The Delhi High Court has quashed the Centre's notification to levy service tax on chit-fund business, saying the act of a foreman, who conducts auction of chit amount among contributors, does not fall under the definition of "service" provided in the Finance Act.

"We have come to the conclusion that no service tax is chargeable on the services rendered by the foreman in a business chit fund on an interpretation of the statutory provisions," the bench of justices B D Ahmed and R V Easwar has said in a recent judgement.

"The notification of June 20, 2012 issued by the Government of India, Ministry of Finance (Department of Revenue) is quashed," the court said.

The court's verdict came on the plea of Delhi Chit Fund Association seeking quashing of a provision under the Finance Act, 1994, which was made applicable from July 1, 2012, to make chit business taxable under the new law.

Discussing the provision and the relevant case laws, the court said "in a chit business, the subscription is tendered in any one of the forms of money as defined in section 65B(33)of the Finance Act.

"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.... 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 provision of the Finance Act said that there shall be levy of service tax "at the rate of twelve percent on the value of all services" rendered by the chit fund firms.

The association of chit-fund firms, in its plea, had said "the notification should be quashed in so far as it seeks to subject the activities of a business chit fund companies to service tax to the extent of 70 percent of the consideration received for the services.

"The contention ... Is that there is no question of exempting a part of the consideration received for the services in chit fund business when the law provides that such services are not taxable at all in the first place."

The court, in its judgement, also gave the account of chit business and the way the foreman conducts the auction of chit amount among the contributors.

The foreman collects equal contributions from the members for a specified period every month and gives the money to a needy contributor who offers the "highest discount" to the chit amount.

The court, while quashing the notification, said the business of chit funds is strictly regulated by the Chit Funds Act that contained provisions to regulate the chit business including the rights and duties of the foreman.