COMMISSIONER OF INCOME TAX DELIH XVII vs. SAHIB CHITS DELHI P. LTD.

In appeal, the action of the AO was quashed by the learned CIT(A) following the decisions in the below mentioned cases: a) Sh. Ram Chit (P) Ltd. v. DCIT, 83 ITD 792 b) Baldeep Singh v. Union of India, 199 ITR 628 c) Shriram Chits & Investment (P) Ltd. v. Union of India & Ors.,

The following substantial questions of law have been raised before us for our consideration :- (a) Whether the ITAT was correct in law in holding that the assessee had not paid any interest to the subscribers of the chit and such payment does not fall within the meaning of interest as defined under Section 2(28A) of the Act?

Since the assessee is a Chit Fund company, various subscribers become members of different chits which are floated by such a company. Normally, these chits are for a fixed period of 20, 25, 30 or 40 months. If the chit is for a period of 25 months, 24 members are made as subscribers and one chit remains with the organizer (i.e. the assessee herein) named as „Foreman‟. The subscribers contribute fixed amount, every month, which is involved in the chit. Normally, 1st, 2nd or 3rd month‟s chit is taken by the Foreman. Thereafter, for subsequent chits, bids between the members take place. The person who gives the highest bid is entitled to take a particular chit. The amount of bid offered by him is distributed between the members/ subscribers. These chits are governed by the law known as the Madras Chit Funds Act, 1961, which is extended to the Union Territory of Delhi. As per the provisions of this Act, there is a restriction to make a bid upto 35% of the maximum value of the chit. If more than one person offered 35%, then between them chit is allocated to a person by a draw of lot. The bid amount offered by the successful bidder is then distributed equally among all the members. It is this amount which is paid to the members that is treated as „interest‟ by the Assessing Officer. On this premise, the Assessing Officer proceeded and opined that before disbursing this amount of „interest‟ to the members/subscribers, the assessee was required to deduct tax at source under Section 194A of the Act and

The assessee disputed the aforesaid approach of the Assessing Officer as the contention of the assessee was that what is distributed to the members is not „interest‟ and, therefore, no deduction was required to be made under Section 194A of the Act. In this backdrop, the moot question which arises for consideration is as to whether payment of the aforesaid nature disbursed to the subscribers of the chit would amount to „interest‟ as defined under Section 2(28A) of the Act. If it is not „interest‟, question of deduction of tax at source under Section 194A of the Act would not arise and, thus, the assessee would not be treated to be in default under Section 201 of the Act. Therefore, answer to question No. (b) would automatically be answered while deciding question No.(a) formulated above.

Before we proceed to examine the question No. (a), the relevant provisions, i.e., the sections in question of the Act, may be stated for a better understanding of the issues at hand :- “Section 2(28A): „interest‟ means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation)and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.“ xx xx xx

A bare reading of Section 2(28A) of the Act would reveal that interest is payable in respect of „moneys borrowed‟ or „debt incurred‟. It, of course, would include a deposit, claim or other similar right or application of any service fee or other charges in respect of the moneys borrowed or debt incurred. We have already disclosed the nature of transaction. All the subscribers/members of the chit contribute moneys each month and bid takes place among the members. The highest bidder is entitled to take the chit, i.e. the money contributed by all the members, after deducting the bid amount offered by him. It is this bid amount which is distributed among all the subscribers/members equally. Obviously, this amount is not in respect of any moneys borrowed by the assessee or any debt incurred by the assessee.

It is at this juncture that it is important to note that as per The Madras Chit Funds Act, 1961, as extended to the Union Territory of Delhi (Madras Act 24 of 1961), the term “dividend”, and not “interest”, has been defined to mean – “the share of a subscriber in the discount available under the chit agreement for ratable distribution among the subscribers at each installment of the chit”. 10. The question raised before us is with regard to the taxability of the discount allotted to the subscribers of the chit, which as per the counsel for the appellant is in the nature of “interest” in the hands of

From the above it is clear that a chit agreement clearly does not fall within the ambit of “money lending” or “debt incurred” and, therefore, will not be covered by the definition of “interest” as contemplated by the Act.

To understand the meaning of the term „interest‟, we may also refer to law dictionary and provisions contained in other enactments. According to BLACK‟S Law Dictionary, Seventh Edition, the term interest means :-

We may point out at this stage that the order of the Assessing Officer proceeds on the basis as if the contribution given by the subscribers/members every month amounts to deposit with the chit fund company, i.e. the assessee, and on that basis he proceeds as if the assessee is working as a banker and, therefore, the amount of bid disbursed equally among members is to be treated as „interest‟ payable on money borrowed. This approach is fallacious on the face of it and particularly in view of the principle laid down in the aforesaid judgment of the Supreme Court in Shriram Chits & Investment (P) Ltd. (supra) wherein the Apex Court observed that the subscriptions received from the members of the chit fund company in terms of contract are not treated as „deposits‟ for the purpose of Reserve Bank of India‟s directions. The amount contributed by the members every month is given back to them in the following manner - The successful bidder takes the entire amount (minus) the bid amount and the bid amount is disbursed equally among the members. Therefore, by no stretch of imagination the aforesaid amount contributed by the members can be treated as

Thus, from whatever angle the matter is to be looked into, the amount disbursed to the members from their contribution cannot be treated as „interest‟. The Tribunal was, thus, right in holding that the assessee had not paid any interest to its subscribers of the chit. This issue is, thus, decided against the Revenue and in favour of the assessee, affirming the order of the Tribunal in this behalf.

The second issue is with respect to the applicability of section 194A of the Act to the assessee‟s case. As pointed out above, the payments made/disbursed to the subscribers/members was not „interest‟ and, therefore, the question of deducting any tax at source therefrom would not arise. The ITAT has rightly held that the assessee was not required to deduct the tax at source within the meaning of section 194A of the Income Tax Act and as such the assessee was not in default under section 201 of the Act. We are in agreement with the ITAT as well as the CIT(A) to the extent that interest can only be payable in respect of moneys borrowed or debts incurred. Further, in

No substantial question of law arises. The appeal is, therefore, dismissed.