Back
Karnataka High Court
Commissioner of Income Tax - Appellant
Versus
Amarjeet Kaur - Respondent
Decided On : 01-31-06
Income Tax Referred Case : 48 of 1999
Cases Referred: AIR 1988 SC 492; AIR 1980 SC 1468 Followed: (1991) 190 ITR 275; (1964) 15 STC 656 (SC); AIR 1982 SC 949.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978 -Preamble -Preamble -Object of the Act stated. [H. L. Dattu and A. S. Bopanna, JJ]: . It is an Act to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto. Clause (c) of Section 2 of the Act defines "Money Circulation Scheme" to mean any Scheme, by whatever name called for making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrollment of members into the Scheme, whether or not such money or thing is derived from the entrance money of the member of such Scheme or periodical subscriptions.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978 -Offence under -Section 4 r/w Section 3 -Offence under -Conditions to be satisfied. [H. L. Dattu and A. S. Bopanna, JJ]: In the first place, it must be proved that promoter of the Scheme is promoting or conducting a Scheme for making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrollment of members into that Scheme.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978 -Money Circulation Scheme -Section 2(c) -Money circulation Scheme -Meaning.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978 -Deposit Linked Incentive Scheme -Section 4 r/w Section 3 -Deposit Linked Incentive Scheme -Under the scheme the promoter gave goods worth 75% to the depositor and retained the remaining amount for a fixed period and at which time the entire deposit amount to be paid to the depositor without any interest -Scheme answers the requirements of definition of Money Circulation Scheme which is banned under the Act.
Income Tax Act, 1961 -Allowable expenditure -Section 37(1) -Allowable expenditure -Deposit Linked Incentive Scheme -Under the scheme the promoter gave goods worth 75% to the depositor and retained the remaining amount for a fixed period and at which time the entire deposit amount to be paid to the depositor without any interest -Whether the goods disbursed to depositors is allowable expenditure. [H. L. Dattu and A. S. Bopanna, JJ]: , in the previous year relevant to the assessment year, the assessee had received deposit of Rs. 41,92,920/- from its members and as against this, the assessee had distributed articles Worth of Rs. 27,27,191/- byway of gift/free present item and under this Scheme, the assessee could retain a sum of Rs. 14,65,729/- for a period of five years, use it the way she wants it, and return thereafter the depositors money without any interest. In our view, this Scheme has all the basic ingredients of money circulation scheme, which is banned under Section 3 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and therefore, the expenditure incurred by the assessee is an expenditure prohibited by law and therefore, in view of Explanation inserted by Finance (No.2) Act, 1998 to Section 37(1) of the Act, which has come into force with effect from 1-4-1962, the expenditure shall not be deemed to have been incurred for the purpose of business and therefore, no deduction or allowance can be made in respect of such expenditure in computing the income chargeable under the head "profits and gains of business or profession".
Cases Referred: AIR 1988 SC 492; AIR 1980 SC 1468 Followed: (1991) 190 ITR 275; (1964) 15 STC 656 (SC); AIR 1982 SC 949.
( 1 ) IN all these reference cases, the question of law and the facts referred by the Income Tax appellate Tribunal, Bangalore Bench, Bangalore, for our consideration and decision is common and similar, and therefore, all these cases are taken up together, heard and disposed of by this common order.
( 2 ) THE facts in ITRC No. 48/1999 is noticed in this judgment for disposal of these reference cases. The assessee has her own proprietary business "mis Manjog Home" and also gets share income from firms. For the assessment year 1985-86, the assessee is assessed in the status of "individual". M/s. Manjog Home was dealing in home appliances like refrigerators, television sets, electric and electronic goods, etc. The assessee as a proprietrix of M/s. Manjog Home had launched a sales promotion scheme known as "deposit Linked Incentive Scheme" for the purpose of raising additional funds to extend her business. Under the Scheme, as noticed by the first appellate authority, the public are invited to become members by making deposits with the assessee and on the making of such deposits, goods dealt by the assessee of the value of about 75% of the deposit would be given free to the members as incentive/gift. The deposit so made by the members were returnable to the members without interest after the expiry of 5 to 10 years depending on the nature of the goods involved. Based on this Scheme, deposits were accepted from the members and goods and articles of the members choice was given to them as gift or incentive. The price of the article was credited as and when the issues were made in the Scheme and a like amount was debited as incentive in the profit and loss account.
( 3 ) THE assessee debited the value of the goods supplied to the customers in a sum of rs. 27,27,191/- for the relevant assessment year in her profit and loss account and claimed the same as expenses towards "deposit Linked Incentive Schemes" and the same amount was also credited by the assessee to the sales account increasing the amount of sales thereby. By this modus operandi, the assessee was able to mobilise deposit to the extent of Rs. 41,92,920/- during the accounting period relevant to the assessment year under this Scheme. In the return of income filed for the relevant assessment year, the assessee had claimed allowance of the above mentioned amount as revenue expenditure for the purpose of income chargeable to tax. The same was disallowed by the assessing authority on various grounds. In sum and substance, the view of the assessing authority appears to be, that the expenses towards mobilising deposit cannot be allowed under Section 37 of the Income Tax Act, 1961 ('act' for short), as revenue expenditure.
( 4 ) IN the appeal filed by the assessee, the first appellate authority has allowed the appeal in part and while doing so, has observed in his order:"8. With regard to the first issue, I have no difficulty in holding that the expenditures incurred are wholly and exclusively for business. The Learned Income Tax Officer's observation that there was no trading with reference to the articles given as incentive is incorrect; The only articles given as incentives are articles dealt with by the appellant as a trader. The other observation of the I. T. O. that the collection of deposits was not a business activity is again incorrect. The appellant needed money for expanding the turnover; the appellant had several methods of obtaining this finance ego from borrowals etc. The appellant however chose to obtain deposits and to lure these deposits, offered the articles tree to the gullible public on condition that by taking away of these articles worth 75% of the deposit, the depositor has been sufficiently recompensed for making the deposit tree of interest. I would observe that by setting out Rs. 27 lakhs of incentives, the appellant was able to mobilise deposits of Rs. 42 lakhs. I would also observe that these incentives of Rs. 27 lakhs are but a small tra
SupremeToday
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
