M/S.MARGADARSI CHIT FUND LTD., HYDERABAD vs. THEDY.COMMISSIONER OF INCOME TAX., HYDERABAD

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WP/911/2009HC TelanganaHBHC01033069200902 December 2025Author: P.SAM KOSHY,SUDDALA CHALAPATHI RAO9 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court allowed the writ petitions in part. Regarding the primary issue of disallowance of chit dividend/interest under Section 10(a)(ia), the Court held that the disbursement of chit amounts to members from their contributions cannot be treated as interest or dividend. This finding was based on previous judgments of the Delhi High Court in CIT vs. Sahib Chits (P) Ltd. and the High Court's own decisions in similar cases involving the same assessee and other writ petitions. The Court quashed the assessment order to the extent it pertained to this issue. For the other issues (staff cost, Section 14A expenditure, Section 40(a)(ia) for Section 194C failure, short-term capital loss, and PF/ESI treated as income), the Court left it open for the Petitioner to challenge them by preferring a statutory appeal, as these issues had already been adjudicated by the Assessing Officer. No order as to costs was made.

What were the facts?

The Petitioner, M/s. Margadarsi Chit Fund Ltd., filed two writ petitions challenging assessment orders for Assessment Year (AY) 2006-07 and AY 2007-08. The assessment order for AY 2006-07 was dated 29.12.2008, and for AY 2007-08 was dated 14.12.2009. The Respondent was the Deputy Commissioner of Income Tax (for AY 2006-07) and the Additional Commissioner of Income Tax (for AY 2007-08). The Petitioner sought to quash these orders and stay recovery proceedings. The primary grievance of the Petitioner concerned the disallowance of chit dividend/interest under Section 10(a)(ia). Other issues included disallowance of staff cost, expenditure under Section 14A, and disallowance under Section 40(a)(ia) for failure under Section 194C. For AY 2006-07, additional issues were disallowance of short-term capital loss and PF/ESI treated as income.

What were the issues?

1. Whether the disbursement of chit amounts by a chit fund company to its members from their contributions can be treated as interest or dividend, leading to disallowance under Section 10(a)(ia) of the Income Tax Act, 1961? The Petitioner argued that such disbursements are not interest or dividend. The Revenue contended that they are disallowable. 2. Whether disallowance of staff cost is justified? The Petitioner's arguments are not explicitly recorded. The Revenue's arguments are not explicitly recorded. 3. Whether disallowance of expenditure under Section 14A is justified? The Petitioner's arguments are not explicitly recorded. The Revenue's arguments are not explicitly recorded. 4. Whether disallowance under Section 40(a)(ia) for failure to deduct tax under Section 194C is justified? The Petitioner's arguments are not explicitly recorded. The Revenue's arguments are not explicitly recorded. 5. For AY 2006-07, whether disallowance of short-term capital loss on sale of plant and machinery and treating PF and ESI as income under Section 2(24) are justified? The Petitioner's arguments are not explicitly recorded. The Revenue's arguments are not explicitly recorded.

Which sections of the Income-tax Act were involved?

Section 10(a)(ia),Section 14A,Section 40(a)(ia),Section 194C,Section 2(24)

AI-generated summary — verify with the full judgment below

Heard together (2 matters)

W.P.No.26553 of 2005
W.P.No.1562 of 2008

Read from the judgment's own cause title. This page is filed under one of them.

Cause title — parties, addresses and appearances
[ 348e 1 IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD (Special Original Jurisdiction) TUESDAY, THE SECOND DAY OF DECEMBER TWO THOUSAND AND TWENTY FIVE PRESENT THE HONOURABLE SRI JUSTICE P.SAM KOSHY AND THE HONOURABLE SRI JUSTICE SUDDALA CHALAPATHI RAO WRIT PETITION NOS: 911 & 28441 OF 2009 W.P.NO:911 OF 2009 Between: M/s. Margadarsi Chit Fund Ltd., Rep. by its lVlanaging Director, Smt. Ch.Sailaja Kiran, W/o. Ch.Kiran 5-10-195, Corporate office, Opp Police ControlRoomFatehmaidanRoad,Hyderabad-500004 ...'ETITIONER AND The Deputy Commissioner Of lncome Tax, Circle 16(2) 6thfloor, Ayakar Bhavan' Basheerbagh' Hyderabad ...RES'.NDENT Petition under Article 226 of the Constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue a writ of certiorari or any other writ or direction or order more in the nature of Writ of Certiorari calling for the records comprised in the impugned assessment order dated 29.12.2008 for the assessment year 2006-07 on the file of the Respondent and impugned Notice under section '1 56 of the lncome Tax Act,1961 dated 29.12.2008 issued by the Respondent and quash the same. l.A. NO: 1 OF 2009(WP MP. NO: 1157 OF 2009) Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased to grant an order of interim stay of all further proceedings in pursuance of the impugned assessment order dated 29.12.2008 for the assessment year 2006-07 on the file of the respondent pending disposal of the above writ petition. l.A. NO: 2 OF 2009(WPMP. NO:1158 oF 2009) Petition under Section 15'l CPC praying that in the ci1 umstances stated in the affidavit filed in support of the petition, the High Court mil be pleased to grant an order of interim stay of all further proceedings in pursuit ce of the impugned Notice under sectiorr 156 of the lncome Tax Act, 1961 dated : 9.12.2008 issued by the respondent pending disposal of the above writ petition anc thus render Justice. l.A. NO: 4 OF 2009(V\IVMP. NO: 1640 OF 2009 ) Between: The Deputy Commissioner Of lncome Tax, Circle 16(2) e hfloor, Ayakar Bhavan, Basheerbagh, Hyderabad AND ...PETtTIrl \ERyRESPONDENT M/s. ft/argadarsi Chit Fund Ltd., Rep. by its Mart ging Director, Smt. Ch.Sailaja Kiron, W/o. Ch.Kiran 5-10-1 95, Corporate office, Opp Police Controi Room Fatehmaidan Road, Hyderabad-500004 ...RESPC I DENT/PETITIONER Petition under Section '1 5'1 CPC praying that in the circ Jmstances stated in the affidavit filed in support of the petition, the High Court may be pleased to vacate the interim order dated 27.4.2009 granted by the l-lr n'ble High Court in WP.tt/PNo. of 2009 in WPNo.9.1 1 of 2009. Counsel for the Petitioner: SRI KAILASH NATH P.S.S REPII :SENTING SRI T.BALAMOHAN REDDY, AD\ OCATE Counsel for the Respondent: SRI K.SUDHAKAR REDDY, St: {lOR STANDING COUNSEL FOR INCOME TA} W.P.NO: 28441 OF 2009 Between: V/..ltlqlSr{qpi Chrt lund Limited, represented by its Managing Director Smt Ch.Shailaja W/o. Sri Ch.Kiran 5-10-195, Corporate Office, O-pp?olice Control Room, Hyderabad. AND ...PET|T|ONER The Additional Commissioner of lncome Tax, Range '16, Ayakar Bhavan, Basheerbagh, Hyderabad. ...RESPONDENT Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue an order or direction or writ more in the nature of Writ of Certiorari calling for the record comprised in the impugned assessment order dated 14.12.2009 for the assessment year 2OO7 -2008 on the file of the Respondent and quash the same. l.A. NO: 1 OF 2009(WPMP. NO: 37009 OF 2009 Petition under Section 1 51 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased grant an order of interim stay of all further proceedings in pursuance of the impugned assessment order dated 14.12.2009 for the assessment year 2007-2008 on the file of the respondent, including recovery of tax of Rs.1 27,86,89,098/- as per notice under Section 1 56 of the l.T. Act, 1961 or any other amounts, pending disposal of the above Writ Petition and thus render justice. Counsel for the Petitioner: SRI KAILASH NATH P.S.S REPRESENTTNG SRI T.BALAMOHAN REDDY, ADVOCATE Counsel for the Respondent: SRI K.SUDHAKAR REDDY, SENIOR STANDING COUNSEL FOR INCOME TAX

)

,; IN THE HIGH COURT FOR THE STATE OF Tli -ANGANA AT HYDERABAD THE HONOTIRABLE SRI.ITJSTICE P.SAM T OSHY AND THE HONOURABLE SRI JUSTICE SUDDALA CHALAPATHI RAO w.P.Nos.9l I & 28441 OF 2009 02.12.2025 Between M/s Margadarsi Chit Find Limited, Rep. by its Manaeing Director, Smt.Ch.Shailaja. Hyderabad. ..Petitioner AND The Deputy (lotnmissioner of Income Tax, Circte l6(2),6''' Floor, Ayakar Bhavan, Basheerbagh, llyderabad. . . Respondent BDEB, @er !{on'ble Sri .Justice P.Sum Koshy) Heard Mr. Kailash Nath P.S.S, leamed counse. r'epresenting Mr. T.Bala Mohan Reddy, learned counsel for the 1 etitioner and Mr. K.Sudhakar Reddy, leamed Senior Standing Cc rnsel for the Income Tax Department for the respondent. Perusec he record-

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2.

Thcsc arc two writ pctitions which have been filed assailing the asscssment order dated 29.12.2008 for the assessment year 2006'2001 and datcd 14.12.2009 for the assessment ycars 2007- 2008. 3. Though the Assessing Officer in the course of passing the impugned assessrttent order has decided tbur issues' those are - ( I ) disallowancc of chit d iv idend/interest u/s O(a)(ia), (2) disallorvance of staff cost, (3) disallowance of expenditure u/s l4A and (4) disaltoq'ancc u/s 40(a)(ia) for the failure u/s 194C, the petitioner seems to be primarily aggrieved of the order passed in issue No. I so {-ar as disallowance of chit dividend/interest under Section 10(aXia). 't'he said issue by now has been considered in a 'ITA No.44 OF 2008 DATED 24.07.2009 ol High Court of l)elhi at New Delhi

3{-*:4 3 I I i i I I thc Delhi High Court dealing with the issue on chit sub cription has held as under: "The above question has already been ar: by the Delhi High Court in Sahib Chits (Delhi) I in l.T.A. No 44 of 2008, on 24.07.2009, at by the learned Tribunal of Bangalore Bencf case of Marga Soochi Chit P\d. Ltd., irt No.995/Bangalore/2008, wherein it was held tl amount disbursed by a chit fund company members from the contribution cannot be tr€ 2 interest. Similar view was taken by the Madra C:ourt in the case of Bilahari lnvestments (P, C;.lT (288 ITR 39 (Mad ) and the decisiott Madras High Court has been affirmed by the ti Court in the case of C.l.T. v. Bilahari lnvestn t Ltd t(2008) 299 ITR 11. Therefore, the learned - has followed the correct proposition of law r€ | the Supreme Court decision, and Delhi and High Courts decisions. We do not find any n: interfere with the impugned order'" wered )Ltd., lalso in the I,T.A. at the :o the :ed as ; High _td. v. of the preme nt Pvt. ribunal ing on / adras son to 4. Foltowing the aforesaid judgment ol the Delhi High Court, this High Clourl also in the case of the asse I ee itself in W.P.No.26553 of 2005 allowed the writ petition in temrs of the order passed by the Delhi High Court in the case c Sahib Chits (supra) vide its order dated 29.01.2024. The said jrdgment was subsequently also followed in W.P.No.1562 of 200t which stood decided on26.06.2025. -/t'

4 5. ln the present two writ petitions also, the main issue that was under challenge is this itseif and, therefore, the leamed counsel appearing on either side do not dispute the f-act that the said issue stands decided by the aforesaid judgment of the Delhi High Coutt in the case of Sahib Cftils (supra) and this High Court in W.P.No.26553 of 2005 and W.P.No.1562 of 2008. 6. In view of the satne. we are inclined to allow the writ petitions to the extent so far as issue No. I in respect of chit subscription is concerned holding that disbursement of the chit amount to its members cannot be treated as ititerest or dividend

7.

However, as regards the other issues are concemed, those pertaining to disallowance of' staff cost, disallo'uvance of expenditurc undel Section 14(A) and disallowance under Section 40(aXia) fbr the failure under Section I 9a (c) are concemed and lor the assessmgnt year 2006-2007, there two more additional issues, those. are disallowance of short term capital loss on sale of plant and machinery and PF and ESI treated as income r-ls 2Q\@), this Courl in its earlier decision itself in W.P.No.1 562 of 2008 had left it for the Assessing Offi:r to issue fresh notice and '\- e:.: I i I I I I I II I I I I I E : ! t i I : I t

-at- Y-!FB=SF '!?-ry/ - ,;,:q - ! -. :.1., ', "/' 5 decide on merits. However, in tlie instant case, i nce there is already an adjudication by the. Asscssing Officer, thc re issues rve are leaving it open permitting the petitioner to challer'! : the sarne if at all il the petitioner inclined to challenge the sar t I by way of pre f'erring a sLatutory appeal in accot'dance with lar'r,.

8.

With the aforesaid observation and direction. .l ese two rvrit petitions stand allowed-in-part. As a consequence, tlr, ordcr of the Assessing Officer so t-ar as the issue pertaining to chi contribution is concemed, is set aside/quashed. -l-here shall be rt ' order as to costs Consequently, miscellaneous petitions pending , if any, shall stand closed. That Rule Nisi has been made absolute as above' ./ wirness THE HON,BLE THE CHIEF JUSTICE APARESH KIJ ,lAR SINGH, on this ?. iiJiSbAV, irrE SECOND DAY OF DECEMBER TWO THOUSANC AND TWENW FIVE SD/-,I SRINIVASA REDDY 1' J STANT REGISTRAR //II To 1 2 PSK LS The Deoutv Commissioner Of lncome Tax, Ci Bhavan', Bisheerbagh, HYderabad. The Additional Commissioner of lncome Tax, el Ra e , SECTION OFFICER (2 ithfloor, Ayakar 1l) Ayakar Bhavan, Basheerbagh, Hyderabad. e. one cc to"snt T.BALAMOHAN REDDY, Advocate [ol) JC] 4. o;; cc io SnL K.suDHA-KAii n'eooV, 5' SCroniN: fME rAX toPUCl

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Two CD Copies \&

HIGH COURT DATED:0211212025 COMMON ORDER WP.Nos.911 & 28441 of 2009 PARTLY ALLOWING THE WRIT PETITIoNS WITHOUT COSTS lA ,RTHE S 028 ( JAII 3 Ut -:\ ,, / . <t ,/,, 5itrl,,i \"-.'-2/ 2 * "oP(nA &r" ) *

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