Chit fund business not cash or fund management for service tax levy purpose – Supreme Court

Chit fund business not cash or fund management for service tax levy purpose. Chit fund not covered u/s 12 of Section 65 of Finance Act 1994-Supreme Court

Chit fund business not cash or fund management

ABCAUS Case Law Citation:
ABCAUS 1289 (2017) (07) SC

The Question framed for determination:
Question No.1 – Whether chit fund activity can be treated as business of cash management?
Question No.2 – Whether chit fund can be treated as a form of fund management?

The Issue:
The issue was as to whether service tax is leviable on chit fund or not w.e.f. June 1, 2007, the date on which the Finance Act, 2007 came into effect.

Important Case Laws Cited/relied upon:
All Kerala Association of Chit Funds v. Union of India 2013 (29) STR 557
Delhi Chit Fund Association v. Union of India 2013 (30) STR 347 (Del)
Sriram Chits and Investment (P) Ltd. v. Union of India AIR 1993 SC 2063
Reserve Bank of India v. Pearless General Finance and Investment Company Limited AIR 1987 SC 1203
Union of India & Ors. v. Martin Lottery Agencies Limited (2009) 12 SCC 209
Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited (2015) 1 SCC 1
Commissioner of Income Tax, Patiala & Ors. Vs. Shahzada Nand & Sons & Ors (1966) 3 SCR 379

Brief Facts of the Case:
Few writ petitions were filed by some chit fund companies (the ‘assessees’) before the High court of Andhra Pradesh, assailing the validity of Circular No. 96/7/2007-ST dated August 23, 2007 issued by the Central Board of Excise & Customs. The assesses were called upon to pay the service tax on the running of chit funds on the ground that it was a service provided by the assessees which was covered under ‘banking and other financial services’ under sub-section 12 of Section 65 of the Finance Act, 1994.

The assessees submitted that the chit fund business does not amount to any service covered by the definition of ‘banking and other financial services’ as per the said term as defined in that provision, prevalent during the relevant period. The High Court  accepted the plea of the assessees and thereby quashed the said Circular dated August 23, 2007 and consequently Proceedings.

The High Court noted that there was neither any definition of ‘cash management’ nor ‘asset management’ in the Act. Therefore, in the absence of specific statutory definition of the aforesaid expression, the question of its wider interpretation either by seeking to include or exclude any other transactions or business does not arise and is not permissible.

The High Court held that notwithstanding deletion of the words ‘but does not include cash management’ from sub-clause (v) from sub-section (12) of Section 65, the assessees would not be covered by even under the amended definition of ‘banking and other financial services’. As per the High Court, mere deletion of the aforesaid words would not suffice inasmuch as for the purpose of coverage, it is necessary that business of chit fund is that of ‘asset management’.

Aggrieved by the order of the high Court, the Revenue challenged it before the Apex court in the present Petition.

Contentions of the Petitioner Revenue:
As per the appellant, managing chit fund, is a fund management service, is a specie of cash management which now stands included in the amended definition made effective from June 1, 2007.-

Contention of the Respondent Assessee:
The assesses maintained that even with the deletion of the words ‘but does not include cash management’ from sub-clause (v) of sub-section (12), chit fund does not get covered and for the purpose of coverage, it is to be shown that the chit fund services is ‘asset management’, while it is not so.

Observations made by the Supreme Court:
The Hon’ble Supreme Court noted that The definition of ‘banking and other financial services’ was incorporated in the sub-section 12 of Section 65 of the Finance Act, 1994 and as per the advice of RBI, cash management was specifically excluded from the definition of ‘banking and other financial services’. Therefore, service tax was not leviable on cash management services. The aforesaid definition was amended vide Finance Act, 2007, which came into force w.e.f. June 1, 2007. Thereby, the words ‘but does not include cash management’ were deleted.

The Hon’ble Supreme Court  opined that mere deletion of the words ‘but does not include cash management’ by 2007 amendment would not serve the purpose of the Revenue. When these words were there in sub-clause (v), those companies doing the business of cash management were specifically excluded. After deletion of those words, the definition of ‘asset management’ in amended form is to be looked into and, therefore, the Revenue had to establish that the chit fund business is a service which comes within the scope of ‘asset management’

The Hon’ble Supreme Court  observed that in order to levy service tax on the chit fund business, as per amended definition of sub-section (12) by the Amendment Act, 2007, it is necessary to understand the meaning of ‘cash management’ and to see as to whether the activity of managing chit fund amounts to cash management. Thereafter, the second question would be as to whether cash management is a form of ‘fund management’. Only then it would be covered by the expression ‘asset management’ and exigible to the service tax.

Looking at the historical background, the Hon’ble Supreme Court  observed that there is no dispute that w.e.f. June 15, 2015, service tax is payable on chit fund and present dispute concerned the period from June 15, 2007 to June 30, 2012 only.

It was observed that in Sriram Chits & Investment (P) Ltd. case, the following propositions pertaining to the business of chit funds were declared:

(a) The Act, in pith and substance, deals with special contract and consequently falls within entry 7 of list III of the 7th 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 beonging to him.

The Hon’ble Supreme Court  opined that the argument of the Revenue that chit fund activity amounted to cash management was difficult to sustain as in common parlance as well as in banking field, cash management is understood as managing the surplus cash of a person or a company and it becomes difficult to hold that chit fund business amounts to ‘cash management’ particularly as there is no definition of cash management in the Act.

Concept of Cash Management

The Hon’ble Supreme Court  explained the cash management as under;

“In business management, this aspect is studied with a specific focus in mind. It is accepted as a reality that one of the most important factors for failure of business firms is the shortage of working capital which emerges due to lack of attention to proper management of current assets i.e. cash, inventories, receivables etc. An efficient management of these current assets cannot only reduce the risk of financial distress but can also make a positive contribution to the profit of the firm. Therefore, need is felt to properly manage the aforesaid current assets which include cash as well. In this sense, cash management refers to management of cash balance and the bank balance including the short terms deposits. The cash is obviously the most important current assets, as it is the most liquid and can be used to make immediate payments. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. On the other hand, extreme liquidity may take the firm to make uneconomic investments. This underlines the significance of cash management. The term cash is generally used in two different ways: One, it may include currency, cheques, drafts, demand deposits held by a firm i.e., pure cash or generally accepted cash equivalents. Second, and in a broader sense, it also includes near cash assets such as marketable securities and short term deposits with banks. For cash management purposes, the term cash is used in this broader sense i.e., it covers cash, cash equivalents and those assets which are immediately convertible into cash. In the aforesaid sense, managing the cash, which is crucial for any business, becomes a challenge, namely, to see as to how much cash is to be held which may be required for day to day liquidity/expenses and how the surplus cash is to be invested in order to have some return thereupon in the form of interest or otherwise. Thus, finance manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the business. In this sense while undertaking the task of cash management, the financial manager may also be required to identify the sources from where cash may be procured on a short term basis or the outlets where excess cash may be invested for a short term so that whenever the cash is needed in the business, short term investment is liquidated and the cash utilised. A judicious management of cash, near cash assets and marketable securities allows the firm to hold the minimum amount of cash necessary to meet the firm’s obligations as and when they arise. As a result, the firm is not only able to meet its obligations, but is also in a position to take advantage of the opportunity of earning a return and thereby increasing the profitability of the firm. Thus, the challenge before any business is to assess how much holding of cash is needed for day to day business, that is, for the purpose of business transactions as a precautionary measure, and even keeping in mind speculative motive in order to take advantage of potential profit making situations etc. Further, after setting apart cash for the aforesaid purposes which is to be held, how the surplus cash is to be invested so that it yield proper returns instead of keeping the surplus cash idle. At the same time, the company should also be in a position to liquidate the investment and realise cash immediately if situation so demands. For this, the Manager is supposed to ensure that the firm is having right quantity and the right liquidity from right source at right place and at the right time. All this is known as cash management. Cash management, thus, deals with optimisation of cash as an asset and for this purpose various decisions are to be taken for proper management thereof. The cash management schemes are, thus, built around two goals: (a) to provide cash needed to meet the obligations and (b) to minimise the idle cash held by the business.”

Regrading the question whether chit fund can be treated as a form of fund management?, the Hon’ble Supreme Court  observed that the entire case of the Revenue was that chit fund amounted to cash management and cash management is one of the forms of fund management. Thus once it was held that chit fund business is not cash management or a business of managing cash, no further discussion on this issue was even required.

However, the Hon’ble Supreme Court  opined that the activity of managing chit fund does not amount to management of any type of fund and even as per the definition from dictionary relied upon by the Revenue, fund is an aggregation or deposit of resources from which supplies are or may be drawn for carrying on any work, or for maintaining existence.

Held:

Question No.1 – Whether chit fund activity can be treated as business of cash management?

Held that the term ‘cash management’ as understood in common parlance would not embrace chit fund business.

Question No.2 – Whether chit fund can be treated as a form of fund management?

Chit fund cannot be treated as fund management as understood in the sense the term is known in business parlance

Thus it was held that the chit fund business was not covered by sub-clause (v) of sub-section 12 of Section 65 even after its amendment by Finance Act, 2007. The impugned judgment of the Andhra Pradesh High Court was affirmed while the Kerala High Court judgment was declared as having taken erroneous view and overruled.

Chit fund business not cash or fund management
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Penalty u/s 221(1)-Interest component has to be excluded while levying Penalty. “tax in arrears” not include interest -Bombay HC

Penalty u/s 221(1)-Interest component has to be excluded while levying Penalty. The term “tax in arrears” does not include interest component-Bombay HC

Penalty u/s 221(1)-Interest component

ABCAUS Case Law Citation:
ABCAUS 1288 (2017) (07) HC

The Question framed by the Appellant Revenue:

(1) Whether on facts and in the circumstances of the case and in   law,   the   ITAT   is   justified   in   holding   the   penalty u/s.221(1)  is to  be imposed  in respect  of  only the  tax excluding   interest   u/s.234A,   234B   &   234C   without appreciating that section 221(1) does not contain any such condition that the penalty imposed under the said section should be a percentage of only the tax excluding the interest

(2) Whether on facts and in the circumstances of the case and in  law,  the  ITAT  is  justified  in  deleting  penalty  imposed in respect   of   arrears   of   interest   u/s.234A,   234B   &   234C without  appreciating  that Section  221(1), the   Assessing Officer  is  empowered  to  impose  any  amount  of penalty so, however  that  the  total  amount  of penalty  does not exceed the amount of tax in arrears and thus the term used in the said  section  is  tax  in  arrears and not ‘tax’, as erroneously held by the Hon’ble Tribunal.

(3)Whether on facts and in the circumstances of the case and in  law,  the  ITAT  is  justified  in  deleting  the  penalty  levied u/s 221(1) in respect of arrears of interest u/s.234A, 234B &   234C,   without   appreciating   that,   as  held  by Hon’ble Supreme Court in the case of CIT vs. Anjum Ghaswala & Others  and  in  the  case  of  Karanvir  Singh Gosssal  vs. CIT and   Another,   interest   u/s.234A,   234B   &   234C   is mandatory in  nature   and  therefore   by   the ratio  of  the above cited decisions interest is an integral part of tax.

Date/Month of Pronouncement: July, 2017

Important Case Laws Cited/relied upon:
Commissioner of Income Tax vs. Anjum M.H. Ghaswala & Ors. (2001) 252 ITR 0001

Harshad   Shantilal   Mehta   vs. Custodian   and   others,   reported   in   (1998)   231   ITR   871
Commissioner of Income Tax vs. P.B. Hathiramani, reported in (1994) 207 ITR 483.
Shreeniwas and Sons vs. ITO, referred in (1974) 96 ITR 562.  Calcutta High Court
Commissioner of Income Tax vs. Anjum M.H. Ghaswala, referred in (2001) 252 ITR 0001

Grounds raised by the appellant assessee:

Brief Facts of the Case:
The Income Tax Return of the Respondent­ Assessee was processed  under  Section  143(1)  of  the  Income Tax Act (“the Act”) raising demand for Rs.1,64,90,573/­and penalty of Rs.1,19,30,677/­ was also imposed by the Assessing Officer under Section 221(1) of the Income Tax Act for default by Assessee in the payment of demand.

Aggrieved, the assessee company filed Appeal before the Commissioner of Income­Tax (Appeals) [“CIT(A)”]. The CIT(A)  deleted   the   penalty   imposed   by   the Assessing Officer holding  that  interest  component  has  to be excluded while levying penalty under Section 221(1) and since the penalty levied  exceeded the tax component, it set­aside the order levying penalty.

Aggrieved thereby, the Department filed a appeal before the Income Tax   Appellate   Tribunal (ÍTAT’), which held that while levying penalty under Section 221(1) of the Act, interest  component  is  not  to  be  considered  and remitted the matter to the Assessing Officer with the direction to quantify the amount of penalty  in  accordance with provisions  of  Section 221(1) of the Act. The Department has assailed the said order in the present appeal.

Contentions of the Petitioner Revenue:
It was contended that the terminology “tax in arrears” would include the interest component also.  The  payment  of  interest under Section 234(A), 234(B) and 234(C)  is  mandatory  and  the  same  would  form part of the arrears of tax. The Department relied on a judgment  of  the Apex Court .  No  powers  are  given  for  waiver of the interest.

It was contended that since interest forms part of amount chargeable under Section 156 of the Act,  the  penalty under Section 221(1) is also imposable.

Contention of the Respondent Assessee:
It was submitted that tax, interest and penalty are separate components. The term “tax” does not include penalty or interest.The assessee also relied on the judgment of the Supreme Court along with  judgment of the Division Bench of the Bombay High Court.

Observations made by the High Court:
The Hon’ble High Court observed that the   moot   question   for   consideration   in   the   present appeal was whether the phraseology “amount of tax in arrears” as envisaged in  Section  221  of  the  Act  would  in  addition to the tax include within its fold the interest component also.

The Hon’ble High Court observed that the definition   of   the   “Tax”   u/S. 2(43)   read   in   its entirety suggests that the “tax” means income­tax, super­tax and/or the fringe benefit tax, as the case may be chargeable under the provisions  of the Act. The definition of tax does not take within its fold the interest component. The definition of “interest” as envisaged under Section 2(28­A) of the Act would not be relevant in the present matter. As the said definition is restricted to the interest payable in respect of any moneys borrowed or debt incurred.

The Hon’ble High Court observed that it is the elementary rule of interpretation that when the language of a statute is clear and unambiguous, the Courts are to interpret the same in its literal sense and not to give a meaning that would cause violence to the provisions of the statute. Each word in the statute should be assign the meaning as per the context.

The provision imposing penalty will have to be strictly construed. The statute being fiscal and the provisions of Section 221 dealing with imposition of penalty naturally shall have to be strictly construed. Strict construction is a construction in which application of a provision used is limited by words used, so that anything which is not clearly included within the scope of the language is treated as excluded.

The Hon’ble High Court opined that a reading of section 221 in its entirety  makes it abundantly clear that the aspect of default in payment of tax and the amount of interest payable are treated as distinct and separate components. The section categorically and specifically states that when an Assessee is in default or is deemed to be in default in making payment of tax, he shall in addition to the amount of arrears and the amount of interest payable   under   Sub­ Section   2   of   Section   220,   be   liable,   to   pay penalty, however the amount of penalty does not exceed the amount of tax in arrears. The terminology “default in making a payment of tax and amount of interest payable” are considered to be separate for imposition   of  penalty   and   penalty   is   to   be   levied   on account   of default in making a payment of tax. However, the total amount of penalty  shall not exceed  the  amount  of tax  in arrears.  The said penalty for non payment of the tax is in addition to the levy of interest under Sub­Section 2 of Section 220. Under no principle of interpretation, the arrears of tax as laid down in the said Section would include the amount of interest payable under Sub­ Section 2 of Section 220. The amount of penalty will have to be restricted on the arrears   of   tax,   which   would   not   include   the   interest   component charged under Section 220(2) of the Act.

The Hon’ble High Court observed that in this regard a reference can be had to Section  156   viz.  notice of demand. In Section  156 also tax, interest, penalty, fine are separately referred to. Even a notice of demand issued under Section 156 in ‘Form No.7’ specifies tax and interest as separate components.

The Hon’ble High Court observed that in this regard, second proviso to Section 221 and explanation would also be relevant. The second proviso to Section 221(1) states that, if the Assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reason, no penalty shall be levied   under   the   said   section.   Sub­ Section   2   further   says   that, whereas result of final order, the amount of tax with respect to the default in the payment of which penalty was levied has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded. This would suggest that the payment of penalty is directly commensurate with the default in payment of ax and not of interest.

The Hon’ble High Court observed that the Apex Court observed that the definition of tax under Section 2(43) does not include penalty or interest. Tax, penalty and interest are different concepts under Income Tax Act. The provisions for imposition of penalty and interest are distinct from provisions for imposition of tax. The Apex Court agreed with the reasoning and the conclusion   drawn   by   the   Special   Court   that   neither   penalty   nor interest   can  be  considered  as  tax under Section 11(2)(a) of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. The said section dealt with the priorities for distribution and liability specified under Clause ‘A’   i.e. All Revenues, Taxes, Cesses   and   rates   due   from   persons   notified.   Even   in   case   of P.B. Hathiramani, the Division Bench of the Court relied on the judgment of the Calcutta High Court wherein it is held that under Section  221, penalty can be imposed only  when the Assessee is in default in making   payment   of   the  tax. Since   the   expression   tax   has   been defined in Section 2(43) of the Act, there would be no scope for any argument that interest is additional tax.

Finally, the Hon’ble High Court concluded that the   phraseology   “tax   in   arrears”  as envisaged in Sec. 221 of the Act would not take within its realm the interest component. It would be abundantly clear that the Assessing Officer can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under Section 220(2) of the Act.

Held:
The substantial question of law were answered against the Appellant. The Appeal was dismissed.

Penalty u/s 221(1)-Interest component
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Penalty us 271(1)(c) invoking discretionary jurisdiction us 40A(2)(b) invalid – Allahabad High Court

Penalty us 271(1)(c) invoking discretionary jurisdiction us 40A(2)(b) invalid. Income assessed on the basis of deeming provisions would not amount to non-disclosure-Allahabad High Court

Penalty us 271(1)(c) invoking discretionary jurisdiction

ABCAUS Case Law Citation:
ABCAUS 1287 (2017) (07) HC

The Issue:
The only point of the litigation was regarding the levy of penalty under Section 271(1)(c) of the Act in respect of sales to parties covered under Section 40A (2)(b) of the Income Tax Act (‘the Act’)..

Assessment Year : 2006-07

Important Case Laws Cited/relied upon:
Commissioner of Income Tax Vs P. Rojes (2013) 260 CTR (Mad) 397
S.V. Kalyanam Vs. Income Tax Officer (2011) 237 CTR (Mad) 491,
C.I.T. vs. Reliance Petroproducts Pvt.Ltd (2010) 230 CTR (SC) 320

Brief Facts of the Case:
The respondent assessee was a Private Limited Company. During the relevant assessment year, the company sold certain scrap to parties not covered under Section 40A(2)(b) of the Act @ Rs. 17,340/- per metric tone whereas it was sold at a lower rate of @ Rs. 5000/- per metric ton to parties covered under Section 40A (2)(b) of the Act.

The Assessing Officer (‘AO’) added  the value of the difference of the scrap sold to the income of the assessee company and accordingly a penalty was imposed under Section 271 (1)(c) of the Act for concealment of income.

The Tribunal by the impugned order held that the assessee company could not be held guilty for non-disclosure of income, which was determined by invoking discretionary jurisdiction under Section 40A (2)(b) of the Act. The Tribunal held that where deeming provisions are applied in assessing the income, the provisions of imposing penalty would not be attracted. 

Observations made by the High Court:
The Hon’ble High Court observed that the Division Bench of the Madras High Court had held that where additions are made in the income by applying the deeming provisions the department could not presume that there is concealment of income so as to attract penalty proceedings. In other words, where income is assessed on the basis of deeming provisions it would not amount to non-disclosure and as such it is not proper to impose penalty under Section 271 of the Act. 

It was also noted that  again a Division Bench of the Madras High Court had held that penalty under Section 271 (1)(c) of the Act cannot be imposed on the basis of estimation of income. In the aforesaid decision, reliance was placed upon the landmark decision of the Supreme Court in Reliance Petroproducts Pvt.Ltd in which it was observed that in order to bring the case under Section 271 (1)(c) of the Act there has to be concealment of particulars of the income of the assessee and the assessee must have furnished inaccurate particulars of his income. It was further held that making an incorrect claim in law cannot tantamount to furnishing of incorrect particulars so as to attract the penalty provisions. 

In view of the aforesaid facts and circumstances, the Hon’ble High Court opined that there was no concealment of income or furnishing of an incorrect particulars of the income, the penalty could not be imposed on account of addition of income by applying the deeming provisions. 

Held:
It was held that the Tribunal did not commit any error of law in removing the penalty imposed by the Assessing Authority.  The appeal was dismissed being having no merit.

Penalty us 271(1)(c) invoking discretionary jurisdiction
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