2009 (7) TMI 75 - HC - Income Tax

Surplus on Chit Funds or Discount on Chit Funds scope of section 2(28A) as Interest - deduction of TDS u/s 194A Non deduction of TDS, assessee in default u/s 201 Held that - a chit agreement clearly does not fall within the ambit of money lending or debt incurred and, therefore, will not be covered by the definition of interest as contemplated by the Act - Assessing Officer proceeds on the basis as if the contribution given by the subscribers/members every month amounts to deposit with the chit fund company, i.e. the assessee, and on that basis he proceeds as if the assessee is working as a banker and, therefore, the amount of bid disbursed equally among members is to be treated as interest payable on money borrowed. This approach is fallacious on the face of it - the amount disbursed to the members from their contribution cannot be treated as interest No TDS u/s 194A is not deducible

Summary

Issues:
1. Whether the chit fund company was required to deduct tax under Section 194A of the Income Tax Act, 1961 on the amount paid to its members on the chits contributed by them?
2. Whether the payment made to the subscribers of the chit fund company constitutes 'interest' as defined under Section 2(28A) of the Act?

Analysis:

Issue 1:
The appeal was filed against the order of the ITAT, New Delhi regarding the chit fund company's failure to deduct tax under Section 194A of the Income Tax Act. The Assessing Officer held the company in default for not deducting tax on the amount paid to its members. However, the CIT(A) quashed the action of the AO, citing relevant case laws and Circular No. 647 dated 22.3.1993. The ITAT affirmed the CIT(A)'s decision, dismissing the appeal of the Revenue.

Issue 2:
The question revolved around whether the payment made to the subscribers of the chit fund company constituted 'interest' as per Section 2(28A) of the Act. The Assessing Officer considered the amount distributed to subscribers as 'interest' and held the company liable for not deducting tax at source. However, the chit fund company contended that the payment to subscribers did not qualify as 'interest' under the Act. The court analyzed the nature of chit fund transactions, highlighting that the bid amount distributed among subscribers did not constitute 'interest' as it was not in respect of money borrowed or debt incurred by the company.

The court referred to the Madras Chit Funds Act, 1961, which defined 'dividend' as the share of a subscriber in the discount available under the chit agreement. It was emphasized that a chit agreement did not involve money lending or debt incurring, thus not falling under the definition of 'interest' as per the Act. The court also referred to legal definitions of 'interest' from Black's Law Dictionary and the Interest Tax Act, 1974 to support its interpretation.

The court concluded that the amount disbursed to members from their contributions could not be considered as 'interest.' It upheld the ITAT's decision that the company was not required to deduct tax at source under Section 194A, as the payments to subscribers did not qualify as 'interest.' Therefore, there was no default under Section 201 of the Act. The court dismissed the appeal, stating that no substantial question of law arose in the case.