Commissioner of Income Tax and Others vs Avenue Super Chits P. Ltd. and Others

N. Kumar, J.—The Revenue has preferred these appeals against the order passed by the authorities, holding that the chit dividend paid by the assessee to its customers would not amount to interest as defined under section 2(28A) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") and, consequently, no deduction of TDS under section 194A of the Act is required to be made. The assessee is a private limited company being assessed in the status of a company engaged in the business of chit fund. The assessee has several chit groups which are formed by having 25 to 40 customers to make one chit group. The customers subscribe to equal amount, which depends upon the value of chits. There are two types of chits. One is the lottery system and the other is auction system. In the lottery system the lucky winner gets the chit amount and in the auction system the highest bidder gets the chit amount. The assessee has paid amounts to its subscribers who had participated in its chit scheme. The said amount is called as dividend. However, while making these payments, the assessee has failed to pay TDS amount on the sums earned as income by the customers. Under the scheme, the unsuccessful members in the auction chit will earn dividend and the successful bidders will be entitled to retain the face value till the stipulated period under the scheme. The Revenue took the view that when the successful bidder in an auction took the face value or the prize money earlier to the period to which he was entitled, he is liable to pay an amount to others who contributed to take prize money which was termed as interest. This interest amount, which had been paid by the assessee to its members was liable for deduction of tax under section 2(28A) and section 194A of the Act. The assessee had failed to do so. Therefore, the assessee was treated as defaulter under section 201 of the Act and was liable to pay interest under section 201(1A) of the Act.

The assessee preferred an appeal against the said order. The Appellate Commissioner held that the amount paid by way of dividend under the chit scheme by the assessee to the members of the chit cannot be construed as interest under the Act and, therefore, there is no liability on the part of the assessee to deduct tax at source.

Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal, which has affirmed the said findings and dismissed the appeals. Aggrieved by these two orders, the Revenue is in these appeals.

The substantial question of law that arises for consideration in these appeals is as under:

"Whether the appellate authorities were correct in holding that the chit dividend paid by the assessee to its customers would not amount to interest as defined under section 2(28A) of the Act and, consequently, no deduction TDS under section 194A of the Act need be made as the definition of dividend contemplated under the Chit Funds Act should be adopted and not as per the Income-tax Act or the other law applicable?"

We have heard the learned counsel appearing for both the parties. The Delhi High Court had an occasion to consider the same substantial question of law in the case of Commissioner of Income Tax Vs. Sahib Chits (Delhi) (P) Ltd., (2009) 226 CTR 119 : (2010) 328 ITR 342 : (2009) 185 TAXMAN 34 . After setting out the statutory provisions namely, section 2(28A), the provisions of the Interest-tax 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 194A 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 deduction under section 194A 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. The substantial question of law is answered in favour of the assessee and against the Revenue and, hence, we pass the following:

Appeals are dismissed.

No costs.