"Supreme Court to Decide Applicability of Doctrine of Mutuality in Sales Tax on Supply of Goods by Members' Clubs: Impact of Article 366(29-A) on Incorporated Clubs Under Scrutiny".

This appeal concerns the liability of a members' club to pay sales tax on the supply of food and drinks to its permanent members. The dispute arose when the Assistant Commissioner of Commercial Taxes issued a notice to the club for non-payment of sales tax on such supplies. The club contended that there was no sale involved as it acted as an agent of its members and there was no consideration involved. The case went through various stages of litigation, and the main issue before the court was whether the doctrine of mutuality applied to incorporated clubs and whether the supplies made by the club to its members constituted a sale liable for sales tax.

The court examined the constitutional and statutory provisions, including Article 366(29-A) of the Constitution of India and the West Bengal Sales Tax Act, 1994. It referred to the doctrine of mutuality and its applicability to clubs. The court also considered previous judgments, including the Constitution Bench decision in C.T.O. v. Young Men’s Indian Association (1970) 1 SCC 462, which had held that if a club acted as an agent for its members and there was no transfer of property, no sale would be involved. The court referred to the 46th Amendment to the Constitution, which introduced sub-clause (e) to Article 366(29-A), relating to the tax on supply of goods by an unincorporated association or body of persons.

The court framed three questions for determination by a larger bench: (i) whether the doctrine of mutuality still applied to incorporated clubs; (ii) whether the judgment in Young Men’s Indian Association still held the field after the 46th Amendment; and (iii) whether the 46th Amendment deemed the provision of food and beverages by incorporated clubs to their permanent members as sales liable for sales tax.

The appellant argued that the 46th Amendment intended to do away with the doctrine of mutuality and that the expression "body of persons" in sub-clause (e) of Article 366(29-A) included incorporated entities. They relied on the constitutional provisions, statutory definitions, and previous judgments to support their argument.

However, the court did not decide the appeal but referred it to a larger bench for consideration of the questions framed. The larger bench would determine the applicability of the doctrine of mutuality to incorporated clubs and whether the supplies made by the club to its members constituted sales subject to sales tax.

In a legal case regarding the applicability of the West Bengal Sales Tax Act to members' clubs, the learned Senior Advocate representing the Respondent argued against the inclusion of members' clubs under the Act. He referred to Section 2(5) of the Act, which states that a profit motive is a prerequisite for falling within the provisions of the Act. Since members' clubs do not have a profit motive, the charging section of the Act should not be applicable to them. He relied on a previous Supreme Court case, State of Gujarat v. Raipur Manufacturing Co. Ltd., which defined "profit motive" as a motive of making money from sale transactions, not just making a surplus. He also referred to Section 25 of the Companies Act, which pertains to Section 25 companies registered with the intention of applying their profits and other income in promoting their objects, prohibiting the payment of dividends to members. Therefore, the ratio of a previous case, Bacha F. Guzdar, should not apply to members' clubs in the form of Section 25 companies. He further argued that a company cannot be considered a "body of persons," thus Article 366(29-A)(e) would not apply to sales of food or refreshments by a club to its members. He stated that the 46th Amendment to the Constitution, which added Clause (29-A) to Article 366, did not abolish the doctrine of agency/trust/mutuality, as there cannot be a supply of goods by one person to itself. He also referred to the definition of "consideration" in the Indian Contract Act, which states that consideration must flow from one person to another, and in the case of Young Men's Indian Association, where there are no distinct players, Article 366(29-A) would not apply. Regarding Article 366(29-A)(f), he argued that it was enacted to overcome a previous judgment that dealt with the service element in bills for food or drinks consumed in restaurants. The expression "in any other manner whatsoever" emphasizes that the service element should not hinder the taxation of food under Article 366(29-A)(f). The learned Senior Advocate concluded that unincorporated associations mentioned in Article 366(29-A)(e) should be read ejusdem generis with "body of persons" and should not include members' clubs in corporate form.

After hearing the arguments from both sides, it is necessary to examine the relevant constitutional and statutory provisions. Article 366(29-A) defines "tax on the sale or purchase of goods" and includes various types of transactions involving the transfer, supply, or delivery of goods for cash, deferred payment, or other valuable consideration. Section 2 of the West Bengal Sales Tax Act provides definitions related to business, dealers, and sales. The Act imposes tax on sales, and liability to pay tax is determined based on certain criteria. The 61st Law Commission Report discussed the subject matter of Article 366(29-A) and referred to previous court cases regarding the taxation of sales by associations to members. The report concluded that amending the Constitution to include members' clubs under the tax net is not desirable, as the number of such clubs is not large, taxation could discourage the cooperative movement, and there is no serious issue of tax evasion since a member essentially takes their own goods.

In summary, the case revolves around whether members' clubs should be subject to the West Bengal Sales Tax Act. The arguments presented by the learned Senior Advocate for the Respondent highlight the absence of a profit motive in members' clubs and the limitations of Article 366(29-A) in including corporate clubs as unincorporated associations. The Law Commission Report advises against amending the Constitution to tax members' clubs, citing reasons such as their

The given text appears to be an excerpt from a legal document or a judgment. It discusses the interpretation and application of Article 366(29-A) of the Constitution of India, specifically focusing on sub-clause (e) and its implications. Here is a synopsis of the main points discussed in the text:

1. Article 366(29-A) of the Indian Constitution includes sub-clause (e), which is important for the discussion.

2. The Statement of Objects and Reasons leading up to the 46th Amendment is referred to. It highlights the need to widen the interpretation of the expression "sale of goods" to prevent tax avoidance.

3. The Supreme Court's decision in Gannon Dunkerley's case held that the term "sale of goods" in the Constitution has the same meaning as in the Sale of Goods Act, 1930. This decision primarily relates to works contracts.

4. The series of subsequent decisions by the Supreme Court resulted in certain transactions being considered not liable for sales tax, creating opportunities for tax avoidance.

5. The proposed amendments aim to augment state revenues and address tax avoidance. They validate laws levying tax on the supply of food or drink for consideration, but certain exceptions are made.

6. The judgment in BSNL v. Union of India is referred to, which discusses whether mobile phone connections are service transactions or transactions for the sale or supply of goods.

7. The court's observations on Article 366(29-A) clarify that sub-clause (e) covers transactions that may not have been considered sales previously, such as those involving unincorporated associations.

8. The court recognizes that the judgment in Gannon Dunkerley's case has not been entirely overridden by the 46th Amendment. Certain aspects of that judgment still apply, and transactions must qualify as sales under the Sales of Goods Act, 1930 for the purpose of levying sales tax.

9. The judgment in Young Men's Indian Association case is discussed, which deals with the supply of food and drink by clubs to their members. It applies the principle of mutuality, stating that if the club acts as an agent for its members, no sale is involved.

10. The judgment distinguishes the Enfield India Ltd. case and concludes that if there is no transfer of property involved in the supply of goods by a club acting as an agent for its members, no sale eligible for taxation occurs.

In summary, the text analyzes the interpretation and application of Article 366(29-A) of the Indian Constitution, particularly focusing on the implications of sub-clause (e) and its impact on the definition of sales and taxation in relation to various transactions.

The High Court concluded that the case of each club was similar to that of an agent or mandatory who uses their own money to prepare things for the consumption of the principal and later recoups the expenses. Therefore, the High Court ruled that there was no levy of tax on the supply of refreshments and preparation by the clubs to their members as no sale transaction was involved.

The judgment in Enfield India Ltd. reached a similar conclusion, stating that the English cases cited in the present case were related to criminal proceedings, while the current case concerned a taxing statute.

The judgment in Young Men's Indian Association distinguished the Enfield India Ltd. case, stating that the holding of property must be on behalf of the members of the club, regardless of whether the club is in corporate form or registered as a society or incorporated by a deed of trust.

The court clarified that the Enfield India Ltd. case did not further the discussion on this matter. It emphasized that clubs registered under Section 25 of the Companies Act, where payment of dividends to shareholders is prohibited, cannot be treated as separate legal entities from their members.

The doctrine of mutuality, as applied to clubs, was discussed in the Bangalore Club case. It established that there must be a complete identity between the contributors of funds and the participants in the club's activities. The surplus made by the club does not come back to the members as shareholders but is disposed of as agreed upon among the members. The doctrine recognizes that there is no sale transaction between two persons in such cases.

In summary, the courts have concluded that clubs providing services to their members do not engage in sale transactions, and therefore, there is no levy of tax on the supply of goods or services by the clubs to their members. The doctrine of mutuality recognizes the commonality between contributors and participants in the club's activities.

This passage discusses the implications of the 46th Amendment in relation to the principles established in the Young Men's Indian Association case and other judgments on the doctrine of mutuality as applied to members' clubs. The main question is whether the 46th Amendment has nullified the principles outlined in previous judgments.

The passage highlights that the 61st Law Commission Report acknowledged that members' clubs did not evade taxes because the members essentially consumed their own goods. However, the framers of the 46th Amendment took a different view and aimed to tax sales made by unincorporated clubs or associations of persons to their members. It was mistakenly assumed that such transactions were not taxable because these clubs or associations had no separate legal existence from their members.

The interpretation of the expression "any unincorporated association or body of persons" within the 46th Amendment is discussed. It is argued that this expression applies only to clubs that are not in corporate form, while clubs with corporate status were already taxable under the existing law. The word "any" implies all unincorporated associations or bodies, further supporting the interpretation that only non-corporate clubs were intended to be included in the tax net.

The passage also examines the definition of "person" under the General Clauses Act and the Income Tax Act, emphasizing that "body of persons" is used to exclude corporate entities from the scope. The contrast in language between the Income Tax Act and Article 366(29-A)(e) suggests that "body of persons" does not include the corporate form unless accompanied by the expression "whether incorporated or not."

Furthermore, it is argued that the supply of goods by an unincorporated association or body of persons must involve consideration passing from one person to another, as defined in the Indian Contract Act. The concept of reciprocity and consideration is highlighted to emphasize that there is no sale transaction between a club and its members based on the doctrine of mutuality. Therefore, the limited fiction introduced by Article 366(29-A)(e) does not nullify the principles established in the Young Men's Indian Association case.

Regarding sub-clause (f) of Article 366(29-A), which allows taxation on the supply of food or drink, the passage argues that it specifically pertains to the undoing of two Supreme Court judgments related to the taxability of food and drink served in hotels and restaurants. The subject matter of sub-clause (f) is distinct from sub-clause (e) and does not apply to members' clubs. It is pointed out that other goods supplied by members' clubs, such as soap or cosmetics, would not fall within sub-clause (f), creating an absurd situation where only food and drink would be taxable in such clubs.

Judgments of the Supreme Court are referenced to support the contention that sub-clause (f) pertains to food and drink supplied in hotels and restaurants, and its purpose was to overcome previous judgments on the taxability of such supplies. The passages from the K. Damodarasamy Naidu & Bros. case and the Federation of Hotel and Restaurant Associations of India case further clarify the scope and intent of sub-clause (f).

Lastly, it is reiterated that the doctrine of mutuality has not been abolished by sub-clause (e) of Article 366(29-A). The provisions of the Income Tax Act, such as Section 2(24)(vii) and Section 44, demonstrate that mutual insurance companies and cooperative societies are subject to taxation, but the doctrine of mutuality still applies.

In conclusion, the passage examines the interpretation and implications of the 46th Amendment in relation to the taxation of members' clubs and the doctrine of mutuality. It highlights the distinctions between sub-clause (e) and sub-clubs.

This passage concludes the discussion by addressing the applicability of the doctrine of mutuality to incorporated and unincorporated members' clubs after the 46th Amendment. It states that the doctrine of mutuality continues to apply to members' clubs even after the amendment, and the judgments that applied this doctrine, including the Young Men's Indian Association case, still hold the field. The passage emphasizes that sub-clause (f) of Article 366(29-A) has no relevance to members' clubs.

The passage also highlights the absence of language in Article 366(29-A)(e) similar to the provisions in the Income Tax Act that expressly tax the profits and gains of mutual insurance companies or the deemed transfer of assets by the owner to themselves. This further supports the conclusion that the doctrine of mutuality has not been abolished by the 46th Amendment.

Based on the answers provided to the three questions posed by the Division Bench in the State of West Bengal v. Calcutta Club Limited case, the passage affirms that no interference is warranted in the findings of fact or declaration of law in the case.

In relation to the connected matters in Civil Appeal No. 7497 of 2012 and others, the passage mentions that the appeals were listed before a larger bench after a reference order from a Division Bench. It notes that two judgments, one by the High Court of Jharkhand and the other by the High Court of Gujarat, have been challenged by the Revenue. These judgments followed the principles established in the Young Men's Indian Association case and declared that service tax on members' clubs is not applicable.

The passage concludes by stating that the appeals before the court involve judgments that have followed the reasoning of the High Court of Jharkhand and the High Court of Gujarat. The majority of cases pertain to members' clubs registered as companies or co-operative societies under relevant laws.

In summary, the passage reaffirms the continued application of the doctrine of mutuality to members' clubs and states that sub-clause (f) of Article 366(29-A) has no bearing on such clubs. It concludes that the findings in the case and the impugned judgments do not warrant interference, and it dismisses the relevant appeals accordingly.

This passage discusses the arguments presented by both sides regarding the imposition of service tax on members' clubs. The Revenue's representative, Shri Dhruv Agarwal, argues that service tax has been levied on members' clubs since 2005 and that the principle of mutuality laid down in the Young Men's Indian Association case no longer applies in the context of service tax. He contends that the High Courts of Jharkhand and Gujarat erred in applying the judgment to service tax cases.

On the other hand, the counsel representing the respondents argue that when service tax was introduced in 1994, certain activities were selected for taxation, including members' clubs. However, after statutory changes in 2005 and 2012, service tax continued to be imposed on members' clubs, except for those in an incorporated form. They assert that the doctrine of mutuality still applies to incorporated members' clubs in the service tax regime and that the Jharkhand and Gujarat High Courts correctly applied the Young Men's Indian Association judgment to these cases.

The passage provides the definitions of relevant terms and provisions related to service tax, including the definition of "club or association" under Section 65, the definition of "taxable service" under Section 65(105)(zze), and the valuation and payment of service tax under Sections 67 and 68.

It notes that from July 1, 2012, new provisions were introduced, and Section 65 and 65A became inapplicable. Instead, a new Section 65B was introduced, which defined the term "person" to include various entities such as individuals, companies, societies, and associations.

In summary, this passage presents the arguments of both sides regarding the applicability of service tax to members' clubs and provides relevant definitions and provisions related to service tax.

This passage discusses the definition and scope of service tax under Section 65B and Section 66B of the Finance Act. It also examines the historical background of service tax and its evolution over the years.

The definition of "service" under Section 65B(44) is defined as any activity carried out by a person for another for consideration, excluding certain specified activities such as the transfer of goods, transactions in money, and services provided by an employee to the employer. The definition of "person" under Section 65B(37) includes various entities, including companies, societies, and associations of persons, whether incorporated or not.

The passage further explains that service tax was levied at a rate of 14% on all services, except those specified in the negative list under Section 66D of the Act. It highlights the changes introduced in the service tax regime, including the shift from a specific list of taxable services to a negative list approach.

The Court refers to the Union of India v. Margadarshi Chit Funds Private Limited case, which outlines the history of service tax and the introduction of the negative list system. It also mentions the All-India Federation of Tax Practitioners case, where the constitutional validity of service tax was upheld.

The passage then focuses on the definition of "club or association" under Section 65 and Section 65B. It discusses the inclusion and exclusion of incorporated entities and highlights that incorporated clubs or associations were not included in the service tax net before July 1, 2012.

The Court analyzes the impact of the changes made post-July 1, 2012. It emphasizes that the term "body of persons" in Explanation 3 of Section 65B(44) cannot include incorporated companies or cooperative societies. Therefore, it is inferred that the legislature continued the pre-2012 scheme of not taxing members' clubs when they are in an incorporated form.

The passage concludes by affirming the correctness of the judgments of the Jharkhand High Court and the Gujarat High Court, which applied the Young Men's Indian Association case to hold that service tax is not applicable to incorporated members' clubs. It further declares that show-cause notices, demand notices, and other actions taken to levy and collect service tax from incorporated members' clubs are void and of no effect in law.

In summary, this passage explains the definitions and provisions related to service tax under the Finance Act. It discusses the historical development of service tax, the shift to a negative list system, and the implications for members' clubs, particularly those in an incorporated form.

C.A. No.4184 of 2009

1. This Appeal arises out of a reference order by a Division

Bench of this Court, reported in State of West Bengal v. Calcutta

Club Limited (2017) 5 SCC 356. The facts of Civil Appeal No.

4184 of 2009 are set out in the said reference order as follows:

“2. The facts that are necessary to be stated are that the

Assistant Commissioner of Commercial Taxes issued a

notice to the respondent Club assessee apprising it that

it had failed to make payment of sales tax on sale of food

and drinks to the permanent members during the quarter

ending 30-6-2002. After the receipt of the notice, the

respondent Club submitted a representation and the

assessing authority required the respondent Club to

appear before it on 18-10-2002. The notice and the

communication sent for personal hearing was assailed

by the respondent before the Tribunal praying for a

declaration that it is not a dealer within the meaning of

the Act as there is no sale of any goods in the form of

food, refreshments, drinks, etc. by the Club to its

permanent members and hence, it is not liable to pay

sales tax under the Act. A prayer was also made before

the Tribunal for nullifying the action of the Revenue

threatening to levy tax on the supply of food to the

permanent members.

3. It was contended before the Tribunal that there could

be no sale by the respondent Club to its own permanent

members, for doctrine of mutuality would come into play.

To elaborate, the respondent Club treated itself as the

agent of the permanent members in entirety and

advanced the stand that no consideration passed for

supplies of food, drinks or beverages, etc. and there was

only reimbursement of the amount by the members and

therefore, no sales tax could be levied.

4. The Tribunal referred to Article 366(29-A) of the

Constitution of India, Section 2(30) of the Act, its earlier

decision in Hindustan Club Ltd. v. CCT [Hindustan Club

Ltd. v. CCT, (1995) 98 STC 347 (Tri)] , distinguished the

authority rendered in Automobile Assn. of Eastern

India v. State of W.B. [Automobile Assn. of Eastern

India v. State of W.B., (2017) 11 SCC 811 : (2002) 40

STA 154 (SC)] and, eventually, opined as follows:

“Considering the relevant fact presented before us and

the different judgments of the Supreme Court and the

High Court we find that supplies of food, drinks and

refreshments by the petitioner clubs to their permanent

members cannot be treated as “deemed sales” within the

meaning of Section 2(30) of the 1994 Act. We find that

the payments made by the permanent members are not

considerations and in the case of Members' Clubs the

suppliers and the recipients (Permanent Members) are

the same persons and there is no exchange of

consideration.”

Being of this view, the Tribunal accepted the contention

of the respondent Club and opined that it is not eligible to

tax under the Act.

5. Being dissatisfied with the aforesaid order passed by

the Tribunal, the Revenue preferred a writ petition and

the High Court opined that the decision rendered

in Automobile Assn. of Eastern India [Automobile Assn.

of Eastern India v. State of W.B., (2017) 11 SCC 811 :

(2002) 40 STA 154 (SC)] , was not a precedent and

came to hold that reading of the constitutional

amendment, as well as the provisions of the definition

under the Act, it was clear that supply of food, drinks and

beverages had to be made upon payment of

consideration, either in cash or otherwise, to make the

same exigible to tax but in the case at hand, the drinks

and beverages were purchased from the market by the

Club as agent of the members. The High Court further

ruled that the members collectively was the real life and

the Club was a superstructure only and, therefore, mere

fact of presentation of bills and non-payment thereof

consequently, striking off membership of the Club, did

not bring the Club within the net of sales tax. The High

Court further opined that in the obtaining factual matrix

the element of mutuality was not obliterated. The

expression of the aforesaid view persuaded the High

Court to lend concurrence to the opinion projected by the

Tribunal.

9. At the very outset, we may mention certain undisputed

facts. It is beyond cavil that the respondent is an

incorporated entity under the Companies Act, 1956. The

respondent assessee charges and pays sales tax when

it sells products to the non-members or guests who

accompany the permanent members. But when the

invoices are raised in respect of supply made in favour of

the permanent members, no sales tax is collected.”

2. After setting out the definition of “sale“ in Section 2(30) of

the West Bengal Sales Tax Act, 1994 (hereinafter referred to as

the “West Bengal Sales Tax Act”) and Article 366(29-A) of the

Constitution of India, the Court then referred to the Constitution

Bench decision in C.T.O. v. Young Men’s Indian Association

(1970) 1 SCC 462 as follows:

“14. Earlier the Constitution Bench decision

in CTO v. Young Men's Indian Assn. [CTO v. Young

Men's Indian Assn., (1970) 1 SCC 462] dealing with the

liability of a club to pay sales tax when there is supply of

refreshment to its members, the Court had concluded

thus: (SCC pp. 467-68, para 11)

“11. The essential question, in the present case, is

whether the supply of the various preparations by each

club to its members involved a transaction of sale within

the meaning of the Sale of Goods Act, 1930. The State

Legislature being competent to legislate only under

Schedule VII List II Entry 54 to the Constitution the

expression “sale of goods” bears the same meaning

which it has in the aforesaid Act. Thus in spite of the

definition contained in Section 2(n) read with Explanation

I of the Act if there is no transfer of property from one to

another there is no sale which would be eligible to tax. If

the club even though a distinct legal entity is only acting

as an agent for its members in matter of supply of

various preparations to them no sale would be involved

as the element of transfer would be completely absent.

This position has been rightly accepted even in the

previous decision of this Court.”

3. After then referring to a number of decisions on the doctrine

of mutuality, the Court observed:

“23. In the light of the aforesaid position and the law of

mutual concerns, we have to ascertain the impact and

the effect of sub-clause (e) to clause (29-A) to Article 366

of the Constitution of India, as enacted vide 46th

Amendment in 1982 and applicable and applied to sales

or VAT tax. The said clause refers to tax on supply of

goods by an unincorporated association or body of

persons. The question would be whether the expression

“body of persons” would include any incorporated

company, society, association, etc. The second issue is

what would be included and can be classified as

transactions relating to supply of goods by an

unincorporated association or body of persons to its

members by way of cash, deferred payment or valuable

consideration. Such transactions are treated and

regarded as sales. The decisions of the Court in Fateh

Maidan Club [Fateh Maidan Club v. CTO, (2017) 5 SCC

638 : (2008) 12 VST 598 (SC)] and Cosmopolitan

Club [Cosmopolitan Club v. State of T.N., (2017) 5 SCC

635 : (2009) 19 VST 456 (SC)] in that context have

drawn a distinction when a club acts as an agent of its

members and when the property in the goods is sold i.e.

the property in food and drinks is passed to the

members. The said distinction, it is apparent to us, has

been accepted by the two Benches. However, the

decisions do not elucidate and clearly expound, when

the club is stated and could be held as acting as an

agent of the members and, therefore, would not be

construed as a party which had sold the goods. The

agency precept necessarily and possibly refers to a third

party from whom the goods i.e. the food and drinks had

been sourced and provided to by the club acting as an

agent of the members, to the said members. These are

significant and relevant facets which must be elucidated

and clarified so that there is no ambiguity in appreciating

and understanding the aforesaid concepts “acting as an

agent of the members” or when property is transferred in

the goods sold to the members.”

4. The Division Bench then set out 3 questions to be answered

by a larger Bench as follows:

“30.1. (i) Whether the doctrine of mutuality is still

applicable to incorporated clubs or any club after the

46th Amendment to Article 366(29-A) of the Constitution

of India?

30.2. (ii) Whether the judgment of this Court in Young

Men's Indian Assn. [CTO v. Young Men's Indian Assn.,

(1970) 1 SCC 462] still holds the field even after the 46th

Amendment of the Constitution of India; and whether the

decisions in Cosmopolitan Club [Cosmopolitan

Club v. State of T.N., (2017) 5 SCC 635 : (2009) 19 VST

456 (SC)] and Fateh Maidan Club [Fateh Maidan

Club v. CTO, (2017) 5 SCC 638 : (2008) 12 VST 598

(SC)] which remitted the matter applying the doctrine of

mutuality after the constitutional amendment can be

treated to be stating the correct principle of law?

30.3. (iii) Whether the 46th Amendment to the

Constitution, by deeming fiction provides that provision of

food and beverages by the incorporated clubs to its

permanent members constitute sale thereby holding the

same to be liable to sales tax?”

5. Shri Rakesh Dwivedi, learned Senior Advocate appearing

on behalf of the Appellants, referred to the ‘Sixty-First Law

Commission Report on Certain Problems Connected With Powers

of the States to Levy a Tax on the Sale of Goods and with the

Central Sales Tax Act, 1956 (May, 1974)’ (hereinafter referred to

as the “61st Law Commission Report”), which preceded the

enactment of Article 366(29-A) of the Constitution of India; the

‘Statement of Objects and Reasons’ appended to the Constitution

(Forty-sixth Amendment) Bill, 1981 [enacted as the Constitution

(Forty-sixth Amendment) Act, 1982] (hereinafter referred to as the

“Statement of Objects and Reasons”), which led to the insertion of

Article 366(29-A); and then referred, in particular, to Article

366(29-A)(e) and (f). According to the learned Senior Advocate,

366(29-A)(e) was inserted in order to do away with the doctrine of

agency/trust or mutuality, insofar as it applied to members’ clubs

and, therefore, sought to do away with the basis of the judgment

in Young Men’s Indian Association (supra). He argued that the

language of 366(29-A)(e) did away with transfer of property in

goods and was specifically differently worded from 366(29-A)(a)

and (b), which referred to such transfer. According to him, the

expression “unincorporated association or body of persons” in

sub-clause (e) must be read disjunctively, and so read would

include incorporated persons such as companies, cooperative

societies, etc. According to him, it is important to construe a

provision of the Constitution broadly, and in consonance with the

object sought to be achieved, that being, to do away with the

doctrine of mutuality in all its forms. According to him, even

assuming that “body of persons” under 366(29-A)(e) did not

include incorporated persons, 366(29-A)(f) would take within its

wide sweep the supply of goods, being food or any other article

for human consumption or drink, given that sub-clause (f) does

not refer to incorporated or unincorporated bodies, and takes

within its sweep a tax in the supply of goods “in any other manner

whatsoever”, which are words of extremely wide import. He then

took us through the West Bengal Sales Tax Act and referred to the

definition of “dealer” in Section 2(10) and “sale” in Section 2(30),

and then adverted to the charging Section 9 of the aforesaid Act.

According to him, a reading of the definition of “dealer” and

explanation (1) thereof in particular, would make it clear that the

explanation is not really an explanation in the classical sense, but

seeks to rope in members’ clubs which sell goods to their

members. Thus, the explanation stands apart from the main part

of the definition of “dealer”, which requires a person to carry on

the business of selling and purchasing goods. He then relied

heavily on Deputy Commercial Tax Officer, Saidapet & Anr. v.

Enfield India Ltd., Co-operative Canteen Ltd. (1968) 2 SCR

421 for the proposition that the English cases which dealt with the

doctrine of mutuality had no application in the context of a taxing

statute, as these judgments dealt with criminal liability. He also

relied strongly on this judgment to show that profit-motive is totally

unnecessary where a supply of goods by a club to its members,

falls within the definition of “sale” under the Madras General Sales

Tax Act, 1959 in that case. He also distinguished Inland Revenue

Commissioners v. Westleigh Estates Company, Limited 1924

K.B. 390 from the present case, by stating that all observations on

mutuality were made in the context of whether a business

corporation’s profits could be brought to tax. He instead relied

upon the observations made in Walter Fletcher v. Income Tax

Commissioner (1972) Appeal Cases 414, stating that the

mutuality principle was not of universal application, even when it

applied to members’ clubs, and it is important to find out in the

facts of a case when relationship of mutuality ends and when

trading begins. In any case, according to the learned Senior

Advocate, the doctrine of mutuality has no application when a

members’ club is in the corporate form, as it is clear from Bacha

F. Guzdar v. Commissioner of Income Tax, Bombay (1955) 1

SCR 876, where it was held that a shareholder is not the owner of

the assets of a company and, therefore, the aforesaid principle

cannot possibly apply to members’ clubs in corporate form.

According to him, it makes no difference that the company is one

registered under Section 25 of the Companies Act, 1956

(“hereinafter referred to as the “Companies Act”), as is the case in

the appeal in the present case.

6. Shri Jaideep Gupta, learned Senior Advocate appearing on

behalf of the Respondent, has on the other hand referred to

Section 2(5) of the West Bengal Sales Tax Act, and stated that the

very first pre-requisite for falling within the provisions of that Act is

that there should be a profit motive, as defined, and since there is

none in members’ clubs, the charging section will not be attracted

on the facts of these cases. He relied strongly upon State of

Gujarat v. Raipur Manufacturing Co. Ltd. (1967) 1 SCR 618, for

the proposition that the expression “profit-motive” does not refer to

surplus being made, but only refers to a motive of making money

from sale transactions. He then referred to Section 25 of the

Companies Act and, in particular, Section 25(1)(b), which states

that a company is registered under Section 25 only if it intends to

apply its profits and other income in promoting its objects, and

prohibits payment of dividend to its members. For this reason, the

ratio of Bacha F. Guzdar (supra) cannot possibly apply to

members’ clubs in the form of Section 25 companies. He then

referred to the Statement of Objects and Reasons, which

according to him, made it clear that only unincorporated clubs or

associations of persons were referred to in Article 366(29-A)(e).

He also argued that under no circumstances can a company be

fitted within “body of persons”, as a result of which Article 366(29-

A)(e) will not apply to sales of food or refreshments by a club to its

members. According to him, the Constitution (Forty-sixth

Amendment) Act, 1982 (“hereinafter referred to as the “46th

Amendment”), which inserted Clause (29-A) into Article 366 of the

Constitution, has not done away with the Young Men’s Indian

Association (supra), as there cannot possibly be a supply of

goods by one person to itself; and that, therefore, the doctrine of

agency/trust/mutuality continues as before. He referred to the

definition of “consideration” in Section 2(d) of the Indian Contract

Act, 1872, which according to him made it clear that consideration

must flow from one person to another and in the absence of two

players, as in the case of Young Men’s Indian Association

(supra), Article 366(29-A) would have no application. When it

came to the application of 366(29-A)(f), Shri Gupta stated that it is

clear that (f) was enacted for a very different purpose, namely, to

get over the judgment of Northern India Caterers (India) Ltd. v.

Lt. Governor of Delhi (1978) 4 SCC 36, which dealt with the

service element contained in a bill for food or drinks being

consumed in restaurants. The expression “in any other manner

whatsoever” only seeks to re-emphasise that where goods are

supplied in such restaurants, then the service element will not

interdict the State Legislature from taxing food etc. under Article

366(29-A)(f). In any case, going back to sub-clause (e), the

learned Senior Advocate said that it is clear that the expression

“unincorporated associations“ must be read as ejusdem generis

with “body of persons” and so read would not include members’

clubs in corporate form.

7. Having heard the learned Senior Advocates on behalf of

both sides, it is important to first set out the relevant Constitutional

and statutory provisions. Article 366(29-A) reads as follows:

“366. (29-A) “tax on the sale or purchase of goods”

includes—

(a) a tax on the transfer, otherwise than in pursuance of

a contract, of property in any goods for cash, deferred

payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as

goods or in some other form) involved in the execution of

a works contract;

(c) a tax on the delivery of goods on hire-purchase or

any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for

any purpose (whether or not for a specified period) for

cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated

association or body of persons to a member thereof for

cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service

or in any other manner whatsoever, of goods, being food

or any other article for human consumption or any drink

(whether or not intoxicating), where such supply or

service, is for cash, deferred payment or other valuable

consideration,and such transfer, delivery or supply of any goods shall

be deemed to be a sale of those goods by the person

making the transfer, delivery or supply and a purchase of

those goods by the person to whom such transfer,

delivery or supply is made;”

8. The relevant Sections in the West Bengal Sales Tax Act are

also set out here in below:

“2. Definitions

(5) “business” includes—

(a)any trade, commerce, manufacture, execution of

works contract or any adventure or concern in the

nature of trade, commerce, manufacture or

execution of works contract, whether or not such

trade, commerce, execution of works contract,

adventure or concern is carried on with the motive

to make profit and whether or not any profit

accrues from such trade, commerce, manufacture,

execution of works contract, adventure or concern;

and

(b)Any transaction in connection with, or ancillary or

incidental to, such trade, commerce, manufacture,

execution of works contract, adventure or concern;

(10) “dealer” means any person who carries on the

business of selling or purchasing goods in West Bengal

or any person making sales under section 15, and

includes—

(a)an occupier of a jute-mill or shipper of jute;

(b)Government, a local authority, a statutory body, a

trust or other body corporate which, or a liquidator

or a receiver appointed by a Court in respect of a

person, being a dealer as defined in this clause,

who, whether or not in the course of business,

sells, supplies or distributes directly or otherwise

goods for cash or for deferred payment or for

commission, remuneration or other valuable

consideration.

Explanation I: A co-operative society or a club or any

association which sells goods to its members is a dealer.

Explanation II: A factor, a broker, a commission agent, a

del credere agent, an auctioneer, an agent for handling

or transporting of goods or handling of document of title

to goods or any other mercantile agent, by whatever

name called, and whether of the same description as

hereinbefore mentioned or not, who carries on the

business of selling goods and who has, in the customary

course of business, authority to sell goods belonging to

principals, is a dealer;

(30) “sale” means any transfer of property in goods for

cash, deferred payment or other valuable consideration,

and includes-

(a)any transfer, otherwise than in pursuance of a

contract, of property in any goods for cash,

deferred payment or other valuable consideration;

(b)any delivery of goods on hire-purchase or any

system of payment by instalments;

(c)any transfer of the right to use any goods for any

purpose (whether or not for a specified period) for

cash, deferred payment or other valuable

consideration;

(d)any supply, by way of, or as part of, any service or

in any other manner whatsoever, of goods, being

food or any other article for human consumption or

any drink(whether or not intoxicating), where such

supply or service is for cash, deferred payment or

other valuable consideration;

(e)any supply of goods by any unincorporated

association or body of persons to a member

thereof for cash, deferred payment or other

valuable consideration,and such transfer, delivery, or supply of any goods

shall be deemed to be a sale of those goods by the

person or unincorporated association or body of

persons making the transfer, delivery, or supply and a

purchase of those goods by the person to whom such

transfer, delivery, or supply is made, but does not

include a mortgage, hypothecation, charge or pledge.

Explanation: A sale shall be deemed to take place in

West Bengal if the goods are within West Bengal –

(a) In the case of specific or ascertained

goods, at the time of the contract of sale is

made; and

(b) In the case of unascertained or future

goods, at the time of their appropriation to

the contract of sale by the seller, whether

the assent of the buyer to such

appropriation is prior or subsequent to the

appropriation:

PROVIDED that where there is a single

contract of sale in respect of goods

situated in West Bengal as well as in

places outside West Bengal, provisions of

this Explanation shall apply as if there

were a separate contract of sale in respect

of the goods situated in West Bengal.

9. Incidence of tax on sale

(1) Subject to the provisions of this Act, with effect from

the appointed day –

(a) Every dealer –

(i) who has been liable immediately before the

appointed day to pay tax under section 4 or

section 8 of the Bengal Finance (Sales Tax)

Act, 1941 (Bengal Act VI of 1941), and who

would have continued to be so liable on

such appointed day under that Act had this

Act not come into force, or

(ii) whose gross turnover during a year first

exceeds the taxable quantum as applicable

to him under the Bengal Finance (Sales

Tax) Act, 1941, on the day immediately

preceding the appointed day,

(b)Every dealer registered under the West Bengal

Sales Tax Act, 1954 (West Bengal Act IV of 1954),

who is in possession of a registration certificate

under that Act on the day immediately before the

appointed day, and to whom clause (a) does not

apply, and

(c)Every dealer registered under the West Bengal

Motor Spirits Sales Tax Act, 1974, (West Bengal

Act XI of 1974), who is in possession of a

registration certificate under that Act on the day

immediately before the appointed day, and to

whom clause (a) or clause (b) does not apply,

shall be liable to pay tax under this Act on all sales,

other than those referred to in section 15, effected on or

after the appointed day.

(2)Every dealer to whom sub-section (1) does not apply

shall, if his gross turnover of sales calculated from

the commencement of any year exceeds the taxable

quantum at any time within such year, be liable to

pay tax under this Act on all sales, other than those

referred to in section 15, effected on and from the

date immediately following the day on which such

gross turnover of sales first exceeds the taxable

quantum.

(3)In this Act the expression “taxable quantum” means-

(a)In relation to any dealer who imports for sale any

goods, other than those specified in Schedule IV,

into West Bengal, 30,000 Rupees; or

(c)In relation to any dealer who manufactures or

produces any goods, other than those specified in

Schedule IV [***] for sale, 1,00,000 rupees; or

(e)In relation to any other dealer, 5,00,000 rupees,

excluding turnover of sales of goods specified in

Schedule IV.

(4) Every dealer who has become liable to pay tax

under sub-section (1) or sub-section (2) shall

continue to be so liable until the expiry of three

consecutive years, during each of which his gross

turnover of sales has failed to exceed the taxable

quantum, and such further period after the date of

such expiry as may be prescribed, and on the expiry

of this later period his liability to pay tax under sub-

section (1) or sub-section (2) shall cease.

Explanation: For the purposes of sub-section (4), in

computing the period of three consecutive years in

respect of a dealer who has become liable to pay tax

under sub-section (1), the year or years which

expired before the appointed day during which or

each of which the gross turnover failed to exceed the

taxable quantum referred to in the Bengal Finance

(Sales Tax) Act, 1941, shall be included.

(5) Every dealer whose liability to pay tax under sub-

section (1) or sub-section (2) has ceased under sub-

section (4), shall, if his gross turnover of sales

calculated from the commencement of any year

again exceeds the taxable quantum at any time

within such year, be liable to pay such tax on all

sales, other than those referred to in Section 15,

effected on and from the date immediately following

the day on which such gross turnover of sales

against first exceeds the taxable quantum.

(6)The Commissioner shall, after making such enquiry

as he may think necessary and after giving the

dealer an opportunity of being heard, fix the date on

and from which such dealer shall become liable to

pay tax under sub-section (2) or sub-section (5).”

9. The 61st Law Commission Report, which deliberated on the

subject matter of Article 366(29-A), dealt with sales by

associations to members under Chapter 1-D. of the Report. It

began by referring to Enfield India Ltd. (supra) and then referred

to Young Men’s Indian Association (supra) as follows:

“1D.3. Unincorporated associations- Though the

above case related to a co-operative society, the court

(Shah, J.) did make certain observations as to the

position in regard to unincorporated societies, as

follows:-

“In the case of an unincorporated society, club or

a firm or an association, ordinarily the supply and

distribution by such a society, club, firm or an

association, of goods belongs to its members, may not

result in sale of the goods which are jointly held for the

benefit of the members of the society, club, firm or the

association, when, by virtue of the relinquishment of the

common rights of the members, the property stands

transferred to a member in payment of a price, and the

transaction may not prima facie be regard as a ‘sale’

within the meaning of the Act.”

But the Court made it very clear (towards the end of the

judgment) that it was not called upon in this case to

decide whether an unincorporated club which supplies

goods for a price to its members, may be regarded as

selling goods to its members.

1D.4. Supply by club to members not ‘sale’.- Then,

there are clubs. In a case decided by the Supreme Court

on appeal from Madras, the Cosmopolitan club, Madras,

the Youngmen’s Indian Association, Madras and the

Lawley Institute, Ootacamund, filed writ petitions under

Article 226 of the Constitution, challenging the levy of

sales tax under Madras General Sales Tax Act, 1959, on

snacks, beverages and other articles supplied to their

members or guests. The High Court held that the club

was not a ‘dealer’ within the meaning of section 2(g),

read with Explanation I, of the Madras Act and that there

was no ‘sale’ within the meaning of section 2(h), read

with Explanation I, of the Act. On appeal to the Supreme

Court it was held that a member’s club cannot be made

subject to the provisions of the Sale Tax Act concerning

sales, because the members are joint owners of all the

club property. The supply of articles to a member at a

fixed price by the Club cannot be regarded as a “sale”;

1D.5.No ‘sale’ in such circumstances in England.- It

is necessary to mention here that, in England, it was held

in Graff v. Evans, that a transaction whereby a member

of a club acquired liquor which was the property of the

club was not sale but merely transfer of special property.

This case was decided eleven years before the English

Act relating to the sale of goods was passed in 1893.

The basis of the decision was that the transaction was a

release of the rights of the other members to the

“purchaser”. It might have been thought, therefore, that

when section 1(1) of the Sale of Goods act specifically

enacted (in 1893) that—

“............There may be a contract of sale between one

part owner and another,”

The basis of Graff v. Evans had ceased to be valid.

It may be noted that the Indian Sale of Goods Act has a

similar provision. But in Davies v. Burnett, a Divisional

Court followed the earlier case, and the Sale of Goods

Act was not even referred to. A well-known writer has

stated, that “this view of the law has now been accepted

for so long that it is unlikely to be upset by a higher

court.”

The English cases mostly relate to licensing. But the

point to be noted is, that the provision in the Sale of

Goods Act as to “part owner” has not come in their way.

The position in this respect, as was observed in an

Australian case, is simply that “a part of the common

property is appropriated to the separate use of the

members, and he makes a corresponding contribution

from his separate property to the common fund.” The

question must, of course, always be as to the meaning of

the word “sale’ or “sell” in the particular statute which

comes under consideration. If no reason is seen for

giving the word an extended meaning, one would think it

perfectly correct to say that an ordinary unincorporated

members’ club does not “sell”, in the true sense, liquor

which a member obtains from the common store on

payment of money to the common fund.

1D.6. General observations.- The broad general

principle which constitutes a common feature of these

transactions, in the absence of the transfer of property. It

would appear that these transactions are not “sale”,

because there is no transfer of property.

1D.6A. This, then, is the present position. The question

now to be considered is , whether is desirable that the

taxability of such transactions should be provided for by

expanding the concept of “sale” for the purpose of the

legislative power of the States,—a result which can be

achieved only by amending the Constitution.

1D.7. Amendment of Constitution not needed.- We do

not think that it would be appropriate to amend the

Constitution of this purpose. The number of such clubs

and associations would not be very large. Moreover,

taxation of such transactions might discourage the co-

operative movement.

1D.8. Unincorporated associations exist various

arrangements.- Unincorporated associations exist in a

“myriad of structural arrangements.” As a general

proposition, each is liable for the activities of its members

when the activity has been authorised, supported, or

ratified by the association.

1D.9. No evasion.- It should be also noted that there

can be no serious question of evasion in such cases. A

member really takes his own goods.

1D.10. We, therefore, do not recommend any change.”

10. It will be seen from the above that the Law Commission was

of the view that the Constitution ought not to be amended so as to

bring within the tax net members’ clubs. It gave three reasons for

so doing. First, it stated that the number of such clubs and

associations would not be very large; second, taxation of such

transactions might discourage the cooperative movement; and

third, no serious question of evasion of tax arises as a member of

such clubs really takes his own goods.

11. However, despite the aforesaid, Article 366(29-A) included

within it sub-clause (e).

12. At this point, it is important to refer to the Statement of

Objects and Reasons which led upto the 46th Amendment. The

relevant portions of the Statement of Objects and Reasons read

as follows:

“Sales tax laws enacted in pursuance of the Government

of India Act, 1935 as also the laws relating to sales tax

passed after the coming into force of the Constitution

proceeded on the footing that the expression "sale of

goods", having regard to the rule as to broad

interpretation of entries in the legislative lists, would be

given a wider connotation. However, in Gannon

Dunkerley's case (A.I.R. 1958 S.C. 560), the Supreme

Court held that the expression "sale of goods" as used in

the entries in the Seventh Schedule to the Constitution

has the same meaning as in the Sale of Goods Act,

1930. This decision related to works contracts.

By a series of subsequent decisions, the Supreme Court

has, on the basis of the decision in Gannon Dunkerley's

case, held various other transactions which resemble, in

substance, transactions by way of sales, to be not liable

to sales tax. As a result of these decisions, a transaction,

in order to be subject to the levy of sales tax under entry

92A of the Union List or entry 54 of the State List, should

have the following ingredients, namely, parties

competent to contract, mutual assent and transfer of

property in goods from one of the parties to the contract

to the other party thereto for a price.

This position has resulted in scope for avoidance of tax

in various ways. An example of this is the practice of

inter-State consignment transfers, i.e., transfer of goods

from head office or a principal in one State to a branch or

agent in another State or vice versa or transfer of goods

on consignment account, to avoid the payment of sales

tax on inter-State sales under the Central Sales Tax Act.

While in the case of a works contract, if the contract

treats the sale of materials separately from the cost of

the labour, the sale of materials would be taxable, but in

the case of an indivisible works contract, it is not possible

to levy sales tax on the transfer of property in the goods

involved in the execution of such contract as it has been

held that there is no sale of the materials as such and

the property in them does not pass as moveables.

Though practically the purchaser in a hire-purchase

agreement gets the goods on the date of the hire-

purchase, it has been held that there is sale only when

the purchaser exercises the option to purchase at a

much later date and therefore only the depreciated value

of the goods involved in such transaction at the time the

option to purchase is exercised becomes assessable to

sales tax. Similarly, while sale by a registered club or

other association of persons (the club or association of

persons having corporate status) to its members is

taxable, sales by an unincorporated club or association

of persons to its members is not taxable as such club or

association, in law, has no separate existence from that

of the members. In the Associated Hotels of India case

(A.I.R. 1972 S.C. 1131), the Supreme Court held that

there is no sale involved in the supply of food or drink by

a hotelier to a person lodged in the hotel.

The proposed amendments would help in the

augmentation of the State revenues to a considerable

extent. Clause 6 of the Bill seeks to validate laws levying

tax on the supply of food or drink for consideration and

also the collection or recoveries made by way of tax

under any such law. However, no sales tax will be

payable on food or drink supplied by a hotelier to a

person lodged in the hotel during the period from the

date of the judgment in the Associated Hotels of India

case and the commencement of the present Amendment

Act if the conditions mentioned in sub-clause (2) of

clause 6 of the Bill are satisfied. In the case of food or

drink supplied by Restaurants this relief will be available

only in respect of the period after the date of judgment in

the Northern India Caterers (India) Limited case and the

commencement of the present Amendment Act.”

(emphasis supplied)

13. At this juncture, it is important to advert to the decision of

this Court in BSNL v. Union of India (2006) 3 SCC 1. This

judgment concerned itself with the nature of the transaction by

which mobile phone connections are enjoyed. The question that

arose before this Court was whether the transaction in question

was a service transaction and not a transaction for sale or supply

of goods. In answering this question, the Court, after referring to

Article 366(29-A), observed as follows:

“41. Sub-clause (a) covers a situation where the

consensual element is lacking. This normally takes place

in an involuntary sale. Sub-clause (b) covers cases

relating to works contracts. This was the particular fact

situation which the Court was faced with in Gannon

Dunkerley [State of Madras v. Gannon Dunkerley & Co.

(Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 :

1959 SCR 379] and which the Court had held was not a

sale. The effect in law of a transfer of property in goods

involved in the execution of the works contract was by

this amendment deemed to be a sale. To that extent the

decision in Gannon Dunkerley [State of

Madras v. Gannon Dunkerley & Co. (Madras) Ltd.,

(1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379]

was directly overcome. Sub-clause (c) deals with hire-

purchase where the title to the goods is not transferred.

Yet by fiction of law, it is treated as a sale. Similarly the

title to the goods under sub-clause (d) remains with the

transferor who only transfers the right to use the goods

to the purchaser. In other words, contrary to A.V.

Meiyappan decision [(1967) 20 STC 115 (Mad)] a lease

of a negative print of a picture would be a sale. Sub-

clause (e) covers cases which in law may not have

amounted to sale because the member of an

incorporated association would have in a sense begun

as both the supplier and the recipient of the supply of

goods. Now such transactions are deemed sales. Sub-

clause (f) pertains to contracts which had been held not

to amount to sale in State of Punjab v. Associated Hotels

of India Ltd. [(1972) 1 SCC 472 : (1972) 29 STC 474]

That decision has by this clause been effectively

legislatively invalidated.”

14. In the separate concurring judgment of Lakshmanan, J., the

learned Judge observed thus:

“105. The amendment introduced fiction by which six

instances of transactions were treated as deemed sale of

goods and that the said definition as to deemed sales will

have to be read in every provision of the Constitution

wherever the phrase “tax on sale or purchase of goods”

occurs. This definition changed the law declared in the

ruling in Gannon Dunkerley & Co. [State of

Madras v. Gannon Dunkerley & Co. (Madras) Ltd.,

(1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR 379]

only with regard to those transactions of deemed sales.

In other respects, law declared by this Court is not

neutralised. Each one of the sub-clauses of Article

366(29-A) introduced by the Forty-sixth Amendment was

a result of ruling of this Court which was sought to be

neutralised or modified. Sub-clause (a) is the outcome

of New India Sugar Mills Ltd. v. CST [(1963) 14 STC 316

: 1963 Supp (2) SCR 459] and Vishnu Agencies (P)

Ltd. v. CTO [(1978) 1 SCC 520 : 1978 SCC (Tax) 31 :

AIR 1978 SC 449] . Sub-clause (b) is the result

of Gannon Dunkerley & Co. [State of Madras v. Gannon

Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR

1958 SC 560 : 1959 SCR 379] Sub-clause (c) is the

result of K.L. Johar and Co. v. CTO [(1965) 2 SCR 112 :

AIR 1965 SC 1082] . Sub-clause (d) is consequent

to A.V. Meiyappan v. CCT [(1967) 20 STC 115 (Mad)] .

Sub-clause (e) is the result of CTO v. Young Men's

Indian Assn. (Regd.) [(1970) 1 SCC 462] . Sub-clause (f)

is the result of Northern India Caterers (India) Ltd. v. Lt.

Governor of Delhi [(1978) 4 SCC 36 : 1978 SCC (Tax)

198] and State of Punjab v. Associated Hotels of India

Ltd. [(1972) 1 SCC 472 : (1972) 29 STC 474]”

15. The observations made in the judgment on sub-clause (e)

cannot possibly be said to form the ratio-decidendi of the

judgment, as what came up for consideration in that case was

whether electro-magnetic waves can be said to be ‘goods’, so as

to be the subject matter of taxation within Article 366. This was

answered in the negative as follows:

“71. For the reasons stated by us earlier we hold that the

electromagnetic waves are not “goods” within the

meaning of the word either in Article 366(12) or in the

State legislations. It is not in the circumstances

necessary for us to determine whether the telephone

system including the telephone exchange is not goods

but immovable property as contended by some of the

petitioners.”

In any case, paragraph 41 of the judgment, when it refers to sub-

clause (e), cannot possibly refer to “incorporated” associations

contrary to the plain language of sub-clause (e), which refers to

“unincorporated” associations.

16. In point of fact, this Court went on to state that the judgment

in State of Madras v. Gannon Dunkerley AIR 1958 SC 560 was

not done away with altogether and actually survived the 46th

Amendment in at least two respects as follows:

“43. Gannon Dunkerley [State of Madras v. Gannon

Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR

1958 SC 560 : 1959 SCR 379] survived the Forty-sixth

Constitutional Amendment in two respects. First with

regard to the definition of “sale” for the purposes of the

Constitution in general and for the purposes of Entry 54

of List II in particular except to the extent that the clauses

in Article 366(29-A) operate. By introducing separate

categories of “deemed sales”, the meaning of the word

“goods” was not altered. Thus the definitions of the

composite elements of a sale such as intention of the

parties, goods, delivery, etc. would continue to be

defined according to known legal connotations. This

does not mean that the content of the concepts remain

static. The courts must move with the times. [See

Attorney General v. Edison Telephone Co. of London

Ltd., (1880) 6 QBD 244 : 43 LT 697] But the Forty-sixth

Amendment does not give a licence, for example, to

assume that a transaction is a sale and then to look

around for what could be the goods. The word “goods”

has not been altered by the Forty-sixth Amendment. That

ingredient of a sale continues to have the same

definition. The second respect in which Gannon

Dunkerley [State of Madras v. Gannon Dunkerley & Co.

(Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 :

1959 SCR 379] has survived is with reference to the

dominant nature test to be applied to a composite

transaction not covered by Article 366(29-A).

Transactions which are mutant sales are limited to the

clauses of Article 366(29-A). All other transactions would

have to qualify as sales within the meaning of the Sales

of Goods Act, 1930 for the purpose of levy of sales tax.”

17. We have thus to discover for ourselves whether the doctrine

of mutuality has been done away with by Article 366(29-A)(e), and

whether the ratio of Young Men’s Indian Association (supra)

would continue to operate even after the 46th Amendment.

18. At this juncture, it is important to set out the two pillars, so to

speak, on which the Young Men’s Indian Association (supra) is

largely based. In Graff v. Evans (1882) 8 Q.B. 373, the

Grosvenor Club was incorporated in the form of a trust, the

Appellant Graff acting as Manager of the club, for and on behalf of

a Managing Committee, which conducted the general business of

the club. Food and refreshments such as wine, beer and spirits

were served to members on payment for the same. The question

was whether a license was required under the Licence Act, 1872,

to sell liquor by retail. In this context, the Queen’s Bench Division

held:

“I think the true construction of the rules is that the

members were the joint owners of the general property in

all the goods of the club, and that the trustees were their

agents with respect to the general property in the goods,

although they had other agents with respect to special

properties in some of the goods. I am unable to follow

the reasoning of the learned magistrate in saying that the

question depends upon whether or not a profit was made

upon the sale of the liquors. It appears to me immaterial

whether the sum a member pays for the liquor is equal to

or more or less than the cost price. The transaction does

not become the more or the less a sale on that account.

It cannot be the true view that if the member pays a sum

exactly equal to the cost price there is no sale within the

section, but that if he pays more than the cost price there

is. The section must be construed by looking at the

language used, and taking a large view of the object of

the legislation. The legislature have come to the

conclusion that it is unadvisable that intoxicating liquors

should be sold anywhere without a license. The

enactment is limited to “sales” of intoxicating liquors, and

only seems aimed at sales by retail traders, because the

wholesale trader is not touched. The question here is,

Did Graff, the manager, who supplied the liquors to

Foster, effect a “sale” by retail? I think not. I think Foster

was an owner of the property together with all the other

members of the club. Any member was entitled to obtain

the goods on payment of the price. A sale involves the

element of a bargain. There was no bargain here, nor

any contract with Graff with respect to the goods. Foster

was acting upon his rights as a member of the club, not

by reason of any new contract, but under his old contract

of association by which he subscribed a sum to the funds

of the club, and became entitled to have ale and whisky

supplied to him as a member at a certain price. I cannot

conceive it possible that Graff could have sued him for

the price as the price of goods sold and delivered. There

was no contract between two persons, because Foster

was vendor as well as buyer. Taking the transaction to be

a purchase by Foster of all the other members' shares in

the goods, Foster was as much a co-owner as the

vendor.”

19. Likewise, in Trebanog Working Men’s Club and Institute

Ltd. v. Macdonald (1940) 1 K.B. 576, a similar question arose

before the Kings Bench Division. Graff (supra) was applied and

followed thus:

“In our opinion, the decision in Graff v. Evans applies to

and governs the present case. Once it is conceded that a

members' club does not necessarily require a licence to

serve its members with intoxicating liquor, because the

legal property in the liquor is not in the members

themselves, it is difficult to draw any legal distinction

between the various legal entities that may be entrusted

with the duty of holding the property on behalf of the

members, be it an individual, or a body of trustees, or a

company formed for the purpose, so long as the real

interest in the liquors remains, as in this case it clearly

does, in the members of the club. There is no magic in

this connection in the expressions “trustee” or “agent.”

What is essential is that the holding of the property by

the agent or trustee must be a holding for and on behalf

of, and not a holding antagonistic to, the members of the

club. We are dealing here with a quasi-criminal case,

where the Court seeks to deal with the substance of a

transaction rather than the legal form in which it may be

clothed.”

20. The stage is now set for a consideration of the judgment in

Young Men’s Indian Association (supra). Three separate

appeals were heard and decided by a Six Judge Bench of this

Court in this case. The first considered the Cosmopolitan Club,

Madras, which was registered under Section 26 of the Companies

Act, 1913 as a non-profit earning institution. Young Men’s Indian

Association was also considered, being a Society registered

under the Societies Registration Act, 1860. The third case

involved the Lawley Institute which came into existence by a

deed of trust. In all these cases, food preparations were supplied

to members at prices fixed by the club. In the Cosmopolitan Club

case, a member is allowed to bring guests with him, but if any

article of food is consumed by the guest, it is the member who has

to pay for the same, which was similar to the position in the Young

Men’s Indian Association. The Madras Sales Tax Act, 1959 came

up for consideration in the aforesaid judgment. This Court

referring to the two English cases cited here in above held:

“7. The law in England has always been that members'

clubs to which category the clubs in the present case

belong cannot be made subject to the provisions of the

Licensing Acts concerning sale because the members

are joint owners of all the club property including the

excisable liquor. The supply of liquor to a member at a

fixed price by the club cannot be regarded to be a sale.

If, however, liquor is supplied to and paid for by a person

who is not a bona fide member of the club or his duly

authorised agent there would be a sale. With regard to

incorporated clubs a distinction has been drawn. Where

such a club has all the characteristics of a members' club

consistent with its incorporation, that is to say, where

every member is a shareholder and every shareholder is

a member, no licence need be taken out if liquor is

supplied only to the members. If some of the

shareholders are not members or some of the members

are not shareholders that would be the case of a

proprietary club and would involve sale. Proprietary clubs

stand on a different footing. The members are not

owners of or interested in the property of the club. The

supply to them of food or liquor though at a fixed tariff is

a sale. (See Halsbury's Laws of England, 3rd Edn., Vol.

5, pp. 280-281). The principle laid down

in Graff v. Evans [(1882) 8 QBD 373] had throughout

been followed. In that case Field, J., put it thus:

“I think the true construction of the Rules is that the

members were the joint owners of the general property in

all the goods of the club, and that the trustees were their

agents with respect to the general property in the goods.”

The difficulty felt in the legal property ordinarily vesting in

the trustees of the members' club or in the incorporated

body was surmounted by invoking the theory of agency

i.e. the club or the trustees acting as agents of the

members. According to Lord Hewart (L.C.J.)in Trebanog

Working Men's Club and Institute

Ltd. v. Macdonald [(1940) 1 AELR 454] once it was

conceded that a members' club did not necessarily

require a licence to serve its members with intoxicating

liquor it was difficult to draw any distinction between the

various legal entities which might be entrusted with the

duty of holding the property on behalf of members, be it

an individual or a body of trustees or a company formed

for the purpose so long as the real interest in the liquor

remained in the members of the club. What was

essential was that the holding of the property by the

agent or trustee must be a holding for and on behalf of

and not a holding antagonistic to members of the club.

8. In the various cases which came to be decided by the

High Courts in India the view which had prevailed in

England was accepted and applied. We may notice the

decisions of the Madhya Pradesh High Court in Bengal

Nagpur Cotton Mills Club, Rajnandangaon v. Sales Tax

Officer, Raipur [8 STC 781] and of the Mysore High

Court in Century Club v. State of Mysore [16 STC 38] . In

the former it was held that the supply to the member of a

members' club registered under Section 26 of the Indian

Companies Act, 1913 of refreshments purchased out of

club funds which consisted of members' subscription was

not a transfer of property from the club as such to a

member and the club was not liable to Sales Tax under

the C.P. and Berar Sales Tax Act, 1947, in respect of

such supplies of refreshments. The principle adverted to

in Trebanog Working Men's Club was adopted and it was

said that if the agent or a trustee supplied goods to the

members such supplies would not amount to a

transaction of sale. The Mysore court expressed the

same view that a purely members' club which makes

purchases through a Secretary or Manager and supplies

the requirements to members at a fixed rate did not in

law sell those goods to the members.”

21. The judgment heavily relied upon by Shri Dwivedi, namely,

Enfield India Ltd. (supra) was then distinguished thus:

“9. On behalf of the appellants reliance has been placed

on a decision of this Court in Deputy Commercial Tax

Officer v. Enfiend India Ltd. [(1968) 2 SCR 421] In that

case the Explanation to Section 2(g) was found to be

intra vires and within the competence of the State

Legislature. The judgment proceeded on the footing that

when a cooperative society supplied refreshments to its

members for a price the following four constituent

elements of sale were present: (1) parties competent to

contract; (2) mutual consent; (3) thing, the absolute or

general property in which is transferred from the seller to

the buyer and (4) price in money paid or promised. The

mere fact that the society supplied the refreshments to

its members alone and did not make any profit was not

considered sufficient to establish that the society was

acting only as an agent of its members. As a registered

society was a body corporate it could not be assumed

that the property which it held was the property of which

its members were owners. The English decisions were

distinguished on the ground that the courts in those

cases were dealing with matters of quasi-criminal

nature.”

22. Finally, the Court concluded:

“11. The essential question, in the present case, is

whether the supply of the various preparations by each

club to its members involved a transaction of sale within

the meaning of the Sale of Goods Act, 1930. The State

Legislature being competent to legislate only under Entry

54, List II, of the Seventh Schedule to the Constitution

the expression “sale of goods” bears the same meaning

which it has in the aforesaid Act. Thus in spite of the

definition contained in Section 2(n) read with Explanation

I of the Act if there is no transfer of property from one to

another there is no sale which would be eligible to tax. If

the club even though a distinct legal entity is only acting

as an agent for its members in matter of supply of

various preparations to them no sale would be involved

as the element of transfer would be completely absent.

This position has been rightly accepted even in the

previous decision of this Court.

12. The final conclusion of the High Court in the

judgment under appeal was that the case of each club

was analogous to that of an agent or mandatory

investing his own monies for preparing things for

consumption of the principal, and later recouping himself

for the expenses incurred. Once this conclusion on the

facts relating to each club was reached it was

unnecessary for the High Court to have expressed any

view with regard to the vires of the Explanations to

Sections 2(g) and 2(n) of the Act. As no transaction of

sale was involved there could be no levy of tax under the

provisions of the Act on the supply of refreshments and

preparation by each one of the clubs to its members.”

(emphasis supplied)

23. Shah, J., who was the author in Enfield India Ltd. (supra),

arrived at the same conclusion - but without applying the English

cases - stating that the English cases dealt with criminal

proceedings, whereas the present case was the case of a taxing

statute.

24. It can be seen that Young Men’s Indian Association

(supra) expressly distinguished Enfield India Ltd. (supra), in

paragraph 9 therein. The judgment in Enfield India Ltd. (supra),

held on the facts of that case that there was nothing to show that

the society in that case was acting as an agent of its members in

providing facilities for making food available to them. A distinction

was then made between a society which is a body corporate and

its members, stating that the body corporate is a separate person

in law. It then referred to various English judgments including

Trebanog (supra), and refused to apply them on the ground that

they were cases which dealt with criminal proceedings. The

judgment then ended by stating that the Court was not called

upon to decide whether an unincorporated club, supplying goods

for a price to its members, may be regarded as selling goods to its

members.

25. It can be seen from the above, that the ratio of the Three

Judge Bench in Enfield India Ltd. (supra) does not square with

the ratio of the Six Judge Bench in Young Men’s Indian

Association (supra). Young Men’s Indian Association (supra) is

expressly based upon the English judgments which disregarded

the corporate form and stated that there could not be a sale, on

the facts of those cases, between two persons because Foster,

i.e. a member of the club, could be regarded as vendor as well as

purchaser in Graff (supra). Likewise, in Trebanog (supra), the

form in which the club was clothed was of no moment, it being

stated that there is no magic in the expressions “trustee or agent”.

What is essential is that the holding of the property by the trustee

or agent must be a holding for and on behalf of, and not a holding

antagonistic to, the members of the club.

26. It is thus clear that Enfield India Ltd. (supra) does not take

the matter any further. Young Men’s Indian Association (supra)

made no distinction between a club in the corporate form and a

club by way of a registered society or incorporated by a deed of

trust. What is the essence of the judgment is that the holding of

property must be a holding for and on behalf of the members of

the club, there being no transfer of property from one person to

another. Proprietary clubs were distinguished, as there the owner

of the club would not be the members themselves, but somebody

else.

27. Shri Dwivedi sought to rely upon Bacha F. Gazdar (supra)

for the proposition that a shareholder acquires no interest in the

assets of the company, as a result of which the judgment in

Young Men’s Indian Association (supra) needs to be revisited.

The present appeal deals with a company that is registered under

Section 25 of the Companies Act. Section 25(1) reads as follows:

“25. Power to dispense with “Limited” in name of

charitable or other company. – (1) Where it is proved

to the satisfaction of the Central Government that an

association–

(a) is about to be formed as a limited company for

promoting commerce, art, science, religion, charity or

any other useful object, and

(b) intends to apply its profits, if any, or other income in

promoting its objects, and to prohibit the payment of any

dividend to its members,the Central Government may by licence, direct that the association may be registered as a company with limited

liability, without the addition to its name of the word

“Limited” or the words “Private Limited”.

28. It will thus be seen that in these companies, payment of

dividend to shareholders is prohibited, and the profits, if any, have

to be applied to promote the objects of the company. Bacha F.

Guzdar (supra) did not deal with a Section 25 company - it dealt

with two tea companies which were Public Limited Companies,

registered under the Companies Act. It is in this context that this

Court held:

“That a shareholder acquires a right to participate in the

profits of the company may be readily conceded but it is

not possible to accept the contention that the

shareholder acquires any interest in the assets of the

company. The use of the word ‘assets’ in the passage

quoted above cannot be exploited to warrant the

inference that a shareholder, on investing money in the

purchase of shares, becomes entitled to the assets of

the company and has any share in the property of the

company. A shareholder has got no interest in the

property of the company though he has undoubtedly a

right to participate in the profits if and when the company

decides to divide them...The company is a juristic person

and is distinct from the shareholders. It is the company

which owns the property and not the shareholders. The

dividend is a share of the profits declared by the

company as liable to be distributed among the

shareholders. Reliance is placed on behalf of the

appellant on a passage in Buckley's Companies

Act (12th Edn.), p. 894 where the etymological meaning

of dividend is given as dividendum, the total divisible

sum but in its ordinary sense it means the sum paid and

received as the quotient forming the share of the divisible

sum payable to the recipient. This statement does not

justify the contention that shareholders are owners of a

divisible sum or that they are owners of the property of

the company. The proper approach to the solution of the

Question 1s to concentrate on the plain words of the

definition of agricultural income which connects in no

uncertain language revenue with the land from which it

directly springs and a stray observation in a case which

has no bearing upon the present question does not

advance the solution of the question. There is nothing in

the Indian law to warrant the assumption that a

shareholder who buys shares buys any interest in the

property of the company which is a juristic person

entirely distinct from the shareholders. The true position

of a shareholder is that on buying shares an investor

becomes entitled to participate in the profits of the

company in which he holds the shares if and when the

company declares, subject to the Articles of Association,

that the profits or any portion thereof should be

distributed by way of dividends among the shareholders.

He has undoubtedly a further right to participate in the

assets of the company which would be left over after

winding up but not in the assets as a whole as Lord

Anderson puts it.”

In Cricket Club of India Ltd. v. Bombay Labour Union (1969) 1

SCR 600, this Court decided a preliminary objection taken in

favour of the Cricket Club of India, that the said Club is not an

“industry”, and consequently, the Industrial Disputes Act, 1947

would not apply to such members’ club. A contention was raised

against this proposition - that the said Club had been incorporated

as a limited company under the Companies Act, and would thus

have to be treated as a separate legal entity apart from its

members, and would therefore fall within the definition of

“industry” under the Industrial Disputes Act, 1947. This was

negatived by the Court, stating at page 614 of the said judgment:

“Lastly, reference was made to the circumstance that,

unlike the Madras Gymkhana Club, the Club has been

incorporated as a Limited Company under the Indian

Companies Act. It was urged that the effect of this

incorporation in law was that the Club became an entity

separate and distinct from its Members, so that, in

providing catering facilities, the Club, as a separate legal

entity, was entering into transactions with the Members

who were distinct from the Club itself. In our opinion, the

Tribunal was right in holding that the circumstance of

incorporation of the Club as a Limited Company is not of

importance. It is true that, for purposes of contract law

and for purposes of suing or being sued, the fact of

incorporation makes the Club a separate legal entity; but,

in deciding whether the Club is an industry or not, we

cannot base our decision on such legal technicalities.

What we have to see is the nature of the activity in fact

and in substance. Though the Club is incorporated as a

Company, it is not like an ordinary Company constituted

for the purpose of carrying on business. There are no

shareholders. No dividends are ever declared and no

distribution of profits takes place. Admission to the Club

is by payment of admission fee and not by purchase of

shares. Even this admission is subject to balloting. The

membership is not transferable like the right of

shareholders. There is the provision for expulsion of a

Member under certain circumstances which feature

never exists in the case of a shareholder holding shares

in a Limited Company. The membership is fluid. A person

retains rights as long as he continues as a Member and

gets nothing at all when he ceases to be a Member, even

though he may have paid a large amount as admission

fee. He even loses his rights on expulsion. In these

circumstances, it is clear that the Club cannot be treated

as a separate legal entity of the nature of a Limited

Company carrying on business. The Club, in fact,

continues to be a Members' Club without any

shareholders and, consequently, all services provided in

the Club for Members have to be treated as activities of

a self-serving institution.”

29. Given the differences pointed out in Cricket Club of India

(supra) between clubs registered as Companies under Section 25

of the Companies Act and other companies, it is clear that the

ratio decidendi in the judgment in Bacha F. Guzdar (supra) would

not apply to such clubs - there being no shareholders, no

dividends declared, and no distribution of profits taking place.

Such clubs, therefore, cannot be treated as separate in law from

their members.

30. The doctrine of mutuality as applied to clubs is elaborately

discussed in Bangalore Club v. Commissioner of Income Tax

and Anr. (2013) 5 SCC 509. In discussing the fact that in

members’ clubs there is a complete identity between contributors

and participators, this Court held:

“16. On this aspect of the doctrine, especially with regard

to the non-members, Halsbury's Laws of England, 4th

Edn., Reissue, Vol. 23, Paras 222 and 224 (pp. 152 and

154) states:

“222.General features of mutual trading.— Where

the trade or activity is mutual, the fact that as regards

certain activities, certain members only of the association

take advantage of the facilities which it offers does not

affect the mutuality of the enterprise.

224.Clubs, etc.—Members' clubs are an example of a

mutual undertaking; but, where a club extends facilities

to non-members, to that extent the element of mutuality

is wanting.”

17.Simon's Taxes, Vol. B, 3rd Edn., Paras B1.218 and

B1.222 (pp. 159 and 167) formulate the law on the point,

thus:

“... it is settled law that if the persons carrying on a trade

do so in such a way that they and the customers are the

same persons, no profits or gains are yielded by the

trade for tax purposes and therefore no assessment in

respect of the trade can be made. Any surplus resulting

from this form of trading represents only the extent to

which the contributions of the participators have proved

to be in excess of requirements. Such a surplus is

regarded as their own money and returnable to them. In

order that this exempting element of mutuality should

exist it is essential that the profits should be capable of

coming back at some time and in some form to the

persons to whom the goods were sold or the services

rendered..

It has been held that a company conducting a members'

(and not a proprietary) club, the members of the

company and of the club being identical, was not

carrying on a trade or business or undertaking of a

similar character for purposes of the former corporation

profits tax.

A members' club is assessable, however, in respect of

profits derived from affording its facilities to non-

members. Thus, in Carlisle and Silloth Golf Club v. Smith

(Surveyor of Taxes) [(1913) 3 KB 75 (CA)] , where a

members' golf club admitted non-members to play on

payment of green fees it was held that it was carrying on

a business which could be isolated and defined, and the

profit of which was assessable to income tax. But there

is no liability in respect of profits made from members

who avail themselves of the facilities provided for

members.”

18. In short, there has to be a complete identity between

the class of participators and class of contributors; the

particular label or form by which the mutual association

is known is of no consequence. Kanga and Palkhivala

explain this concept in The Law and Practice of Income

Tax (8th Edn., Vol. I, 1990) at p. 113 as follows:

“1.Complete identity between contributors and

participators.—‘... The contributors to the common fund

and the participators in the surplus must be an identical

body. That does not mean that each member should

contribute to the common fund or that each member

should participate in the surplus or get back from the

surplus precisely what he has paid.’ The Madras, Andhra

Pradesh and Kerala High Courts have held that the test

of mutuality does not require that the contributors to the

common fund should willy-nilly distribute the surplus

amongst themselves: it is enough if they have a right of

disposal over the surplus, and in exercise of that right

they may agree that on winding up the surplus will be

transferred to a similar association or used for some

charitable objects.”

Rowlatt, J.’s observations in Thomas (Inspector of Taxes) v.

Richard Evans & Co. Ltd. (1927) 1 K.B. 33 were then referred to

as follows:

“... But a company can make a profit out of its members

as customers, although its range of customers is limited

to its shareholders. If a railway company makes a profit

by carrying its shareholders, or if a trading company, by

trading with the shareholders even if it is limited to

trading with them, makes a profit, that profit belongs to

the shareholders in a sense, but it belongs to them qua

shareholders. It does not come back to them as

purchasers or customers; it comes back to them as

shareholders upon their shares. Where all that a

company does is to collect money from a certain number

of people—it [does not matter] whether they are called

members of the company or participating policy-holders

—and apply it for the benefit of those same people, not

as shareholders in the company, but as the people who

subscribed it, then, as I understand Styles case [New

York Life Insurance Co. v. Styles (Surveyor of Taxes),

(1889) LR 14 AC 381 : (1886-90) All ER Rep Ext 1362 :

(1889) 2 TC 460 (HL)] , there is no profit. If the people

were to do the thing for themselves, there would be no

profit, and the fact that they incorporate a legal entity to

do it for them makes no difference; there is still no profit.

This is not because the entity of the company is to be

disregarded; it is because there is no profit, the money

being simply collected from those people and handed

back to them, not in the character of shareholders, but in

the character of those who have paid it. That, as I

understand [it], is the effect of the decision in Styles

case [New York Life Insurance Co. v. Styles (Surveyor of

Taxes), (1889) LR 14 AC 381 : (1886-90) All ER Rep Ext

1362 : (1889) 2 TC 460 (HL)] .”

Given these observations, it is clear that if persons carry on a

certain activity in such a way that there is a commonality between

contributors of funds and participators in the activity, a complete

identity between the two is then established. This identity is not

snapped because the surplus that arises from the common fund is

not distributed among the members – it is enough that there is a

right of disposal over the surplus, and in exercise of that right they

may agree that on winding up, the surplus will be transferred to a

club or association with similar activities. Most importantly, the

surplus that is made does not come back to the members of the

club as shareholders of a company in the form of dividends upon

their shares. Since the members perform the activities of the club

for themselves, the fact that they incorporate a legal entity to do it

for them makes no difference. This judgment was also followed by

this Court in Income Tax Officer, Mumbai v. Venkatesh

Premises Cooperative Society Limited (2018) 15 SCC 37.

What is of essence, therefore, in applying this doctrine is that

there is no sale transaction between two persons, as one person

cannot sell goods to itself.

31. What arises for deliberation now is whether the 46th

Amendment has done away with the principles contained in

Young Men’s Indian Association (supra) and the other

judgments on the doctrine of mutuality, as applied to members’

clubs.

32. It can be seen that the 61st Law Commission Report had

observed that there cannot be said to be any evasion of tax as a

member of members’ clubs “really takes his own goods” and,

therefore, did not seek to tax such goods. The framers of the 46th

Amendment thought otherwise, and made it plain that they sought

to bring to tax sales made by unincorporated clubs or an

association of persons to their members, as it was thought that

such transactions were not taxable, as such club or associations

in law has no separate existence from that of the members.

33. Quite obviously, the Statement of Objects and Reasons has

not read the case of Young Men’s Indian Association (supra) in

its correct perspective. As has been noticed hereinabove, Young

Men’s Indian Association (supra) had three separate appeals

before it, in one of which a company was involved. To state,

therefore, that under the law as it stood on the date of the 46th

Amendment, a sale of goods by a club having a corporate status

to members is taxable, is wholly incorrect. Proceeding on this

incorrect basis, what the 46th Amendment sought to do was to

then bring to tax sales by clubs which have no separate existence

from that of their members. In so doing, the 46th Amendment used

the expression “any unincorporated association or body of

persons”. This expression, when read with the Statement of

Objects and Reasons, makes it clear that it was only clubs which

are not in corporate form that were sought to be brought within the

tax net, as it was wrongly assumed that sale of goods by

members’ clubs in the corporate form were taxable. “Any” is the

equivalent of “all”. This word, therefore, also lends itself to the

aforesaid interpretation, as the emphasis of the legislature is on all

unincorporated associations or bodies being brought within sub-

clause (e).

34. Thus, it is clear that even going by Shri Dwivedi’s eloquent

argument as to the intention of the legislature, as seen through

the object that the legislature sought to achieve, would lead to the

aforesaid expression applying only to clubs which were not in the

corporate form.

35. Even otherwise, on the assumption that “unincorporated

association or body of persons” must be read disjunctively, “a

body of persons” cannot be equated with “person”. “Person” as

defined by the General Clauses Act, (which applies to the

interpretation of the Constitution vide Article 367) reads as follows:

“3. Definitions.-

(42) “person” shall include any company or association

or body of individuals, whether incorporated or not;

Article 366(29-A) does not use this expression, as “person” would

then include corporate persons as well. On the other hand, “body

of persons” is used to make it clear beyond doubt that corporate

persons are not referred to.

36. The definition of “person” in other Acts such as the Income

Tax Act, 1961 is also very wide, and includes an association of

persons or body of individuals, whether incorporated or not – see

Section 2(31) of the Income Tax Act, 1961. Quite clearly, this

language was available and in common usage by the legislature,

as the definition of “person” under the Income Tax Act has stood in

the statute book since 1961. The contrast in the language of the

Income Tax Act, 1961 and Article 366(29-A)(e) again leads to the

conclusion that “body of persons” would not refer to the corporate

form unless “person” by itself is accompanied by the expression

“whether incorporated or not”.

37. Even otherwise, the “supply” of goods by an unincorporated

association or body of persons has to be to a member for cash,

deferred payment or other valuable consideration. As has been

correctly argued by Shri Jaideep Gupta, the definition of

“consideration” in Section 2(d) of the Indian Contract Act, 1872

necessarily posits consideration passing from one person to

another. The definition of “consideration” as stated in the Indian

Contract Act, 1872 is as follows:

“2. Interpretation-clause.- In this Act the following

words and expressions are used in the following senses,

unless a contrary intention appears from the context:-

(d)When, at the desire of the promisor, the promisee or

any other person has done or abstained from doing, or

does or abstains from doing, or promises to do or to

abstain from doing, something, such act or abstinence

or promise is called a consideration for the promise;”

The expression “valuable consideration” has, as has been pointed

out in ‘Pollock and Mulla, The Indian Contract & Specific Relief

Acts (16th ed.)’, been taken from an old English case Currie v.

Misa (1875) LR 10 EX 153, and explained as follows:

“A valuable consideration in the sense of the law, may

consist either in some right, interest, profit, or benefit

accruing to one party, or some forbearance, detriment,

loss or responsibility given, suffered, or undertaken by

the other.

The above definition brings out the idea of reciprocity as

the distinguishing mark; it is the gratuitous promise that

is unenforceable in English law.”

38. This is further reinforced by the last part of Article 366(29-A),

as under this part, the supply of such goods shall be deemed to

be sale of those goods by the person making the supply, and the

purchase of those goods by the person to whom such supply is

made. As the Young Men’s Indian Association (supra) case and

the doctrine of mutuality state, there is no sale transaction

between a club and its members. As has been pointed out above,

there cannot be a sale of goods to oneself. Here again, it is clear

that the ratio of Young Men’s Indian Association (supra) has not

been done away with by the limited fiction introduced by Article

366(29-A)(e).

39. But, says Shri Dwivedi, even if sub-clause (e) does not

apply, sub-clause (f) would apply, given the width of its language.

Here again, it is clear that the reason for sub-clause (f), as has

been stated in the Statement of Objects and Reasons, is the

doing away with of two judgments of this Court, namely, State of

Punjab v. Associated Hotels of India Limited AIR 1972 SC

1131 and Northern India Caterers (India) Ltd. (supra).

40. This is clear not only from the Statement of Objects and

Reasons, but from the subject matter of sub-clause (f) (which

does not include “goods” in their entirety, but only food or any

other article for human consumption, or any drink), which is the

serving of such food or drink in hotels or restaurants. This is

further made clear by Section 6 of the 46th Amendment Act, which

is a validation and exemption provision. Section 6(1)(a)

specifically refers to transactions referable to the aforesaid two

Supreme Court judgments. The exemption provision puts the

matter beyond doubt. Section 6(2) of the Amendment Act reads as

follows:

“...(2) Notwithstanding anything contained in sub-section

(1), any supply of the nature referred to therein shall be

exempt from the aforesaid tax-

(a) where such supply has been made, by any restaurant

or eating house (by whatever name called), at any

time on or after the 7th day of September, 1978 and

before the commencement of this Act and the

aforesaid tax has not been collected on such supply

on the ground that no such tax could have been

levied or collected at that time; or

(b) where such supply, not being any such supply by any

restaurant or eating house (by whatever name

called), has been made at any time on or after the 4th

day of January, 1972 and before the commencement

of this Act and the aforesaid tax has not been

collected on such supply on the ground that no such

tax could have been levied or collected at that time:

Provided that the burden of proving that the aforesaid

tax was not collected on any supply of the nature

referred to in clause (a) or, as the case may be,

clause (b), shall be on the person claiming the

exemption under this sub-section.”

41. Sub-clause (a) refers to 7th September, 1978, which is the

date on which Northern India Caterers (supra) was pronounced

and sub-clause (b) refers to 4th January, 1972, which is the date

on which Associated Hotels of India Ltd. (supra) was

pronounced. The 46th Amendment Act, therefore, when read as a

whole, would make it clear that Article 366(29-A)(f) refers only to

an undoing of the aforesaid two judgments, the subject matter

being the taxability of food or drink served in hotels and

restaurants. This being the case, it is obvious that the taxability of

food or drink served in members’ clubs is not the subject matter of

sub-clause (f).

42. Looked at from another point of view, a members’ club may

supply goods which are not food or drink – for example, soap,

cosmetics and other household items. These items would be

“goods”, but would not be within sub-clause (f) - not being food or

drink, and cannot, therefore, be taxed under sub-clause (f),

leading to the absurd situation of the supply of food and drink

being taxable in members’ clubs, and the supply of other goods in

such clubs being outside the tax net. For this reason also, it is

clear that the subject matter of sub-clause (f) is entirely different

and distinct from that of sub-clause (e), and cannot possibly apply

to members’ clubs. In this view of the matter, the expression “in

any manner whatsoever”, being part and parcel of sub-clause (f)

cannot be held to extend to a supply of all goods so as to bring

such goods to tax when applied to members’ clubs.

43. Judgments of this Court have also held that the subject

matter of sub-clause (f) related to food and drink supplied in hotels

and restaurants, the deeming fiction of sub-clause (f) being

introduced only to get over certain judgments of this Court. In K.

Damodarasamy Naidu & Bros. and Ors. v. State of T.N. and

Anr. (2000) 1 SCC 527, this Court referred to Article 366(29-A)(f)

as follows:

“9. The provisions of sub-clause (f) of clause (29-A)

of Article 366 need to be analysed. Sub-clause (f)

permits the States to impose a tax on the supply of

food and drink. The supply can be by way of a

service or as part of a service or it can be in any other

manner whatsoever. The supply or service can be for

cash or deferred payment or other valuable

consideration. The words of sub-clause (f) have

found place in the Sales Tax Acts of most States and,

as we have seen, they have been used in the said

Tamil Nadu Act. The tax, therefore, is on the supply of

food or drink and it is not of relevance that the supply

is by way of a service or as part of a service. In our

view, therefore, the price that the customer pays for

the supply of food in a restaurant cannot be split up

as suggested by learned counsel. The supply of food

by the restaurant-owner to the customer though it

may be a part of the service that he renders by

providing good furniture, furnishing and fixtures, linen,

crockery and cutlery, music, a dance floor and a floor

show, is what is the subject of the levy. The patron of

a fancy restaurant who orders a plate of cheese

sandwiches whose price is shown to be Rs 50 on the

bill of fare knows very well that the innate cost of the

bread, butter, mustard and cheese in the plate is very

much less, but he orders it all the same. He pays Rs

50 for its supply and it is on Rs 50 that the restaurant-

owner must be taxed.”

44. In a recent judgment of this Court, Federation of Hotel and

Restaurant Associations of India v. Union of India and Ors.

(2018) 2 SCC 97, this Court referred to the reason for the

enactment of sub-clause (f) as follows:

“11. As has been stated in the trilogy of judgments

in Associated Hotels of India Ltd. [State of

Punjab v. Associated Hotels of India Ltd., (1972) 1

SCC 472] and the two Northern India Caterers (India)

Ltd. [Northern India Caterers (India) Ltd. v. State (UT

of Delhi), (1978) 4 SCC 36 : 1978 SCC (Tax) 198 :

(1979) 1 SCR 557] ,

[Northern India Caterers (India)

Ltd. v. State (UT of Delhi), (1980) 2 SCC 167 : 1980

SCC (Tax) 222] , it is clear that when “sale” of food

and drinks takes place in hotels and restaurants,

there is really one indivisible contract of service

coupled incidentally with sale of food and drinks.

Since it is not possible to divide the “service element”,

which is the dominant element, from the “sale

element”, it is clear that such composite contracts

cannot be the subject-matter of sales tax legislation,

as was held in those judgments.

12. Bearing these judgments in mind, Parliament

amended the Constitution and introduced the

Constitution (Forty-sixth Amendment) Act, by which it

introduced Article 366(29-A). Sub-clause (f), with

which we are directly concerned, reads as follows:

“366. (29-A)(f) a tax on the supply, by way of or

as part of any service or in any other manner

whatsoever, of goods, being food or any other article

for human consumption or any drink (whether or not

intoxicating), where such supply or service, is for

cash, deferred payment or other valuable

consideration, and such transfer, delivery or supply of

any goods shall be deemed to be a sale of those

goods by the person making the transfer, delivery or

supply and a purchase of those goods by the person

to whom such transfer, delivery or supply is made.”

A reading of the constitutional amendment would

show that supply by way of or as part of any service

of food or other article for human consumption is now

deemed to be a sale of goods by the person making

the transfer, delivery or supply.”

45. That the doctrine of mutuality has not been done away with

by sub-clause (e) is also clear when sub-clause (e) is contrasted

with certain provisions of the Income Tax Act, 1961. Section 2(24)

(vii) of the Income Tax Act, 1961, reads as under:

“2. Definitions.-

(24) “income” includes-

(vii) the profits and gains of any business of

insurance carried on by a mutual insurance company

or by a co-operative society, computed in accordance

with section 44 or any surplus taken to be such profits

and gains by virtue of the provisions contained in the

First Schedule”

This has to be read with Section 44 of the Income Tax Act, 1961

which reads as under:

“44. Insurance business.-Notwithstanding anything

to the contrary contained in the provisions of this Act

relating to the computation of income chargeable

under the head "Interest on securities", "Income from

house property", "Capital gains" or "Income from

other sources", or in section 199 or in sections

28 to 43B, the profits and gains of any business of

insurance, including any such business carried on by

a mutual insurance company or by a co-operative

society, shall be computed in accordance with the

rules contained in the First Schedule.”

46. A reading of the aforesaid provisions makes it clear that

when profits and gains of a mutual insurance company are sought

to be brought to tax, they are so done by express reference to the

fact that the business of insurance is carried on by a mutual

insurance company. The absence of any such language in sub-

clause (e) of Article 366(29-A) is also an important pointer to the

fact that the doctrine of mutuality cannot be said to have been

done away with by the said 46th Amendment.

47. In fact, Section 2(24)(vii) has been expressly noticed in

Venkatesh Premises Cooperative Society Limited (supra) as

follows:

“14. The doctrine of mutuality, based on common law

principles, is premised on the theory that a person

cannot make a profit from himself. An amount

received from oneself, therefore, cannot be regarded

as income and taxable. Section 2(24) of the Income

Tax Act defines taxable income. The income of a

cooperative society from business is taxable under

Section 2(24)(vii) and will stand excluded from the

principle of mutuality.”

48. Also, Section 45(2) of the Income Tax Act, 1961 is an

example of a provision by which a deemed transfer by a person to

himself gets taxed. Section 45(2) reads as follows:

“45. Capital gains.-

(2) Notwithstanding anything contained in sub-section

(1), the profits and gains arising from the transfer by

way of conversion by the owner of a capital asset

into, or its treatment by him as, stock-in-trade of a

business carried on by him shall be chargeable to

income-tax as his income of the previous year in

which such stock-in-trade is sold or otherwise

transferred by him and, for the purposes of Section

48, the fair market value of the asset on the date of

such conversion or treatment shall be deemed to be

the full value of the consideration received or

accruing as a result of the transfer of the capital

asset.”

It can be seen from this provision that profits or gains arising from

a transfer by way of conversion by the owner of a capital asset

into, or its treatment by him as stock-in-trade of a business, is by a

deeming fiction brought to tax, despite the fact that there is no

transfer in law by the owner of a capital asset to another person.

Modalities such as these to bring to tax amounts that would do

away with any doctrine of mutuality are conspicuous by their

absence in the language of Article 366(29-A)(e).

49. In light of the view that we have taken, it is unnecessary to

advert to Shri Dwivedi’s arguments that the explanation (1) to

Section 2(10) of the West Bengal Sales Tax Act is a stand-alone

provision and not an explanation in the classical sense. We,

therefore, answer the three questions posed by the Division

Bench in State of West Bengal v. Calcutta Club Limited (supra)

as follows:

(1) The doctrine of mutuality continues to be applicable to

incorporated and unincorporated members’ clubs after the 46th

Amendment adding Article 366(29-A) to the Constitution of India.

(2) Young Men’s Indian Association (supra) and other

judgments which applied this doctrine continue to hold the field

even after the 46th Amendment.

(3) Sub-clause (f) of Article 366(29-A) has no application to

members’ clubs.

50. Having gone through the judgment and order of the West

Bengal Taxation Tribunal dated 3rd July, 2006 and the impugned

Calcutta High Court judgment dated 1st February, 2008, and in

view of the answers to the three questions referred to the present

Three Judge Bench (as listed hereinabove), we are of the view

that no interference is called for in the findings of fact or

declaration of law in this case. Accordingly, C.A. No. 4184 of 2009

stands dismissed.

C.A. No.7497 of 2012 and other connected matters

51. Delay condoned. Leave is granted.

52. By an order dated 13th December, 2017 by a Division Bench

of this Court in Civil Appeal No.7497 of 2012 and its connected

matters, this Court listed these appeals involving the levy of

service tax upon members’ clubs as follows:

“The issue involved in these cases has been referred

to the larger Bench and the reference order is

reported as 'State of West Bengal & Ors. v. Calcutta

Club Ltd.' [2017(5) SCC 356][Civil Appeal No. 4184 of

2009].

Let these appeals be also listed before the larger

Bench along with the aforesaid matter after taking

orders from Hon'ble the Chief Justice of India.”

53. Primarily two judgments have been impugned before us by

the Revenue; one by the High Court of Jharkhand at Ranchi in

W.P (T) No.2388 of 2007 dated 15th March, 2012; and the other by

the High Court of Gujarat in S.C.A. Nos.13654-13656 of 2005

dated 25th March, 2013. The impugned judgment dated 15th

March, 2012 by the High Court of Jharkhand set out the relevant

provisions of the Finance Act, 1994 (hereinafter referred to as the

“Finance Act”), by which service tax was levied on members’

clubs, and arrived at the conclusion that such clubs stand on a

different footing from proprietary clubs, as has been held in

Young Men’s Indian Association (supra). The High Court

following Young Men’s Indian Association (supra) then held,

stating:

“18. However, learned counsel for the petitioner

submits that sale and service are different. It is true

that sale and service are two different and distinct

transaction. The sale entails transfer of property

whereas in service, there is no transfer of property.

However, the basic feature common in both

transactions requires existence of the two parties; in

the matter of sale, the seller and buyer, and in the

matter of service, service provider and service

receiver. Since the issue whether there are two

persons or two legal entity in the activities of the

members' club has been already considered and

decided by the Hon'ble Supreme Court as well as by

the Full Bench of this Court in the cases referred

above, therefore, this issue is no more res integra

and issue is to be answered in favour of the writ

petitioner and it can be held that in view of the

mutuality and in view of the activities of the club, if

club provides any service to its members may be in

any form including as mandap keeper, then it is not a

service by one to another in the light of the decisions

referred above as foundational facts of existence of

two legal entities in such transaction is missing.

However, so far as services by the club to other than

members, learned counsel for the petitioner

submitted that they are paying the tax.

19. Therefore, this writ petition deserves to be

allowed and it is held that rendering of service by the

petitioner- club to its members is not taxable service

under the Finance Act, 1994 and the writ petition of

the petitioner is allowed accordingly.”

54. Likewise, the Gujarat High Court by the judgment dated 25th

March, 2013, followed the judgment of the High Court of

Jharkhand and declared the following:

“8. In the result, these petitions are allowed and it is

hereby declared that Section 65(25a), Section

65(105) (zzze) and Section 66 of the Finance (No.2)

Act, 1994 as incorporated/ amended by the Finance

Act, 2005 to the extent that the said provisions

purport to levy service tax in respect of services

purportedly provided by the petitioner club to its

members, to be ultra vires. Rule is made absolute

with no order as to costs.”

55. The appeals that are listed before us concern impugned

judgments that have in essence followed these two judgments,

insofar as service tax that is levied on members’ clubs is

concerned. The vast majority of cases before us concerns

members’ clubs that have been registered as Companies under

Section 25 of the Companies Act, or registered co-operative

societies under various State Acts, such societies being bodies

corporate under the aforesaid Acts.

56. Shri Dhruv Agarwal, learned Senior Advocate appearing on

behalf of the Revenue, after taking us through the relevant

provisions, submitted that service tax was levied on members’

clubs with effect from 2005. With effect from 2012, after statutory

changes had been made, service tax continued to be levied on

such clubs and was attracted even to members’ clubs in

incorporated form, i.e., as companies or as registered cooperative

societies. According to Shri Agarwal, the principle of mutuality that

is laid down in Young Men’s Indian Association (supra) has

been expressly done away with in the service tax context, as there

is in these cases no transaction of sale, unlike the sales tax cases

that have just been heard. He cited a number of judgments to

buttress his proposition that the High Courts of Jharkhand and

Gujarat wrongly applied the judgment of Young Men’s Indian

Association (supra), which was in the context of Sales Tax acts,

to Service Tax, and hence did not lay down the law correctly.

57. On the other hand, learned counsel appearing on behalf of

the Respondents in these cases argued that when service tax was

introduced in 1994, the legislature indicated activities which

amounted to service, which were then selected for the purpose of

imposition of tax. In 2005, despite the fact that members’ clubs

were so selected, members’ clubs in incorporated form were

expressly excluded from service tax. Post-2012, there was a sea

change, as a result of which service tax was imposed on all

taxable services, short of those which were in a negative list

contained in Section 66D of the Finance Act. According to the

learned counsel appearing on behalf of the Respondents, the

same position that obtained re: incorporated members’ clubs

continued after 2012, despite the introduction of Explanation 3 to

Section 65B(44). All the learned counsel argued that the doctrine

of mutuality, insofar as incorporated institutions are concerned,

was not done away with in the service tax regime, and the

Jharkhand and Gujarat High Court were correct in applying the

judgment in Young Men’s Indian Association (supra) to these

cases.

58. As was stated hereinabove, service tax was introduced for

the first time by the Finance Act, 1994. Under Section 64(3),

Chapter V of the Finance Act applied to taxable services as

defined, with effect from 16th June, 2005. Under Section 65(25a),

“club or association” was defined as follows:

“club or association” means any person or body of

persons providing services, facilities or advantages,

for a subscription or any other amount, to its

members, but does not include-

(i) anybody established or constituted by or under

any law for the time being in force, or

(ii) any person or body of person engaged in the

activities of trade unions, promotion of

agriculture, horticulture or animal husbandry, or

(iii) any person or body of person engaged in any

activity having objectives which are in the

nature of public service and are of a charitable,

religious or political nature, or

(iv) any person or body of persons associated with

press or media.

59. Under Section 65(105)(zze), “taxable service” was defined

as follows:

““Taxable service” means any service provided-

(zze) to its members by any club or association in

relation to provision of services, facilities or

advantages for a subscription or any other amount.”

60. With effect from 1st May, 2011, “club or association” was

defined by Section 65(25aa) as follows:

“club or association” means any person or body of

persons providing services, facilities or advantages,

primarily to its members for a subscription or any

other amount but does not include-

(i) anybody established or constituted by or

under any law for the time being in force, or

(ii) any person or body of person engaged in the

activities of trade unions, promotion of

agriculture, horticulture or animal husbandry, or

(iii) any person or body of person engaged in any

activity having objectives which are in the

nature of public service and are of a charitable,

religious or political nature, or

(iv) any person or body of persons associated with

press or media.

61. Likewise, in Section 65(105)(zzze), the expression “or any

other person” was added after the expression “to its members”,

thus making it clear that the tax net had now been widened so as

to include non-members of clubs or associations as well.

62. Under Section 66, it was stated that there shall be levied the

tax (referred to as “the service tax”) at the rate of 12% of the value

of taxable services referred to in sub-clauses...(zzze) of clause

(105) of section 65, and collected in such manner as may be

prescribed.

63. Under Section 67, where service tax is chargeable on any

taxable service with reference to its value, it was stated:

“67. Valuation of taxable services for charging

service tax

(1) Subject to the provisions of this Chapter, where

service tax is chargeable on any taxable service

with reference to its value, then such value shall, -

(i) in a case where the provision of service is

for a consideration in money, be the gross

amount charged by the service provider for

such service provided or to be provided by

him;

(ii) in a case where the provision of service is

for a consideration not wholly or partly

consisting of money, be such amount in

money as, with the addition of service tax

charged, is equivalent to the consideration;

(iii) in a case where the provision of service is

for consideration which is not ascertainable.

be the amount as may be determined in the

prescribed manner.”

64. Likewise, under Section 68, it was stated:

“68. Payment of service tax

(1) Every person providing taxable service to any

person shall pay service tax at the rate specified

in section 66 in such manner and within such

period as may be prescribed.”

65. With effect from 1st July, 2012, Sections 65 and 65A were

made inapplicable, and a new Section 65B introduced, in which

under Section 65B(37), the term “person” was defined as follows:

“(37) “person” includes,-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a society,

(v) a limited liability partnership

(vi) a firm,

(vii) an association of persons or body of

individuals, whether incorporated or

not,

(viii) Government,

(ix) a local authority, or

(x) every artificial juridical person, not

falling within any of the preceding

sub-clauses;

66. Under Section 65B(44), “service” was defined as follows:

“(44) “service” means any activity carried out by a

person for another for consideration and includes a

declared service but shall not include-

(a) an activity which constitutes merely,-

(i) a transfer of title in goods or immovable

property, by way of sale, gift or in any

other manner; or

(ii) such transfer, delivery or supply of any

goods, which is deemed to be sale within

the meaning of clause (29A) of article 366

of the Constitution; or

(iii) a transaction in money or actionable

claim;

(b) a provision of service by an employee to the

employer in the course of or in relation to his

employment;

(c) fees taken in any Court or tribunal established

under any law for the time being in force.

Explanation 3. For the purposes of this Chapter;-

(a) an unincorporated association or a body of

persons, as the case may be, and a member

thereof shall be treated as distinct persons;

(b) an establishment of a person in the taxable

territory and any of his other establishment in a

non-taxable territory shall be treated as

establishments of distinct persons.”

67. A new Section 66B was then introduced, which states as

follows:

“66B. Charge of service tax on and after Finance

Act, 2012

There shall be levied a tax (hereinafter referred to as

the service tax) at the rate of fourteen per cent on the

value of all services, other than those services

specified in the negative list, provided or agreed to

be provided in the taxable territory by one person to

another and collected in such manner as may be

prescribed.”

68. As was stated hereinabove, service tax was thus leviable on

all services as defined, short of a negative list of services which

was then set out in Section 66D of the Act.

69. In an interesting judgment of this Court, Union of India and

Ors. v. Margadarshi Chit Funds Private Limited and Ors.

(2017) 13 SCC 806, this Court outlined the history of service tax

as follows:

“19. The amendment was carried w.e.f. 1-6-2007

whereby the words “but does not include cash

management” were deleted. This provision remained

on statute book up to 30-6-2012. By the Finance Act,

2012, entire scheme of service tax was completely

changed and overhauled with the introduction of

altogether new system of service tax. There was a

paradigm shift in the service tax regime. Initially,

service tax was levied only on three services by the

Finance Act, 1994. The Finance Act, 1996 extended

the levy to three more services. Twelve more services

were brought under the service tax net by the

Finance Act, 1997 and its scope was further enlarged

by the Finance Act, 1998 when twelve more services

were brought under the service tax net. Three

services were exempted from the service tax by the

Finance Act, 1998 and one more service by the

Finance Act, 2000. Its scope was further widened by

the Finance Act, 2001 when service tax was

extended to include fifteen more services. The

Finance Act, 2002 further levied service tax on ten

more services. The Finance Act, 2003 brought 8 new

services within the ambit of service tax. Further, the

Finance (No. 2) Act, 2004 brought 13 new services

under service tax which included reintroduction of

service tax on 3 services and also made applicable

service tax on risk cover in life insurance under the

life insurance service, whereas this service was

introduced in the year 2002. The Finance Act, 2005

brought 9 new services under the service tax net. The

Finance Act, 2006 brought 15 new services under the

service tax net. The Finance Act, 2007 brought 7 new

services under the service tax net and six telecom

related services were omitted and merged into one

new category of taxable service. Further, the Finance

Act, 2008 w.e.f. 16-5-2008, introduced 6 new

services. Further, the Finance (No. 2) Act, 2009 w.e.f.

1-9-2009 introduced 3 new services. Likewise, the

Finance Act, 2010 w.e.f. 1-7-2010 vide Notification

No. 24/2010-ST, dated 22-6-2010 introduced 8 new

services. By the Finance Act, 2011 w.e.f. 1-5-2011

vide Notification No. 29/2011-ST dated 25-4-2011, 2

new services were brought within its net and at the

same time, health service was exempted w.e.f. 1-5-

2011 by Notification No. 30/2011-ST dated 25-4-

2011. Thus, the service tax was on a total of 115

services.

20. Thus, right from 1994 till 2011, the mode adopted

was to specify those services on which it was

intended to levy service tax. However, Parliament by

the Finance Act, 2012 w.e.f. 1-7-2012 has introduced

altogether new system of taxation of services by

making a paradigm shift. Now, the scheme of taxation

of services is based on negative list of services.

Therefore, earlier list of taxable services is no longer

applicable. Instead two things have happened. First,

the term “service” is defined whereas there was no

definition of “service” in the Finance Act, 1994 which

position remained till 2012. Earlier, each individual

service on which tax was levied (known as taxable

service) was defined. Secondly, the definition of

“service” given now contains a negative list which is

contained in Section 66-D of the Act. In other words,

it specifically excludes certain transactions from the

ambit of service. Thus, those transactions which are

specifically excluded are not liable for service tax.

Any other kind of service which qualifies the definition

of “service” contained in the Act would be exigible to

service tax.”

70. In All-India Federation of Tax Practitioners and Ors. v.

Union of India and Ors. (2007) 7 SCC 527, this Court upheld the

constitutional validity of the levy of service tax, also stating:

“8. As stated above, service tax is VAT. Just as excise

duty is a tax on value addition on goods, service tax

is on value addition by rendition of services.

Therefore, for our understanding, broadly “services”

fall into two categories, namely, property based

services and performance based services. Property

based services cover service providers such as

architects, interior designers, real estate agents,

construction services, mandapwalas, etc.

Performance based services are services provided by

service providers like stockbrokers, practising

chartered accountants, practising cost accountants,

security agencies, tour operators, event managers,

travel agents, etc.”

After exhaustively reviewing a number of judgments, the Court

stated that Parliament has legislative competence to levy service

tax under Entry 97 List I of the Constitution of India.

71. With this background, it is important now to examine the

Finance Act as it obtained, firstly from 16th June, 2005 uptil 1st

July, 2012.

72. The definition of “club or association” contained in Section

65(25a) makes it plain that any person or body of persons

providing services for a subscription or any other amount to its

members would be within the tax net. However, what is of

importance is that anybody “established or constituted” by or

under any law for the time being in force, is not included. Shri

Dhruv Agarwal laid great emphasis on the judgments in DALCO

Engineering Private Limited v. Satish Prabhakar Padhye and

Ors. Etc. (2010) 4 SCC 378 (in particular paragraphs 10, 14 and

32 thereof) and CIT, Kanpur and Anr. v. Canara Bank (2018) 9

SCC 322 (in particular paragraphs 12 and 17 therein), to the effect

that a company incorporated under the Companies Act cannot be

said to be “established” by that Act. What is missed, however, is

the fact that a Company incorporated under the Companies Act or

a cooperative society registered as a cooperative society under a

State Act can certainly be said to be “constituted” under any law

for the time being in force. In R.C. Mitter & Sons, Calcutta v. CIT,

West Bengal, Calcutta (1959) Supp. 2 SCR 641, this Court had

occasion to construe what is meant by “constituted” under an

instrument of partnership, which words occurred in Section 26A of

the Income Tax Act, 1922. The Court held:

“The word “constituted” does not necessarily mean

“created” or “set up”, though it may mean that also. It

also includes the idea of clothing the agreement in a

legal form. In the Oxford English Dictionary, Vol. II, at

pp. 875 & 876, the word “constitute” is said to mean,

inter alia, “to set up, establish, found (an institution,

etc.)” and also “to give legal or official form or shape

to (an assembly, etc.)”. Thus the word in its wider

significance, would include both, the idea of creating

or establishing, and the idea of giving a legal form to,

a partnership. The Bench of the Calcutta High Court

in the case of R.C. Mitter and Sons v. CIT [(1955) 28

ITR 698, 704, 705] under examination now, was not,

therefore, right in restricting the word “constitute” to

mean only “to create”, when clearly it could also

mean putting a thing in a legal shape. The Bombay

High Court, therefore, in the case of Dwarkadas

Khetan and Co. v. CIT [(1956) 29 ITR 903, 907] , was

right in holding that the section could not be restricted

in its application only to a firm which had been

created by an instrument of partnership, and that it

could reasonably and in conformity with commercial

practice, be held to apply to a firm which may have

come into existence earlier by an oral agreement, but

the terms and conditions of the partnership have

subsequently been reduced to the form of a

document. If we construe the word “constitute” in the

larger sense, as indicated above, the difficulty in

which the learned Chief Justice of the Calcutta High

Court found himself, would be obviated inasmuch as

the section would take in cases both of firms coming

into existence by virtue of written documents as also

those which may have initially come into existence by

oral agreements, but which had subsequently been

constituted under written deeds.”

73. It is, thus, clear that companies and cooperative societies

which are registered under the respective Acts, can certainly be

said to be constituted under those Acts. This being the case, we

accept the argument on behalf of the Respondents that

incorporated clubs or associations or prior to 1st July, 2012 were

not included in the service tax net.

74. The next question that arises is - was any difference made

to this position post 1st July, 2012?

75. It can be seen that the definition of “service” contained in

Section 65B(44) is very wide, as meaning any activity carried out

by a person for another for consideration. “Person” is defined in

Section 65B(37) as including, inter alia, a company, a society and

every artificial juridical person not falling in any of the preceding

sub-clauses, as also any association of persons or body of

individuals whether incorporated or not.

76. What has been stated in the present judgment so far as

sales tax is concerned applies on all fours to service tax; as, if the

doctrine of agency, trust and mutuality is to be applied qua

members’ clubs, there has to be an activity carried out by one

person for another for consideration. We have seen how in the

judgment relating to sales tax, the fact is that in members’ clubs

there is no sale by one person to another for consideration, as

one cannot sell something to oneself. This would apply on all

fours when we are to construe the definition of “service” under

Section 65B(44) as well.

77. However, Explanation 3 has now been incorporated, under

sub-clause (a) of which unincorporated associations or body of

persons and their members are statutorily to be treated as distinct

persons.

78. The explanation to Section 65, which was inserted by the

Finance Act of 2006, reads as follows:

“Explanation: For the purposes of this section,

taxable service includes any taxable service provided

or to be provided by any unincorporated association

or body of persons to a member thereof, for cash,

deferred payment or any other valuable

consideration:”

79. It will be noticed that the aforesaid explanation is in

substantially the same terms as Article 366(29-A)(e) of the

Constitution of India. Earlier in this judgment qua sales tax, we

have already held that the expression “body of persons” will not

include an incorporated company, nor will it include any other form

of incorporation including an incorporated co-operative society.

80. It will be noticed that “club or association” was earlier

defined under Section 65(25a) and 65(25aa) to mean “any

person” or “body of persons” providing service. In these

definitions, the expression “body of persons” cannot possibly

include persons who are incorporated entities, as such entities

have been expressly excluded under Section 65(25a)(i) and

65(25aa)(i) as “anybody established or constituted by or under

any law for the time being in force”. “Body of persons”, therefore,

would not, within these definitions, include a body constituted

under any law for the time being in force.

81. When the scheme of service tax changed so as to introduce

a negative list for the first-time post 2012, services were now

taxable if they were carried out by “one person” for “another

person” for consideration. “Person” is very widely defined by

Section 65B(37) as including individuals as well as all

associations of persons or bodies of individuals, whether

incorporated or not. Explanation 3 to Section 65B(44), instead of

using the expression “person” or the expression “an association of

persons or bodies of individuals, whether incorporated or not”,

uses the expression “a body of persons” when juxtaposed with “an

unincorporated association”.

82. We have already seen how the expression “body of

persons” occurring in the explanation to Section 65 and occurring

in Section 65(25a) and (25aa) does not refer to an incorporated

company or an incorporated cooperative society. As the same

expression has been used in Explanation 3 post-2012 (as

opposed to the wide definition of “person” contained in Section

65B(37)), it may be assumed that the legislature has continued

with the pre-2012 scheme of not taxing members’ clubs when they

are in the incorporated form. The expression “body of persons”

may subsume within it persons who come together for a common

purpose, but cannot possibly include a company or a registered

cooperative society. Thus, Explanation 3(a) to Section 65B(44)

does not apply to members’ clubs which are incorporated.

83. The expression “unincorporated associations” would include

persons who join together in some common purpose or common

action – see ICT, Bombay North, Kutch and Saurashtra,

Ahmedabad v. Indira Balkrishna (1960) 3 SCR 513 at page

519-520. The expression “as the case may be” would refer to

different groups of individuals either bunched together in the form

of an association also, or otherwise as a group of persons who

come together with some common object in mind. Whichever way

it is looked at, what is important is that the expression “body of

persons” cannot possibly include within it bodies corporate.

84. We are therefore of the view that the Jharkhand High Court

and the Gujarat High Court are correct in their view of the law in

following Young Men’s Indian Association (supra). We are also

of the view that from 2005 onwards, the Finance Act of 1994 does

not purport to levy service tax on members’ clubs in the

incorporated form.

85. The appeals of the Revenue are, therefore dismissed. Writ

Petition (Civil) No.321 of 2017 is allowed in terms of prayer (i)

therein. Consequently, show-cause notices, demand notices and

other action taken to levy and collect service tax from incorporated

members’ clubs are declared to be void and of no effect in law.

(R.F. Nariman)

(Surya Kant)

(V. Ramasubramanian)

New Delhi;

October 03, 2019