TDS – Chit Fund – Interest – Section 194A – A. Ys. 2004-05 to 2006-07 – Amount paid by Chit Fund to its subscribers – Not interest – Tax not deductible at source on such interest

The assessee ran a chit fund. The assessee had several chit groups which were formed by having 25 to 40 customers to make one chit group. The customers subscribed an equal amount, which depended upon the value of chits. There were two types of chits. One was the lottery system and the other was the auction system. In the lottery system the lucky winner got the chit amount and in the auction system the highest bidder got the chit amount. Under the scheme the unsuccessful members in the auction chit would earn dividend and the successful bidders would be entitled to retain the face value till the stipulated period under the scheme. The Revenue took the view that when the successful bidder in an auction took the face value or the prize money earlier to the period to which he was entitled, he was liable to pay an amount to others who contributed to the prize money which was termed as interest and that this interest amount, which had been paid by the assessee to its members was liable for deduction of tax u/s. 2(28A) and section 194A of the Income-tax Act, 1961. The Commissioner (Appeals) held that the amount paid by way of dividend under the chit scheme by the assessee to the members of the chit could not be construed as interest under the Act and, therefore, there was no liability on the part of the assessee to deduct tax at source. This was upheld by the Tribunal.

On appeal by the Revenue, the High Court upheld the decision of the Tribunal and held as under:

“In the first place the amount paid by way of dividend could not be treated as interest. Further, section 194A of the Act had no application to such dividends and, therefore, there was no obligation on the part of the assessee to make any deduction u/s. 194A of the Act before such dividend was paid to its subscribers of the chit.”