2008 (7) TMI 227 - HC - Service Tax

Correctness of Circular No. 96/7/07-ST - revenue is not correct to treat the chit fund business to fall within the ambit of asset management as there is subtle difference between banking and financial services as defined under the Act and the services of the chit transactions - further revenue cannot levy a tax for the first time on a totally new arena by issuance of a circular - as the Finance Act is not properly amended to bring within its fold chit transactions, the demand is unsustainable

Issues Involved:
1. Validity of Circular No. 96/7/2007-ST dated 23-8-2007 and Proceedings No. HAST 141/2007 dated 18-12-2007.
2. Whether chit fund business falls under "cash management" or "asset management" as per Section 65(12) of the Finance Act, 1994.
3. Legality of imposing service tax on chit fund transactions through a circular.
4. Availability of alternative remedies and the invocation of Article 226 of the Constitution of India.

Issue-Wise Detailed Analysis:

1. Validity of Circular No. 96/7/2007-ST dated 23-8-2007 and Proceedings No. HAST 141/2007 dated 18-12-2007:

The petitioners, comprising chit fund companies and a registered federation of chit funds, challenged the circular and proceedings issued by the second respondent, claiming they violated Articles 14, 19(1)(g), and 265 of the Constitution of India, as well as Section 65(12) read with Section 65(105)(zm) of the Finance Act, 1994. The petitioners argued that the circular incorrectly classified chit fund transactions under "asset management" and imposed service tax without proper legislative backing.

2. Whether chit fund business falls under "cash management" or "asset management" as per Section 65(12) of the Finance Act, 1994:

The respondents contended that the nature of chit transactions falls within the ambit of "cash management" and, following the 2007 amendment to the Finance Act, 1994, which omitted the exclusion of "cash management," chit transactions should attract service tax. They argued that the definition of "financial institution" under Section 45-I of the RBI Act, 1934, includes chit funds, thereby justifying the imposition of service tax.

The court examined the definition of "chit" under Section 2(b) of the Chit Funds Act, 1982, and referenced the Supreme Court's decision in Shriram Chits & Investment (P.) Ltd. v. Union of India, which clarified that chit transactions are a special form of contract and do not constitute money-lending or asset management. The court concluded that chit transactions do not fall within the parameters of "cash management" or "asset management" as defined under the Finance Act, 1994.

3. Legality of imposing service tax on chit fund transactions through a circular:

The court emphasized that taxing statutes must be interpreted strictly and cannot be extended through executive circulars. The petitioners argued that the respondents could not impose service tax on chit transactions without a clear legislative mandate. The court agreed, stating that the circular issued by the respondents lacked statutory basis and was an impermissible executive action under Article 265 of the Constitution of India.

4. Availability of alternative remedies and the invocation of Article 226 of the Constitution of India:

The respondents argued that the petitioners had alternative remedies available and should not have invoked the extraordinary jurisdiction of the High Court under Article 226. However, the court noted that the petitioners raised substantial questions of law regarding the validity of the circular and the imposition of service tax, justifying the invocation of Article 226.

Conclusion:

The court set aside the impugned circular dated 23-8-2007 and the consequential proceedings dated 18-12-2007, ruling that the imposition of service tax on chit fund transactions through a circular was illegal and unconstitutional. The writ petitions were allowed, and no costs were awarded.

← Previous Next →