Judge s P A MOHAMMED V V KAMAT JUDGMENT The judgment of the court was delivered by V V KAMAT J These references relate to the assessment years 1979 80 and 1980 81 respectively They relate to the assessee which is a firm in the name and style of Muthootu Mini Chitty Funds Kozhencherry The only question for our consideration is with regard to the nature and description of the two amounts involved therein In the first reference the amount is Rs 2 08 400 and in the second reference it is Rs 1 10 087 The question is whether it could be understood as the business income of the assessee firm and consequently as to whether the Income tax Appellate Tribunal was justified in directing the Income tax Officer to exclude these amounts from the income of the assessee To be precise the questions are as follows 1 Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the Income tax Officer was not justified in including the amount of Rs 2 08 400 as the business income of the assessee and was the Tribunal right in law in directing the Income tax Officer to exclude this amount from the income of the assessee 2 Whether on the facts and in the circumstances of the case the contribution to Muthoottu Charitable Trust made by the assessee i was as per the terms of the talavaryola ii is not the income of the assessee The firm carries on activity known as thalavaryola chitty agreement The very name of the firm would show that the activity is chitty fund The English translation of the form of agreement is available at annexure B of the paper book at page 8 onwards The firm had several series of chit funds functioning simultaneously The agreements are entered into between the fund and the subscribers who are participants in the series of chitty funds The chitties are of durations and its commencement is also specified in connection thereto It would be seen that the payment of the first instalment by the subscribers to these series becomes the property of the assessee which is described in the talavariola as the foreman of the series With regard to the balance of the monthly payments or contributions or subscriptions the provision is that there would be auction every month and with reference thereto the successful bidder would be one who forgoes the largest margin of discount It is this margin of the successful bidder or successful member that comes up for distribution amongst all the members of the series It is this margin of discount for the purpose of distribution that forms the subject matter of the controversy with regard to the amount as to whether it is the income of the firm or not Clause 6 of the talavaryola which is determinative is as follows From the amount forgone by the successful bidder five per cent will be set apart to meet the chitty expenses and from the balance amount 25 per cent will be given to Muthuttu Charitable Trust and the remaining amount will be distributed among all the subscribers A bare reading of the said clause would show that from and out of the amount the margin of discount forgone by the successful bidder or subscriber five per cent is set apart to meet the chitty expenses 25 per cent from the remaining balance is to be given to the Muthuttu Charitable Trust leaving the remaining balance for distribution amongst all the members commonly known in common parlance as the bonus or commission of the subscriber The question is whether this 25 per cent from the balance of the amount leaving aside five per cent set apart as shown above according to clause 6 would be the income of the firm or not With regard to both the years the Income tax Officer annexures C 1 and C 2 took the view that a close scrutiny of the thalavariyola would reveal that the subscribers do not have a say in the matter 25 per cent has to be set apart leaving five per cent at the inception and only the balance amount shall be divided as veethapalisa discount It is observed as a consequence that the right to claim veethapalisa is curtailed by the foreman who will have a say in the matter It is further observed that the subscribers chittals could not be understood to have voluntarily contributed this amount of 25 per cent to the trust in question The Income tax Officer took the view that it would be the income of the assessee The first appellate authority considered the question in the light of the decision of the Supreme Court in CIT v Bijli Cotton Mills P Ltd 1979 116 ITR 60 relied upon by the Punjab and Haryana High Court as well as the Bombay High Court The Supreme Court in Bijli Cotton Mills case 1979 116 ITR 60 was concerned with the amount described as Dharmada by the assessee private company carrying on the business of manufacturing and selling yarn The amounts were collected from the customers on sale of yarn and cotton at the rate of one anna per bundle of 10 pounds of yarn and cotton and two annas per bale of cotton being particular in seeing that the collection was set apart separately in an account also described as Dharmada The first appellate authority considered the position in the light of certain positions declared by the Supreme Court in regard to this process of realisation of the amount on account of Dharmada Some of the factors taken into consideration by the Supreme Court show that the payments were earmarked for charity right from the inception of the receipt thereof The other aspect revealed that the payments could not be regarded as part of the price or a surcharge on the price of goods purchased by the customers and payments were undoubtedly in addition to the price emphasizing that purchase of goods would have to be understood as an occasion and not consideration for the contribution The Dharmada amount could only be considered as payment for the specific purpose of being spent on charitable purposes After referring to the decision of the Supreme Court in its application to the factual matrix the first appellate authority observed that the amount to be distributed and the method of distribution of the discount is purely a matter of contract and in regard thereto the subscribers could not claim any particular amount as a matter of right The agreement has been analysed However the first appellate authority observed that when the assessee collected the instalment or any part thereof it was not specifically collected for the purpose of charity The decision of the Supreme Court see 1979 116 ITR 60 was attempted to be justified by particularising the factual peculiarities that when the subscribers contributed their money it was contributed towards the chitty run by the assessee foreman It was further observed that this percentage of contribution or condition of setting apart in regard thereto was not known either to the foreman assessee or to the subscribers of the chitty schemes It was emphasised that the subscription paid by the members of a series was as a part of the business dealings with the assessee and not by way of contribution to the chitty It is in this process that the first appellate authority justified the decision of the Income tax Officer to the effect that the amounts would have to be understood as the income of the firm However the question was considered by the Income tax Appellate Tribunal in a different way altogether The Tribunal has observed that when the subscribers of the chitties pay their instalments to the assessee firm they are not paying any part of such instalments towards charity but subscribers payment towards charity is reflected in the reduction of the discount veethapalisa by 25 per cent of the discount forgone by the successful subscriber The Tribunal observed that clause 6 of the agreement thalavariyola imposed an obligation on the subscribers successful subscribers in the context to forgo 25 per cent from the margin or discount amount after setting apart 5 per cent towards commission to the assessee firm The Tribunal observed that after deducting 5 per cent for expenses 25 per cen................Income Tax - Case Law
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