TMI Blog2009 (6) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend or discount paid to the subscribers of the chit would not constitute interest and consequently these assessees are not liable to deduct tax under section 194A of the Act on such payments. The facts relating to the issue are stated in brief. These assessees are carrying on chit business. The Revenue carried out inspection to find about the compliance with the TDS provisions. It was noticed that these companies were making payments to subscribers of chits by way of chit dividends. According to the TDS officials, the dividend payments are in the nature of interest and hence the assessee is liable to deduct tax at source under section 194A of the Act. In this regard, the TDS officer relied upon the Instruction No. 1175 dated May 16, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fund are auctioned each month amongst the subscribers. At each auction, the lowest bidder is paid the amount of his bid and the balance received from out of the total subscriptions received is distributed equally amongst other subscribers, as premium. The manager is paid a certain percentage of the collections each month on account of expenses and charges for conducting the auction. In the auction, a maximum amount, which the highest bidder agrees to forgo, is the amount, which is distributed to the other members, subject to deduction of the manager's commission." Now the dispute is with regard to the nature of dividend, which represents the share of discount forgone by the bidder, i.e., whether the dividend would fall under the categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993 SC 2063. In that case the hon'ble Supreme Court by considering the decision of the hon'ble Andhra Pradesh High Court in the case of Dhoosa Narasimloo v. Yelala Rajanna [1958] ILR AP 409 and the decision of the Kerala High Court in the case of Janardhana Mallan v. Gangadharan [1985] 58 Comp Cas 390 [FB] ; AIR 1983 Ker 178 has approved the decisions of the abovesaid High Courts that a chit fund transaction cannot be treated as a loan transaction and hence the same would not come under the ambit of the Money Lenders Act. The Kerala High Court has specifically held that no debt due to the foreman arises by reason of the receipt of the prize amount or of the execution of the security bond for securing future subscription. In view of the fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... times out of the discount forgone by the 20 members. The member also receives dividend from out of the discount forgone by him. The circular issued by the Central Board of Direct Taxes, which is relied upon by the TDS officer, clarifies the nature of the receipt in the hands of the recipient of the prize money. In a chit fund scheme, the net result of paying the instalments and receiving the prize money may result in a surplus or deficit depending upon the periodicity of the bid. Hence, the Central Board of Direct Taxes has clarified the nature of treatment of such surplus or deficit. As stated earlier, such surplus or deficit is not actually paid by the foreman, but a cumulative effect of the discount shared by members in each month. As p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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