A. Kalyanasundharam, Senior Vice-President. - The appeal by the assessee, a company carrying on the business of running of chits, is on the aspect of proper method of accounting of its income from the running of chit business. The issue raised in this present appeal is a matter of concern of companies and other persons carrying on the chit business all over Tamil Nadu. The Hon’ble President of this Tribunal accordingly constituted this Special Bench, to examine the concept of the chit business governed by the Chit Funds Act, 1982 (hereinafter referred to as "the CFA"), enacted by the State Legislature and determine the system of accounting that would reflect the proper income for the previous year relevant to the assessment year for assessment of income under the provisions of the Income-tax Act, 1961 (hereinafter referred to as "the Act").

2. The assessee was represented by learned counsel, Mr. Gopal, and the Department was represented by Mr. Acharya, who holds the rank of the Commissioner of Income-tax. Both Mr. Gopal and Mr. Acharya extended full co-operation and assistance to this Bench in the appreciation of the nature of the chit business and on the proper of system of accounting. We place on record our appreciation for the both the representatives in this regard.

3. The assessee is a registered company with the main object to carry on the business of chit. The assessee was following the mercantile system of accounting in regard to the commission earned by it in its capacity as foreman conducting the chit activity and this practice continued till December 31, 1985. For the three months from January 1, 1986, to March 31, 1986, the assessee chose to change its system of accounting to completion method accounting, i.e., the income of foreman was being accounted on completion of the chits. The authorities below did not accept this change on the reasoning that the commission accrued and was due to the foreman on the day of conduct of the auction of the chit. The effort of learned counsel, Mr. Gopal had been to show that the income accrues only at the closure of the chit because, it is at that point of time, the financial impact of running and maintaining of chit could be determined. The effort of the learned representative of the Department, Mr. Acharya, was to show that the income earned for the services as foreman has nothing to do with the final result of profit or loss from the running of the chit.

4. Learned counsel, Mr. Gopal, carried us through the provisions of the CFA and this was so done so that we appreciate the constraints that are placed on foreman in the running and maintaining of the chit. Section 2 of the CFA dealt with definitions of the various terms used in the said Act and the terms relevant to the issue before us are, chit, chit agreement, chit amount, defaulting subscriber, discount, dividend, draw, foreman, non-prized subscriber, prize amount, Registrar, subscriber and ticket. Chapter II of the CFA deals with registration of chits, commencement and conduct of chit business, from section 4 through to section 19. Chapter III prescribes rights and duties of the foreman and this is so expressed from section 20 through 26. Chapter IV covers rights and duties of non-prized subscriber from section 27 through section 30. Chapter V touches upon rights and duties of prized subscribers from section 31 through 33. Chapter VI has the caption "transfers" and covers, restriction on transfer of rights of foreman (section 34), transfer of non-prized subscriber’s rights to be in writing (section 35), recognition of transfer (section 36), entering of transferee’s name in the books (section 37). Chapter VII deals with the method of the general body of subscribers and Chapter VIII deals with termination of chits. The other Chapters deal with inspection of documents including the power to inspect by Reserve Bank of India, appointment of officers and to levy fee for such inspection and the winding up of the chit. We shall r