Amount disbursed by Chit Fund Company to its members from their contribution cannot be treated as interest

RELEVANT PARAGRAPH

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 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 :-

“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 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 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.