ORDER
R.S. Syal, A.M.
1. This appeal by the assessed emanates from the order passed by the CIT (A) on 20.03.2002 in relation to the assessment year 1998-99.
2. The main grievance of the assessee is the action of the CIT(A) in holding it as a financial company, being a Residuary Non Banking Company, as defined in Section 2(5B)(va) of the Interest Tax Act.
3. The facts leading to the present appeal, as incorporated in the assessment order, are that the assessee is a Chit Fund Company as defined in the Chit Funds Act, 1982, that a return declaring total chargeable interest at Nil was filed; that in the course of assessment proceedings, it was stated on behalf of the assessee that the business carried on by it was that of conventional chits and hence it was not a credit institution as defined in Section 2(5A) read with (5B) of the Interest Tax Act, 1974 (hereinafter called the Act) and hence the subscriptions received in respect of chit fund were not covered within the ambit of the Act. The AO agreed that the assessee was a chit fund company and the income by way of auction of the chits was by way of mutuality and hence not chargeable to tax. However, the contention that the assessee was not a financial company, as defined in Section 2(5B) (va) of the Act, was not found to be acceptable, as in his opinion it was “receiving deposit under any scheme or arrangement” (in this case subscriptions to chit funds). Resultantly, it was held that the company falls within the purview of the Act and the income in the nature of interest on loans would be taxable. Such interest on loans, totalling Rs. 2.74 lacs, was put to tax. The first appeal did not change the fortune of the assessee.
4. Before us, the learned counsel for the assessee reiterated the submissions as advanced before the authorities below and contended that there was no justification in treating assessee as Residuary Non-Banking Company chargeable under the Act.
5. In the opposition, the ld. DR strongly supported the impugned order.
6. We have heard the rival submissions and perused the relevant material on record. It is an admitted position that the subject matter of the instant appeal is a virgin issue in as much as no precedent is available on it. There is no dispute about the fact and the AO agreed to this proposition that the assesses was a chit fund company and the income on auction of chits was not charged to tax on the basis of mutuality. The controversy centres around charging Rs. 2.74 lacs to tax under the Act, which was earned by the assessee as interest on loans, by reflecting it to the credit side of the profit & loss account. The case of the departmental authorities is that since the assessee is a Residuary Non-Banking Company, falling under Section 2(5B) (va), therefore, interest on loans is chargeable to tax. On the contrary, it has been strenuously argued on behalf of the assessee that it is not a “Credit institution” and, therefore, the interest on loans cannot be put to tax. The primary question that falls for our consideration is to decide as to whether the assesses is a “Credit institution”. If it is answered in the affirmative then obviously, the interest on loans would be subjected to tax and vice versa. Section 2(5A) defines the “Credit institution”. Clause (iv) refers to “any other financial company”. Sub-section (5B) defines “financial company” to mean a company, other than a company referred to in Sub-clause (i), (ii) or (iii) of Clause (5A), being hire purchase finance company and an investment company etc. Clause (va) of Sub-section (5B), which has been hold by the authorities below to be applicable in the instant case, reads as under:
‘a residuary non-banking company (other than a financial company referred to in Sub-clause (i), (ii), (iii) (iv) or (v), that is to say, a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contribution or subscriptions or by sale of units or certificates or other instruments or in any other manner; or’
(Emphasis supplied by us)
A bare perusal of the above extracted provision indicated that it is a company which, inter alia, receives any deposit under any schema or arrangement etc. It shows that in order to be covered within the purview of this clause, it is of utmost importance that the company should be receiving deposits. Admittedly, the word “Deposit” has no where been defined in this Act. In common parlance, it refers to an act of depositing money with the deposited, repayable on demand by the depositor. The Shorter Oxford Dictionary defines the word “Deposit” to mean “the state of being deposited or placed in safe keeping”. The Law Lexicon by P. Ramauatha Aiyar explains this word to mean “An act by which a person receives the thing of another person with the obligation to keep it and to return it.” In the context of banking it normally refers to a sum of money left with a bank for safe keeping subject to the agreed terms and conditions, payable not in the specific money deposited but in an equal sum sometimes interest added to it. It shows that the “deposit” is essentially repayable with or without interest subject to the terms and conditions.
6.1. Adverting to the facts of the instant case, it is found an admitted proposition that the assesses is a Chit Fund company in terms of the Chit Funds Act, 1982. Section 2(b) of this Act defines “Chit” to “mean a transaction whether called Chit, Chit fund, Chitty, Kuri or by any other name and by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money or certain quantity of grain instead, by way of periodical instalments over a definite period and that each such subscriber shall in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount. The term “prize money” has been defined in Section 2(m) as “a difference between the chit amount and the discount, and in the case of fraction of a ticket means the difference between the chit amount and the discount proportionate to the fraction of ticket, and when the prize amount if payable otherwise than in cost, the value of the prize amount shall be the value at the time when it become payable”.
6.2. Chit fund companies collect instalments of subscription from the members. By becoming a member of the group, the subscriber becomes entitled to the prize amount which is determined by lot or by auction etc. The working of a chit fund company can be exemplified, in simple term where a specified number of persons, say five, agree to subscribe Rs. 100/- each per month. At the time of the contribution made at the first instance, the total money available at the disposal of the company will be Rs. 500/-. There will be an auction and the subscriber who bids lowest would get the chit amount. Supposingly, ‘A’ gives auction for taking the chit amount at Rs. 400/-, which is the lowest amongst all the five subscribers, then he will accept a sum of Rs. 400/-. The company after deducting commission, say @ 2% from Rs. 500/- will distribute Rs. 90 (Rs. 100-10) amongst five subscribers, who will either receive Rs. 18/- each in cash or contribute the next instalment of Rs. 100/- at Rs. 82/-. This process will go on till the group is completed after five months. This system of working of the chit fund company divulges that no subscriber is entitled to the amount contributed by him in chits. He is only entitled to the prize amount. The subscribers who lift the chit earlier will evidently suffer a little loss vis-a-vis those who take the chit amount later as they would tend to gain by way of proportionate reduction in the monthly instalments. The AO has treated the receipt of instalments of subscription from the members as “Deposits”. It is seen from the example cited supra that the instalments contributed by different subscribers of the groups are not refundable. The subscribers become entitled to the prize amount only. The subscriber who gets the chit amount even in the first auction remain liable to contribute to the common fund till the completion of group.
6.3. Section 269T of the I.T. Act, 1961, at the relevant point of time, explains the meaning of deposit to mean “any deposit of money which is repayable after notice or repayable after a period and, in case of a person other than a company, includes deposit of any nature”. The aforesaid definition of the term “deposit” when read with dictionary meanings discussed in the foregoing paras, goes to show that the deposit of money is payable alter notice or after a period. Any amount which is not repayable to the person giving it, can under no circumstances be treated as deposit. The instalments in the chit fund company, contributed by the subscribers are non-refundable in nature. By becoming a member, the subscribers becomes entitled to the prize money alone which in our considered opinion cannot be equated with the term “deposit”.
6.4. “Deposit” has been defined by the Reserve Bank of India Act, 1934 under Section 45-I (bb) in an inclusive manner. It has carved out certain exceptions as not includible in “Deposit”. Sub-clause (vii) of the exclusion list is “any amount received by way of subscription in respect of a chit”. Explanation-I below this clause explains the meaning of Chits as having been assigned to it in Clause (b) of Section 2 of the Chit Funds Act, 1882. This definition leaves no scope to contend that the amount received by way of subscription in respect chit; cannot be construed as “Deposit”.
6.5. All the Non Banking Companies are subject to the control of the Reserve Bank of India. In 1987 the Reserve Bank of India, Department of Financial Companies, has vide notification, issued directions to the Residuary Non-Banking Companies. These are called Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. Part-II of these directions states its applicability to every Residuary Non-Banking Company. Such a company has been defined to be a company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in instalments by way of contribution or subscription or by sale of units or certificates or other instalments or in any other manner. The meaning given to a residuary non-banking company, in these directions, is similar to that which has been defined in Section 2(5B) (va) of the Interest Tax Act. These directions are not operative on certain companies defined therein and Clause (viii) has been mentioned to read as miscellaneous non-banking company. Such a “miscellaneous non-banking company” has been defined in the Miscellaneous Non-banking Companies (Reserve Bank) Directions, 1977. Sub-clause (g) of Clause (3) of these directions states a “miscellaneous non-bunking company” to mean a company carrying on all or any of the types of business referred to in paragraph 2 of these directions. Paragraph-2, in turn, refers, inter alia, to conducting any other form of Chitty or Kuri etc. On a conjoint reading of 1977 & 1987 directions issued by the Reserve Bank of India, it becomes palpable that the chit fund companies have been excluded from the residuary non-banking companies, for the purposes of directions that are meant for residuary non-banking company, a term, which is synonymous with Clause (va) of Section 2(5B) of the Interest Tax Act.
6.6. From the above discussion, it is clearly deducible that the subscription received by the Chit Fund Companies cannot be termed as deposits and accordingly Clause (va) of Section 2(5B), being a residuary non-banking company which receives any deposit under any scheme or arrangement etc., cannot be held to be applicable to such Chit Fund Company. As the AO agreed in the opening part of the assessment order that the assessee is chit fund company, governed by the Chit Funds Act, 1982 we, therefore, find no hesitation in holding that it is not covered in Section 2(5A) with (5B) and is accordingly out of the ambit of the Interest Tax Act. Ex consequenti, there is no scope of framing any assessment on the assesses under the Act In the final analysis, we set aside the impugned order and direct that the assessee cannot be subjected to tax under the Act nor there is any question of charging consequential interest under Sections 12 & 12A.
7. In the result, the appeal is allowed.
