Taxation of Chit Fund

Tax treatment of income/loss from chit business 
(a)   If any person organises Chit Funds and for this purposes brings the members together, administers the Chit Funds and thereby earns commission, etc., profits made by such a person is income from business and if for any special reason there is loss then it is business loss. Normally there should be no loss to the organiser unless he takes over the liability of some of the members. In such a case the unrecovered amount due from such members will have to be treated as bad debts and the test to be adopted in usual business assessment for the allowance of bad debts would be applicable in such cases also. 
(b)   In the hands of the subscribers, a few will be receiving more than what they have subscribed. This extra amount is the nature of interest and as such, taxable. Members who take the money earlier from the chit will necessarily have to contribute more which means that they incur loss, which is nothing but interest paid for moneys taken in advance. The claim of such a loss will have to be considered for the purpose of allowance according to the provisions of the Act depending upon how the money was utilised by the subscriber.
”Instruction : No. 1175 [F. No. 169/21/78-IT(80)], dated 16-5-1978. [Source : Rajees v. ITO [1997] 63 ITD 330 (Coch. - Trib.) at pp. 334-335].