Bad debt claim in Chit fund funds on terminated chits

Facts:

Assessee was into Chit fund business. They claimed bad debts of substantial amounts. When questioned the assessee explained that the claim of bad debt was two fold, those subscribers to chits who failed to pay their instalments was a bad debt and those amounts in terminated chits which they ought to pay in future was also claimed as a bad debt. Revenue did not relish the second point of the amounts what ought to be paid by the subscribers can be claimed as a bad debt. Their plea was in chit fund business neither the foreman nor the subscribers have a creditor/debtor relationship and that what is not paid is claimable as a bad debt while what is to be collected in future on terminated chits could not be an allowable claim. On appeal the CIT(A) allowed the stand of the assessee basing their own cases of Madras high court and at other high courts. On higher appeal -

Held against the revenue that the claim of bad debt on terminated chits was an allowable expenditure.

Ed. Note: Chit fund scheme is a money circulation scheme where in subscribers join with the lead player as the foreman. Generally the foreman takes the first instalment of the subscribers as the cost of running the chit and their commission. Thereafter the subscribers auction and claim the money to their needs. Earlier auctioneers loose money as interest compensation for the earlier drawing of the money and those people who contribute less gain more as interest income for their non-auctioning of their money over the tenure of the chit fund. Thus if a subscriber withdraws money or refuses to pay an instalment it becomes a bad debt definitely if not recoverable. To complete the double entry the future instalments also need to be accounted on periodical basis in mercantile system. Thus the future instalments not paid also become a bad debt in one way or other. If not claimable as a bad debt but as a business expenditure under section 37(1).

The decision also refers to the CBDT circular on this business.

Case: Dy. CIT v. Shriram Chits (P) Ltd. 2024 TaxPub(DT) 1700 (Chen-Trib)