Delhi High Court
Delhi Chit Fund Association vs Union Of India & Anr. on 23 April, 2013
Author: R.V. Easwar
THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 23.04.2013
+ W.P. (C) 4512/2012
DELHI CHIT FUND ASSOCIATION .......Petitioner
versus
UNION OF INDIA & ANR. .......Respondents
Advocates who appeared in this case:
For the Petitioner : Mr Venkatraman, Sr. Adv. with Mr Ravi Sikri, Mr Hari Shankar,
Mr Ayush Kumar, Advocates.
For the Respondent : Mr Rajeeve Mehra, ASG with Mr Mukesh Anand, Mr Aditya
Malhotra, Advcoates for R-1.
Mr Kamal Nijhawan, Sr. Standing Counsel for R-2.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR
JUDGMENT
R.V.EASWAR, J
1. The short question which arises in this writ petition is whether the
provision of services in relation to conducting a chit business is a taxable
service for the purposes of section 65B(44) of the Finance Act, 1994
inserted w. e. f. 1st July, 2012.
2. The petitioner is an association of chit fund companies based in
Delhi. By a notification No.26/2012 issued on 20 th June, 2012, the
Department of Revenue, Ministry of Finance of the Government of India
exempted: -
―the taxable service of the description specified in column
(2) of the Table below, from so much of the service tax
leviable thereon under section 66B of the said Act, as is in
excess of the service tax calculated on a value which is
equivalent to a percentage specified in the corresponding
entry in column (3) of the said Table, of the amount charged
by such service provider for providing the said taxable
service, unless specified otherwise, subject to the relevant
conditions specified in the corresponding entry in column
(4) of the said Table, namely: -
Sl. Description Percent Conditions
No. of taxable age
service
(1) (2) (3) (4)
8 Services 70 CENVAT credit on inputs,
provided in capital goods and input
relation to services, used for providing
chit the taxable service, has not
been taken under the
provisions of the CENVAT
Credit Rules, 2004.
3. The petitioner prays that the notification should be quashed in so
far as it seeks to subject the activities of a business chit fund companies to
service tax to the extent of 70% of the consideration received for the
services. The contention of the petitioner is that there is no question of
exempting a part of the consideration received for the services in chit
fund business when the law provides that such services are not taxable at
all in the first place.
3. In order to appreciate the contention a few provisions have to be
noticed. The Finance Act, 1994 provided for the levy of service tax in
India for the first time. It received several amendments in the course of
the time. Originally service tax was levied on the basis of a selective
approach; in other words certain taxable services were specified in
section 65(105) of the said Act and it was those services that were
chargeable to service tax. A drastic change was made w. e. f. 1 st July,
2012 when the comprehensive approach was sought to be introduced by
the Finance Act, 2012. The tax regime contemplated under the
comprehensive approach was to treat all activities as services chargeable
to service tax, except those placed in the negative list or specifically
exempted. This fundamental change was brought about by defining
―service‖ in section 65B(44) in the following manner: -
―(44) "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) a transfer of title in goods or
immovable property, by way of sale,
gift or in any other manner; or
(ii) such transfer, delivery or supply of
any goods which is deemed to be a sale
within the meaning of clause (29A) of
article 366 of the Constitution; or.
(iii) a transaction in money or
actionable claim;
(b) a provision of service by an employee to the
employer in the course of or in relation to his
employment;
(c) fees taken in any Court or tribunal established
under any law for the time being in force.
Explanation 1.-- For the removal of doubts, it is
hereby declared that nothing contained in this clause
shall apply to,--
(A) the functions performed by the Members of
Parliament, Members of State Legislature, Members
of Panchayats, Members of Municipalities and
Members of other local authorities who receive any
consideration in performing the functions of that
office as such member; or
(B) the duties performed by any person who holds any
post in pursuance of the provisions of the Constitution
in that capacity; or
(C) the duties performed by any person as a
Chairperson or a Member or a Director in a body
established by the Central Government or State
Governments or local authority and who is not
deemed as an employee before the commencement of
this section.
Explanation 2.--For the purposes of this clause,
transaction in money shall not include any activity
relating to the use of money or its conversion by cash
or by any other mode, from one form, currency or
denomination to another form, currency or
denomination for which a separate consideration is
charged.
Explanation 3.-- For the purposes of this Chapter,--
(a) an unincorporated association or a body of
persons, as the case may be, and a member thereof
shall be treated as distinct persons;
(b) an establishment of a person in the taxable
territory and any of his other establishment in a non-
taxable territory shall be treated as establishments of
distinct persons.
Explanation 4.-- A person carrying on a business
through a branch or agency or representational office
in any territory shall be treated as having an
establishment in that territory;‖
4. Section 66B provided for the charge of service tax on and after the
Finance Act, 2012. That section is as follows: -
―66B. Charge of service tax on and after Finance Act,
2012 - There shall be levied a tax (hereinafter referred to as
the service tax) at the rate of twelve per cent on the value of
all services, other than those services specified in the
negative list, provided or agreed to be provided in the
taxable territory by one person to another and collected in
such manner as may be prescribed.‖
5. A negative list of services which were not taxable was set out in
section 66D. It is not necessary to reproduce the said list as it is not the
petitioner's case that the services rendered by the chit companies are
included in the negative list and hence not taxable. Section 66E contains
a list of ―declared services‖ which are subjected to service tax by virtue
of section 65B(44) which is quoted above. There are other provisions
relating to valuation of the taxable services, registration, furnishing of
returns, assessment and recovery, penalties, etc, which are not relevant
for the purpose of the present writ petition.
6. It is necessary to give a brief account of the operations of a chit
fund business. Supposing 50 persons come together to organise a chit.
Let us further suppose that each of them undertake to contribute `1,000/-.
The total chit amount would be `50,000/-. Let us further suppose that the
fund would operate for a period of 50 months. Thus the member
subscribers and the number of months for which the chit would operate
would be the same. In this example at the end of each month, an amount
of `50,000/- (`1,000/- x 50) would be available in the kitty of the chit
fund. The said amount would be put to auction and those subscribers
who are interested in drawing the money early because of their needs may
participate in the auction. The successful bidder who is normally the
person who offers the highest discount is given the chit amount. For
example if there are three bidders offering to take the chit of `50,000/- for
`40,000/-, `37,500/- and `35,000/- respectively, the chit would be given
to that subscriber who is willing to take it for `35,000/- since he has
offered a discount of `15,000/-. This leave a balance of `15,000/-
(`15,000 - `50,000) in the kitty. The amount of `15,000/- which
represents the discount which the successful bidder has foregone becomes
the dividend which is to be distributed to all the subscribers after
deducting a fixed amount representing the commission payable to the
―foreman‖. A foreman is normally a person who organises the auction
and conducts the proceedings. If in the example given above, the
commission payable to the foreman is fixed at 5%, then after deducting
`2,500/- (5% of `50,000/-, the chit amount) the balance of `12,500/-
would be distributed among all the 50 subscribers so that each would get
`250/-. This amount of `250/- can be set off by the subscribers against
the second month's installment of `1,000/- payable by him and he can
give only `750/-. The auction would be repeated in the subsequent
months and the same procedure is followed. Any subscriber who delays
the bidding or does not bid at all stands to gain the maximum discount.
The chit is thus somewhat like a recurring deposit with the bank. There is
no bar on the foreman of the chit fund also participating as a subscriber.
7. The business of chit funds is strictly regulated by the Chit Funds
Act, 1982. It contains detailed provisions relating to registration of chits,
commencement and conduct of chit business. Rights and duties of
foreman, rights and duties of the subscribers, termination of chits,
meetings of general body of subscribers, provisions relating to winding
up, disputes and arbitration and other miscellaneous provisions. Suffice
to note that section 11 recognises that a chit business can be known by
several names such as chit, chit fund, chitty, kuri, etc. Dealing with the
Chit Funds Act, the Supreme Court in Sriram Chits & Investment (P)
Ltd. vs. Union of India : AIR 1993 SC 2063 has laid down the following
propositions: -
(a) The Act, in pith and substance, deals with special contract
and consequently falls within entry 7 of list III of the 7 th Schedule
to the constitution of India;
(b) A chit fund transaction is not a case of borrowing, nor is it a
loan transaction. If a subscriber advances any amount, he does so
only to one of the members;
(c) The funds of the chit fund belong to the entire lot of
subscribers;
(d) The amounts are in deposit which the stake holder only
holds a trust for the benefit of the members of the fund;
(e) The foreman acts only as a person to bring together the
subscribers and he is subject to certain obligations with a view to
protecting the subscribers from any mischief or fraud committed by
him by using the position;
(f) Commission is payable to the foreman for the service
rendered by him as he does not lend money belonging to him.
8. The precise question that arises for consideration in this writ
petition is whether the services rendered in connection with a chit
business are taxable services or not. The contention advanced on behalf
of the petitioner is based on the definition of the word ―service‖ in section
65B(44). The contention is that the definition excludes an activity which
constitutes ―merely a transaction in money or actionable claim‖; a chit
business is a transaction in money and it is obvious that a transaction in
money by itself cannot be a service in the sense of being an activity
carried out by any person for consideration. Therefore, there can be no
question of excluding what is not a service from the definition and that
being so, what stands excluded is a service rendered in relation to a
transaction in money and chit business being a transaction in money, the
services rendered in connection with the said business is excluded from
the definition. This argument is sought to be supported by reference to
Explanation 2 to Section 65B(44). According to the petitioner, this
Explanation makes it clear that an activity relating to the use of money or
its conversion from one form, currency or denomination to another form,
currency or denomination shall not be treated as a transaction in money
and, therefore, will be chargeable to service tax and by holding so it seeks
to put at rest any ambiguity that may arise in the interpretation of the
definition of ―service‖. The only service in relation to a transaction in
money or actionable claim, which is taxable, according to the
Explanation, being the activity relating to the use of money or its
conversion from one form, currency or denomination to another form
currency or denomination for which a separate consideration is charged,
it clearly implies that all other services rendered in connection with a
transaction in money or actionable claim, including the services rendered
by the foreman of a chit business, stand excluded from the definition. It
is accordingly submitted that the commission received by the foreman or
any other person conducting the chit business is not subject to service tax.
These contentions are stoutly controverted on behalf of the respondents.
9. We shall first address the argument that what is excluded is only a
service in relation to an activity which constitutes merely a transaction in
money or actionable claim. The basis of this argument is the principle
that a provision cannot exclude something from the definition, unless it is
included in the definition. Section 65B(44) defines ―service‖ as any
activity carried out by a person for another for consideration. This
implies, as pointed out on behalf of the petitioner, that there are four
elements therein: the person who provides the service, the person who
receives the service, the actual rendering of the service and, lastly, the
consideration for the service. The opening words of the definition consist
of the above four aspects or characteristics and unless all the four are
present, the activity cannot be charged with service tax. A mere
transaction in money or actionable claim cannot under the ordinary
notions of a service be considered as a service, neither can it be
considered as falling within the first part of the definition because it lacks
the four constituent elements which are required by the definition. In a
mere transaction in money or actionable claim, no service is involved;
there is just the payment and receipt of the money. The word ―money‖ is
defined in section 65B(33) in the following manner: -
―(33) ―money‖ means legal tender, cheque, promissory
note, bill of exchange, letter of credit, draft, pay order,
traveler cheque, money order, postal or electronic remittance
or any similar instrument but shall not include any currency
that is held for its numismatic value;
10. A mere transaction in money represents the gross value of the
transaction. But what is chargeable to service tax is not the transaction in
money itself since it can by no means be considered as a service. The
exclusionary part of the definition of the word ―service‖ however refers
to ―an activity which constitutes merely a transaction in money or
actionable claim‖. Since a mere transaction in money or actionable claim
cannot under the common notions of a service be considered as a service
by any stretch of imagination, it is necessary to examine what could have
been the intention of the legislature in excluding it from the definition.
The obvious answer is that it is not the mere transaction in money or
actionable claim that is sought to be excluded from the definition but
what is sought to be excluded is any service rendered in connection with
a transaction in money or actionable claim. But the difficulty which
could arise in this line of reasoning can be that the language of the
exclusionary part of the definition in terms refers to the very activity
which constitutes a transaction in money and contains no reference to any
service rendered in connection therewith. The possible answer to this
conundrum is that the legislature deemed it fit, ex abundanti cautela, to
exclude an activity which constitutes merely a transaction in money,
which even otherwise could not have been considered as a service in any
sense of the word. This however appears to us to be a far-fetched answer.
A clue to a proper interpretation of the exclusionary part of the definition
is embedded in Explanation 2. This Explanation carves out an exception
to the exclusionary part of the definition by providing that any activity
relating to the use of money or its conversion by cash or by any other
mode, from one form, currency or denomination to another form,
currency or denomination for which a separate consideration is charged
shall not be considered as a transaction in money. Therefore, if the only
activity, for which a separate consideration is charged, and which cannot
be considered as a transaction in money is the activity mentioned in the
Explanation, and service tax would accordingly be charged on the
consideration received in respect of such an activity, then it follows that
all other cases of transaction in money shall stand excluded from the
charge of service tax, including the consideration charged for the services
of a foreman in a chit business. The Explanation, therefore, seems to
offer a clue to the problem which appears to us to be a creation of the
very confounding manner in which the definition is found to have been
drafted. However, we have to make sense of what we have.
11. It is the function of an Explanation to explain the meaning and
effect of the main provision to which it is an Explanation and to clear up
any doubt or ambiguity in it. Ultimately, however, it is the intention of
the legislature which is paramount and a mere use of a label cannot
control or deflect such a function. This is the principle laid down by a
Constitution Bench of the Supreme Court in Dattatraya Govind Mahajan
& Ors. vs. State of Maharashtra & Anr. : (1977) 2 SCC 548. In S.
Sundaram Pillai, etc. v. P. Lakshminarayana Charya and Ors. : AIR
1985 SC 582, a three-Judge Bench of the Supreme Court considered the
object of an Explanation and observed as follows: -
―52. Thus, from a conspectus of the authorities referred to
above, it is manifest that the object of an Explanation to a
statutory provision is -
(a) to explain the meaning and intendment of
the Act itself,
(b) where there is any obscurity or vagueness
in the main enactment, to clarify the same so as
to make it consistent with the dominant object
which it seems to subserve,
(c) to provide an additional support to the
dominant object of the Act in order to make it
meaningful and purposeful,
(d) an Explanation cannot in any way
interfere with or change the enactment or any
part thereof but where some gap is left which is
relevant for the purpose of the Explanation, in
order to suppress the mischief and advance the
object of the Act it can help or assist the Court
in interpreting the true purport and intendment
of the enactment, and
(e) it cannot, however, take away a statutory
right with which any person under a statute has
been clothed or set at naught the working of an
Act by becoming an hindrance in the
interpretation of the same.‖
Moreover, ―every clause of a statute should be construed with reference
to the context and other clauses of the Act, so as, as far as possible, to
make a consistent enactment of the whole statute or series of statutes
relating to the subject matter‖, as held in Canada Sugar Refining
Company Vs. R. (1898) A.C. 375, a principle that is frequently applied in
case of difficulty in construing a statute. In N. T. Veluswami's case (AIR
1959 SC 422), a three-judge Bench of the Supreme Court speaking
through T.L. Venkatarama Aiyar, J, held as follows :
―......... It is no doubt true that if on its true construction, a
statute leads to anamolous result, the courts have no option
but to give effect to it and leave it to the legislators to amend
and alter the law. But when on a construction of a statute,
two views are possible, one which results in an anamoly and
the other, not, it is our duty to adopt the latter and not the
former, seeking consolation in the thought that the law
bristles with anamolies‖.
12. If these rules of interpretation are applied, it appears to us that even
if it is assumed that there is an ambiguity or doubt in the interpretation of
the exclusionary part of the definition of the word ―service‖ and as to
what types of activities in relation to a transaction or money or actionable
claim are exempted from the levy of service tax, that doubt or ambiguity
gets cleared up on a careful examination of the implications of the
Explanation 2. The Explanation has been enacted only ―for the purposes
of this clause‖ and since it is placed below clause (c), strictly speaking it
is relevant only for the purpose of the aforesaid clause. However, clause
(c) refers to fees taken in any Court or Tribunal established under any law
for the time being in force. It is obvious that Explanation 2 can have no
relevance to this clause. If we refer to clause (c) immediately below
which the Explanation is placed, we find that the said clause refers to
duties performed by any person as a Chairperson or a Member or a
Director in a body established by the Central Government or State
Governments or local authority and who is not deemed as an employee
before the commencement of this section. It is obvious that the
Explanation can have no relevance to this clause also. In these
circumstances we are constrained to hold that Explanation 2, when it says
―for the purpose of this clause‖, the reference can only be to clause (a)
and more precisely to sub-clause (iii) which refers to ―a transaction in
money or actionable claim‖. Be that as it may, if the exclusionary part of
the definition [i.e., clause (a)(iii)] is construed on its own terms there
would be an anamoly in as much as what was not a ―service‖ in the first
place within the opening words of Section 65B (44) would fall to be
excluded - a construction that would be aimless or futile; but if that part
is construed in the light of or with the aid of Explanation 2 and what it
signifies or implies, then the anamoly gets ironed out or removed, as we
have explained earlier. Obviously, we have to prefer the latter
interpretation and not the former.
13. In a chit business, the subscription is tendered in any one of the
forms of ―money‖ as defined in section 65B(33). It would, therefore, be a
transaction in money. So considered, the transaction would fall within
the exclusionary part of the definition of the word ―service‖ as being
merely a transaction in money. This would be the result if the argument
that the exclusionary part of the definition in clause (a) is considered to
have been enacted ex abundant cautela; if the argument based on
Explanation 2 read with the exclusionary part of the definition is accepted
as correct, even then the services rendered by the foreman of the chit
business for which a separate consideration is charged, not being an
activity of the nature explained in the said Explanation, would be out of
the clutches of the definition. Either way, there can be no levy of service
tax on the footing that the services of a foreman of a chit business
constitute a taxable service.
14. Our attention was drawn on behalf of the petitioner to the
Education Guide issued by the Central Board of Excise and Customs and
particularly to paragraph 2.8 under the heading ―transactions only in
money or actionable claims do not constitute service‖. Paragraph 2.8.2 is
in the following terms: -
―2.8.2 Would a business chit fund comes under
‗transaction only in money'?
In business chit fund since certain commission received
from members is retained by the promoters as consideration
for providing services in relation to the chit fund it is not a
transaction only in money. The consideration received for
such services is therefore chargeable to service tax.‖
15. The argument is that the answer given in the Education Guide is
not correct having regard to the proper interpretation of the statutory
provision. We have come to the conclusion that no service tax is
chargeable on the services rendered by the foreman in a business chit
fund on an interpretation of the statutory provisions. It is not necessary
for us to therefore express any opinion as to the correctness of the views
expressed in the aforesaid Education Guide issued by the Central Board
of Excise and Customs.
16. In the result the writ petition succeeds and prayer (i) is granted.
The notification No.26/2012-ST dated 20.06.2012 issued by the
Government of India, Ministry of Finance (Department of Revenue) is
quashed to the extent of the entry in serial No.8 thereof. The writ petition
is allowed with no order as to costs.
R.V.EASWAR, J
BADAR DURREZ AHMED, J
APRIL 23, 2013
hs
