- (1.) 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,;