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.


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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