No Service Tax To Be Levied On Chit Funds: SC [Read Judgment]

The Supreme Court, in the case of Union of India & Ors vs M/S Margdarshi Chit Funds Pvt Ltd, has held that the management of a chit fund does not amount to management of any type of fund and would, therefore, not be covered under Section 65(12)(v) of the Finance Act 2007.

This appeal was filed challenging the validity of the decision of the Andhra Pradesh High Court which had accepted the assessee’s plea that no service tax should be levied on the running of chit funds since chit fund business do not amount to any service covered by the definition of ‘banking and other financial services’.

A question before the bench comprising Justice AK Sikri and Justice RK Agarwal was whether chit fund activity would be treated as business of cash management.

The court noted that chit funds are a special kind of contract contemplated by Entry 7 of List III of the Seventh Schedule of the Constitution of India and cannot be termed as money lending business.

“It is clear that the foreman does not lend his money to any of the subscribers. The foreman acts only as person to bring together the subscribers and certain obligations are cast upon him with a view to protect the subscribers from the mischief and fraud committed by the foreman in view of his position. The amounts are paid to the subscribers as per the chit and in accordance with the provisions of the Act. It will not be correct to state that each subscriber lends money to the person who gets chit earlier. It cannot also be construed that the person who gets chit later should be treated as the moneylender. The agreement between the parties that is entered as per Section 6 of the Act, only provides for distribution of the chit amount. This agreement has to be treated as contract between the subscribers and the foreman and it is the foreman who brings the subscribers together and therefore, the Act provided for payment of commission for the services rendered by the foreman as he does not lend money belonging to him. The dominant purpose of the Act is to regulate the chit and control the activity of the foreman and protect the interests of the subscribers. The pith and substance of the Act is that it provides for a special contract. The legislation provides for a special kind of contract and thus squarely falls within Entry 7 of List III of Schedule VII.”

The bench noted that in light of the nature of chit funds and the absence of the definition of ‘cash management’ in the Act, such funds cannot be termed ‘cash management’.

Cash management would refer to the fruitful utilisation of idle funds by an individual.

Further, a taxing statute cannot be envisaged to cover goods dealing with uncertainty.

Another question before the bench was whether or not chit fund can be termed as ‘fund management’.

Read the Judgment Here