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Issues involved:
The issue in this case is whether the dividend or discount paid to the subscribers of the chit would constitute interest and whether the assessees are liable to deduct tax under section 194A of the Act on such payments. Judgment Summary: The Appellate Tribunal ITAT Vishakhapatnam heard four appeals filed by the Revenue against the order passed by the Commissioner of Income-tax (Appeals)-II, Visakhapatnam, for the financial year 2005-06. The appeals raised a single issue regarding the nature of dividend or discount paid to chit subscribers and the applicability of tax deduction under section 194A of the Act. The Tribunal decided to dispose of all four appeals by a common order due to the identical nature of the issue. The Revenue contended that the dividend payments to chit subscribers should be treated as interest, attracting tax deduction under section 194A of the Act. However, the Commissioner of Income-tax (Appeals) held that such dividends do not fall under the category of interest, thereby deleting the demand raised by the TDS officer. The Tribunal examined the operation of chit fund schemes as explained by the Supreme Court and analyzed the provisions of the Chit Funds Act, 1982, which regulate chit schemes run by the companies in question. The Tribunal referred to previous judicial decisions, including a Supreme Court ruling and a decision by the Amritsar Bench of the Income-tax Appellate Tribunal, to establish that chit fund transactions are distinct from loan transactions. It was emphasized that the dividend paid to chit members represents their share of the discount forgone by the bidder and is not akin to interest payments. The Tribunal also considered a circular issued by the Central Board of Direct Taxes, which clarified the treatment of surplus or deficit in chit fund schemes. Ultimately, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals), dismissing the appeals filed by the Revenue. The Tribunal concluded that the dividend payments to chit subscribers should not be treated as interest payments made by the chit companies, based on the provisions of the Chit Funds Act and relevant judicial precedents. The judgment was pronounced in open court on July 20, 2009.
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