Madrasdated High Court · 2012

of the Assistant Commissioner of Income tax Company Circle V(2)Chennai dated 12.3.2002 made in PAN GIR.No.S?H-153 for the Assessmentyear 1999-2000 and against the order of the Deputy Commissioner ofIncome tax, Special Range, Chennai dated 19.3.1998 made in PANGIR.No.57-S/95-96 for the Assessment year 1995-1996 respectively. For Appellant:Mr.V.D.GopalFor Respondent:Mr.N.V.BalajiStanding Counsel for Income TaxCOMMON JUDGMENT(Judgment of the Court was made by CHITRA VENKATARAMAN ,J)The assessee is on appeal as against the order of the Income TaxAppellate Tribunal. The issues raised in these appeals are commonexcept Tax Case Appeal Nos.141/2004, 425 and 426/2006, and 213/2004 .So far as Tax Case Appeal No.141/2004 relating to assessment year1987-88, T.C.(A).Nos.425 and 426/2006 relating to the assessment year1995-96 and T.C.(A).No.213/2004 relating to assessment year 1991-92are concerned, the following are the substantial questions of law:-"1. Whether in law taxable income accrues inthe case of chit company rendering services tothe chit subscriber only at the end of the chitperiod and therefore completed contract method ofaccounting is the proper method of accounting ?2. Whether in law, in the light of Section 5 ofthe Income Tax Act 1961 and Section 2 of the ChitFunds Act 1982 commission cannot be taxed asincome without meeting the cost of services to beprovided till the end of the chit period and thecost of bad debts ?"In so far as Tax Case Appeal Nos.616/2005, 628/2005, 627/2005,624/2005, 625/2005, 617/2005, 213/2004, 618/2005, 626/2005, 620/2005,622/2005, 623/2005, 621/2005, 619/2005, 425/2006, 2445 and 2449/2006are concerned, they are relating to the assessment years 1988-89,1988-89, 1989-90, 1989-90, 1990-91, 1990-91, 1991-92, 1991-92, 1992-93, 1992-93, 1993-94, 1993-94, 1994-95, 1994-95 and 1995-96, 1995-96and 1999-2000 respectively. Apart from the above two questions oflaw, the assessee raised two other questions in the above Tax CaseAppeals. Thus, the questions of law raised in these Tax Case Appealsare as under:-" 1.Whether in law taxable income accrues inthe case of chit company rendering services to thechit subscribers only at the end of the chitperiod and therefore completed contract method ofaccounting is the proper method of accounting ? https://hcservices.ecourts.gov.in/hcservices/

2.Whether in law, in the light of Section 5of the Income Tax Act, 1961 and Section 2 of thechits funds Act, 1982 commission cannot be taxedas income without meeting the cost of services tobe provided till the end of the chit period andthe cost of bad debts ? 3. Whether in law, the dividends receivedby the appellant as a chit subscriber is exemptfrom taxation on grounds of mutuality between allthe chit subscribers including the appellant ?4. Whether in law, the proper course open tothe ITAT was to refer the matter to a larger Benchespecially when the case law cited in the groundsof appeal is in favour of appellant ?"2. The facts in all these cases are one and the same. Theassessee is engaged in the business of running chits. Till31.12.1985, the assessee was following mercantile system ofaccounting as regards the commission earned by it in its capacity asforeman, conducting the chit activity. However, thereafterwards,while following mercantile system of accounting, the assessee changedthe system of accounting to completion contract method of accounting,that the commission earned by foreman was accounted for on completionof each series of chits. The Revenue did not accept the change onthe ground that on the date the auction was conducted, the right toreceive the commission in the capacity as Foreman had accrued;consequently, the assessee was not entitled to wait for thecompletion of each chit period, as there was no accrual of income atthe end of each term. The assessee's contention was rejected by theIncome Tax Officer. Aggrieved by this, the assessee went on appealbefore the Commissioner of Income Tax (Appeals). 3. A reading of the order of the Commissioner of Income Tax(Appeals), particularly the order passed for the assessment year1987-88, shows that the first appellate authority considered thequestion as to whether at all the assessee had really changed itsmethod of accounting. The Commissioner of Income Tax (Appeals)viewed that the assessee had merely changed its presentation and notreally the method of accounting. He held that every auction is astep towards the fulfilment of a contract between the assesseecompany and the subscribers. The foreman continues to receive thecommission before the distribution of the dividend income, which hadalready accrued to the assessee; hence, assessable without postponingthe same to the end of the chit period and there was no question ofpostponing the accounting to the end of the chit period. TheCommissioner of Income Tax (Appeals) further pointed out that eventhough the assessee claimed that it had to suffer bad debts on thedifferent auctions when the subscribers defaulted in not meetingtheir commitments, yet, the assessee had not placed before the https://hcservices.ecourts.gov.in/hcservices/ Commissioner, materials to show that the system of accounting itfollowed till 01.04.1986 showed impracticable results; in thecircumstances, the change in the presentation of accounts based oncompletion of contract, did not facilitate the determination ofcorrect profits of the assessee. Thus, the presentation of accountsdid not help in the determination of correct profits of theassessee's business. This reasoning was followed in other appeals.Aggrieved by the same, the assessee went on appeal before the IncomeTax Appellate Tribunal. 4. After referring to the various provisions of the Chit FundsAct, the Tribunal pointed out that the foreman is allowed a fixedpercentage as commission or remuneration at the time of each monthlydraw, and is permitted to pay himself from the subscription amount,his commission or remuneration that becomes due to him at that draw.The chit business is run as any other business and the problemsregarding bad debts cannot be termed as a speciality of the business.Thus, remuneration or commission of the foreman accrues at the end ofchit draw and it becomes due to him and is payable to him from out ofthe monthly subscriptions. The accrual of income as commissiontogether with the right to receive it, is related to each draw andgets completed on that basis. In the circumstances, the Tribunalheld that the foreman's commission has to be related to anddetermined on the basis of every auction and not to be postponed tothe completion period. Thus, the assessee's appeal was dismissed.Aggrieved by this, the present appeals are filed by the assessee. 5. Learned counsel appearing for the assessee, while taking usthrough the decision of the Supreme Court in the case of M/s.ShriramChits & Investment (P) Ltd., Vs. Union of India and others reportedin AIR 1993 SC 2063, pointed out to the various obligations,responsibilities and liability to be discharged by the foreman andsubmitted that each group or each series of chit is one transactionand the foreman has statutory responsibilities and risks relating tothe conduct of the chit of the series. Apart from the conduct of thechits, the draws or auction and maintenance of accounts, theresponsibilities of the foreman include his obligations to pay theprize amount on the date, whether or not all the members have paidtheir subscriptions. As enjoined in the provisions of the Act, ifthe prized member defaults in instalments, the foreman has to makegood the deficit out of his own resources apart from the steps to betaken by the foreman for realising all the amount. Thus, chittransaction of every series is one single transaction involving aseries of activities and every stage of activity is having severalobligations. The income that the company would earn has to benecessarily worked out on the basis of the completion of thetransaction and not on proportionate basis. https://hcservices.ecourts.gov.in/hcservices/

6. Mr.V.D.Gopal, learned counsel appearing for the assessee,further pointed out to the decision of the Apex Court in the case ofCommissioner of Income Tax Vs. Bilahari Investment P.Ltd reported in(2008) 299 ITR 1 (SC), wherein, the Supreme Court had an occasion toconsider the case of the subscriber to a chit and the distinctionbetween the completed contract method of accounting and theproportionate system of accounting, income and realisation in chittransaction. Referring to the various obligations in the Chit FundsAct, particularly, dividend declaration, learned counsel pointed outthat even in preparing the financial statement, the assessee isguided by the historical background; the transaction period of everychit runs over a number of months and hence, the nature of businesscannot be lost sight of for the purpose of appreciating the claim ofthe assessee; that the income, in effect, has to be necessarilyworked out only at the end of the transaction period when results areavailable on how much, in fact, would be the discount and thedividend accruing through the particular series. Hence, it is tooimpracticable for anyone to say with any degree of certainty, whatcould be the income for the purpose of apportioning during anyparticular period. In short, the submission of the learned counselfor the assessee is that the completion of contract method is themost appropriate method to arrive at the income of the assessee. Hefurther pointed out that even though the assessee is entitled to theforeman's commission on the conduct of auction every month, yet,that, by itself, cannot be taken as a positive indicator as to theincome that the assessee is likely to receive in the future months.Thus, there could be no question of estimating profit in the line ofbusiness before the end of the series; in the circumstances, hesubmits that the Tribunal committed serious error in rejecting theassessee's case. As regards the claim for deduction on expenditure,he pointed out that the expenditure incurred by the assessee inrunning the chit business cannot be apportioned to any particularchit group during any particular period and considering the nature ofbusiness carried on by the assessee, the advertisement expenditure tokeep the business growing are very much part of the businessexpenditure, which has to be allowed as a deduction in the year inwhich it was incurred. 7. Referring to the amendment to Section 145 of the Income TaxAct, 1961 with effect from 01.04.1997 in the Finance Act, 1995,learned counsel pointed out that the accrual method of accountingcontinued as a system of accounting too. Thus, even though theassessee followed the mercantile system of accounting, yet, businessnecessities call for following the completed contract method andhence, due regard has to be given to the responsibilities imposedunder the Chit Funds Act and the nature of business for the purposeof determining the income on the completion contract basis. 8. Assailing the claim of the assessee, learned Standing counselappearing for the Revenue submits that there is no dispute on the https://hcservices.ecourts.gov.in/hcservices/ fact that the assessee has the right to change the method of aparticular system of accounting. But this, however, does not meanthat the change in the method of accounting, which distorts theincome, could be accepted by the Revenue. The only ground on whichthe assessee sought for change in the accounting method is that thereis uncertainty with regard to the receipt of commission and secondly,the uncertainty regarding subscribers making up the instalmentsregularly. Learned Standing counsel pointed out that while preparingthe financial statement, it is an accepted practice that estimatesare used as key element. Given the nature of responsibilities of theforeman under the Chit Funds Act, on a chit holder bidding the prizeamount, he becomes a prized chit holder. Under Section 31 of theAct, the prized subscriber has to furnish security for the duepayment of all future subscriptions. In the event of a defaultcommitted by this prized subscriber, it is no doubt true that thecompany suffers a loss. Yet, the assessee is always backed up by agood security. Thus, the uncertainty spoken to by the assessee iswithout any legal or factual basis. In case of non-prize chitholder, in the event of default, Section 28 of the Chit Funds Act,1982 provides for the remedy as by way of removal of the non-prizedsubscriber or alternatively, a foreman may substitute any person inplace of the defaulting subscriber as per Section 29 of the ChitFunds Act. Thus, in either case, there is no loss for the assesseeto contend that uncertainty in respect of payment of instalmentsleads to indeterminate income for the assessee to follow thecompleted contract method. Thus, while Sections 28 and 29 of the Actprovide for substitution, Section 31 of the Chit Funds Act providesfor protection of the company against any risk or uncertainty in thematter of realising the amount due to the Chit Fund company. Thuscertainty as regards the receipt of income is the key element in thefinancial statement of the company. 9. Referring to the Accounting Standards, particularly, the oldprovisions in Accounting Standard relating to construction contractsAS-7 and AS-11, learned Standing counsel submits that even thoughstrictly speaking, this may not have a binding character in decidingthe question, yet, for the purpose of understanding the concept ofcompleted contract method, guidance should be taken from theaccounting standards as well as research reports and financialstatements prepared by the Institute of Chartered Accountants ofIndia. Referring to the old provisions contained in AccountingStandard AS-7 relating to construction contracts - Disclosure ofAccounting Policies and Accounting Standard AS-9 - RevenueRecognition, learned Standing counsel submitted that even if chittransaction is to be taken as one single transaction, revenuerecognition requires revenue as measurable at the time of running ofservice. In other words, going by the provisions of the Chit FundsAct, a reasonably determinable nature of receipts would discount theclaim of the assessee to prefer the completed contract method asregards its receipts. He pointed out that the services of the https://hcservices.ecourts.gov.in/hcservices/ assessee are provided every month; hence, certain determinableresults, particularly with reference to the commission payable to theassessee, are always available to the assessee. Hence, revenue hasto be recognised on straight line basis and every act performed bythe assessee every month positively point out to the commissionreceipt every month and hence, has to be taken as for the purpose ofrevenue recognition. Thus, even though there may be certain degreeof uncertainty on an individual chit holder complying with hisobligation, yet, the interest of the company is protected well by theprovisions of the Chit Funds Act. The sheet-anchor of Revenue'scontention is that there is certainty as regards income viz., thatthe dividend it gets by way of commission. Thus, the contention ofthe assessee that there is uncertainty in ascertaining the incomeevery month, fails. 10. Learned Standing Counsel appearing for the Revenue furtherpointed out that the method adopted by the assessee is not completedcontract method, even if the change in the system of accounting is tobe accepted as bona fide. Pointing out to the decisions of theSupreme Court that there should be matching concept of income andexpenditure, learned Standing Counsel pointed out that while theassessee has taken the commission and dividend to the end of the chitperiod, there are certain expenditure apart from the administrativeexpenditure which are claimed then and there and not deferred.Expenses incurred like advertisement costs, which are for theparticular chit group, are also claimed as expenditure in the year inwhich it had incurred and not deferred. While there is accumulationof profit to the chit end period while calculating the real income,there exists distortion in identifying the income and as such, thesystem of accounting adopted by the assessee is not completedcontract method. Learned Standing Counsel pointed out that if theassessee had taken the entire costs to the end, thereby postponingthe entire costs as in the case of receipts, the Revenue might nothave any objection, wherein, one may find matching principle onincome and expenditure. Thus, taking the cost attributable on everychit as available for the particular series on the completed contractmethod, taxable income identification would not be a problem. On thecontrary, taking the cost alone for deduction in the year forconsideration and postponing the income to the transaction periodend, really results in revenue escapement. He further pointed outthat even though the assessee's business is chit business, yet, thesalary paid and the overhead charges are actually involved in runningthe particular chit series claimed as deduction in the year ofincurring expenditure, thus, makes the claim of the assessee totallyunscientific; hence, the system of accounting should be rejected.In this context, he placed reliance on the decision of Supreme Courtin the case of Commissioner of Income Tax Vs. Bilahari InvestmentP.Ltd., reported in (2008) 299 ITR 1 (SC) and the decision of thisCourt in the case of G.Padmanabha Chettiar and Sons Vs. Commissionerof Income Tax reported in (1990) 182 ITR 1. https://hcservices.ecourts.gov.in/hcservices/

11. Learned Standing Counsel pointed out that what the assesseehad followed is cash system for expenditure and accrual system forincome, which, in fact, clearly distorts the income chargeable totax. Thus, when the assessee has certainty of income, one by way ofdividend as per Sections 28, 29 and 31 of the Chit Funds Act and thecommission arising out of the conduct of the business, one may notethat the ultimate income of the assessee has to be worked out only bythe matching of income and expenditure. 12. Countering the claim of the Revenue, learned counselappearing for the assessee referred to the decision in the case ofCommissioner of Income Tax Vs. Bilahari Investment P.Ltd reported in(2008) 299 ITR 1 (SC), wherein, the Apex Court pointed out that everyassessee is entitled to arrange its affairs and follow the method ofaccounting. The assessee had not taken the receipt of the dividendon accrual basis. The method adopted by the Revenue on thepercentage of completed contract method on proportionate basis waswrong. The Apex Court clearly held that in the absence of anyfinding recorded that the completed contract method distorted theprofits of the particular year and the chit scheme being one singlescheme spread over a period of time, the method adopted by theRevenue in proportionate basis on the percentage of completedcontract method was erroneous. Learned counsel further pointed outthat the said decision was a case of a subscriber where the assesseehad accepted the view of the High Court as regards chit dividend thatthe completed contract method was not correct. The question beforethe Supreme Court in the appeal at the instance of the Revenue was asto whether the completed contract method of accounting adopted by theassessee for chit discount is required to be substituted by thepercentage of completed contract method. Learned counsel pointed toparagraph 16 of the judgment, wherein the Apex Court pointed out thatin the completed contract method, revenue is not recognised till thecontract is complete. The profit and loss is established in the lastaccounting period and transferred to the profit and loss account.This determined the results on the completed contract method. TheApex Court pointed out that this method leads to the objectiveassessment of the results of the contract. 13. Given the fact that each chit series is a transaction byitself, with intervening activities in the conduct of the chittransaction, with the conduct of the auction of every month facingups and downs and ultimately seen in the matter of discount, thedetermination of the income of the assessee, thus, has to benecessarily postponed to the end of the transaction viz., end of theeach series. However, as far as the expenditure incurred by theassessee are concerned, which are administrative in character,considering the number of chit series and transactions conducted bythe assessee itself being the business of the assessee, necessarily,the assessee has overhead expenses, expenses relating to business https://hcservices.ecourts.gov.in/hcservices/ advertisement, for the purpose of running its business. Even though aparticular advertisement refers to the start of a new chit series,yet, the expenditure could not be restricted to the particular chit.On the other hand, the expenses incurred are for running of thebusiness; thus, by applying the matching principle, the expenditureincurred cannot be postponed to the end of the chit period. Hence,given the nature of the chit transaction with each series runningthrough the number of months, the income arising out of theparticular series of chit transaction could be identified only at theend of the transaction, which may consist of a series of activitiesand at any intermediate stage of the chit transaction, there is nopossibility of identifying the income, but has to be postponed to thelast performance. In the circumstances, the decision of the ApexCourt in the case of CIT Vs. Bilahari Investment P. Ltd (cited supra)supports the case of the assessee that the income of the assessee onthe dividend earned every month and the discounts arising therefromhave to be necessarily taken to the end of the chit period for thepurpose of ascertaining the income. 14. Heard learned counsel appearing on either side and perusedthe documents available on record. 15. Before going into the various contentions of the assessee, weneed to know the provisions of the Chit Funds Act, 1982 and thedefinitions therein. "Discount" and "dividend" under Sections 2(g)and (h) respectively, are as follows:-" 2(g) 'discount' means the sum of money orthe quantity of grain which a prized subscriber isunder the terms of the chit agreement, required toforego and which is set apart under the saidagreement to meet the expenses of running the chitor for distribution among the subscribers or forboth:2(h) 'dividend' means the share of thesubscriber in the amount of discount availableunder the chit agreement for rateable distributionamong the subscribers at each instalment of thechit. "Section 12 of the Chit Funds Act speaks on the prohibition on chitcompany from carrying on any other business and if a company desiresto carry on other business, it has to get the permission of the StateGovernment. Section 14 of the Chit Funds Act provides for theutilisation of funds. In Chapter III, Sections 20 to 28 of the Actrefer to the rights and duties of the foreman and Chapter IV(Sections 27 to 30) refers to the rights and duties of non-prizedsubscribers. Section 21 in Chapter III speaks about the rights ofthe foreman. Sub Section (1)(b) of Section 21 states that theforeman would be entitled as by way of commission, remuneration orfor meeting the expenses of running the chit, a sum not exceeding https://hcservices.ecourts.gov.in/hcservices/ five per cent of the chit amount. Section 25 deals with theliability of the foreman to the subscribers that every foreman shallbe liable to account to the subscriber for the amounts due to them.Section 27 in Chapter IV speaks about the payment of the subscriptionby a non-prized subscriber and Section 28 deals with the removal ofdefaulting subscribers. Section 29 refers to the circumstances underwhich there could be substitution of subscribers in the place ofdefaulting subscribers. Section 30 speaks about the amounts due todefaulting subscribers and the payment to be made to the defaultingsubscribers. Chapter V (Sections 31 to 33) speaks about the rightsand duties of the prized subscribers. Section 31 states that theprized subscriber has to furnish security for the due payment offuture subscription in the event of the subscriber not offering todeduct the future subscriptions from out of the prize amount. 16. A reading of the rights of the subscribers andresponsibilities of the foreman points out to the duty cast on theforeman to conduct the chit to a duration assured and in the event ofany default of payment of any one of the instalments, the foreman hasthe responsibility to make good that loss. In the end of the chitperiod, the subscriber is assured of the amount for which heparticipated in the scheme. Thus, in the background of theseprovisions, read in the context of the definition of "discount" and"dividend", it is evident that on every auction, the discount that isarrived at is taken for the purpose of meeting the expenses ofrunning the chit. The expenses normally include all expenses apartfrom the commission payable to the foreman and the dividend that arepayable to the subscriber, which are normally carried to the end ofthe chit period. 17. Given the fact that every chit is an independent transactioncontaining a series of activities to be undertaken during the courseof the transaction, one may note that even though the discount andcommission are recognised with the conduct of auction every month,yet, with all the load that are mounted on the discount, theuncertainties in the payment of subscriptions and the commitmentsthat the assessee has to discharge under the Chit Funds Act, therevenue recognition, as a business proposition becomes determinableonly at the end of the particular chit transaction. In AccountingStandard 9, as published by the Institute of Chartered Accountants ofIndia, it is stated that in a Chit Fund Business, the following itemsof revenue ordinarily arise viz., (1) Foreman's commission, (2)Default interest and (3) Interest on loans and advances. 18. Revenue referred to the old AS-7, which deals with accountingstandards on Construction Contracts. It is fairly stated by theRevenue that even though this has no relevance to the case on hand,yet, the concepts stated for revenue recognition with reference tocompleted contract method and proportionate completion method offerthe guidance and hence, need to be referred to. Accounting Standard https://hcservices.ecourts.gov.in/hcservices/ AS-7 provides for Revenue recognition in case of constructioncontracts. Revenue recognition on the rendering of services is madeeither by proportionate completion method or completed servicecontract method, which reads as under:-" (i) Proportionate completion method –Performance consists of the execution of more thanone act. Revenue is recognised proportionately byreference to the performance of each act. Therevenue recognised under this method would bedetermined on the basis of contract value,associated costs, number of acts or other suitablebasis. For practical purposes, when services areprovided by an indeterminate number of acts over aspecific period of time, revenue is recognised ona straight line basis over the specific periodunless there is evidence that some other methodbetter represents the pattern of performance.(ii) Completed service contract method –Performance consists of the execution of a singleact. Alternatively, services are performed inmore than a single act, and the services yet to beperformed are so significant in relation to thetransaction taken as a whole that performancecannot be deemed to have been completed until theexecution of those acts. The completed servicecontract method is relevant to these patterns ofperformance and accordingly revenue is recognisedwhen the sole or final act takes place and theservice becomes chargeable."19. As is evident from the reading of both these methods, whilein proportionate completion method, revenue is recognisedproportionately by referring to the performance of each act, thepossibility of revenue recognition in the proportionate completionmethod being a fairly determinable one, in the completed servicescontract method, the difficulty in determining the revenue arises byreason of the significant nature of the services yet to be performedin relation to the transaction that normally, the revenue recognitionis taken to the end of the performance. Thus, even while advocatingthe proportionate completion method, where there is every possibilityof identifying the revenue vis-a-vis the extent of servicescompleted, there is a line of caution stated that when there is abetter method available to assess the better performance, the samemay be adopted to the straight line basis for ascertaining theincome. However, when the services yet to be performed are sosignificant in relation to the transaction, difficulty arises inrecognising the revenue in the performed services. Thus in contrastto the proportionate completion method, necessarily, revenuerecognition is postponed till the completion of the services of thecontract; thus, under Clause 9, "Basis for Revenue recognition", it https://hcservices.ecourts.gov.in/hcservices/ is stated that so long as there is uncertainty on the ultimatecollection, revenue is not normally recognised along with renderingof services; thus, even though payment may be made on instalments,when the consideration is not determinable within the reasonablelimits, recognition of revenue is postponed. A.S.7 gives theinstances as to how the cost incurred by the contractor could bedivided into, (i) Costs that relate directly to a specificcontract (ii) Costs that can be attributed to the contract activityin general and can be allocated to specific contract and (iii) coststhat relate to the activities of the contractor generally, or thatrelate to the contract activity but cannot be related to specificcontract. Accounting Standards also describe about selection of amethod of accounting for a construction contract. 20. A reading of Accounting Standards 7 and Accounting Standards9 shows that both speak in one voice at least as regards theproportionate completion method, completion contract method and boththese methods aim at the methodology for arriving at the revenuerecognition with a certain degree of certainty, taking intoconsideration, the significance of the services performed and to beperformed in relation to the particular transaction. 21. In the decision reported in (2008) 299 ITR 1 (SC) (CIT Vs.Bilahari Investment P.Ltd.), cited supra, the Supreme Courtconsidered the relevance of completed contract method, particularlywith reference to chit transactions. The said decision was an appealby the Revenue as against the decision of this Court reported in(2007) 288 ITR 39 (Mad) (Bilahari Investments P.Ltd. Vs. Commissionerof Income Tax). The assessee therein conducting chit business is asubscriber to chits too as business activity. It maintained itsaccounts on mercantile basis, computing loss or profit as the casemay be at the end of the chit period in respect of chits terminatingin a particular year, following the completed contract method. Asfar as the discount was concerned, the assessee contended that thediscount was not an amount paid in advance like rent or interest, butwas a single amount giving rise to a single liability not onlylegally enforceable but also actually enforced by the foreman bydeducting it from the chit amount and by paying only the balance tothe prized subscriber as the prized amount; once the prizedsubscriber offered the highest bid, his liability for the discountbecame crystallized, adjusted and totally discharged and the chitdiscount which was payable and adjusted against the bid amountleaving only the prized amount to be disbursed to the prizedsubscriber, did not leave any scope for showing a part of thediscount as an advance referable to the remaining period of therespective chit and it would be a misconception to call the discountamount as a time based liability and it would be legally untenable todissect it on time basis. The assessees also contended that in themercantile system of accounting, the liabilities were incurredirrespective of the date of payment, whereas, in the instant case, by https://hcservices.ecourts.gov.in/hcservices/ virtue of the provisions of the Chit Funds Act and the agreemententered into between the foreman and the assessees, the liability byway of discount arose in full measure at the moment the subscriberbecame a prized subscriber and it was a liability in praesenti andalso a statutory liability, which could not even be postponed by theact of the parties concerned. Referring to the nature of chittransactions, this Court held that the measure of future instalmentsdoes not depend upon the prized amount or the discount, nor thediscount an expenditure to be incurred in future. Discount is not adeferred expenditure for which payment has been made or liabilityincurred and there is no deferred benefit. Hence, discount wasallowable in the very same year of accrual. Hence, dividend was alsoto be taxed in the year of accrual. Thus, this Court confirmed theTribunal's view rejecting the completed contract method of accountingadopted by the assessee, that the assessee cannot contend uncertaintyon the discount. This Court, however, held that it is not correct tohold that the discount should be spread over for the remaining periodon a proportionate basis. This Court held against the assessee,holding that the dividend was assessable in the year of accrualitself; as regards discount/loss claimed by the assessee in the yearof its accrual, this Court answered the same against the Revenue thatthe same was allowable in the year of accrual itself and cannot bepostponed or allowed on a proportionate basis. The Revenue took onappeal before the Apex Court as regards the assessability of thediscount in the year itself.22. It is a matter of record that the assessee accepted the viewof this Court as regards the assessability of the dividend income inthe year of accrual itself and thereby rejection of the assessee'scase of completed contract method in dividend aspect. 23. In considering the question as to whether discount was to beconsidered as in the case of dividend on accrual basis, the ApexCourt considered the difference between the completed contract methodand the proportionate contract method. While pointing out thatRecognition/identification of income under the 1961 Act isattainable by several methods of accounting, the Apex Court pointedout to the distinction between the completed contract method and thepercentage of completion method in paragraphs 16 and 17, which is asfollows:-" 16. Under the completed contract method,the revenue is not recognised until the contractis complete. Under the said method, costs areaccumulated during the course of the contract.The profit and loss is established in the lastaccounting period and transferred to the profitand loss account. The said method determinesresults only when the contract is completed. Thismethod leads to objective assessments of theresults of the contract. https://hcservices.ecourts.gov.in/hcservices/

17. On the other hand, the percentage ofcompletion method tries to attain periodicrecognition of income in order to reflect currentperformance. The amount of revenue recognisedunder this method is determined by reference tothe stage of completion of the contract. Thestage of completion can be looked at under thismethod by taking into consideration the proportionthat costs incurred to date bears to the estimatedtotal costs of contract. "24. A reading of the judgment thus points out that the principaldifference between these two methods is that in the proportionatecompletion method, there is possibility of a periodic recognition ofincome with reference to the stage of performance of the transaction;that the proportionate costs and income to the possible cost of thecontract enables one to identify the income with reference to thestage of completion of contract. In the context of this, the SupremeCourt also referred to the chit scheme as one integrated concept overa period of time and on an analysis of the transaction, the ApexCourt held on a perusal of the statement arising out of change ofmethod from completed contract method to deferred revenueexpenditure, that the entire exercise is revenue neutral,particularly when the scheme is read as one integrated scheme spreadover a period of time. The judgment also pointed out to the settledprinciple on the matching concept of income and expenditure, that theultimate analysis results in true income for the purposes ofassessment. 25. It is no doubt true that the decision rendered was in thecase of the subscriber to the chit; nevertheless, the decision of theApex Court is an authority for the proposition that the revenuerecognition in any system or method of accounting followed must reston the matching concept of income and expenditure. On a reading ofthis decision along with Accounting Standards 9, it is clear that infollowing any system of accounting, one has to have the correlationof income in relation to the extent of service performed, that theincome earned must be an ascertainable one with reference to theservices rendered and the services to be performed and itssignificance in relation to the transaction. 26. In the context of the decision of the Apex Court dealing withcompleted contract method and the proportionate completion method,the claim of the assessee, running the business in chit transaction,assumes significance. As noted already, every transaction on chitspreads over a fairly good number of months from twelve months andexceeding 12 months, with auction held for every month for everyseries. The multiple acts performed over the chit transaction period,thus relate to the transaction cycle of the chit scheme. As held bythe Apex Court, in the chit transaction, which is an integrated https://hcservices.ecourts.gov.in/hcservices/ scheme on savings, the responsibility of the chit subscribers to keepthe contributions made till the term of the chit period, is absolute.27. With all the responsibilities of the chit subscriber spokento in the Chit Funds Act, conscious of the range and possibilities ofcompliance from the subscribers' end, the Chit Funds Act casts anonerous responsibility on the foreman to see that the chit runsthrough the series and it is not aborted in the midst of the serieseither on account of a default committed by the prized subscriber oron account of the non-prized subscriber. As already seen, Section 21speaks about the rights of the foreman. Section 21(1)(b) of the Actspeaks about the entitlement to receive commission, remuneration orfor meeting the expenditure of running the chit at the rate not morethan 5%. Thus, at a given point of time, a foreman cannot, with anycertainty, assert that his commission be paid irrespective of theexpenses that he may have to incur for the conduct of thetransaction. As held in the decision in the case of M/s.ShriramChits & Investment (P.)Ltd Vs. Union of India reported in AIR 1993 SC2063, the Chit Funds Act itself is one of the socio-economiclegislations which had been enacted primarily and predominantly tosafeguard the interests of the chit subscribers who are gullible andunwary public and who have been subjected to exploitation by chitforeman. The Act is intended to regulate and to bring in financialdiscipline in the chit business, as the foremen deal in and dabblewith the funds of the subscribing public.28. As rightly pointed out by the learned counsel appearing forthe assessee, if one is to look at the integrated scheme of the chittransaction spread over a period of time and the computation ofincome on completed contract basis, the exercise would be seen asrevenue neutral. As already seen from the provisions of the ChitFunds Act, the discount is the sum of money which is set apart underthe chit agreement to meet the expenses of running the chit. Thisalso has to take note of the default among the different classes ofsubscribers. The decision of the Apex Court, even though related tothe case of the subscriber, has relevance to the case on hand,particularly as regards the completed contract method. In thecircumstances, the decision reported in (1990) 182 ITR 1(G.Padmanabha Chettiar and Sons Vs. Commissioner of Income Tax),relied on by the Revenue, does not, in any manner, advance its case. 29. Looked at from the angle of the subscriber, while there maybe a certainty as to the dividend received every month forconsidering the same for assessment on accrual basis, as far as acompany running the chit business is concerned, the dividend and thediscount can properly be ascertained only at the completion of thetransaction and not in the midway. Given the significant nature ofthe service yet to be performed in relation to the chit series, tillthe series come to an end, it is difficult to assess with anycertainty, the amount that would be properly called as income for the https://hcservices.ecourts.gov.in/hcservices/ purpose of assessment. "Discount" as defined under Section 2(g) ofthe Chit Funds Act, means the money set apart under the chitagreement to meet the expenses of running the chit or fordistribution among the subscribers or for both. Dividend is theshare of the subscriber in the amount of discount available forreasonable distribution among the subscribers at each instalment ofthe chit. Given the rights of the subscriber, when Section 21provides for 5% chit amount to be given to the foreman, the same isstated therein as commission, remuneration or for meeting theexpenses of running the chits. Thus, going by these provisions, whendividend to the foreman has to come only from out of the discount, wedo not find any justifiable ground to agree with the Revenue that theassessee cannot claim completed contract method for incomerecognition. In the circumstances, we agree with the assessee andhave no hesitation in setting aside the order of the Tribunal. 30. As far as the expenditure of the company is concerned, it isseen that the same related both to the administrative costs as wellas to the advertisement costs. Taking note of the business of theassessee, we agree with the assessee's contention that the expensescannot be viewed as relatable to the particular series alone, but asrelating to the running of the business. Thus it has to be revenueexpenditure to be considered in the year in which the same isincurred. The fact that the advertisement referred to the beginningof a new series, per se, does not mean that it is not relatable tothe conduct of the business of the assessee in general. Theadvertisement is more in the nature of information as to the businessof the assessee and for its promotion. Hence, the contention of theRevenue based on the observation in paragraph 16 in the case of CITVs. Bilahari Investment P.Ltd., (cited supra) does not, in anymanner, find favour with us. 31. It may also be pointed out that even though the Revenue tookthe plea that the change in the system of accounting is not a bonafide one, it is only a plea taken without material and we do not findgood ground to uphold such contention. 32. In the light of the above discussions, we have no hesitationin setting aside the order of the Income Tax Appellate Tribunal byallowing the Tax Case Appeals. Thus, the assessee is justified infollowing the mercantile system of accounting and adopting thecompleted contract method, to arrive at the real income. 33. As far as the issue raised on mutuality is concerned, learnedcounsel for the assessee has not made serious arguments on the saidaspect. Hence, on this aspect, the contention of the assessee standsrejected. 34. Except for the third question of law on mutuality relating tothe assessment years 1988-89 to 1995-1996 and 1999-2000 in T.C.(A). https://hcservices.ecourts.gov.in/hcservices/ Nos.616/2005, 628/2005, 627/2005, 624/2005, 625/2005, 617/2005,213/2004, 618/2005, 626/2005, 620/2005, 622/2005, 623/2005, 621/2005,619/2005, 425/2006, 2445 and 2449/2006, the findings of the Tribunalregarding the method of accounting are answered in favour of theassessee and the order of the Income Tax Appellate Tribunal to thatextent is set aside. Accordingly, the Tax Case Appeals are partlyallowed. No costs.Sd/Asst.Registrar/true copy/Sub Asst.RegistrarnvsriTo1. The Assistant Commissioner of Income Tax Central Circle II (3), Nungambakkam High Road, Chennai 600 034 2.The Commissioner of Income Tax (Appeals) I, Chennai3. The Income Tax Appellate Tribunal, Chennai Bench 'A' IIIrd Floor, Besant Nagar, Rajaji Bhavan,Chennai - 904. The Deputy Commissioner of Income Tax, Special Range, Central(IV) Chennai - 600 034.5. The Assistant Registrar Income Tax Appellate Tribunal, Chennai Bench 'C' IIIrd Floor, Besant Nagar, Rajaji Bhavan,Chennai - 906. The Assistant Registrar Income Tax Appellate Tribunal, Chennai Bench 'B' IIIrd Floor, Besant Nagar, Rajaji Bhavan,Chennai - 902 ccs To Mr.V.A.Gopal, Advocate, SR.52470, 524711 cc To Mr.N.V.Balaji, Advocate, SR.52616TC(A). Nos. 141 and 213 of 2004, 616, 621, 622, 624 to 628 of 2005, 2445, 2449 and 425 of 2006 TRM (CO)SRA,EU(21/12/2012)