Income tax query

Hey Ajnas! Great question on chit fund accounting and tax treatment.

Here’s the scoop from an income tax perspective:

Since Mr. A is a member of a chit fund and has withdrawn his share before the chit is completed, the loss or profit on chit can be treated in two ways:

1. Completed Contract Method:
   Recognize the loss or gain only at the end of the chit period, i.e., when the chit completes (25 months). So, all income, dividend, and loss get accounted for in the last financial year.

2. Percentage of Completion Method:
   Recognize the income, dividend, and loss proportionately in each financial year based on the period covered (like monthly or yearly), adjusting the dividend received in that period.

Income Tax Position:
Both methods are generally accepted for accounting and tax purposes, provided the method adopted is consistent and properly disclosed in the books of accounts.

Since the assessee is following mercantile system, it is preferable to show income and expenses proportionately to reflect the true financial position each year (i.e., the percentage of completion method). But many taxpayers use completed contract method as well.

The key is to maintain consistency and properly disclose your method in the tax return and books.

Summary:

• Either method can be accepted.

• Choose one method and stick to it for all years.

• The percentage completion method may give a more accurate reflection year-wise.

• Show loss as business expenditure accordingly in your ITR.