2015 (7) TMI 51 - HC - Income Tax

Liability to deduction of TDS under Section 194(A) - whether the chit dividend paid by the assessee to its customers would not amount to interest as defined under Section 2(28A)? - Held that - The Delhi High Court had an occasion to consider the same substantial question of law in the case of CIT v. Sahib Chits (Delhi) (P.) Ltd. 2009 (7) TMI 75 - DELHI HIGH COURT wherein after setting out the statutory provisions namely, Section 2(28A), the provisions of the Interest Act, 1974 and noticing various judgments held, in the first place the amount paid by way of dividend cannot be treated as interest. Further, Section 194(A) of the Act has no application to such dividends and therefore it held there is no obligation on the part of the assessee to make any deductions under Section 194(A) of the Act before such dividend is paid to its subscribers of the chit. The aforesaid judgment squarely applies to the facts of these appeals. Hence, we do not see any merit in these appeals. Decided in favour of the assessee.

Summary

Issues:
Interpretation of chit dividend as interest under the Income Tax Act.
Applicability of TDS deduction under Section 194(A) of the Act on chit dividend payments.

Analysis:
The revenue appealed against the Authorities' decision that the chit dividend paid by the assessee to its customers did not qualify as interest under Section 2(28A) of the Income Tax Act, hence exempt from TDS deduction under Section 194(A) of the Act. The assessee, a private limited company engaged in chit fund business, operated chit groups where customers subscribed to equal amounts depending on chit values, with two types of chits - lottery and auction systems. The revenue contended that successful bidders taking prize money earlier than stipulated owed an interest amount to others, subject to tax deduction. The Appellate Commissioner ruled in favor of the assessee, stating that chit dividends were not interest under the Act, relieving the assessee from TDS obligations.

The revenue, dissatisfied with the Appellate Commissioner's decision, appealed to the Tribunal, which upheld the ruling, prompting further appeals by the revenue. The key legal question revolved around whether chit dividends should be considered interest under Section 2(28A) of the Act, necessitating TDS deduction under Section 194(A). The Court referenced a Delhi High Court case, CIT v. Sahib Chits (Delhi) (P.) Ltd., which clarified that dividend payments in chit schemes did not constitute interest, absolving the assessee from TDS obligations. Citing statutory provisions and precedents, the Court concurred with the Delhi High Court's interpretation, ruling in favor of the assessee and dismissing the revenue's appeals.

In conclusion, the Court upheld the lower authorities' decisions, emphasizing that chit dividends did not fall under the definition of interest as per the Income Tax Act, thereby negating the requirement for TDS deductions. The judgment favored the assessee, rejecting the revenue's appeals and dismissing the case without costs.