The assessee is engaged in the chit fund business. The issue involved includes a question on whether the amounts paid by the assessee to cover defaults by chit holders should be treated as bad debts.

The revenue contended that the assessee did not fulfill the conditions for allowance of bad debts under Section 36(1)(vii). The assessee claimed that the payments made to cover defaults by chit holders were during business and resulted in a loss, qualifying them as bad debts under Section 36(1)(vii).

The Hon’ble Tribunal held that the payments made to cover defaults by chit holders were allowable as bad debts under Section 36(1)(vii).

The High Court upheld the Hon’ble Tribunal’s decision, while also taking necessary cue from the Supreme Court’s ruling in Shriram Chits and Investment (P.) Ltd v. Union of India; AIR 1993 SC 2063, held that the payments made by the assessee to cover defaults by chit holders, ensuring the continuation of the chit cycle, can be treated as bad debts under Section 36(1)(vii). (AY.2014-15)