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Income Tax Appellate Tribunal - Hyderabad

Laxman Chit Fund & Finance (P) Ltd, ... vs Department Of Income Tax on 29 September, 2011

              IN THE INCOME TAX APPELLATE TRIBUNAL
                 HYDERABAD "A" BENCH, HYDERABAD

           Before Shri Chandra Poojari, Accountant Member and
               Smt. Asha Vijayaraghavan, Judicial Member

                   ITA No. 526/Hyd/2011 - A.Y. 2004-05
                   ITA No. 527/Hyd/2011 - A.Y. 2005-06
                   ITA No. 528/Hyd/2011 - A.Y. 2006-07
                   ITA No. 529/Hyd/2011 - A.Y. 2007-08

     Income-tax Officer             vs M/s. Laxman Chit Fund &
     Ward-14(3)                        Finance (P) Ltd., Hyderabad
     Hyderabad                         PAN: AAACL3465B
     Appellant                         Respondent

                        Appellant by:   Shri P. Peerya
                     Respondent by:     Shri V. Siva Kumar
                     Date of hearing:   29.9.2011
             Date of pronouncement:     29.9.2011
                                 ORDER
Per Chandra Poojari, A.M.

The above four appeals by the Revenue are directed against the separate orders of the CIT(A)-II, Hyderabad dated 14.2.2011 for assessment years 2004-05 to 2007-08. Since the issue involving in all these appeals is common, these appeals were heard together and are being disposed of by this common order.

2. The issue involving in these appeals is with regard to cancellation of orders passed u/s. 201 and 201(1A) of the Income-tax Act, 1961 with reference to non deduction of tax on chit dividend paid / distributed by the assessee though it represents the interest as per section 2(28A) and was within the meaning and purview of section 194A of the Act.

3. We have heard both the parties on this issue. Similar issue came up for consideration in the case of Marga Soochi Chit Pvt. Ltd., in I.T.A. No. 995/Bang/2008 and also in the case of Sahib Chits (Delhi) (P) Ltd., before the Delhi High Court in I.T.A. No. 44 of 2008 order dated 24.7.2009 wherein it was held that the amount disbursed by a 2 ITA Nos. 526 to 529/Hyd/2011 M/s. Laxman Chit Fund & Finance (P) Ltd.

============================ chit fund company to the members from the contribution cannot be treated as interest. As the payment made/disbursed to the subscribers/members is not interest, therefore, the question of deducting any tax at source from it would not arise. In the case of a chit fund, there is no borrowing of money nor any debt is incurred and as such the provisions of section 194A and 2(28A) of the Act are not attracted.

4. Similar view has been taken in the case of Bilahari Investments (P) Ltd., v. CIT, 288 ITR 39 (Mad). The view was confirmed by the Supreme Court in the case of CIT vs. Bilahari Investment Pvt. Ltd. (2008) 299 ITR 1, wherein it was held as under:

"A chit fund scheme is a kind of savings scheme in which a specific number of individuals come together to pool a specific amount at periodic intervals. Usually the number of individuals and number of periods is the same. At the end of each period, there is an auction of the chit. The members of the chit participate in this auction for the pooled money during that interval. The bid amount is divided by the number of members thus determining the contribution per head during that period. When the chit is auctioned every month, the bidder takes the chit for an amount which is less than the face value of the chit. The difference between the face value and the auctioned value during every period is gross dividend generated in this period. This amount of dividend gets distributed among all the members (subscribers) equally. The members (subscribers) need not pay the total monthly subscription and instead, they pay the monthly subscription after deducting the amount of dividend earned. Members who have bid for the chit in auction have the liability to keep the contribution to the chit till the end of the chit period and the prized members get dividend in future months also. Usually the discount, namely, the sum of money, which the prized subscriber is required to forgo, decreases over periods. The person getting money in the last period received the full scheme amount."

5. Further similar issue is considered by this Tribunal in the case of M/s. Vipanchi Chit Funds Ltd. and M/s. Vinutna Chit Funds (P) Ltd., in ITA Nos. 804 & 805/Hyd/2011 order dated 11th August, 2011 deciding the issue in favour of the assessee.

M/s. Laxman Chit Fund & Finance (P) Ltd.

============================

6. In view of the above findings of the various courts, we are of the opinion that the CIT(A) is justified in holding that the payment of dividend to the subscribers of a chit towards dividend does not partake the character of interest and accordingly the assessee is not liable to deduct TDS u/s. 194A of the Act and not liable for interest u/s. 201(1) and 201(1A) of the Act.

7. In the result, both the appeals of the Revenue are dismissed.

Order pronounced in the Open court on 29th September, 2011.

               Sd/-                             Sd/-
     (ASHA VIJAYARAGHAVAN)                (CHANDRA POOJARI)
        JUDICIAL MEMBER                  ACCOUNTANT MEMBER

Hyderabad, dated the 29th September, 2011 Copy forwarded to:

1. The Income-tax Officer, Ward-14(3) (TDS), Range-14, Hyderabad.

2. M/s. Laxman Chit Fund & Finance (P) Ltd., Flat No. 311, Bhanu Enclave, Sunder Nagar, Erragadda, Hyderabad.

3. The CIT(A)-II, Hyderabad

4. The CIT (TDS), Hyderabad

5. The DR, A-Bench, ITAT, Hyderabad.

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