2015 (7) TMI 689 - HC - Income Tax

Liability for deduction of TDS under the provisions of Section 194A - whether the chit dividend paid by the assessee to its customer, would not amount to interest as defined under the provisions of Section 2(28A)? - Appellate Authorities deleted TDS liability - Held that - The Division Bench of the Delhi High Court had an occasion to consider the said issue in the case of CIT v. Sahib Chits (Delhi) (P.). Ltd. 2009 (7) TMI 75 - DELHI HIGH COURT . After setting out the statutory provisions viz., Sections 2(28A) and 194A of the Act and the provisions of the Interest Act, 1974 and relying on the various judgments of the Apex Court, held that in the first place the amount paid by way of dividend cannot be construed as interest. It was further held that the dividend/discount cannot be mistaken for interest income in the hands of the subscribers and therefore, there has been no default under the provisions of Section 194A of the Act. Further Section 194A of the Act has no application to such dividends and therefore, it held that there is no obligation on the part of the assessee to make any deductions under Section 194A of the Act before such dividend is paid to its subscribers of the chit. The aforesaid Division Bench decision of the Delhi High Court squarely applies to the facts of the present case. Hence, we do not see any merit in the present appeal. Decided in favour of the assessee.

Summary

Issues:
1. Whether chit dividend paid by the assessee amounts to interest under Section 2(28A) of the Income-tax Act, 1961?
2. Whether the assessee is required to deduct TDS under Section 194A of the Act on chit dividends paid to customers?
3. Whether the Appellate Authorities correctly interpreted the definition of dividend under the Chit Fund Act in relation to the Income-tax Act?

Analysis:
1. The appeal was filed by the revenue challenging the orders that held the chit dividend paid by the assessee does not qualify as interest as per Section 2(28A) of the Income-tax Act. The company, engaged in chit funds business, distributed dividends to its customers without deducting TDS. The authorities contended that the dividend should be treated as interest, making the assessee liable for TDS deduction. However, the Appellate Commissioner and the Tribunal disagreed, citing that the dividend does not fall under the definition of interest, as established by legal precedents.

2. The Appellate Commissioner's order emphasized that since the chit dividend did not meet the criteria of interest under Section 2(28A) of the Act, there was no obligation for the assessee to deduct TDS under Section 194A. The Tribunal upheld this decision, leading to the revenue's appeal. The judgment referred to a Delhi High Court case where it was established that dividends/discounts from chits should not be considered as interest income, thus absolving the assessee from the TDS deduction requirement.

3. The crucial question of law revolved around the interpretation of the term "dividend" in the context of chit funds and its classification under the Income-tax Act. The judgment highlighted the Delhi High Court decision, which clarified that chit dividends should not be equated with interest income, aligning with the Chit Fund Act's definition of dividends. Consequently, the High Court dismissed the revenue's appeal, ruling in favor of the assessee based on the established legal principles and precedents.

In conclusion, the High Court upheld the lower authorities' decisions, emphasizing that the chit dividends paid by the assessee did not amount to interest under the Income-tax Act, thereby negating the necessity for TDS deduction. The judgment provided a detailed analysis of the legal interpretations and precedents, ultimately ruling in favor of the assessee and dismissing the revenue's appeal.