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TDS on Chit Dividend

CA Mallikharjun Penala (CA in Practice) (150 Points)

15 June 2016

Whether TDS is applicable on Chit dividend? any supreme court judgement is there?

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4 Replies

Senu Reddy (ca final) (291 Points)
Replied 15 June 2016

Margadarsi chit fund limited vs income tax dept

ITA NO. 1119/Hyd/2012 M/s Margadarshi Chit Fund (P) Ltd.

contended that in the scheme of chit funds, the assessee acts as a foreman for the chit subscribers, the foreman's job is to collect chit instalment from subscribers, conducts auction of chits among subscribers, distributes the discount remaining after foreman's commission among the chit subscribers equally which is called as dividend in the chit fund business. It was further submitted that in this activity, the foreman neither lends his money to the subscribers nor borrows money from the subscribers and thus there is no creditor and debtor relationship between the foreman and the chit subscribers and, therefore, issue of payment of interest does not arise at all. It was also submitted that the dividend paid by the foreman to the subscriber cannot be treated as interest since it does not fit into the definition of interest as provided in theIT Act and as it is also not known whether any surplus would be earned or loss would be suffered by subscribers to consider it as income by way of interest. Therefore, provisions of section 194A of the IT Act cannot be applied to the chit dividends. It was further submitted that in the assessee's case in respect of assessment order u/s 143(3) where disallowance u/s 40(a(ia) was made for non deduction of tax at source for the AYs 2005-06 to 2007-08, the CIT(A)-V, Hyderabad by his orders dated 17/09/2010 following the decision of Delhi High Court in the case of Sahib Chits (Delhi) (P) Ltd., 328 ITR 342, the decision of the ITAT, Visakhapatnam Bench in the case of ITO Vs. Daspalla Chits and Investments Ltd. in ITA Nos. 151, 154, 155 & 157/V/2007 dated 20/07/2009 (41 ITR's Tribunal Tax Reports 732) had allowed the appeal of the assessee. It was also submitted that the said order of CIT(A)-V had been confirmed by the ITAT vide order in ITA Nos. 526, 527, 528 & 529/Hyd/2011 dated 29/09/2011.

ITA NO. 1119/Hyd/2012 M/s Margadarshi Chit Fund (P) Ltd.

5. After considering the submissions of the assessee, the CIT(A) directed the AO to delete the demand raised u/s 201(1) & 201(1A) r.w.s. 194 of the Act, by recording the findings as under:-

1)It is pertinent to mention that in the case of some other chit fund companies, orders were passed by him in favour of the chit fund companies after elaborat3ely discussing and analyzing the various case laws.

2) In the case of M/s Vijay Bhargavi Chit Fund(P) Ltd. for the AY 2004-05, vide order in ITA No. 00437/CIT(A)-II, Hyd/2005- 06d 09/03/2011, it was held by him that the chit dividend paid to various persons does not partake the character of interest payment and there was no applicability of section 194A of the Act, which was confirmed by the Hon'ble Jurisdictional Tribunal, A-Bench vide its order in ITA No. 820/Hyd/2001, dated 26/12/2011.

3) The ITA, A-Bench, Hyderabad while confirming the decision of CIT(A)-V, Hyderabad vide order in ITA Nos. 526,527,528 & 529/Hyd/2011 dated 29/09/2011 for AYs. 2004-05, 2005-06, 2007-08 & 2007-08, in assessee's own case, had held that the payment of dividend to the subscribers of a chit towards dividend does not partake the character of interest and accordingly the assessee is not liable to deduct TDS u/s 194A of the Act and not liable for interest u/s 201(1) and 201(1A) of the Act.

4) In assessee's own case for AY 2005-06 vide order in ITA No. 0064/CIT(A)-II/Hyd/2011-12, dted 18/04/2012, the CIT(A) deleted the demand raised u/s 201(1) & 201(1A) by the AO.