Supply of food and drinks to the permanent members of the club is not a sale - not liable for sale tax and service tax =
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.=
Apex court held that
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.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.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE/ORIGINAL JURISDICTION
CIVIL APPEAL NO.4184 OF 2009
State of West Bengal & Ors. .… Appellants
Versus
Calcutta Club Limited … Respondent
AND
CIVIL APPEAL NO. 7497 OF 2012
Chief Commissioner of Central .… Appellants
Excise and Service & Ors.
Versus
M/s. Ranchi Club Ltd. … Respondent
WITH
CIVIL APPEAL NO. 7773 OF 2019
(ARISING OUT OF SLP (C) NO.26883 OF 2013)
WITH
CIVIL APPEAL NO. 7771 OF 2019
(ARISING OUT OF SLP (C) NO.22909 OF 2013)
WITH
CIVIL APPEAL NO. 7772 OF 2019
(ARISING OUT OF SLP (C) NO.24977 OF 2013)
WITH
CIVIL APPEAL NOS.4377-4380 OF 2015
WITH
CIVIL APPEAL NO.5157 OF 2015
WITH
CIVIL APPEAL NO.7030 OF 2015
WITH
CIVIL APPEAL NO.8543 OF 2015
WITH
CIVIL APPEAL NO.7259 OF 2015
WITH
1
CIVIL APPEAL NO.7924 OF 2015
WITH
CIVIL APPEAL NO. 7774 OF 2019
(ARISING OUT OF SLP (C) NO.33249 OF 2015)
WITH
CIVIL APPEAL NO. 7775 OF 2019
(ARISING OUT OF SLP (C) NO.151 OF 2016)
WITH
CIVIL APPEAL NO. 7781 OF 2019
(ARISING OUT OF SLP (C) NO.2491 OF 2016)
WITH
CIVIL APPEAL NO. 7780 OF 2019
(ARISING OUT OF SLP (C) NO.2494 OF 2016)
WITH
CIVIL APPEAL NO. 7783 OF 2019
(ARISING OUT OF SLP (C) NO.2490 OF 2016)
WITH
CIVIL APPEAL NO. 7778 OF 2019
(ARISING OUT OF SLP (C) NO.4158 OF 2016)
WITH
CIVIL APPEAL NO. 7779 OF 2019
(ARISING OUT OF SLP (C) NO.4156 OF 2016)
WITH
CIVIL APPEAL NO. 7777 OF 2019
(ARISING OUT OF SLP (C) NO.4157 OF 2016)
WITH
CIVIL APPEAL NO.5946 OF 2016
WITH
CIVIL APPEAL NO.5949 OF 2016
WITH
CIVIL APPEAL NO.6593 OF 2016
WITH
CIVIL APPEAL NOs.7366-7367 OF 2016
WITH
CIVIL APPEAL NO.626 OF 2017
WITH
CIVIL APPEAL NO. 7776 OF 2019
(ARISING OUT OF SLP (C) NO.33377 OF 2016)
WITH
CIVIL APPEAL NO.3584 OF 2017
2
WITH
CIVIL APPEAL NO.5087 OF 2017
WITH
CIVIL APPEAL NOs.3819-3821 OF 2017
WITH
WRIT PETITION (CIVIL) NO. 321 OF 2017
WITH
CIVIL APPEAL NO.10674 OF 2017
WITH
CIVIL APPEAL NO.11224 OF 2017
WITH
CIVIL APPEAL NOs.72-73 OF 2018
WITH
CIVIL APPEAL NO.104 OF 2019
WITH
CIVIL APPEAL NO. 7790 OF 2019
(D.NO.5100 OF 2019)
WITH
CIVIL APPEAL NO.5338 OF 2019
WITH
CIVIL APPEAL NOs.5215-5217 OF 2019
WITH
CIVIL APPEAL NO. 7789 OF 2019
(D.NO.20271 OF 2019)
J U D G M E N T
R.F. Nariman, J.
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:
3
“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
4
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.
xxx xxx xxx
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
5
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.”
6
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.”
7
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
8
(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
9
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
10
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.
11
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-
12
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
13
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
14
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 hereinbelow:
“2. Definitions
xxx xxx xxx
(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;
xxx xxx xxx
(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
15
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;
xxx xxx xxx
(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
16
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.
xxx xxx xxx
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
17
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
(b)[***]
18
(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
(d)[***]
(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 subsection (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 subsection (1) or sub-section (2) has ceased under subsection (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
19
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
20
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.”
21
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 cooperative 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
22
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
23
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 hirepurchase, 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
24
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.
xxx xxx xxx
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
25
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 hirepurchase 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. Subclause (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. Subclause (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
26
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:
27
“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 subclause (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
28
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,
29
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
30
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
31
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 hereinabove 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
32
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
33
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:
34
“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.
35
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
36
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
37
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
38
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.”
39
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
40
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
41
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
42
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 nonmembers. 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:
43
“… 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
44
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,
45
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
46
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 subclause (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.-
xxx xxx xxx
(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
47
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:
48
“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:-
xxx xxx xxx
(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,
49
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
50
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
51
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
52
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 restaurantowner 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.
53
(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
54
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.-
xxx xxx xxx
(24) “income” includesxxx xxx xxx
(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.”
55
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 subclause (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.-
xxx xxx xxx
56
(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
57
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.
58
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:
59
“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
60
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
61
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,
62
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 provided63
(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.
64
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,
65
(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.
xxx xxx xxx
Explanation 3. For the purposes of this Chapter;-
66
(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,
67
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.
68
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,
69
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
70
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
71
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
72
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
73
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”,
74
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
75
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.
………..……………………J.
(R.F. Nariman)
.……………………………J.
(Surya Kant)
..……...…….……………..J.
(V. Ramasubramanian)
New Delhi;
October 03, 2019
76
