TaxTMI 
TaxTMI 
2015 (4) TMI 938
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.... in the business of running a chit fund, entertainment, food processing and Farm Maintenance. The return of income for the year under consideration was filed by it on 1.11.2005 declaring a total income of Rs. 49,52,66,680. In the Profit & Loss Account filed alongwith the said return, a sum of Rs. 43,42,717 was debited by the assessee on account of interest paid on the deposits received from chit subscribers. During the course of assessment proceedings, it was noticed by the Assessing Officer from the information furnished by the assessee company that it has given advances of Rs. 7.47 crores to its sister concerns on which no interest was charged. He noted that the deposits received by the assessee company from chit subscribers were also around Rs. 7.79 crores. He held that the deposits received by the assessee company from chit subscribers, thus, were diverted by the assessee company for non-business purposes, i.e. giving interest free advances to its sister concerns, and accordingly interest paid by the assessee on such deposits was disallowed by him. 5. The disallowance made by the Assessing Officer on account of interest was challenged by the assessee in appeal filed before t....
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.... 3.4 The Appellant further submits that, such amounts are kept in short term deposits in the banks and interest is earned from such deposits at more than 6% and the said interest is offered to tax. Therefore, the Appellant submits that since the Appellant is paying interest to the subscribers on either the advance instalments received or future subscriptions received and earning interest on the said amounts from banks on keeping such amounts as deposits, the interest paid is to be set off against interest received in which case no interest is disallowable since interests received would be much more than the interest paid by the Appellant to its subscribers. In this connection it would be relevant to note that the Appellant earned interest of Rs. 8,79,74,185/- as against interest incurred of Rs. 43,42,717/-." 6. After considering the submissions made by the assessee as well as the material available on record, the learned CIT(A) did not find the basis given by the Assessing Officer for making disallowance of interest to be correct, by observing as under- "6.3. I h....
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.... the income earned from keeping the subscribers' money in fixed deposits is "income from other sources'." 8. The learned counsel for the assessee submitted that as per the Scheme of Chit Fund, instalments were received by the assessee company in advance from the chit subscribers in some cases and on such advances received from members, interest was paid at the rate of 6% per annum. He invited our attention to clause 5(d) of the Bye-Laws of the assessee company governing the Chit Fund Scheme to point out that the interest at the rate of 6% was payable by the assessee on the future instalments received from the subscribers in advance. He pointed out that the amount of advance instalments as per the Bye-Laws was required to be kept separately by the assessee with the bank and accordingly the same was kept by the assessee in the form of bank deposits during the year under consideration. He contended that interest received by the assessee company on the bank deposits so kept as per the Scheme of the Chit Fund itself constituted its business income, as rightly held by the Assessing Officer and the learned CIT(A) was not justified in treating the same as income from other sources. In s....
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....ived in advance from the subscribers was kept by the assessee separately in the form of bank deposits. In our opinion, receipt of advance instalments from the subscribers, payment of interest thereon at 6% per annum and investment of the amount of such advance subscriptions separately in the bank deposits in compliance with the bye laws of the chit fund scheme, thus was integral part of the business of the assessee of running the chit fund, and consequently, interest received by the assessee on such bank deposits constituted its business income. The learned CIT(A), therefore, was not justified in treating such interest as income from other sources. Similarly, the learned CIT(A), in our opinion, was not justified in confirming the disallowance made by the Assessing Officer on account of interest paid by the assessee on the instalments received in advance from the customers of the chit funds, as the said interest paid by the assessee as per the scheme of the chit funds, clearly constituted expenditure incurred by it wholly and exclusively for the purpose of its business. According to us, there was a direct nexus between the interest paid by the assessee on the said instalments deposi....
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....to be incurred, which cannot be as low as 1 or 2% of the exempt dividend income, as claimed by the learned counsel for the assessee. Having regard to the facts of the case including especially the quantum of investment made by the assessee in the shares, the quantum of dividend income received during the year under consideration, etc., we are of the view that it would be fair and reasonable to estimate the expenditure incurred by the assessee for earning of exempt dividend income at Rs. 2,32,375 being 5% of the exempt dividend income. We accordingly restrict the disallowance made by the Assessing Officer and confirmed by the CIT(A) under S.14A to Rs. 2,32,375 and allow partly ground No.3 of the assessee's appeal. Revenue's Appeal: ITA No.1553/Hyd/2010: 15. Now, we shall take the Revenue's appeal, being ITA No.1553/Hyd/2010, which involves a solitary issue relating to deletion by the learned CIT(A) of the disallowance of Rs. 188.44 crores made by the Assessing Officer under S.40a(ia) of the Act, on account of dividend paid by the assessee company to its chit subscribers without deduction of tax at source, treating the same as expenditure in the nature of interest. 16. We ha....