2011 (9) TMI 1068 - AT - Income Tax

Tribunal rules chit dividends not subject to TDS under Income-tax Act

The Tribunal dismissed the Revenue's appeals against the cancellation of orders passed under sections 201 and 201(1A) of the Income-tax Act, 1961 related ... TDS u/s 194A - payment of dividend to the subscribers of a chit - Held that:- 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. Issues:Cancellation of orders passed u/s. 201 and 201(1A) of the Income-tax Act, 1961 regarding non-deduction of tax on chit dividend paid by the assessee.Analysis:1. The appeals by the Revenue were directed against separate orders of the CIT(A)-II, Hyderabad for assessment years 2004-05 to 2007-08. The common issue in all appeals was the cancellation of orders passed u/s. 201 and 201(1A) of the Income-tax Act, 1961 related to non-deduction of tax on chit dividend paid by the assessee, which was considered as interest under section 2(28A) and section 194A of the Act.2. The Tribunal considered the issue in light of previous judgments. It referred to cases like Marga Soochi Chit Pvt. Ltd. and Sahib Chits (Delhi) (P) Ltd., where it was held that the amount disbursed by a chit fund company to members cannot be treated as interest. As there is no borrowing of money or debt incurred in a chit fund scheme, the provisions of section 194A and 2(28A) of the Act do not apply.3. The Tribunal also cited the case of Bilahari Investments (P) Ltd. v. CIT, where it was confirmed by the Supreme Court that a chit fund scheme involves pooling money by individuals at periodic intervals without any borrowing or debt, leading to the distribution of dividends among members. This distribution of dividends does not attract TDS under section 194A.4. Additionally, the Tribunal mentioned its own decision in the case of M/s. Vipanchi Chit Funds Ltd. and M/s. Vinutna Chit Funds (P) Ltd., where the issue was decided in favor of the assessee, aligning with the interpretation that chit dividends do not constitute interest for tax deduction purposes.5. Considering the findings of various courts and the nature of chit fund schemes, the Tribunal agreed with the CIT(A) that the payment of dividend to chit fund subscribers does not qualify as interest. Therefore, the assessee was not liable to deduct TDS under section 194A and was not subject to interest under sections 201(1) and 201(1A) of the Act.6. Consequently, the Tribunal dismissed both appeals of the Revenue based on the above analysis and legal interpretations. The order was pronounced in the open court on 29th September 2011.