TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y. 2003-04 : Discount allotted to subscribers of chit : Discount is not interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

[CIT v. Sahib Chits (Delhi) (P) Ltd., 226 CTR 119
(Del.)]

The assessee is a chit fund company. The assessee had not
deducted tax at source on the amounts paid to its members on the chits
contributed by them. The AO held that there was default on the part of the
assessee company for not deducting tax u/s.194A of the Income-tax Act, 1961.
Therefore, the AO passed order u/s.201 and quantified the default amount at
Rs.8,17,683. CIT(A) and the Tribunal quashed the order.

On appeal by the Revenue, the following two questions were
raised :

“(a) Whether the Tribunal 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
u/s.2(28A) of the Act ?

(b) Whether the Tribunal was correct in law in holding
that the assessee was not required to deduct the tax at source within the
meaning of S. 194A of the Act and as such the assessee was not in default
u/s.201 of the Act ?”

The Delhi High Court upheld the decision of the Tribunal
and held as under :

“Distribution of bid amount or discount allotted to the
subscriber of the chit is not interest as there is no money borrowed or debt
incurred and therefore there is no question of deducting tax at source
u/s.194A.”