UNREPORTABLE
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 44 of 2008
% Reserved on : July 13, 2009
Pronounced on : July 24, 2009
Commissioner of Income Tax . . . Appellant
through : Mr. Subhash Bansal, Advocate
VERSUS
Sahib Chits (Delhi) (Pvt.) Ltd. . . . Respondent
through : Mr. Prakash Kumar, Advocate
CORAM :-
THE HON‟BLE MR. JUSTICE A.K. SIKRI
THE HON‟BLE MR. JUSTICE VALMIKI J. MEHTA
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. This appeal has been preferred under Section 260A of the Income
Tax Act, 1961 (hereinafter referred to as „The Act‟) against the order
of the ITAT, New Delhi passed in ITA No. 857/Delhi/2006 on 4th
May 2006 for the financial year 2003-04.
2. The assessee is a chit fund company. During the financial year under
consideration it was running various chits. An on the spot verification
was conducted on 21.12.05 at the business premises of the assessee
and after collecting further details it was held by Assessing Officer
(AO) that there was default on the part of the assessee company for
not deducting tax under Section 194A of the Act on the amount paid
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to its members on the chits contributed by them under various chits
organized by the assessee. While passing order under Section
201/201(1A) the AO quantified the default at Rs. 8, 17,683/-
including tax (TDS), surcharge and interest payable by it.
3. 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.,
AIR 1993 SC 2063 (2074).
Besides the aforementioned, the learned CIT(A) has also relied
on Para 4 of the CBDT Circular No. 647 dated 22.3.1993. The ITAT
affirmed the aforesaid orders of the CIT (A) while dismissing the
appeal of the Revenue.
4. 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?
(b) Whether the ITAT was correct in law in holding that the
assessee was not required to deduct the tax at source within the
meaning of Section 194A of the Act and as such the assessee
was not in default under Section 201 of the Act.
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5. 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
ITA No. 44/2008 nsk Page 3 of 9
held that for not doing so it committed default and, therefore, was
liable for interest and penalty under Section 201/201(IA) of the Act.
6. 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.
7. 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
“Section 194A: Interest other than interest on securities.
(1) Any person, not being an individual or Hindu undivided
family, who ism responsible for paying to a resident anyITA No. 44/2008 nsk Page 4 of 9
income by way of interest other than income by way of
interest on securities, shall, at the time of credit of such income
to the account of the payee or at the time of payment thereof
in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in
force…”
8. 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.
9. 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
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such subscribers and not “dividend”. Thus, it may be noted that the
term „interest‟, as defined under the Act, specifically speaks of
“moneys borrowed or debt incurred (including a deposit, claim or
other similar right or obligation)…”. In the present case various
persons are contributing to chits, which amount is taken by the
successful bidder who offers certain discount. Further, it was
observed in Shriram Chits & Investment (P.) Ltd. (supra) that:
“…it would not be correct to state that each subscriber lends
money to the person who gets chit earlier. It cannot also be
construed that the person who gets chit later should be treated
as the money lender. The agreement between the parties that
is entered as per Section 6 of the Act, only provides for
distribution of the chit amount…”
The Supreme Court further relied on the judgment of the
Kerala High Court in Janardhana Mallan and Ors. v. Gangadharan
and Ors., AIR 1983 Ker 178, wherein it was observed that on
entering into the chit agreement a debt is not incurred by the
subscriber for the amount of all the future installments and in respect
of such amount there is no debtor-creditor relationship.
11. 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.
12. 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 :-
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“Advantage or profit, esp. of a financial nature; a legal share in
something; all or part of a legal or equitable claim to or right
in property.”
Likewise, the Interest Tax Act, 1974 defines interest to mean –
“interest on loans and advances made in India and includes –
(a) commitment charges on unutilized portion of any credit
sanctioned for being availed of in India; and (b) discount on
promissory notes and bills of exchange drawn or made in
India, but does not include – (i) interest referred to in sub-
section (1B) of section 42 of the Reserve Bank of India Act,
1934 (2 of 1934); (ii) discount on treasury bills.”
13. 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
ITA No. 44/2008 nsk Page 7 of 9
„deposit‟ with the company, much less money borrowed by the
assessee. The Assessing Officer also ignores an important fact that no
person can do the business of banking without the necessary
approval of license from the Reserve Bank of India under the
Banking Regulation Act, as pointed out above. The chit fund
operations are regulated statutorily by the Madras Chit Fund Act, as
extended to Delhi, which have nothing to do with the banking
business.
14. 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.
15. 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
ITA No. 44/2008 nsk Page 8 of 9
the case of a chit fund there is no borrowing of moneys nor any debt
is incurred and as such the provisions of section 2(28A) are not
attracted. It is also clear that dividend/discount cannot be mistaken
for interest income in the hands of the subscribers and therefore there
has been no default under section 194A of the Act.
16. No substantial question of law arises. The appeal is, therefore,
dismissed.
(A.K. SIKRI)
JUDGE
(VALMIKI J. MEHTA)
JUDGE
July 24, 2009
nsk
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