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.

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