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Union of India & Ors. v. M/s Margadarshi Chit Funds (P) Ltd. Etc.

Civil Appeal · 2017 INSC 588Decided 4 Jul 2017
Civil Appeal Nos. 5724-5725 of 2011
Justice A.K. Sikri · Justice R.K. Agrawal

Background

The Union Government's tax authorities had issued a circular directing chit fund companies to pay service tax on the running of chit funds, treating that activity as a "banking and other financial service" taxable under the Finance Act, 1994. Several chit fund companies challenged this circular before the Andhra Pradesh High Court, which agreed with them and quashed the circular, holding that chit fund business was not a taxable financial service. The Union of India appealed to the Supreme Court against this ruling.

Decision Breakdown

The Supreme Court examined the statutory definition of "banking and other financial services" under Section 65(12) of the Finance Act and the nature of chit fund operations under the Chit Fund Act, 1982, and concluded that running a chit fund is fundamentally different from "fund management" or "asset management" as those terms are understood in ordinary business and dictionary usage. It held that chit fund business does not fall within the taxable category even after a 2007 amendment to the provision, affirmed the Andhra Pradesh High Court's judgment, and also held that a contrary view taken by the Kerala High Court on the same question was erroneous and stood overruled. The appeals filed by the Union of India were accordingly dismissed, with no order as to costs.

Lesson Learnt

Tax authorities cannot stretch the definition of a taxable "financial service" to cover every activity that merely involves pooling and managing money: a traditional chit fund scheme, which is a method of saving and borrowing among subscribers, is legally distinct from fund/asset management services and was held not liable to service tax under the law as it then stood.

Official source (sci.gov.in)View Judgment (PDF)

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