# UNION OF INDIA & ORS v. MIS. MARGADARSHI CHIT FUNDS (P) LTD. ETC

- **Citation:** [2017] 7 S.C.R. 375
- **Court:** Supreme Court of India
- **Decided:** 2017
- **Case number:** Civil Appeal Nos. 5724-5725 of 2011
- **Bench:** A. K. Sikri, R. K. Agrawal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-ors-v-mis-margadarshi-chit-funds-p-ltd-etc-32059
- **Pages:** 34

## Headnote

Service Tax - Historical background of service tax on banking
and other financial services - Discussed.
A
B
Finance Act, 1974 - s.65(12)(a)(v) - Cash/Fund Management
C
- Service tax on chit fund w.e.f 1 June 2007, the date on which
Finance Act, 2007 came into effect - Exigibility of - Whether Chit
Fund business means cash management or fund management and
therefore fall within the definition of banking and other financial
services in terms of s. 65(12)(a)(v) - Held: Jn common parlance as
D
well as in banking field, cash management is understood as
managing the surplus cash of a person or a company - 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 - Therefore, insofar as activity of chit fund is
concerned, it does not amount to cash management - Also Chit
E
fund cannot be treated as fund management as understood in
business parlance - Therefore, the chit fund business is not covered
by sub-clause (v) of sub-section 12 of s.65 even after its amendment
by Finance Act, 2007 - Finance Act, 2007 - s.65(12)(a)(v) - Chit
Fund Act, 1982 - s.2(b) - Reserve Bank of India, 1954 - s.45-J(c)
- Service Tax.
Dismissing the appeals, the Court
HELD: 1. Right from 1994 till 2011, the mode adopted was
F
to specify those services on which it was intended to levy service
tax. However, the Parliament by the Finance Act, 2012 w.e.f. July
G
01, 2012 has introduced althogether new system of taxation of
services by making a paradigm shift. Now, the scheme of taxation
of services is based on negative list of services. (Para 151(390E-FJ
2. Whether chit fund activity can be treated as business of H
375
376
SUPREME COURT REPORTS
[2017] 7 S.C.R.
A cash management?[397-D)
In common parlance as well as in banking field, cash
management is understood as managing the surplus cash of a
person or a company. Thus, whenever a person is having idle
cash or unrealised dues and wants the same to be utilised in a
B proper and fruitful manner, managing the said idle cash would
amount to cash management. These are the services generally
offered by the banking institutions to their clients. 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
C 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 can not 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
D 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.
E
F
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
G convertible into cash. In that 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 liquidi

## Text

_Characters 0–39,898 of 77,499. This is a partial read: ask again with offset=39898 for what follows._

[2017] 7 S.C.R. 375
UNION OF INDIA & ORS.
v.
MIS. MARGADARSHI CHIT FUNDS (P) LTD. ETC.
(Civil Appeal Nos. 5724-5725 of 2011)
JULY04,2017
(A. K. SIKRI AND R. K. AGRAWAL, JJ.j
Service Tax - Historical background of service tax on banking
and other financial services - Discussed.
A
B
Finance Act, 1974 - s.65(12)(a)(v) - Cash/Fund Management
C
- Service tax on chit fund w.e.f 1 June 2007, the date on which
Finance Act, 2007 came into effect - Exigibility of - Whether Chit
Fund business means cash management or fund management and
therefore fall within the definition of banking and other financial
services in terms of s. 65(12)(a)(v) - Held: Jn common parlance as
D
well as in banking field, cash management is understood as
managing the surplus cash of a person or a company - 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 - Therefore, insofar as activity of chit fund is
concerned, it does not amount to cash management - Also Chit
E
fund cannot be treated as fund management as understood in
business parlance - Therefore, the chit fund business is not covered
by sub-clause (v) of sub-section 12 of s.65 even after its amendment
by Finance Act, 2007 - Finance Act, 2007 - s.65(12)(a)(v) - Chit
Fund Act, 1982 - s.2(b) - Reserve Bank of India, 1954 - s.45-J(c)
- Service Tax.
Dismissing the appeals, the Court
HELD: 1. Right from 1994 till 2011, the mode adopted was
F
to specify those services on which it was intended to levy service
tax. However, the Parliament by the Finance Act, 2012 w.e.f. July
G
01, 2012 has introduced althogether new system of taxation of
services by making a paradigm shift. Now, the scheme of taxation
of services is based on negative list of services. (Para 151(390E-FJ
2. Whether chit fund activity can be treated as business of H
375
376
SUPREME COURT REPORTS
[2017] 7 S.C.R.
A cash management?[397-D)
In common parlance as well as in banking field, cash
management is understood as managing the surplus cash of a
person or a company. Thus, whenever a person is having idle
cash or unrealised dues and wants the same to be utilised in a
B proper and fruitful manner, managing the said idle cash would
amount to cash management. These are the services generally
offered by the banking institutions to their clients. 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
C 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 can not 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
D 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.
E
F
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
G convertible into cash. In that 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
H
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
377
otherwise. Thus, finance manager is required to manage the cash A
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 B
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
C
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
D
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
E
F
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. Insofar as activity of chit fund is concerned, it does not
amount to cash management. (Paras 29-32((401-C; 402-A-B, DG
H; 403-A-H]
Sriram Chits and Investment (P) Ltd. v. Union of India
AIR 1993 SC 2063 : [1993) 1 Suppl. SCR 54; Shriram
Chits and Investment (P) Ltd. v. Union of India & Ors.
H
378
SUPREME COURT REPORTS
[2017] 7 S.C.R.
A
(1993) Suppl. 4 SCC 226; Reserve Bank of India v.
Pearless General Finance and Investment Company
Limited AIR 1987 SC 1203 : (1997) 1 SCR 923; Union
of India & Ors. v. Martin Lottery Agencies Limited
(2009) 12 SCC 209 : (2009) 7 SCR 946 - relied on.
B
3. Whether chit fund can be treated as a form of fund
management?(407-B)
The activity of managing chit fund does not amount to
management of any type of fund. Even as per the definition from
dictionary relied upon by the Revenue, fund is an aggregation or
c deposit of resources from which supplies are or may be drawn
for carrying on any work, or for maintaining existence. Again, it
refers to a fund which is normally created by a business or an
organisation for a specific purpose and then utilised for the said
purpose. Chit fund cannot be treated as fund management as
understood in the sense the term is known in business parlance.
D
Therefore, 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. [Paras 36, 37)[407-B-D; 408-E-FJ
E
F
G
H
Commissioner of Income Tax (Central)-/, New Delhi v.
Vatika Township Private Limited (2015) 1SCC1 : (2014)
12 SCR 1037; Commissioner of Income Tax, Patiala &
Ors. v. Shahzada Nand & Sons & Ors. (1966) 3 SCR
379 - relied on.
All KeralaAssociation of Chit Funds v. Union of India
2013 (29) STR 557 - Overruled.
Delhi Chit Fund Association v. Union of India 2013 (30)
STR 347 (Del) - referred to.
Case Law Reference
2013 (29) STR 557
Overruled
Para 11
2013 (30) STR 347 (Del)
referred to
Para 17
(1993) 1 Suppl. SCR 54
relied on
Para 17
(1993) Suppl. 4 sec 226
relied on
Para 23
(1997) 1 SCR 923
relied on
Para 24
[2009) 7 SCR 946
relied on
Para26
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
379
(2014) 12 SCR 1037
[1966) 3 SCR 379
relied on
relied on
Para 33
Para 34
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 57245725 of2011.
A
From the Judgment and Order dated 14.07 .2008 of the High Court
B
of Judicature at Andhra Pradesh at Hyderabad in Writ Petition Nos.
6028 of2008 and 6114 of2008
WitH
C. A. Nos. 6916-6917 of201 l.
P. S. Patwalia, ASG, K. Radhakrishnan, Sr. Adv., Abhinav
C
Mukherjee, Ms. Binu Tamta, Arijit Prasad, B. Krishna Prasad, Advs.
for the Appellants.
N. Venkatraman, K. V. Vishwanathan, Sr. Advs., R. Satish Kumar
Prateek Gupta, V. N. Raghupathy, E. R. Kumar, Aditya Sharma, Ravi
Raghunath, Mis. Parekh & Co., Advs. for the Respondent.
D
The Judgment of the Court was delivered by
A. K. SIKRI, J. l. In these appeals, the appellant is Union of
India, which has assailed the common judgment and order dated July 14,
2008, passed by High Court of Judicature at Andhra Pradesh, in a batch
E
of writ petitions. Those writ petitions were filed by some chit fund
companies (hereinafter referred to as the 'assessees ') assailing the
validity of Circular No. 96/7/2007-ST (Circular No. 034-04) dated August
23, 2007 and Proceedings No. HAST 141/2007 dated December 18,
2007 which were issued by the Central Board of Excise & Customs,
Ministry of Finance, Department of Revenue (Tax Research Unit),
F
Government of India (hereinafter referred to as the 'Revenue'). By the
aforesaid Circular and Proceedings, the Revenue had called upon the
assessees to pay the service tax on the running of chit funds as according
to the Revenue, it was a service provided by the assessees which was
covered under 'banking and other financial services', a taxable service
G
under sub-section 12 of Section 65 of the Finance Act, 1994. Plea of the
assessees was 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 has accepted the plea of the assessees and
thereby quashed the Circular dated August 23, 2007 and consequently
H
380
SUPREME COURT REPORTS
[2017] 7 S.C.R.
A
Proceedings dated December 18, 2007.
B
c
D
E
It may be mentioned at this stage that we are concerned with the
issue 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.
2. In order to appreciate the controversy and resolution thereof, it
would be apposite to first take note of the relevant statutory provisions
of the Act. It would also be necessary to take into account the nature of
operations performed by the assessees which are governed and regulated
by the Chit Fund Act, 1982.
3. With the enactment of the Finance Act, 1974, for the first time
the Parliament imposed the levy of service tax on rendition of' services'
by the service providers to the service receivers. It is covered by Chapter
V of the Act. Section 65 thereof as it stood prior to June 1, 2007 1,
contains certain definitions. Sub-section (12) defines 'banking and other
financial services' which reads as under:
"banking and other financial services" means -
"(a) the following services provided by a banking company or a
financial institution including a non-banking financial company
or any other body corporate or any commercial concern,
namely:
(i)
(ii) (iii)
(iv)
(v) asset management including portfolio management, all forms
of fund management, pension fund management, custodial,
F
depository and trust services, but does not include cash
management;
(vi)
(vii)
G
(viii)
H
(ix)"
4. Though, the definition of' banking and other financial services'
as contained in sub-section (12) is very wide, we are concerned only
1 This Section stands repealed w.e.f. July I, 2012
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
[A. K. SIKRI, J.]
with sub-clause (v) thereof which mentions that asset management is
also to be treated as banking and financial services. However, the
aforesaid definition would disclose that from asset management, 'cash
management' was specifically excluded. The aforesaid definition of
'banking and other financial services' was incorporated in the Finance
Act, 1994 vide the Finance Act, 2001 in consultation with the Reserve
Bank ofindia (RBI). However, RBI had suggested to consider exemption
from levy of service tax for cash management services. Accordingly,
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 l,
2007. Thereby, the words 'but does not include cash management' were
deleted. It is in the aforesaid backdrop, with the amendment of definition
in the manner stated above, becoming effective from June 1, 2007, it is
381
A
B
c
to be examined as to whether chit fund services are included in the
definition of banking and other financial services. In particular, it is to be
D
examined as to whether such a service is covered by the term 'asset
management'. As per the appellant, managing chit fund, which is a fund
management service, is a specie of cash management, now stands
included in the amended definition made effective from June 1, 2007.
The assessees, on the other hand, maintain that even with the deletion of
the words 'but does not include cash management' from sub-clause (v)
E
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.
5. To understand the nature of chit fund business, we now refer
to the relevant provisions of Chit Funds Act, 1982. Section 2(b) defines
F
'chit', in the following manner:
"chit means a transaetion whether called chit, chit fund, chitty,
kuri or by any other 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
G
quantity of grain instead) by way of periodical instalments over a
definite period and that each such subscriber shall, in his tum, 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
the prize amount.
H
382
A
B
c
D
E
F
G
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SUPREME COURT REPORTS
[2017] 7 S.C.R.
Explanation.- A transaction is not a chit within the meaning of
this clause, if in such transaction, -
{i) some alone, but not all, of the subscribers get the prize amount
without any liability to pay future subscriptions; or
(ii) all the subscribers get the chit amount by turns with a liability
to pay future subscriptions
Section 12 of the Chit Funds Act, 1982 prohibits chit
fund companies from conducting any other business, except with
the general or special permission of the State Government.
Section 14 of the Chit Funds Act, 1982 provides that
"no person carrying on chit fund business shall utilize the moneys
collected in respect of business (other than commission or
remuneration payable to such person or interest or penalty, if any,
received from a defaulting subscriber), except for -
(a) carrying on chit business; or
(b) giving loans and advances to non-prized subscribers on the
security of subscriptions paid by them; or
( c) Investing in trustee securities within the meaning of section 20
of the Indian Trusts Act, 1882 (2 of 1882); or
{d) making deposits with the approved banks mentioned in the
chit agreement.
Chit funds are of two types, namely:
(a) Simple Chits: In simple chit members agree to contribute to
fund a certain amount at regular interval. Lots are drawn
periodically and the member, whose name appears, gets the
periodical collection. There is no foreman and even ifthere is
one, he does not charge any commission.
(b) Business Chits: In this case, there is a promoter called foreman
who enrolls subscribers and draws up the terms and conditions
of the scheme. Every subscriber has to pay his subscription in
regular installments. Th'e foreman charges, for his services, a
commission on which there is a ceiling fixed by law in some
States. Depending upon the terms and conditions, a fixed
amount is also sometimes set aside for distribution among the
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
383
[A. K. SIKRI, J.]
non-prized members. After making provision for the above
A
deductions, the balance amount is put to auction and given as
prize to member who is prepared to forego the highest discount.
The amount of discount is distributed as dividend either among
all the members or among the non-prized member, only."
6. Since banking and other financial services can be carried out
B
only with the permission of and after obtaining requisite licence from the
RBI as per the provisions of Reserve Bank of India Act, 1954 (RBI
Act), it would also become necessary to take note of some provi1>ions of
the RBI Act as well, which are relevant for the purposes of the present
-~
case. As per Section 45-1 of the RBI Act, chit funds are categorised as
financial institutions. Section 45-1 ( c) also defines the financial institution.
C
Relevant extract whereof is as follows:
"Financial institution" means any non-banking institution which
carries on as its business or part of its business any of the following
activities, namely:-
(i)
(ii)
(iii)
(iv)
(v) managing, conducting or supervising, as foreman, agent or
any other capacity, of chits or kuries as defined in law which is
for the time being in force in any State, or any business, which is
similar thereto;
(vi)"
Thus, the activity of managing, conducting or supervising chits or
kuries is covered by the term 'financial institution'.
D
E
F
7. After the amendment in the Finance Act, 1994 vide Finance
Act, 2007, amending definition of banking and financial services,
clarification was issued by the Government vide Budget instruction dated G
February 28, 2007 wherein it was stated as follows:
"7.6 (ii) At present cash management is specifically excluded
from the scope of this service. Specific exclusion of cash
management is being omitted. Consequently, cash management
H
384
SUPREME COURT REPORTS
[2017] 7 S.C.R.
A
services will be leviable to service tax under this service."
B
c
Some clarifications are issued by the RBI as well, from time to
time, touching upon the nature of business of chit fund. We shall refer to
these circulars/clarifications at the relevant stage.
8. After taking note of the relevant statutory provisions under
different enactments, facts leading to the present dispute may now be
recapitulated, which are in a very narrow campus as the main dispute is
purely of a legal nature. It so happened that after the amendment of
definition of banking and financial services w.e.f. June 1, 2007, the
Government issued Circular No.96/7/07-ST dated August 23, 2007 stating
that activity of chit fund is in the nature of cash management and,
therefore, leviable to service tax under 'banking and other financial
services'. Likewise, the Commissioner of Customs, Central Excise and
Service Tax also issued Letter HQST 141/2007 dated December 18,
2007 whereby he advised the assessees under his jurisdiction to obtain
registration and clear service tax liability w.e.f. June 1, 2007 at applicable
D
rates immediately. It is these two circulars dated August 23, 2007 and
December 18, 2007 which were challenged by the respondents herein
by filing writ petitions in the High Court as noted in the beginning. The ·
High Court has held that notwithstanding deletion of the words 'but does
not include cash management' from sub-clause (v) from sub-section
E
(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'.
F
9. 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 went by the basic principle in the taxing
G
statute, namely, no tax can be imposed on the subject without words in
the Act clearly showing an intention to lay a burden upon the assessee;
that the taxing statute are to be interpreted strictly; and that if two views
are possible, benefit of doubt would have to be given to the assessee. In
the opinion of the High Court, the deletion of the words 'but does not
H
include cash management' while amending sub-section (12) of Section
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
385
[A. K. SIKRI, J.]
65 of the Finance Act would not serve any purpose.
A
10. We may note here that tl:le case set up by the Union of India
before the High Court was that it was all along understood by the parties
that business of chit fund was in the nature of cash management. Since,
the definition of 'banking and financial services' prior to June 01, 2007
specifically excluded 'cash management', the benefit was extended to
B
the chit fund companies by not levying any service tax as they were in
the business of cash management. According to the Revenue, the
amendment, thus, brought chit fund companies within the purview of the
service tax. It was submitted that sub-clause (v) of sub-section (12)
specifically covers 'asset management' as 'banking and other financial
services' and categorically mentions that 'all forms of fund management'
C
are to be treated as 'asset management'. As per the Revenue, cash
management is one of the forms of 'fund management'. The High
Court, however, has not agreed with this submission on the ground that
the Revenue could not rely upon the dictionary meanings assigned to
fund and there had to be specific provision in the Act covering chit funds.
D
11. We may mention, at the outset, that mere deletion of the words
'but does not include cash management' by 2007 amendment may 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, we have to
E
look into the definition of 'asset management' in amended form and,
therefore, the Revenue has to establish that the chit fund business is a
service which comes within the scope of 'asset management'. Conscious
of this fact, the Revenue has argued that since asset management includes
all forms of fund management and as the cash management is one of
the form of 'fund management', chit fund companies would be covered
F
thereby. It would be of interest to note that the single Judge of the
Kerala High Court in the case of All Kera/a Association of Chit Funds
v. Union of India2 has accepted this very proposition advanced by the
Department, namely, cash management is one of the forms of fund
management and would, therefore, be covered by the expression 'asset G
management'. Kerala High Court, whileforming this opinion, has not
agreed with the impugned judgment rendered by the Andhra Pradesh
High Court with the observations that the Andhra Pradesh High Court
failed to notice that the definition of asset management includes 'all ·
2 2013 (29) STR 557
H
386
SUPREME COURT REPORTS
(2017] 7 S.C.R.
A
forms offund management' and that cash management would be one of
the forms of fund management. However, even the Kerala High Court
has not adverted to the issue in proper perspective by defining what
amounts to cash management and whether cash management is specie
of fund management. On the other hand, it has been primarily influenced
B
by the fact that with the amendment of sub-clause (v) of sub-section
(12) by Amendment Act, 2007 resulting into deletion of the words 'but
does not include cash management', the business of chit fund would be
covered by the term 'all forms of fund management' which can be seen
from the following discussion therein:
c
D
E
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"31. The nature of contentions raised, argued and dealt with before
the High Court of Andhra Pradesh in A.P. Federation Chit
Funds v. Union of India (2009 (13) STR 350 (A.P.)) is more
discernible from Paragraphs 5,6, 7 and 8 of the said verdict, which
are extracted below:
"5. Shri.N. Venkataramana, learned Senior Counsel appearing
on behalf of the petitioner mainly contended that merely
because of deletion of certain expressions under the aforesaid
sub-clause (12) of S. 65 of the Finance Act, 2007, the nature
of business done by the petitioner cannot be roped in, as long
as the levy is not made specifically in respect of such
transactions in clear words. Therefore, even otherwise it has
been contended that in view of the nature of chit transaction
as already been explained to by the Apex Court, it cannot come
within the parameters of any of the exemptions under the
Finance Act as exists. Even otherwise, it is stated that the
respondents herein cannot take upon themselves by imposing
oflevy proposals on totally different class by mere issuance of
circular which itself is without any jurisdiction.
6. Shri Vedula Venkataramana, learned counsel appearing on
behalf of petitioners has adopted broadly the submissions made
by Shri.N. Venkataramana, senior counsel. However, he sought
to restrict his submissions as regards the validity of the circular
rather than going beyond to hold that the nature of chit
transactions would fall within asset management on the deletion
of expression under the later amended Finance Act. He further
contended that by the impugned action, the respondents are
only trying to enlarge the scope of sub-clause (12) ofS. 65 of
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
387
[A. K. SIKRI, J.]
the Finance Act, 2007 by way of circular without there being A
any legislative transanction or statutory basis. Hence, the
impugned action is liable to be set aside.
7. Shri.K. Rajashekar Reddy, learned Assistant Solicitor
General, appearing on behalf of the respondents have sought
to sustain the entire impugned action and the circulars issued
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by the respondents contending that the expression 'cash
management' is inclusive one and the impugned circulars are
only clarificatory, therefore the question of statutory
interpretation as such does not arise and whatever sought to
be excluded earlier was brought within the four comers of the
levy and it is not open for the petitioners to question the same.
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Even otherwise, all these Writ Petitions are premature and the
same are liable to be dismissed.
8. Having considered the submissions made and on perusal of
the material, the crux of the matter for consideration is as to
whether the petitioners' business i.e., chit fund fall within the D
mischief of expression "cash management", as amended under
sub-S.(12) ofS. 65 of the Finance Act, 2007 and consequently
under the impugned circular issued by the respondents is valid?"
32. From the above, it is evident that the scope of the terms "all
forms of fund management" before the deletion of the words
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"but does not include cash management" and after the deletion
vide the amendment in 2007, was not specifically projected or
adverted to. The thrust was more with regard to the meaning of
the expression 'cash management', though the provision was
extracted in paragraph 11. The verdict passed by the Apex Court
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in AIR 1993 SC 2063 (cited supra) was also referred to, extracting
the relevant portion in paragraph 10, wherein it was held that:
"the foreman does not lend his money to constitute any
money lending business and that the dominant purpose of
the Act (Chit Funds Act 1982) was to regulate the chit and G
control the activity for the foreman and protect the interest
of the subscribers which essentially in the realm of fund
management."
33. True, the provisions in a 'taxation statute' have to be interpreted
strictly, as made clear by the Apex Court. But when "all sorts of H
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fund management" were sought to be taxed, giving exception
only to 'cash management' under the unamendea provision and
when it came to be excluded after the amendment to
S.65(12)(a)(v) in the year 2007, this Court finds that, each and
every instance of 'fund management' need not be separately
mentioned in the provision. to attract the tax liability. Even as per
the unamended statute, when the exception was only to a limited
extent i.e., in respect of 'cash management', the deletion of the
exception has revived "all forms of fund management" with full
vigour and vitality, which cannot be watered down. To put in other
words, the term "all forms of fund management" forms the
genus, of which, 'cash management' is one of the species. The
exception given to the specie (cash management) is taken away
by deleting the same in the year 2007, after which, all forms of
fund management become taxable. It has to be noted that, there
is absolutely no challenge against the statutory provision i.e., in
respect of the amendment brought about in the year 2007 and this
being the position, the tax liability stands governed, not by virtue
of the Circular, but by virtue of the amended provision. The idea
and understanding of the petitioners to the contrary, is quite wrong
and misconceived."
12. We, therefore, feel that neither the Andhra Pradesh High Court
in the impugned judgment nor Kerala High Court in the aforesaid judgment
has addressed the matter in right perspective. According to us, 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. Keeping
this perspective in mind, the two questions which need to be discussed
arid answered are:
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?
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
389
[A. K. SIKRI, J.]
Before we deal with these questions directly, it would be apposite A
to take note of the amendments which are made in sub-section (12) of
Section 65 of the Act from time to time as'this historical background of
levying service tax on banking and other financial services would throw
adequate light on the answers to the questions posed by us. We have
already noticed the definition of 'banking and other financial services'
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as it existed prior to June 01, 2007 (which was introduced w.e.f. 2001)
and its amendment in 2007.
13. No doubt, the definition of banking and other financial services
contained in sub-section (12) of Section 65 as it stood prior to June 1,
2007 specifically excluded cash management. At that time, a doubt had
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arisen in the Department ofRevenue, Ministry of Finance as to whether
it would include the services rendered by a chit fund. Letter dated
December 7, 2001 was written by the Ministry of Finance to the RBI
seeking its clarification. RBI, after examining the issue, responded vide
its communication dated February 5, 2002 explaining the meaning of the
t~rm 'cash management' and also opining that chit fund may not be
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regarded as providing any taxable service in view of detailed note dated
January 29, 2001 which was appended along with said letter dated
February 05, 2002. After receiving this clarification, Ministry ofFinance,
Government of India issued Circular No. 41/4/2002 dated March 15,
2002 addressed to the officials of Central Excise and Customs as well
as service tax clarifying that banking and other financial services will
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not include the service rendered by the chit fund and, therefore, no service
tax was payable.
14. Amendment was carried w.e.f. June 1, 2007 whereby the
words 'but does not include cash management' were deleted. This
provision remained on statute book upto June 30, 2012. By Finance Act,
2012, entire scheme of service tax was completely changed and
overhauled with the introduction of altogether new system of service
tax. There was a paradigm shift in the service tax .regime. Initially,
service tax was levied only on three services by the Finance Act, 1994.
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The Finance Act, 1996 extended the levy to three more services. Twelve
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more services were brought under the service tax net by the Finance
Act, 1997 and its scope was further enlarged by the Finance Act, 1998
when twelve more services were brought under the service tax net.
Three services were exempted from the service tax by the Finance Act,
1998 and one more service by the Finance Act, 2000. Its scope was
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A. further widened by the Finance Act, 2001 when service tax was extended
to include fifteen more services. The Finance Act, 2002 further levied
service tax on ten more services. The Finance Act, 2003 brought 8 new
services within the ambit of service tax. Further, the Finance (No.2)
Act, 2004 brought 13 new services under service tax which included reB
introduction of service tax on 3 services and also made applicable service
tax on risk cover in life insurance under the life insurance service, whereas
this service was introduced in the year 2002. The Finance Act, 2005
brought 9 new services under the service tax net. The Finance Act,
2006 brought 15 new services under the service tax net. The Finance
Act, 2007 brought 7 new services under the service tax net and six
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telecom related services were omitted and merged into one new category
of taxable service. Further, the Finance Act, 2008 w.e.f. May 16, 2008,
introduced 6 new services. Further, the Finance (No.2)Act, 2009 w.e.f.
September 1, 2009 introduced 3 new services. Likewise, the Finance
Act, 2010 w.e.f. July 1, 2010 vide Notification No.24/2010-ST, dated
June 22, 2010 introduced 8 new services. By the Finance Act, 2011
D. w.e.f. May 1, 2011 vide Notification No. 29/2011-ST, dated April 25,
2011, 2 new services were brought within its net and at the same time,
health service was exempted w.e.£ May 1, 2011 by Notification No. 30/
2011-ST, dated April 25, 2011. Thus, the service tax was on a total of
115 services.
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15. Thus, right from 1994 till 2011, the mode adopted was to specify
those services on which it was intended to levy service tax. However,
the Parliament by the Finance Act, 2012 w.e.f. July 01, 2012 has
introduced altogether new system of taxation of services by making a
paradigm shift. Now, the scheme of taxation of services is based on
negative list of services. Therefore, earlier list of taxable services is no
longer applicable. Instead two things have happened. First, the term
'service' is defined whereas there was no definition of 'service' in the
Finance Act, 1994 which position remained till 2012. Earlier, each
individual service on which tax was levied (known as taxable service)
was defined. Secondly, the definition of service given now contains a
G. negative list which is contained in Section 66D of the Act. In other
words, it specifically excludes certain transactions from the ambit of
service. Thus, those transactions which are specifically excluded are
not liable for service tax. Any other kind of service which qualifies the
definition of'service' contained in the Act would be exigible to service
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tax.
UNION OF INDIA v. MIS. MARGADARSHI CHIT FUNDS (P) LTD.
391
[A. K. SIKRI, J.]
16. The term service is definedin Clause 44 of Section 65B of the
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Act which reads as under:
"44. "service" means any activity carried out by a person for
another for consideration, and includes a declared service, but
shall not include ...i
(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
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(ii) such transfer, delivery or supply of any goods which is
deemed to be a sale within the meaning of clause (29A) of C
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."
Likewise, negative list of service is contained in Section 66D of
the Act and all those services which are mentioned therein are not liable
for service tax.
17. Interestingly, in the context of chit fund business, a question
arose as to whether it would be service within the aforesaid definition
and this issue came to be considered by Delhi High Court in the case of
Delhi Chit Fund Association v. Union of India3• The Delhi High
Court examined the nature of chit fund business, keeping in mind the
dicta of this Court in Sriram Chits and Investment (P) Ltd. v. Union
of India4 wherein the nature of chit fund business is explained in detail
and came to the conclusion that it was not a service as per the definition
of'service' contained in Section 65B( 44) of the Act. Following discussion
in the judgment is relevant in this behalf:
"I 0. We shall first address the argument that what is excluded is
only a service in relation to an activity which constitutes merely a
'2013 (30) STR 347 (Del)
4 AIR 1993 SC 2063
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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 6SB( 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 6SB(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;
11. A mere transaction in money represents the gross value of
the transaction.