By TIOL News Service

NEW DELHI, APRIL 29, 2013: FIRST things first.

Who is a foreman in a chit fund business - A foreman is normally a person who organises the chit fund auction and conducts the proceedings. He is paid a commission for this purpose.

It seems, in our country, once an issue hogs the limelight all things associated with it come to the fore only to drown in the cacophony of fresh ones.

Whereas everyone on the streets is talking about the West Bengal chit-fund Ponzi scheme, the greed which led people to invest their hard earned money for allowing some individuals to lead a lavish life in the lap of luxury and go in for plastic surgery coupled with many wives and fast cars, the suicides by agents and those who lost their money, the political class seems to wave the magic wand to raise a part of the amount ‘lost' by raising taxes on the ubiquitous cigarette stick and exhorting intellectuals to smoke a few more to raise their intellectuality and thus serve a social cause.

In the din of these news items, a Writ Petition filed in the Delhi High Court has come as a happy piece of news for all those chit-fund operators who were trying hard to keep their flock together.

The short question in the 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.

The petitioner is an association of chit fund companies based in Delhi.

By a notification No.26/2012 issued on 20th June, 2012, the Central Government 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: -

The petitioner prays that the notification should be quashed for the simple reason that chit fund business services are not taxable at all in the first place.

How a chit fund works:

The following is 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 Rs. 1,000/-. The total chit amount would be Rs. 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 Rs. 50,000/- (Rs. 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 Rs. 50,000/- for Rs. 40,000/-, Rs. 37,500/- and Rs. 35,000/- respectively, the chit would be given to that subscriber who is willing to take it for Rs. 35,000/- since he has offered a discount of Rs. 15,000/-. This will leave a balance of Rs. 15,000/- in the kitty. The amount of Rs. 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 Rs. 2,500/- (5% of Rs. 50,000/-, the chit amount) the balance of Rs. 12,500/- would be distributed among all the 50 subscribers so that each would get Rs. 250/-. This amount of Rs. 250/- can be set off by the subscribers against the second month's installment of Rs. 1,000/- payable by him and he can give only Rs. 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.”

Law regulating chit funds:

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. 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 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 belonging to him.

Whether chit fund services are Taxable – the arguments

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.

The High Court observed -

++ Section 65B(44) defines 'service' as any activity carried out by a person for another for consideration. This implies 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;

++ 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.

++ 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.

++ 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.

++ 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 & N. T. Veluswami‘s case (AIR 1959 SC 422).

++ If these rules of interpretation are applied, it appears 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 anomaly 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 anomaly gets ironed out or removed, as we have explained earlier. Obviously, we have to prefer the latter interpretation and not the former.

++ 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.

The Revenue also sought to draw the attention of the High Court to the Education Guide issued by the Central Board of Excise and Customs and particularly to paragraph 2.8 which reads -

"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."

The High Court observed that since on an interpretation of the statutory provisions it had come to a conclusion that no service tax is chargeable on the services rendered by the foreman in a business chit fund, it was not necessary for the Court to express any opinion as to the correctness of the views expressed in the Education Guide.

In the result the Writ Petition was allowed and the notification No.26/2012-ST dated 20.06.2012 was quashed to the extent of the entry in serial No.8 thereof.

(See 2013-TIOL-331-HC-DEL-ST)