Commissioner of Income-tax v. Avenue Super Chits P. Ltd
[Citation -2015-LL-0116-4]

Citation 2015-LL-0116-4
Appellant Name Commissioner of Income-tax
Respondent Name Avenue Super Chits P. Ltd.
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 16/01/2015
Judgment View Judgment
Keyword Tags substantial question of law • deduction of tax
Bot Summary: JUDGMENT The judgment of the court was delivered by N. Kumar J.-The Revenue has preferred these appeals against the order passed by the authorities, holding that the chit dividend paid by the assessee to its customers would not amount to interest as defined under section 2(28A) of the Income-tax Act, 1961 and no deduction of TDS under section 194A of the Act is required to be made. The assessee has several chit groups which are formed by having 25 to 40 customers to make one chit group. Under the scheme, the unsuccessful members in the auction chit will earn dividend and the successful bidders will be entitled to retain the face value till the stipulated period under the scheme. The assessee was treated as defaulter under section 201 of the Act and was liable to pay interest under section 201(1A) of the Act. The Appellate Commissioner held that the amount paid by way of dividend under the chit scheme by the assessee to the members of the chit cannot be construed as interest under the Act and there is no liability on the part of the assessee to deduct tax at source. The substantial question of law that arises for consideration in these appeals is as under: Whether the appellate authorities were correct in holding that the chit dividend paid by the assessee to its customers would not amount to interest as defined under section 2(28A) of the Act and no deduction TDS under section 194A of the Act need be made as the definition of dividend contemplated under the Chit Funds Act should be adopted and not as per the Income-tax Act or the other law applicable We have heard the learned counsel appearing for both the parties. Further, section 194A of the Act has no application to such dividends and it held there is no obligation on the part of the assessee to make any deduction under section 194A of the Act before such dividend is paid to its subscribers of the chit.


JUDGMENT judgment of court was delivered by N. Kumar J.-The Revenue has preferred these appeals against order passed by authorities, holding that chit dividend paid by assessee to its customers would not amount to interest as defined under section 2(28A) of Income-tax Act, 1961 (hereinafter referred to as "the Act") and, consequently, no deduction of TDS under section 194A of Act is required to be made. assessee is private limited company being assessed in status of company engaged in business of chit fund. assessee has several chit groups which are formed by having 25 to 40 customers to make one chit group. customers subscribe to equal amount, which depends upon value of chits. There are two types of chits. One is lottery system and other is auction system. In lottery system lucky winner gets chit amount and in auction system highest bidder gets chit amount. assessee has paid amounts to its subscribers who had participated in its chit scheme. said amount is called as dividend. However, while making these payments, assessee has failed to pay TDS amount on sums earned as income by customers. Under scheme, unsuccessful members in auction chit will earn dividend and successful bidders will be entitled to retain face value till stipulated period under scheme. Revenue took view that when successful bidder in auction took face value or prize money earlier to period to which he was entitled, he is liable to pay amount to others who contributed to take prize money which was termed as interest. This interest amount, which had been paid by assessee to its members was liable for deduction of tax under section 2(28A) and section 194A of Act. assessee had failed to do so. Therefore, assessee was treated as defaulter under section 201 of Act and was liable to pay interest under section 201(1A) of Act. assessee preferred appeal against said order. Appellate Commissioner held that amount paid by way of dividend under chit scheme by assessee to members of chit cannot be construed as interest under Act and, therefore, there is no liability on part of assessee to deduct tax at source. Aggrieved by said order, Revenue preferred appeal to Tribunal, which has affirmed said findings and dismissed appeals. Aggrieved by these two orders, Revenue is in these appeals. substantial question of law that arises for consideration in these appeals is as under: "Whether appellate authorities were correct in holding that chit dividend paid by assessee to its customers would not amount to interest as defined under section 2(28A) of Act and, consequently, no deduction TDS under section 194A of Act need be made as definition of dividend contemplated under Chit Funds Act should be adopted and not as per Income-tax Act or other law applicable?" We have heard learned counsel appearing for both parties. Delhi High Court had occasion to consider same substantial question of law in case of CIT v. Sahib Chits (Delhi) P. Ltd. reported in [2010] 328 ITR 342 (Delhi). After setting out statutory provisions namely, section 2(28A), provisions of Interest-tax Act, 1974, and noticing various judgments held, in first place amount paid by way of dividend cannot be treated as interest. Further, section 194A of Act has no application to such dividends and, therefore, it held there is no obligation on part of assessee to make any deduction under section 194A of Act before such dividend is paid to its subscribers of chit. aforesaid judgment squarely applies to facts of these appeals. Hence, we do not see any merit in these appeals. substantial question of law is answered in favour of assessee and against Revenue and, hence, we pass following: Order Appeals are dismissed. No costs. *** Commissioner of Income-tax v. Avenue Super Chits P. Ltd
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