M/S. VIPANCHI CHIT FUND, HYD. vs. THE CHIEF COMMR. OF I.T. AND 2 OTHERS

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WP/10730/2010HC TelanganaHBHC01046492201029 January 2026Author: P.SAM KOSHY,NARSING RAO NANDIKONDA7 pages
AI SummaryAllowed

What did the High Court hold?

The High Court allowed the writ petition, setting aside and quashing the impugned orders dated 31.03.2009 and 09.07.2009. The Court held that the amount which the respondent-Income Tax Department was treating as interest should not be treated as interest, but rather as dividend. This decision was based on the reasoning that an identical issue had been decided by the same bench in W.P. No. 27171 of 2007, which in turn relied on the Delhi High Court's judgment in Commissioner of Income Tax v. Sahib Chits (Delhi) (P) Ltd., and a Supreme Court decision affirming the Madras High Court's view in Bilahari Investments (P) Ltd. The ratio decidendi is that amounts disbursed by a chit fund company to its members from contributions are to be treated as dividend, not interest. The operative direction was to quash the impugned orders and declare the amount as dividend. No issue was expressly left undecided.

What were the facts?

The petitioner, M/s. Vipanchi Chit Fund Ltd., filed a writ petition challenging the action of the Income Tax Department in refusing to stay the operation of an order passed under sections 201(1) and 201(1A) of the Income Tax Act, 1961, and a demand notice for Rs. 1,09,65,358/- for assessment year 2005-2006. The petitioner contended that the demand was illegal and arbitrary. The department, through its counsel, submitted that the core issue was whether money disbursed by a chit fund company to subscribers should be treated as dividend or interest. The department noted that this issue was previously decided by the same bench in a similar case involving M/s. Margadarshi Chit Fund Limited.

What were the issues?

1. Whether the amount of money disbursed by the petitioner chit fund company to its subscribers should be treated as dividend or as interest, under the Income Tax Act, 1961. Assessee's Contention: The petitioner argued that the action of the respondents was illegal, arbitrary, and in violation of principles of natural justice and constitutional rights. They sought to set aside the impugned orders and prevent the recovery of the demanded amount pending appeal. Revenue's Contention: The revenue, through its counsel, submitted that the question of law was whether the disbursed amounts are dividend or interest. They further argued that an identical issue was decided by the High Court in a previous writ petition (W.P. No. 27171 of 2007) concerning M/s. Margadarshi Chit Fund Limited, where the court relied on the Delhi High Court's judgment in Commissioner of Income Tax v. Sahib Chits (Delhi) (P) Ltd., holding that such disbursements cannot be treated as interest.

Which sections of the Income-tax Act were involved?

Section 201(1),Section 201(1A),Section 156

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD (Special Original Jurisdiction) THURSDAY, THE TWENTY NINTH DAY OF JANUARY TWO THOUSAND AND TWENTY SIX PRESENT THE HONOURABLE SRI JUSTICE P. SAM KOSHY AND THE HONOURABLE SRI JUSTICE NARSING RAO NANDIKONDA WRIT PETITION NO: 10730 0F 2010 13447 | ...PETITIONER Between: M/s. Vipanchi Chit.Fund Ltd., Rep. by its Director A. Ramkishan, S/o. Late Gangaram R/o. Hyderabad AND I The Chief Commissioner of lncome Tax Hyderabad-.1, 9th Floor, B-Block, l T.Towers, A.C. Guards, Hyderabad. The lncome Tax Officer, Ward No. 15(3), Hyderabad The Commissioner, lncome Tax Appeals (ll), Hyderabad. ...RESPONDENTS Petition under Article 226 of lhe constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High'Court may be pleased to issue a writ or order or direction more preferably inlhe nature of writ of Mandamus declaring the action of the 1st respondent in refusing to stay the operation of order passed by the 2nd respondent under section 201(1)(bi and 201(1A) of the lncome Tax Act, 196i dated 31.03.2009 and the demand notice dated 31.03.2009 issued under section 156 of the Act and in directing collection of outstanding amount of Rs. l,09,65,358/- for the assessment year2005-2006 vide impugned proceedings No. ITO-15(3)A/lpANCHl/A.y.05-06 dated 31 .03.2009 as order passed contrary to the provisions of the lncome Tax Act, 1961 and is being illegal, arbitrary, in violation of principles of natural justice and violative of Article 1a, 19 (1)(g) of the constitution of lndia and consequenily set aside the same and also the proceedings of the 2nd respondent d'ated 09.07.2009 and consequently direct the 2nd respondent not to collect / recover any tax in pursuance of order in proceedings No. TAN PAN/G|RNOHYD0375 j G dated 31.03.2009 on the file of the 2nd respondent pending disposal of the appeal filed by the petitioner before the 3rd respondent 2 'l l.A. NO: 1 OF 201o(wP MP. NO:1 3732 0F 20101 Petition under Section 151 cpc praying that in th€ rircumstances stated in the affidavit filed in support of the petition, ine ulgrr cc L rt may be pleased to stay all further proceedings including taking coercive stepr; against the petitioner pursuant to the demand notice bearing reference N: TAN PAN/GlRNo. HYDV03751G dated 31.03.2009 on the fire of the 2nd res, rndent for an amount of Rs.1,09,65,3581 for the assessment year 2005_20(,( , as otherwise, the petitioner will be put ro much inconvenience, hardship anci ir -eparable loss. Counsel for the Petitioner: SRI V. HARI HARAN Counsel for the Respondent No.1 & 3: SRI K. SUDHAKAR tEDOy, SR. COUNSEL FOR I {COME TAX / Ms. J. SUNITHA, SR. SC FOt TNCOME TAX Counsel for the Respondent No.2: Ms. ROHINI SMITHA, Ji SC REp. FOR SRI RAJA SHEKAR Rli, ) SALVAJ|, SR. SC FOR INCOME .., \X

The Court made the following: ORDER

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT FTYDERABAI) THE HONOURABLE SRI JUSTICE P.SAM KOSHY AND THE HONOURABLE SRI JUSTICE NARSING RAO NANDIKONDA W.P.No.l0 730 of 2010 Date: 29.01.2026 Bctween: IWs.Vipanchi Chit Fund Ltd ir"p.uirL Director, uya"rJua. And The Chief Commissioner ol lncome Tax HyderabadJ and others. . . . Rcspondents 9@EB, (per Hon'bte Sri Justice I' Sam Kosh]') None aPPears for the Petitioner'

2.

Mr.K.Sudhakar Reddy' leamed Senior Standing Counsel for the Income Tax Department, under the instructions of Ms.J.Sunitha, leamed Senior Standing Counsel for the Income Tax Depaftment enters appearance on behalf of respondent Nos I and 3 andMs.RohiniSmitha,leamedJuniorStandingCounselappearson behalf of Mr.Raja Shekar Rao Salvaji' leamed Senior Standing CounselforlncomeTaxDepartment'appearsonbehalfof respondent No.2 and perused the record' . Petitioner

2

3.

Leamed Standing Counsel for the respond: rt-Department subn'rits that the question of law raised in the presen, r'rit petition is its 1o wheihc'r the amount of money disbursed by th,: petitioner chit fund company to its subscribers would be treated ar, lividend or as interest. He further submits that the issue has alreadv been taken-up b1, this Bench in writ petition No.27 i7l of 2007 pertaining to N4s.Margadarshi Chit Fund Limited, wherein, this High Court itsell has relied upon Division Bench ,,1' Delhi High CoLirr judgmer-rt in the case of Commissioner of Jr come Tax v Sahib Chits (Delhi) (P) Ltd.,t has held that the ar{ unr disbursed bv a chit t'r-rnd company to its members from tlr, contribution cannot be treated as interest.

4.

At this juncture, it would be relevant to [ake note of paragraph Nos.i and 4 of the judgment of High Cour passed in the case of- Marqadarshi Chit Fund Limited in Wp.No.2 1671 of 2007 Cecrderi on 19.01 .2026, which reads thus: '- 3. Today rvhen the matter is taken-up for heari r it has been brought to the notice of this Bench that z idcntical issue came up for consideration before I Division Bench of this Court in I.T.T.A.No.l20 of 2t i lTA.ilc.44 of 2008, Cated 24.07.2009

which stood decided on 27 .06-2013 whereby the Division Bench of this Court relying upon the judgment of the Hiph Courr of Delhi in (he case of Commissioner of Iniome Tax v. Sahib Chits (Delhi) (P) Ltd" has held that the amount disbursed by a chit fund company to the members from the contribution cannot be treated as interest. For ready reference, the relevant poftion passed by the Division Blnch of this Court is reproduced herein under: "The above queslion has alreadY been answeted by the Delhi High Court in Sahib Chits (Delhi) (P) Ltd-, in I.T A. No 44 oJ 2008' on 24.07.2009, qnd also by the learned Tribunal of Bangalore Bench in rhe case oJ Marga Soochi-Chit Pvt. Ltd., in I-T A. No'995/Bangalore/2008' wherein it was held thal the amount disbursed by a chit lund company lo the members fron the cont;ibution cannot be lrealed as interest Sinilar view wqs taken hy the M'tdrds High Coul in rht cose of Bilahari lnvesrments tP) Ltd' l C'1. f .and the dicision ol the Madras High Court has been alfirned by thi Supreme Court in the case of C.l T' ,i. giUn*i Investmerr Pvt. Ltcl) Therefore' the learned Ttibunal has follotted the correct proposition ol low relying on lhe Supreme Court 'deiision, qnd Delhi and Madras High Courts ' decisions. Ile do nol fnd anv reason to inlerferc iith rhe impugned ordet-"

5.

Given the fact that the present writ petition also raises the similar benefit and identical issue, we are of the considered opinion that the dispute raised in the present writ petition also desen'es to be allowed on similar grounds'

6.

The impugned orders dated 31'03'2009 and 09'07'2009 are set aside and quashed and we hold that the amount money which '28g ttn E9 (vtad.) ' (zooa) zgg rn r

4 the respondent_Income Tax Department is trea ing as interest is not to be ireaied as interest, it has to be treated as c rzldsnd. '1 . 1'hc \ily'1i1 petition to the aforesaid e)t )nt stands allowed. There shall be no order as to costs. Consequently, miscellaneous petitions p: rding, if any, shall stand closed That Rule Nisi has made Absolute as above wilr ess IX;*Hl;?f; "?*L,f if; i,.B"X.'flxr,".#,Tl#;,ffi ,*,;*n,,tsi,,hi" //II SD/.B. REKHA RANI TANT REGISTR4B----- SECTION OFFICER I To, I fiiglffi,"m,mxmsl++ro*,.: :,__ ; : ,q,:,:.f is y; *-XHEt,,'f-iB !?f,lL::*A. ir IJIIBB] . ,o* u I[" cD copies BS PAq, \ I \

HIGH COURT DATED:2910112026 t i t At ORDER o WP.No.10730 ot 2010 ALLOWING THE WRIT PETITION WITHOUT COSTS 13 h ?0?i r)\ ({ rr\z\>i'

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