Chit fund business constitutes ‘transaction in money’ and not liable to service tax

[Bimal jain]

Dear Professional Colleague,

Chit fund business constitutes ‘transaction in money’ and not liable to service tax

Recently, the Hon’ble Supreme Court of India, dismissed the SLP filed by the Union of India against the judgment of the Hon’ble Delhi High Court in the case of Union of India Vs. Delhi Chit Fund Association [2014 (3) TMI 306 - SUPREME COURT OF INDIA] on following issue:

Issue:

Whether Chit fund business is chargeable to service tax under the Finance Act, 1994 (“the Finance Act”)?

Facts & Background:

Delhi Chit Fund Association (“the Respondent” or “the assessee”) is an association of chit fund companies based in Delhi. The Central Board of Excise and Customs (“the CBEC”) vide Entry No. 8 of the Notification No. 26/ 2012-ST dated June 20, 2012 (“the Notification”) has provided that 70 percent of Gross amount is chargeable to Service tax for Services provided in relation to Chit with certain conditions. Relevant extract of Sl. No. 8 of the Notification is reproduced as under:

Sl. No.	Description of taxable service	Percent- age	Conditions
(1)	(2)	(3)	(4)
8	Services provided in relation to chit	70	CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

Further, “Chit” as defined in the Notification, means “a transaction whether called chit, chit fund, chitty, kuri, or by whatever name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to a prize amount.”

The Respondent filed a writ petition to the Hon’ble Delhi High Court challenging the validity of the Notification since the said activity, being a transaction in money, is specifically excluded from the definition of ‘Service’ as provided under Section 65B(44) of the Finance Act read with Section 65B(33) thereof.

Section 65B (44) of the Finance Act, provides for the definition of ‘service’ as under:

"service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include -

(a) an activity which constitutes merely,––

(i) …………..

(ii) ………….

(iii) a transaction in money or actionable claim…………….”

Further, Section 65B (33) of the Finance Act provides for the definition of ‘money’ as under:

“money" means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value.”

In the writ petition filed by the Respondent, the Hon’ble Delhi High Court while deciding the case {Delhi Chit Fund Association Versus Union of India And Another 2013 (4) TMI 630 - DELHI HIGH COURT}, quashed Entry No. 8 of the Notification and held that the act of a foreman, who conducts auction of chit amount among contributors, does not fall under the definition of ‘service’ provided under Section 65B(44) of the Finance Act. It was further held that in a chit fund business, the subscription is tendered in any one of the forms of 'money' as defined under Section 65B(33) of the Finance Act. It would, therefore, be merely a transaction in money and accordingly falls outside the purview of the definition of ‘service’ provided under the Finance Act.

Being aggrieved by the judgment of Hon’ble Delhi High Court, the Union of India filed a Special Leave Petition (“the SLP”) to the Supreme Court of India against the said judgment.

Held:

The Hon’ble Supreme Court of India dismissed the SLP filed by the Union of India against the judgment of the Hon’ble Delhi Court, meaning thereby that the decision of the Hon’ble Delhi High Court in the said matter holds good.

Accordingly, the consideration received for providing services in relation to the chit fund business, being merely a transaction in money, falls outside the purview of the term ‘service’ as defined under Section 65B(44) of the Finance Act. Hence, it is not exigible to service tax.

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

Thanks & Best Regards.
 
Bimal Jain
FCA, FCS, LLB, B.Com (Hons)

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