Income tax query

Mr. A is a member of Chit and has picked up his share of chit before its completion. He has used this money for business purposes. How do we account for loss on chit in our books and return. The period of chit is for 25 months and cover 3 financial year. 1) Can we account for loss at the end of the chit period in the last financial year or 2) We have to show it on yearly basis proportionately after adjusting the dividend of that period. The assessee is maintaining books mercantile basis.
Which of the above two method accepted as per income tax point of view for claiming chitty loss as business expenditure? Both are accepted as per income tax point of ( completed Contract method (1) and percentage of completion method(2))
Kindly clarify

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 A is a member of a chit fund and has withdrawn his share before the chit is completed, the loss or profit on chit can be treated in two ways:

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.
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: