Actionable Claims under GST

1. INTRODUCTION:

The purpose of this article is to discuss about the expression "actionable claim" or "choses in action" since the same is defined to be "goods" under the proposed GST law as presented before the Parliament and received presidential assent on 13th April 2017. The word "Actionable"  according to Black's Law Dictionary means "That for which an action will lie, furnishing legal ground for an action".  In English law it is known as "chose in action" or "things in action". The expression ‘chose in action or thing in action' in the literal sense means thing recoverable by action as contrasted to ‘chose in possession' which is a thing of which a person may have physical possession (Halsbury's Laws of England).

Thus a person can hold two classes of rights in relation to actionable claims. One is right to properties in his possession known as choses in possession in English law.  The other one is properties over which the person holds only a right of action without possession and known in English law as choses in action. In this article we are concerned only with choses in action or actionable claims.

The discussion assumes importance when we consider the fact that the June 2016 Model GST law excluded actionable claim from the definition of "goods" whereas it is specifically included in the definition of goods in the SGST ACT. It is obvious that there is huge revenue potential since the business of "securitization "is flourishing in India.  Many banks and Non Banking Financial Companies assign their claims or loan portfolios to a Special Purpose Vehicle (SPV) for huge consideration and the law makers perhaps may have an eye on such types of transactions. Therefore it is of utmost importance that we should have a reasonable idea about  the law relating  to actionable claim, its assignment etc with particular reference to taxation aspects.

2. DEFINITION OF "ACTIONABLE CLAIMS":

According to Section 2(1) "actionable claim" shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882. Thus we shall look into the definition under the Transfer of Property Act 1882.

Section 3 of the Transfer of property Act 1882 defines "actionable claim" as follows.

"Actionable Claim is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in possession either actual or constructive, of the claimant, which the civil courts recognize as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent".

When we analyze the definition it is clear that the term "actionable claim" has got two limbs. One is that it is a claim to any unsecured debt. The second limb is about claim to beneficial interest in movable properties not in actual or constructive possession of the claimant which shall be recognized as affording ground for relief by a civil court.  Those two categories of claims can be existent, future, contingent or conditional.

3. CLAIM TO ANY DEBT:

It is very clear that an actionable claim is a claim to an unsecured debt since the definition specifically excludes debts secured by mortgage of immovable properties as wells as debts secured by hypothecation or pledge. It also includes a claim to any beneficial interest in movable property for eg share of a partner in the partnership property subject to the condition that such movable properties are not in actual or constructive possession of the claimant and subject to further condition that the claim shall rest on grounds which civil courts would afford as grounds for granting relief.  The debts or beneficial interest may be existent, accruing, contingent or conditional.

4. WHAT IS A DEBT?

Debt is not defined under the GST law or under the TP Act 1882. The Hon Supreme court in Delhi cloth and General Mills vs. Harnam singh AIR 1955 SC 590 observed Transfer of Property Act

5. ACTIONABLE CLAIMS – SOME EXAMPLES:

We shall now examine some of the judicial pronouncements by courts on what claims can be recognized as "actionable claims". The following items are held to be actionable claims and the related case laws are given in brackets.

• Arrears of rent were held to be a debt. ( State of Bihar v MDS K singh AIR 1952 SC 252)
• Lottery ticket is an actionable claim ( sunrise associates v Govt of NCT Delhi AIR 2006 SC 1909)
• A right to a benefit of a contract ( SM Deoji v UOI AIR 1957 Nag 31)
• A right to credit in a provident fund( B.Mohandass v P C Chakravarty AIR 1935 Cal 756)
• Debuntures (London and India docks co (1906) 95 LT 536
• Dividend on shares
• Negotiable instruments like bills of exchange, Pro-notes etc
• Bank guarantee
• Insurance claims
• Right shares or option to purchase shares
• Share in a partnership property
• Right under a license.

6. NON-ACTIONABLE CLAIMS:  

The following items are held to be non actionable claims.

• A claim to mesne profit is not a debt as it is not liquidated.
• A decree for debt is not an actionable claim since it was a debt prior to the decree and no action is necessary to enforce the claim.
• The right to recover damages for breach of contract.
• A copyright.
• Where a decree provides for a future decree, this future decree is also not actionable claim.

7. ASSIGNMENT OF ACTIONABLE CLAIMS

An actionable claim may be transferred by way of sale, mortgage, gift or exchange etc. But the said transfer or assignment of an actionable claim must be evidenced by an instrument in writing signed by the transferor or his power of attorney. The assignment can be made by an endorsement at the back of a document comprising the actionable claim is enough and no separate document is necessary. The transfer would be effective from the date of the execution of the deed or assignment and would bestow on the transferee all the rights and remedies of the transferor. After the transfer, the transferee is subjected to all the liabilities and equities to which the transferor was subjected at the date of the transfer. The transferee, in his own interest, must give notice of the transfer to the debtor, as early as possible. Once the debtor receives the notice of assignment, he becomes liable to pay the debt only to the transferee. Such a notice must be in writing and it must state the name and address of the transferee. There is no time limit for giving the notice.

8. LIABILITY TO VAT

Having considered the definition and assignment of actionable claims let us discuss about the tax liability arising out of the transfer of actionable claims. We have already noticed that the word "goods" under GST includes actionable claims. But the crucial point to be noted is that it is not regarded as "goods" under the sale of goods act 1930 and this aspect may stir up controversies in the days to come. Let us see the definitions under the general law on sale of goods and the specific tax laws such as GST and CST Act 1956.

9. DEFINITION OF "GOODS UNDER CGST:

Section 2(1) of CGST Act defines "goods" to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

10. DEFINITION OF "GOODS" UNDER SALE OF GOODS ACT 1930:

"Goods" means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [Section 2(7)].

11. DEFINITION OF "GOODS" UNDER CST ACT 1956:

"Goods" includes all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities. [Section 2 (d)]

12. ANALYSIS OF THE VARIUOS DEFINITIONS

On going through the definitions above it is clear that GST law includes actionable claims in the definition of goods whereas sale of goods Act and CST act excludes the same. We shall ignore CST Act since the same shall get subsumed in GST and hence not relevant. But the impact of the definition excluding actionable claims under Sale of Goods Act may present some difficulties. The Hon Supreme court in Gannon Drunkerlys case very clearly held that while interpreting the expression "sale of goods" in a taxation law or in the constitution the scope and meaning of that expression under the Sale of Goods Act have to be considered. But it may be noted that actionable claims are goods at the first instance and have all the features of goods. Exactly for that reason only the definition under sale of goods Act excludes the same. If actionable claims are not goods there is no necessity for its exclusion. Hence tax liability may arise when the same is transferred or supplied. The decision in Gannon Drunkerly is not relevant as the said decision is an authority for the proposition relating to what constitutes "sale of goods" when transfer takes place in a form other than "goods". In other words Gannon Drunkerly is not an authority for the proposition that if a particular item is not regarded as goods under the Sale of Goods Act then the states shall not get the taxing power under the constitution.

13. CONCLUSION

In view of the above discussion it is to be concluded that transfer or assignment of actionable claims shall attract levy of GST or sales tax in view of the specific inclusion in the definition of "goods". But the matter is not entirely free from doubt and hence in certain specific situations the taxability may be subject matter of controversy and the courts may have to resolve those issues. Whether actionable claims can be regarded as goods itself may be a subject matter of controversy and for that reason the taxing power under the constitution may also be challenged. Let us wait and see.

The author can also be reached at siva208@yahoo.com