/2002 to995/MDS/2002, 1242/MDS/2002 to 1244/MDS/2002, 990/MDS/2002 TO 992/MDS/2002and 1247/MDS/2002 to 1249/MDS/2002 for the Assessment Years 1996-97 to1998-1999 against the Order of the Commissioner of Income Tax [Appeals]III, Chennai dt.22.3.2002 made in ITA.Nos.Tr.99/2001-02/A.III,Tr.178/2001-02/A.III, Tr.180/2001-02/A.III, Tr.172/2001-02/A.III andTr.175/2001-02/A.III, against the order of the Asst. Commissioner ofIncome Tax, Company Circle IV[1] Chennai dt. 16.11.98 and made inPAN/GIR.539-B, 559-B, 559-A and 1272-A respectively. For Appellants in:Mr.V.D.Gopalall the casesFor Respondent:Mr.J.Narayanaswamyin all the casesJunior Standing Counsel----- COMMON JUDGMENT (Delivered by P.D.DINAKARAN, J.) These appeals arise out of the common order of the Income-taxAppellate Tribunal dated 26.5.2006 made in I.T.A. Nos.993 to 995, 1242 to1244, 990 to 992 and 1247 to 1249/(Mds)/2002 for the assessment years1996-97 to 1998-99 respectively. 2. The brief facts, which are common so far as the assesses areconcerned, giving rise to the above appeals, are as under:- 2.1. The assessees are private limited companies subscribing to chitsas their business activity. The assessees were maintaining its accounts onmercantile basis and computing loss or profit, as the case may be, at theend of the chit period in respect of chits terminating in a particularprevious year, following completed contract method. 2.2. Before the assessing officer, the assessees claimed that thediscount arose at a particular point of time when the prized chit amountwas received and the discount was a statutory and contractual liabilityincurred by the subscriber as a consideration for obtaining the sum totalof all the contributions by way of subscription in an accelerated manner.According to the assessees, the discount was not an amount paid in advancelike rent or interest, but was a single amount giving rise to a singleliability not only legally enforceable but also actually enforced by theForeman by deducting it from the chit amount and by paying only thebalance to the prized subscriber as the prized amount. The assesseesfurther claimed that once the prized subscriber offered the highest bid,his liability for discount became crystallized, adjusted and totallydischarged and the chit discount which was payable and adjusted againstthe bid amount leaving only the prized amount to be disbursed to theprized subscriber did not leave any scope for showing a part of thediscount as an advance referable to the remaining period of the respectivechit and it would be a misconception to call the discount amount as a timebased liability and it would be legally untenable to dissect it on timebasis. The assessees also contended that in mercantile system ofaccounting the liabilities were incurred irrespective of the date ofpayment whereas in the instant case, by virtue of the provisions of theChit Funds Act and the agreement entered into between the Foreman and theassessees, the liability by way of discount arose in full measure at themoment the subscriber became a prized subscriber and it was a liabilityin praesenti and also a statutory liability which could not even bepostponed by the act of the parties concerned. 2.3. The Assessing Officer found that the chit dividend was a regularactivity and received on a regular basis and the discount amount wouldrun for the remaining period of the chit. The assessing officer rejected https://hcservices.ecourts.gov.in/hcservices/ the method of accounting adopted by the assessees and taxed the dividendin the year of receipt and allowed chit loss on proportionate time basisby distributing over the remaining period subsequent to the bidding at thechit auction. 2.4. On appeal by the assessees, the Commissioner of Income-tax(Appeals), while rejecting the completed contract method, held thatdividend is taxable in the year of receipt and chit loss is allowable as adeduction in the year of bid itself. 2.5. Aggrieved against the same, both the assessees and the Departmentwent on appeals before the Income-tax Appellate Tribunal and the Tribunal,relying upon the instructions made by the Central Board of Direct Taxesdated 16.5.76 and also relying upon the decision of the Apex Court inMadras Industrial Investment Corpn. Ltd. Vs. Commissioner of Income-tax(225 ITR 802), allowed the department's appeal and dismissed the appealspreferred by the assessees. 2.6. Hence, the assessees have preferred the present appeals raisingthe following common questions of law: a) Whether the Income tax Tribunal is right in law particularlyin the light of S.5 and 145 of the Income tax Act, 1961, inrejecting the method of accounting adopted by the appellantunder which income or loss as the case may be arises or accruesby netting dividend against chit loss, only at the end of thechit period of each chit group ? b) Whether the Income-tax Tribunal is right in law in applyingthe principles of deferred expenditure to the appellant's casewhere there is no deferred benefit and concluding that chitdiscount should be allowed spreading it over the remainingperiod of the chit on proportionate basis ?c) Whether the Income-tax Tribunal is right in law in notfollowing the Central Board of Direct Taxes instruction dated16.5.78 on the issue of taxability of dividend and allowance ofchit loss as a deduction? 3. With regard to the issues raised in the above questions of law,this Court, in the assessees's own cases for the assessment years 1990-91,1991-92, 1992-93 and 1993-94, in T.C.(A)Nos.76 to 86 of 2003 etc., batch,by common judgment dated 19.6.2006, held as follows:- "9.3. A conjoint reading of the above provisions of law makesit clear that all income received or deemed to be received oraccrues or arises during the previous year shall form part ofthe total income of the assessee and such income shall becomputed in accordance with the accounting system which theassessee is regularly following. Here, on the facts of the case, the authorities have found that the assessees arefollowing mercantile system of accounting. The mercantile systemof accounting means, as discussed in Shiva Prasad Gupta v.C.I.T. (AIR 1929 All. 823), the amounts that have becomerecoverable are shown as the income actually received and theliabilities incurred are shown as amounts actually disbursed inany particular year. Therefore, when the assessees arefollowing mercantile system of accounting, in which entries areposted in the books of account on the date of the transaction,that is, on the date on which rights accrue or liabilities areincurred irrespective of the date of payment, they have toaccount for their income or loss as per the mercantile system ofaccounting and not otherwise. Therefore, as rightly found bythe Commissioner of income-tax (Appeals), the income derivedduring a particular previous year by way of chit dividend has tobe reckoned and assessed as income of that year following theprinciples of mercantile/accrual system of accounting,particularly when the assessees are companies following themercantile system of accounting. 10.1. The chit transaction is governed by the provisionsof the Chit Funds Act. In view of the non obstante clause foundin section 3 of the Chit Funds Act, 1982, namely, "3. Act to override other laws, memorandum, articles, etc.-Save as otherwise expressly provided in this Act,- (a) the provisions of this Act shall have effectnotwithstanding anything to the contrary contained in anyother law for the time being in force or in the memorandumor articles of association or bye-laws or in any agreementor resolution whether the same be registered, executed orpassed, as the case may be, before or after the commencementof this Act; and (b) any provision contained in the memorandum, articles,bye-laws, agreement or resolution aforesaid, shall, to theextent to which it is repugnant to the provisions of thisAct, become or be void, as the case may be", the definitions of the expressions, discount, dividend, prizeamount, as extracted above, will prevail over the similardefinitions as found in the Income-tax Act, because a nonobstante clause is generally appended to a section with a viewto give the enacting part of the section in case of conflict, anoverriding effect over the provision in the same or other Actmentioned in the non obstante clause (vide: State of Bihar v.Bihar Rajya M.S.E.S.K.K.Mahasangh (2005) 9 SCC 129). Thereforethe discount is not an interest payable on the prized amount,but it is a loss. 10.2. As already observed, in chit transaction there is nocorrelation between the discount amount and the futureinstalments. Further, the measure of future instalments does notdepend upon the prized amount or the discount, nor the discountis an expenditure to be incurred in future. The discount is nota deferred expenditure for which payment has been made, or aliability incurred, but the discount is carried forward on thepresumption that it will be of benefit over a specific period.In the chit transaction, there is no deferred benefit, which isconstrued to mean the benefit deferred to a year subsequent tothe accounting year and hence, the question of deferredexpenditure does not arise. 10.3. That apart, the provisions of the Chit Funds Actrequire the prized subscriber to furnish security for futureinstalments. Therefore, neither the enforceability of the rightto receive the dividend, nor that of the obligation to pay thediscount could be deferred and both accrued instantaneously.Hence, the discount is allowable in the very same year ofaccrual. In this view of the matter, the dividend has to betaxed in the year of accrual; so also, the discount has to beallowed in full in the year of accrual itself. The AppellateTribunal is right in rejecting the completed contract method ofaccounting adopted by the assessees and at the same time, it isnot correct in holding that the discount should be allowedspreading it over the remaining period of the chit on aproportionate basis. 11.1. For the foregoing reasons, we hold that the dividendincome has to be taxed on the basis of its accrual andaccordingly, we answer the first question in favour of theRevenue and against the assessee. 11.2. As regards the second question, we hold that the thediscount loss claimed should be allowed in the year of itsaccrual and hence, we answer the second question in favour ofthe assessee and against the Revenue. 11.3. With regard to the third question, since the questionis academic in nature, we need not go into the same. In view of the above, the above Tax Case Appeals are disposed ofanswering the first question of law in favour of the Revenue and againstthe assessee and the second question of law against the Revenue and infavour of the assessee. The third question being academic in nature isnot answered. No costs. Sd/- Asst. Registrar. /true copy/ sra Sub Asst. Registrar. To 11.2. As regards the second question, we hold that the thediscount loss claimed should be allowed in the year of itsaccrual and hence, we answer the second question in favour ofthe assessee and against the Revenue. 11.3. With regard to the third question, since the questionis academic in nature, we need not go into the same. In view of the above, the above Tax Case Appeals are disposed ofanswering the first question of law in favour of the Revenue and againstthe assessee and the second question of law against the Revenue and infavour of the assessee. The third question being academic in nature isnot answered. No costs. Sd/- Asst. Registrar. /true copy/ sra Sub Asst. Registrar. To 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "A”, Rajaji Bhavan, Besant Nagar, Chennai 90.2.The Commissioner of Income-Tax (Appeals) III, Chennai.3.The Deputy Commissioner of Income-tax, Company Circle IV (1), Chennai.4. The Assistant Commissioner of Income Tax, Company circle IV [1], Chennai.5. The Additional Commissioner of Income Tax,Company Range I, Chennai.6. The Commissioner of Income Tax,Chennai I, Chennai. + 2 CCs to Mr.V.D.Gopal, Advocate SR NO 59265, 59266+ 2 CCs to Mrs. Pushya Sitaraman, Sr. Standing Counsel for Income Tax, SRNO 59136, 59137 mdr[co]Gp/22.12. T.C.(A) Nos.2638 to 2643and 2649 to 2654 of 2006