2011 (12) TMI 633 - AT - Income Tax

Summary

Issues involved: Appeal against CIT(A) order for assessment year 2004-05 regarding deduction of tax at source u/s 201 & 201(1A) and u/s 194A of the Income-tax Act on dividend paid to non-prized subscribers by a chit fund company.

The Revenue raised the following grounds of appeal:
1. CIT(A) should have sustained the order u/s. 201 & 201(1A) of the Act.
2. CIT(A) should have held that the dividend paid to non prized subscribers by a chit fund company is akin to interest, necessitating tax deduction u/s. 194A.
3. CIT(A) failed to recognize that the term "interest" under section 2(28A) covers the dividend paid by a chit fund company to subscribers.
4. The concept of "interest" in commercial terms includes compensation for deferred payment, thus the dividend paid to non-prized subscribers is equivalent to interest.
5. CIT(A) did not consider that dividend paid to non-prized subscribers is a debt incurred by them, falling under the definition of interest u/s. 2(28A).
6. The expression "similar right or obligation" in section 2(28A) is relevant as the dividend paid to non-prized subscribers is akin to interest within the meaning of the said section.

The Tribunal heard both parties and referred to similar cases where it was held that payments made by a chit fund company to members cannot be treated as interest, thus tax deduction is not required. The case of Marga Soochi Chit Pvt. Ltd. and Sahib Chits (Delhi) (P) Ltd. supported this view, stating that in a chit fund scheme, there is no borrowing of money or debt incurred, hence provisions of section 194A and 2(28A) are not applicable. The Tribunal also cited the case of Bilahari Investments (P) Ltd. v. CIT and the subsequent Supreme Court ruling, emphasizing the nature of chit fund schemes and the distribution of dividends among subscribers.

Based on the findings of previous cases, the Tribunal upheld that the payment of dividend to chit fund subscribers does not qualify as interest, thereby concluding that the assessee is not obligated to deduct TDS u/s. 194A and is not liable for interest u/s. 201(1) and 201(1A) of the Act. Consequently, the appeal of the Revenue was dismissed.

The order was pronounced in the open court on 26th December, 2011.