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)

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(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)

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(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)

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(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

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 WITH CIVIL APPEAL NO.5087 OF 2017

 WITH CIVIL APPEAL NOs.3819-3821 OF 2017

 WITH WRIT PETITION (CIVIL) NO. 321 OF 2017

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 WITH CIVIL APPEAL NO.11224 OF 2017

 WITH CIVIL APPEAL NOs.72-73 OF 2018

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                                                  (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:

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“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

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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

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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.”

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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.”

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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

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(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

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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

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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.   

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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-

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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

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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

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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

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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)[***]

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

Explanation: For the purposes of sub-section (4), in computing the period of three consecutive years in respect of a dealer who has become liable to pay tax under  sub-section  (1),  the  year  or  years  which expired  before  the  appointed  day  during  which  or each of which the gross turnover failed to exceed the taxable quantum referred to in the Bengal Finance (Sales Tax) Act, 1941, shall be included.

(5) Every dealer whose liability to pay tax under sub- section (1) or sub-section (2) has ceased under sub- section  (4),  shall,  if  his  gross  turnover  of  sales calculated  from  the  commencement  of  any  year again  exceeds  the  taxable  quantum  at  any  time within  such  year,  be  liable  to  pay such tax  on all sales,  other  than  those  referred  to  in  Section  15, effected on and from the date immediately following the  day  on  which  such  gross  turnover  of  sales against first exceeds the taxable quantum.

(6)The Commissioner shall, after making such enquiry as  he  may  think  necessary  and  after  giving  the

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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.”

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The English cases mostly relate to licensing.  But the point  to  be noted is,  that  the provision in  the Sale  of Goods Act as to “part owner” has not come in their way.

The  position  in  this  respect,  as  was  observed  in  an Australian case,  is  simply  that  “a part  of  the common property  is  appropriated  to  the  separate  use  of  the members,  and  he makes a  corresponding contribution from his  separate  property  to  the  common fund.”  The question must, of course, always be as to the meaning of the word “sale’ or  “sell”  in  the particular  statute  which comes  under  consideration.  If  no  reason  is  seen  for giving the word an extended meaning, one would think it perfectly correct to say that an ordinary unincorporated members’ club does not “sell”, in the true sense, liquor which  a  member  obtains  from  the  common  store  on payment of money to the common fund.

1D.6.  General  observations.- The  broad  general principle which constitutes a common feature of  these transactions, in the absence of the transfer of property. It would  appear  that  these  transactions  are  not  “sale”, because there is no transfer of property.

1D.6A. This, then, is the present position. The question now to be considered is , whether is  desirable that the taxability of such transactions should be provided for by expanding the concept of  “sale” for  the purpose of the legislative power of the States,—a result which can be achieved only by amending the Constitution.

1D.7. Amendment of Constitution not needed.- We do not  think  that  it  would  be  appropriate  to  amend  the Constitution of this purpose. The number of such clubs and  associations  would  not  be  very  large.  Moreover, taxation of  such transactions might discourage the co- operative movement.

1D.8.  Unincorporated  associations  exist  various arrangements.- Unincorporated associations exist  in a “myriad  of  structural  arrangements.”  As  a  general proposition, each is liable for the activities of its members

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  hire- purchase, it has been held that there is sale only when the  purchaser  exercises  the  option  to  purchase  at  a much later date and therefore only the depreciated value of the goods involved in such transaction at the time the option to purchase is exercised becomes assessable to sales tax.  Similarly,  while  sale  by a registered club or

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 hire- purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to  the  purchaser.  In  other  words,  contrary  to A.V. Meiyappan decision [(1967) 20 STC 115 (Mad)] a lease of a negative print  of  a picture would be a sale.  Sub- clause  (e)  covers  cases  which  in  law  may  not  have amounted  to  sale  because  the  member  of  an incorporated association would have in a sense begun as both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub- clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. Associated Hotels of India Ltd. [(1972) 1 SCC 472 : (1972) 29 STC 474] That  decision  has  by  this  clause  been  effectively legislatively invalidated.”

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

learned Judge observed thus:

“105. The  amendment  introduced  fiction  by  which  six instances of transactions were treated as deemed sale of

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 sub-

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

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

“unincorporated” associations.

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

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

not  done  away  with  altogether  and  actually  survived  the  46 th

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

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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:

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“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  non- members. Thus, in Carlisle and Silloth Golf Club v. Smith (Surveyor  of  Taxes) [(1913)  3  KB  75  (CA)]  ,  where  a members'  golf  club  admitted  non-members  to  play  on payment of green fees it was held that it was carrying on a business which could be isolated and defined, and the profit of which was assessable to income tax. But there is no liability in respect of profits made from members who  avail  themselves  of  the  facilities  provided  for members.”

18. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga and Palkhivala explain this concept in The Law and Practice of Income Tax (8th Edn., Vol. I, 1990) at p. 113 as follows:

“1.Complete  identity  between  contributors  and participators.—‘… The contributors to the common fund and the participators in the surplus must be an identical body.  That  does  not  mean  that  each  member  should contribute  to  the  common  fund  or  that  each  member should  participate in  the surplus or  get  back from the surplus precisely what he has paid.’ The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common  fund  should  willy-nilly  distribute  the  surplus amongst themselves: it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will  be transferred  to  a  similar  association  or  used  for  some charitable objects.”

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

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

as follows:

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  46 th

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 46 th

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 46 th

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 46 th 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 sub-

clause (e).

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

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

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

aforesaid expression applying only to clubs which were not in the

corporate form.

35. Even  otherwise,  on  the  assumption  that  “unincorporated

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

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

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

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

“3. Definitions.-

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 46 th 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 restaurant- owner must be taxed.”

44. In a recent judgment of this Court, Federation of Hotel and

Restaurant Associations of India v. Union of India and Ors.

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” includes-

xxx 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 sub-

clause (e) of Article 366(29-A) is also an important pointer to the

fact that the doctrine of mutuality cannot be said to have been

done away with by the said 46th Amendment.  

47. In  fact,  Section  2(24)(vii)  has  been  expressly  noticed  in

Venkatesh Premises Cooperative Society Limited  (supra) as

follows:

“14. The doctrine of mutuality, based on common law principles,  is  premised on the theory that  a person cannot  make  a  profit  from  himself.  An  amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax  Act  defines  taxable  income.  The  income  of  a cooperative  society  from business  is  taxable  under Section  2(24)(vii)  and  will  stand  excluded from the principle of mutuality.”

48. Also,  Section  45(2)  of  the  Income  Tax  Act,  1961  is  an

example of a provision by which a deemed transfer by a person to

himself gets taxed. Section 45(2) reads as follows:

“45. Capital gains.-

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

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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

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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,

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was  not  done  away  with  in  the  service  tax  regime,  and  the

Jharkhand and Gujarat High Court were correct in applying the

judgment in  Young Men’s Indian Association  (supra) to these

cases.

58. As was stated hereinabove, service tax was introduced for

the  first  time  by  the  Finance  Act,  1994.  Under  Section  64(3),

Chapter  V  of  the  Finance  Act  applied  to  taxable  services  as

defined, with effect from 16th June, 2005. Under Section 65(25a),

“club or association” was defined as follows:

“club or  association” means any person or body of persons providing services, facilities or advantages, for  a  subscription  or  any  other  amount,  to  its members, but does not include- (i) anybody established or constituted by or under

any  law for the time being in force, or (ii) any person or body of person engaged in the

activities  of  trade  unions,  promotion  of agriculture, horticulture  or animal husbandry, or

(iii) any person or body of person engaged in any activity  having  objectives  which  are  in  the nature of public service and are of a charitable, religious or political nature, or

(iv) any person or body of persons associated with press or media.

59. Under Section 65(105)(zze), “taxable service” was defined

as follows:

““Taxable service” means any service provided-

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(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.   

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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,

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(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;-

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(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,

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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.

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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,

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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

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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

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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

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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

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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”,

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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

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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

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