STATE OF WEST BENGAL & ORS. versus CALCUTTA CLUB LIMITED on 3 October 2019

[2019] 15 S.C.R. 865

STATE OF WEST BENGAL & ORS.

v.

CALCUTTA CLUB LIMITED

(Civil Appeal No.4184 of 2009)

OCTOBER 03, 2019

[R. F. NARIMAN, SURYA KANT ANDV. RAMASUBRAMANIAN, JJ.]

Doctrines/Principles – Doctrine of Mutuality – Applicabilityof, after the 46[th ]Amendment to Art.366(29-A) – In C.A. No.4184 of2009, the assessee-respondent Club, registered u/s.25, 1956 Actwas issued notice informing that it had failed to make payment ofsales tax on sale of food and drinks to the permanent members –Respondent contended that there could be no sale by it to its ownpermanent members, for doctrine of mutuality would come into play– West Bengal Taxation Tribunal held that the respondent is noteligible to tax under the 1994 Act – Affirmed by the High Court –Division Bench of the Supreme Court set out inter alia 3 questions tobe answered by larger Bench, viz.(i) Whether the doctrine ofmutuality is still applicable to incorporated clubs or any club afterthe 46th Amendment to Art.366(29-A) of the Constitution of India?;(ii) Whether the judgment of Supreme Court in Young Men’s IndianAssociation case still holds the field even after the 46th Amendment?and (iii) Whether the 46th Amendment, by deeming fiction providesthat provision of food and beverages by the incorporated clubs toits permanent members constitute sale, thus liable to sales tax? – InC.A. No.7497 of 2012 and connected matters, issue involves levyingof service tax by Finance Act, 1994 upon members’ clubs, majorityof them being registered as Companies u/s.25 of the 1956 Act, or asco-operative societies under various State Acts – Held: Young Men’sIndian Assn.made no distinction between a club in the corporateform and a club by way of a registered society or incorporated by adeed of trust – What is the essence of the judgment is that the holdingof property must be a holding for and on behalf of the members ofthe club, there being no transfer of property from one person toanother – In members’ clubs there is a complete identity betweencontributors and participators – Thus, in members’ clubs there is

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Ano sale by one person to another for consideration, as one cannotsell something to oneself – What is of essence in applying thedoctrine of mutuality is that there is no sale transaction betweentwo persons, as one person cannot sell goods to itself – Ratio ofYoung Men’s Indian Assn. has not been done away with by the limitedfiction introduced by Art.366(29-A)(e) – Questions answered (i)BDoctrine of mutuality continues to be applicable to incorporatedand unincorporated members’ clubs after the 46[th] Amendment addingArt.366(29-A); (ii) Young Men’s Indian Assn.and other judgmentswhich applied this doctrine continue to hold the field even after the46[th] Amendment; and (iii) Sub-clause (f) of Art.366(29-A) has noCapplication to members’ clubs – No interference called for in thefindings of fact or declaration of law in this case – Further, in C.A.No.7497/12 and connected matters- Argument on behalf of therespondents that incorporated clubs or associations prior to 1[st] July,2012 were not included in the service tax net is accepted – Whathas been stated in the present judgment so far as sales tax isDconcerned applies on all fours to service tax– Explanation 3(a) tos.65B(44) of the Finance Act, 1994 does not apply to members’clubs which are incorporated – From 2005 onwards, the FinanceAct, 1994 does not purport to levy service tax on members’ clubs inthe incorporated form – Jharkhand High Court and the GujaratEHigh Court correct in their view of the law in following Young Men’sIndian Assn.Case– Thus, show-cause notices, demand notices andother action taken to levy and collect service tax from incorporatedmembers’ clubs are void and of no effect in law – West Bengal SalesTax Act, 1994 – ss.2(5), (10), (30) & s.9 Constitution of India –Art.366(29-A)(e)(f) – Companies Act, 1956 – s.25 – ConstitutionF(Forty-sixth Amendment) Act, 1982 – General Clauses Act – IncomeTax Act, 1961 – s.2(24)(vii), 2(31), 44, 45(2) – Finance Act, 1994 –ss.64(3), 65(25a), (25aa), 65(105)(zze), 65(A), 65B(37), Explanation3(a) to s.65B(44), 66B, 66D, 67, 68 – Finance Act, 2006 – FinanceAct, 2012 – Interpretation of Statutes – Central Sales Tax Act, 1956.GConstitution of India – 46[th] Amendment to Art.366(29-A) –61[st] Law Commission Report – Plea on behalf of the appellants,referring to the said Report, which preceded the enactment ofArt.366(29-A); the ‘Statement of Objects and Reasons’ appendedto the 1981 Bill, which led to the insertion of Art.366(29-A); and in H

H

particular to Art.366(29-A)(e), (f) to contend that Art.366(29-A)(e)was inserted in order to do away with the doctrine of mutuality,insofar as it applied to members’ clubs and, therefore, sought to doaway with the basis of the judgment in Young Men’s Indian Assn.case – Held: Statement of Objects and Reasons has not read thecase of Young Men’s Indian Assn. in its correct perspective – YoungMen’s Indian Assn. had three separate appeals before it, in one ofwhich a company was involved – To state, therefore, that under thelaw as it stood on the date of the 46[th] Amendment, a sale of goodsby a club having a corporate status to members is taxable, is whollyincorrect – Proceeding on this incorrect basis, the 46[th] Amendmentthen sought to bring to tax sales by clubs which have no separateexistence from that of their members – In so doing, the 46[th]Amendment used the expression “any unincorporated associationor body of persons” – This expression, when read with the Statementof Objects and Reasons, makes it clear that it was only clubs whichare not in corporate form that were sought to be brought within thetax net, as it was wrongly assumed that sale of goods by members’clubs in the corporate form were taxable –”Any” is the equivalentof “all”– This word, therefore, also lends itself to the aforesaidinterpretation, as the emphasis of the legislature is on allunincorporated associations or bodies being brought within sub-clause(e) – Constitution (Forty-sixth Amendment) Bill, 1981 –Constitution (Forty-sixth Amendment) Act, 1982 – Interpretation ofStatutes – Doctrine of Mutuality.

Words & Expressions– “unincorporated association or bodyof persons” in sub-clause (e) to Art.366(29-A) – Plea on behalf ofthe appellants that the said expression must be read disjunctivelyand thus, would include incorporated persons such as companies,cooperative societies etc. – Held: On the assumption that“unincorporated association or body of persons” must be readdisjunctively, “a body of persons” cannot be equated with “person”– “Person” as defined by the General Clauses Act (which appliesto the interpretation of the Constitution vide Art.367) states that“person” shall include any company or association or body ofindividuals, whether incorporated or not – Art.366(29-A) does notuse this expression, as “person” would then include corporatepersons as well – “body of persons” is used to make it clear beyond AB

CDE

F

G

H

Adoubt that corporate persons are not referred to – Further, contrastin the language of the 1961 Act and Art.366(29-A)(e) again leadsto the conclusion that “body of persons” would not refer to thecorporate form unless “person” by itself is accompanied by theexpression “whether incorporated or not” – Constitution of India– Art.366(29-A)(e), 367 – General Clauses Act – Income TaxBAct, 1961 – s.2(31) – Interpretation of Statutes.

Contract Act, 1872 – s.2(d) – Plea on behalf of the respondentthat s.2(d) makes it clear that consideration must flow from oneperson to another and in the absence of two players, as in the caseof Young Men’s Indian Assn., Art.366(29-A) would have no applicationC

– Held: “supply” of goods by an unincorporated association orbody of persons has to be to a member for cash, deferred paymentor other valuable consideration – Correctly argued by therespondents, the definition of “consideration” in s.2(d) of the 1872Act necessarily posits consideration passing from one person toDanother – This is further reinforced by the last part of Art.366(29-A), as under this part, the supply of such goods shall be deemed tobe sale of those goods by the personmaking the supply, and thepurchase of those goods by the person to whom such supply is made– As the Young Men’s Indian Assn. case and the doctrine of mutualitystate, there is no sale transaction between a club and its members –ERatio of Young Men’s Indian Assn. has not been done away with bythe limited fiction introduced by Art.366(29-A)(e) – Constitution ofIndia – Art.366(29-A) – West Bengal Sales Tax Act, 1994 – ss.2(5),(30) – Doctrine of Mutuality.

Constitution of India– Art.366(29-A)(e), (f)– Applicability ofFsub-clause (f) to members’ club – Held: Reason for sub-clause (f),as stated in the Statement of Objects and Reasons, is the doingaway with of two judgments of Supreme Court, viz., Associated Hotelsof India Ltd. and Northern India Caterers – This is also clear from thesubject matter of sub-clause (f) (which does not include “goods” inGtheir entirety, but only food or any other article for humanconsumption, or any drink), which is the serving of such food ordrink in hotels or restaurants – This is further made clear by s.6 ofthe 46[th] Amendment Act, which is a validation and exemptionprovision – s.6(1)(a) specifically refers to transactions referable tothe aforesaid two Supreme Court judgments – Sub-clause (a) ofH

s.6(2) refers to 07.09.1978, which is the date on which NorthernIndia Catererswas pronounced and sub-clause (b) refers to04.01.1972, when Associated Hotels of India Ltd.was pronounced –46[th] Amendment Act, therefore, when read as a whole, would makeit clear that Art.366(29-A)(f) refers only to an undoing of theaforesaid two judgments, the subject matter being the taxability offood or drink served in hotels and restaurants – Thus, the taxabilityof food or drink served in members’ clubs is not the subject matterof sub-clause (f) – Subject matter of sub-clause (f) is entirelydifferent and distinct from that of sub-clause (e), and cannot possiblyapply to members’ clubs – Thus, expression “in any mannerwhatsoever”, being part and parcel of sub-clause (f) cannot beheld to extend to a supply of all goods so as to bring such goods totax when applied to members’ clubs – Constitution (Forty-sixthAmendment) Act,1982 – s.6.

Income Tax Act, 1961 – ss.2(24)(vii), 44, 45(2) – Held:Doctrine of Mutuality has not been done away with by sub-clause(e) to Art.366(29-A) is also clear when sub-clause (e) is contrastedwith s.2(24)(vii) of the 1961 Act r/w s.44 – A reading of the saidprovisions make it clear that when profits and gains of a mutualinsurance company are sought to be brought to tax, they are sodone by express reference to the fact that the business of insuranceis carried on by a mutual insurance company – Absence of anysuch language in sub-clause (e) of Art.366(29-A) is also an importantpointer to the fact that the doctrine of mutuality cannot be said tohave been done away with by the said 46[th] Amendment – Also, s.45(2)is an example of a provision by which a deemed transfer by a personto himself gets taxed – Modalities such as these to bring to taxamounts that would do away with any doctrine of mutuality areconspicuous by their absence in the language of Article 366(29-A)(e) – Constitution of India – Art.366(29-A)(e) – Constitution (Forty-sixth Amendment) Act, 1982 – Doctrine of Mutuality.

Words & Expressions – Expression “body of persons”occurring in the explanation to s.65 and s.65(25a) and (25aa) –Meaning of – Held: Said expression does not refer to anincorporated company or an incorporated cooperative society –Finance Act, 1994 – Explanation to s. 65, ss.65(25a), (25aa);s.65B(37) and Explanation 3(a) to s.65B(44) – Finance Act, 2006.

A

B

C

D

E

F

G

H

AFinance Act, 1994– Explanation to s.65, ss.65(25a), (25aa);s.65B(37) and Explanation 3(a) to s.65B(44) – Applicability ofexplanation 3(a) to s.65B(44) to incorporated members’ clubs –Discussed – Finance Act, 2006 – Finance Act, 2012.

Dismissing the Civil Appeal No.4184 of 2009 and theBappeals of the Revenue, while allowing the Writ Petition (Civil)No.321 of 2017 in terms of prayer (i) therein, the Court

HELD: 1.1 Young Men’s Indian Association made nodistinction between a club in the corporate form and a club byway of a registered society or incorporated by a deed of trust.CWhat is the essence of the judgment is that the holding of propertymust 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 theclub would not be the members themselves, but somebody else.The present appeal deals with a company that is registered underDSection 25 of the Companies Act. In these companies, paymentof dividend to shareholders is prohibited, and the profits, if any,have to be applied to promote the objects of the company. BachaF. Guzdar did not deal with a Section 25 company - it dealt withtwo tea companies which were Public Limited Companies,Eregistered under the Companies Act. Given the differencespointed out in Cricket Club of India between clubs registered asCompanies under Section 25 of the Companies Act and othercompanies, it is clear that the ratio decidendi in the judgment inBacha F. Guzdar would not apply to such clubs - there being noshareholders, no dividends declared, and no distribution of profitsFtaking place. Such clubs, therefore, cannot be treated as separatein law from their members. If persons carry on a certain activityin such a way that there is a commonality between contributorsof funds and participators in the activity, a complete identitybetween the two is then established. This identity is not snappedGbecause the surplus that arises from the common fund is notdistributed among the members – it is enough that there is aright of disposal over the surplus, and in exercise of that rightthey may agree that on winding up, the surplus will be transferredto a club or association with similar activities. Most importantly,the surplus that is made does not come back to the members ofH

the club as shareholders of a company in the form of dividendsupon their shares. Since the members perform the activities ofthe club for themselves, the fact that they incorporate a legalentity to do it for them makes no difference. What is of essence,therefore, in applying this doctrine is that there is no saletransaction between two persons, as one person cannot sell goodsto itself. [Paras 26, 30] [908-B-D, H; 909-A; 911-C-D; 914-B-D]

C.T.O. v. Young Men’s Indian Association (1970) 1 SCC462 : [1970] 3 SCR 680 – explained.

Bacha F. Guzdar v. Commissioner of Income Tax,Bombay [1955] 1 SCR 876 – distinguished.

Cricket Club of India Ltd. v. Bombay Labour Union[1969] 1 SCR 600 ;Bangalore Club v. Commissionerof Income Tax and Anr. (2013) 5 SCC 509 : [2013] 1SCR 267 – relied on.

1.2 The 61[st] Law Commission Report had observed thatthere cannot be said to be any evasion of tax as a member ofmembers’ clubs “really takes his own goods” and, therefore, didnot seek to tax such goods. The framers of the 46[th] Amendmentthought otherwise, and made it plain that they sought to bring totax sales made by unincorporated clubs or an association ofpersons to their members, as it was thought that such transactionswere not taxable, as such club or associations in law has noseparate existence from that of the members. The Statement ofObjects and Reasons has not read the case of Young Men’s IndianAssociation in its correct perspective. Young Men’s IndianAssociation had three separate appeals before it, in one of whicha company was involved. To state, therefore, that under the lawas it stood on the date of the 46[th] Amendment, a sale of goods bya club having a corporate status to members is taxable, is whollyincorrect. Proceeding on this incorrect basis, what the 46[th]Amendment sought to do was to then bring to tax sales by clubswhich have no separate existence from that of their members. Inso doing, the 46[th] Amendment used the expression “anyunincorporated association or body of persons”. This expression,when read with the Statement of Objects and Reasons, makes itclear that it was only clubs which are not in corporate form that A

B

C

D

E

F

G

H

Awere sought to be brought within the tax net, as it was wronglyassumed that sale of goods by members’ clubs in the corporateform were taxable. “Any” is the equivalent of “all”. This word,therefore, also lends itself to the aforesaid interpretation, as theemphasis of the legislature is on all unincorporated associationsor bodies being brought within sub-clause (e). Thus, it is clearBthat even going by the argument as to the intention of thelegislature, as seen through the object that the legislature soughtto achieve, would lead to the aforesaid expression applying onlyto clubs which were not in the corporate form.[Paras 32-34] [914-F-H; 915-A-D]

C

1.3 Even otherwise, on the assumption that“unincorporated association or body of persons” must be readdisjunctively, “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 D367) states that “person” shall include any company or associationor body of individuals, whether incorporated or not. Article366(29-A) does not use this expression, as “person” would theninclude corporate persons as well. On the other hand, “body ofpersons” is used to make it clear beyond doubt that corporate persons are not referred to. The definition of “person” in otherEActs such as the Income Tax Act, 1961 is also very wide, andincludes an association of persons or body of individuals, whetherincorporated or not– Section 2(31) of the Income Tax Act, 1961.Quite clearly, this language was available and in common usageby the legislature, as the definition of “person” under the IncomeFTax Act has stood in the statute book since 1961. The contrast inthe language of the Income Tax Act, 1961 and Article 366(29-A)(e) again leads to the conclusion that “body of persons” wouldnot refer to the corporate form unless “person” by itself isaccompanied by the expression “whether incorporated or not”.Even otherwise, the “supply” of goods by an unincorporatedGassociation or body of persons has to be to a member for cash,deferred payment or other valuable consideration. The definitionof “consideration” in Section 2(d) of the Indian Contract Act,1872 necessarily posits consideration passing from one personto another. This is further reinforced by the last part of ArticleH

366(29-A), as under this part, the supply of such goods shall bedeemed to be sale of those goods by the person making thesupply, and the purchase of those goods by the person to whomsuch supply is made. As the Young Men’s Indian Association caseand the doctrine of mutuality state, there is no sale transactionbetween a club and its members. there cannot be a sale of goodsto oneself. the ratio of Young Men’s Indian Association (supra)has not been done away with by the limited fiction introduced byArticle 366(29-A)(e). [Paras 35-38][915-E-H; 916-A-C, H;917-A-B]

Pollock and Mulla, The Indian Contract & SpecificRelief Acts(16[th] Edn.) – referred to.

1.4 The reason for sub-clause (f), as has been stated in theStatement of Objects and Reasons, is the doing away with of twojudgments of this Court, namely, State of Punjab v. AssociatedHotels of India Limited AIR 1972 SC 1131 and Northern IndiaCaterers (India) Ltd.. This is clear not only from the Statementof Objects and Reasons, but from the subject matter of sub-clause(f) (which does not include “goods” in their entirety, but onlyfood 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] AmendmentAct, which is a validation and exemption provision. Section 6(1)(a)specifically refers to transactions referable to the aforesaid twoSupreme Court judgments. The exemption provision puts thematter beyond doubt. Sub-clause (a) refers to 7[th] September, 1978,which is the date on which Northern India Caterers waspronounced and sub-clause (b) refers to 4[th] January, 1972, whichis the date on which Associated Hotels of India Ltd. waspronounced. The 46[th] Amendment Act, therefore, when read asa whole, would make it clear that Article 366(29-A)(f) refers onlyto an undoing of the aforesaid two judgments, the subject matterbeing the taxability of food or drink served in hotels andrestaurants. This being the case, it is obvious that the taxabilityof food or drink served in members’ clubs is not the subject matterof sub-clause (f). A members’ club may supply goods which arenot food or drink – for example, soap, cosmetics and otherhousehold items. These items would be “goods”, but would not AB

C

D

E

F

G

H

Abe within sub-clause (f) - not being food or drink, and cannot,therefore, be taxed under sub-clause (f), leading to the absurdsituation of the supply of food and drink being taxable in members’clubs, and the supply of other goods in such clubs being outsidethe tax net. For this reason also, it is clear that the subject matterof sub-clause (f) is entirely different and distinct from that of sub-Bclause (e), and cannot possibly apply to members’ clubs. In thisview of the matter, the expression “in any manner whatsoever”,being part and parcel of sub-clause (f) cannot be held to extendto a supply of all goods so as to bring such goods to tax whenapplied to members’ clubs. [Paras 39-42] [917-C-E; 918-B-F]CNorthern India Caterers (India) Ltd. v. Lt. Governor ofDelhi(1978) 4 SCC 36 : [1979] 1 SCR 557 ;State ofPunjab v. Associated Hotels of India LimitedAIR 1972SC 1131 : [1972] 2 SCR 937 – referred to.

1.5 That the doctrine of mutuality has not been done awayDwith by sub-clause (e) is also clear when sub-clause (e) iscontrasted with certain provisions of the Income Tax Act, 1961.Section 2(24)(vii) of the Income Tax Act, 1961 has to be readwith Section 44 of the Income Tax Act, 1961. A reading of theaforesaid provisions makes it clear that when profits and gains ofEa mutual insurance company are sought to be brought to tax,they are so done by express reference to the fact that the businessof insurance is carried on by a mutual insurance company. Theabsence of any such language in sub-clause (e) of Article366(29-A) is also an important pointer to the fact that the doctrineof mutuality cannot be said to have been done away with by theFsaid 46[th] Amendment. Also, Section 45(2) of the Income Tax Act,1961 is an example of a provision by which a deemed transfer bya person to himself gets taxed. It can be seen from this provisionthat profits or gains arising from a transfer by way of conversionby the owner of a capital asset into, or its treatment by him asGstock-in-trade of a business, is by a deeming fiction brought totax, despite the fact that there is no transfer in law by the ownerof a capital asset to another person. Modalities such as these tobring to tax amounts that would do away with any doctrine of mutuality are conspicuous by their absence in the language ofArticle 366(29-A)(e). [Paras 45, 46 and 48] [920-E, H; 921-C, F;922-C]

Income Tax Officer, Mumbai v. Venkatesh PremisesCooperative Society Limited(2018) 15 SCC 37:[2018] 3 SCR 214 – referred to.

1.6 The three questions posed by the Division Bench inState of West Bengal v. Calcutta Club Limited are answered asfollows:

(1) The doctrine of mutuality continues to be applicable toincorporated and unincorporated members’ clubs after the46[th] Amendment adding Article 366(29-A) to the Constitution ofIndia.

(2) Young Men’s Indian Association and other judgmentswhich applied this doctrine continue to hold the field even afterthe 46[th] Amendment.

(3) Sub-clause (f) of Article 366(29-A) has no application tomembers’ clubs.

No interference is called for in the findings of fact ordeclaration of law in this case. C.A. No. 4184 of 2009 standsdismissed. [Paras 49, 50] [922-E-H]

State of West Bengal v. Calcutta Club Limited(2017) 5 SCC 356 : [2016] 6 SCR 748 – referred to.

C.A. No.7497 of 2012 and other connected matters 2.1 Service tax was introduced for the first time by theFinance Act, 1994. Under Section 64(3), Chapter V of the FinanceAct applied to taxable services as defined, with effect from 16[th]June, 2005. Under Section 65(25a), “club or association” wasdefined. Under Section 65(105)(zze), “taxable service” wasdefined. With effect from 1[st] May, 2011, “club or association”was defined by Section 65(25aa). Likewise, in Section65(105)(zzze), the expression “or any other person” was addedafter the expression “to its members”, thus making it clear thatthe tax net had now been widened so as to include non-members A

B

C

D

E

F

G

H

Aof clubs or associations as well. Under Section 66, it was statedthat there shall be levied the tax (referred to as “the servicetax”) at the rate of 12% of the value of taxable services referredto in sub-clauses…(zzze) of clause (105) of section 65, andcollected in such manner as may be prescribed. Under Section67, where service tax is chargeable on any taxable service withBreference to its value. With effect from 1[st] July, 2012, Sections65 and 65A were made inapplicable, and a new Section 65Bintroduced, in which under Section 65B(37), the term “person”was defined. Under Section 65B(44), “service” was defined. Anew Section 66B was then introduced. Service tax was thusCleviable on all services as defined, short of a negative list ofservices which was then set out in Section 66D of the Act.[Paras 58-63, 65-68] [925-F; 926-C-D, H]

2.2 The definition of “club or association” contained inSection 65(25a) makes it plain that any person or body of personsDproviding services for a subscription or any other amount to itsmembers would be within the tax net. However, what is ofimportance is that anybody “established or constituted” by orunder any law for the time being in force, is not included.Companies and cooperative societies which are registered under the respective Acts, can certainly be said to be constituted underEthose Acts. This being the case, the argument on behalf of theRespondents that incorporated clubs or associations or prior to1[st] July, 2012 were not included in the service tax net is accepted.[Paras 72, 73] [931-E-F; 932-G-H]

R.C. Mitter & Sons, Calcutta v. CIT, West Bengal,FCalcutta [1959] Suppl. 2 SCR 641 – relied on.

DALCO Engineering Private Limited v. SatishPrabhakar Padhye and Ors. Etc.(2010) 4 SCC 378 :[2010] 4 SCR 15 ;CIT, Kanpur and Anr. v. CanaraBank (2018) 9 SCC 322 : [2018] 7 SCR 866 –Greferred to.2.3 The definition of “service” contained in Section 65B(44)is very wide, as meaning any activity carried out by a person foranother for consideration. “Person” is defined in Section 65B(37)

H

as including, inter alia, a company, a society and every artificialjuridical person not falling in any of the preceding sub-clauses,as also any association of persons or body of individuals whetherincorporated or not.What has been stated in the present judgmentso far as sales tax is concerned applies on all fours to servicetax; as, if the doctrine of agency, trust and mutuality is to be appliedqua members’ clubs, there has to be an activity carried out byone person for another for consideration. It has been seen howin 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 allfours when the definition of “service” is construed under Section65B(44) as well. However, Explanation 3 has now beenincorporated, under sub-clause (a) of which unincorporatedassociations or body of persons and their members are statutorilyto be treated as distinct persons. [Paras 75-77] [933-B-E]

2.4 The definition of “service” contained in Section 65B(44)is very wide, as meaning any activity carried out by a person foranother for consideration. “Person” is defined in Section 65B(37)as including, inter alia, a company, a society and every artificialjuridical person not falling in any of the preceding sub-clauses,as also any association of persons or body of individuals whetherincorporated or not. What has been stated in the presentjudgment so far as sales tax is concerned applies on all fours toservice tax; as, if the doctrine of agency, trust and mutuality is tobe applied qua members’ clubs, there has to be an activitycarried out by one person for another for consideration. In thejudgment relating to sales tax, the fact is that in members’ clubsthere is no sale by one person to another for consideration, asone cannot sell something to oneself. This would apply on allfours when the definition of “service” under Section 65B(44) aswell is to be construed. However, Explanation 3 has now beenincorporated, under sub-clause (a) of which unincorporated as-sociations or body of persons and their members are statutorilyto be treated as distinct persons. The explanation to Section 65,inserted by the Finance Act, 2006 is in substantially the sameterms as Article 366(29-A)(e) of the Constitution of India.

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

[2019] 15 S.C.R.

AEarlier in this judgment qua sales tax, it has already been heldthat the expression “body of persons” will not include anincorporated company, nor will it include any other form ofincorporation including an incorporated co-operative society.“Club or association” was earlier defined under Section 65(25a)and 65(25aa) to mean “any person” or “body of persons”Bproviding service. In these definitions, the expression “body ofpersons” cannot possibly include persons who are incorporatedentities, as such entities have been expressly excluded underSection 65(25a)(i) and 65(25aa)(i) as “anybody established orconstituted by or under any law for the time being in force”. “BodyCof persons”, therefore, would not, within these definitions,include a body constituted under any law for the time being inforce. When the scheme of service tax changed so as tointroduce a negative list for the first-time post 2012, serviceswere now taxable if they were carried out by “one person” for“another person” for consideration. “Person” is very widelyDdefined by Section 65B(37) as including individuals as well as allassociations of persons or bodies of individuals, whetherincorporated or not. Explanation 3 to Section 65B(44), insteadof using the expression “person” or the expression “anassociation of persons or bodies of individuals, whetherEincorporated or not”, uses the expression “a body of persons”when juxtaposed with “an unincorporated association”. Theexpression “body of persons” occurring in the explanation toSection 65 and occurring in Section 65(25a) and (25aa) does notrefer to an incorporated company or an incorporated coopera-tive society. As the same expression has been used in Explana-Ftion 3 post-2012 (as opposed to the wide definition of “person”contained in Section 65B(37)), it may be assumed that thelegislature has continued with the pre-2012 scheme of not taxingmembers’ clubs when they are in the incorporated form. Theexpression “body of persons” may subsume within it personsGwho come together for a common purpose, but cannot possiblyinclude a company or a registered cooperative society. Thus,Explanation 3(a) to Section 65B(44) does not apply to members’clubs which are incorporated. The expression “unincorporatedassociations” would include persons who join together in some H

common purpose or common action. The expression “as the casemay be” would refer to different groups of individuals eitherbunched together in the form of an association also, or otherwiseas a group of persons who come together with some commonobject in mind. Whichever way it is looked at, what is importantis that the expression “body of persons” cannot possibly includewithin it bodies corporate. The Jharkhand High Court and theGujarat High Court are correct in their view of the law infollowing Young Men’s Indian Association. From 2005 onwards,the Finance Act of 1994 does not purport to levy service tax onmembers’ clubs in the incorporated form. The appeals of theRevenue are, therefore dismissed. Writ Petition (Civil) No.321of 2017 is allowed in terms of prayer (i) therein. Consequently,show-cause notices, demand notices and other action taken tolevy and collect service tax from incorporated members’ clubsare declared to be void and of no effect in law.[Paras 75-85][933-B-H; 934-A-H; 935-A-B]

Deputy Commercial Tax Officer, Saidapet & Anr. v.Enfield India Ltd., Co-operative Canteen Ltd.[1968] 2SCR 421 – explained.

Cosmopolitan Club v. State of T.N (2017) 5 SCC 635 ;Fateh Maidan Club v. CTO(2017) 5 SCC 638 ;Stateof Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 1SCR 618 ; BSNL v. Union of India(2006) 3 SCC 1 :[2006] 2 SCR 823 ;State of Madras v. GannonDunkerley AIR 1958 SC 560 : [1959] SCR 379;Unionof India and Ors. v. Margadarshi Chit Funds PrivateLimited and Ors.(2017) 13 SCC 806 : [2017] 7 SCR375; All-India Federation of Tax Practitioners and Ors.v. Union of India and Ors.(2007) 7 SCC 527 : [2007]9 SCR 147;ICT, Bombay North, Kutch and Saurashtra,Ahmedabad v. Indira Balkrishna [1960] 3 SCR 513– referred to.

K. Damodarasamy Naidu & Bros. and Ors. v. State ofT.N. and Anr.(2000) 1 SCC 527 ;Federation of Hoteland Restaurant Associations of India v. Union of Indiaand Ors. (2018) 2 SCC 97 : [2017] 12 SCR 503– relied on.

A

B

C

D

E

F

G

H

AInland Revenue Commissioners v. Westleigh EstatesCompany, Limited 1924 K.B. 390; Walter Fletcher v.Income Tax Commissioner (1972) Appeal Cases 414;Graff v. Evans (1882) 8 Q.B. 373 ;Trebanog WorkingMen’s Club and Institute Ltd. v. Macdonald(1940) 1K.B. 576 ;Thomas (Inspector of Taxes) v. Richard EvansB& Co. Ltd. (1927) 1 K.B. 33 ; Currie v. Misa (1875)LR 10 EX 153 – referred to.

Case Law Reference

referred toPara 1 explainedPara 2explainedPara 5distinguished Para 5referred toPara 6referred toPara 6 referred to Para 13referred toPara 16relied onPara 28relied onPara 30referred toPara 30referred toPara 39relied onPara 43relied onPara 44referred toPara 69referred toPara 70referred toPara 72referred toPara 72relied on Para 72referred toPara 83

CIVIL APPELLATE/ORIGINAL JURISDICTION: Civil AppealNo.4184 of 2009

From the Judgment and Order dated 01.02.2008 of the DivisionBench of the Calcutta High Court in W.P.T.T. No. 652 of 2006

With

Civil Appeal Nos.7497/2012, 7773/2019, 7771/2019, 7772/2019,4377-4380/2015, 5157/2015, 7030/2015, 8543/2015, 7259/2015, 7924/2015,7774/2019, 7775/2019, 7781/2019, 7780/2019, 7783/2019, 7778/2019,7779/2019, 7777/2019, 5946/2016, 5949/2016, 6593/2016, 7366-7367/2016,626/2017, 7776/2019, 3584/2017, 5087/2017, 3819-3821/2017, W.P. (C)No. 321/2017, C.A. Nos. 10674/2017, 11224/2017, 72-73/2018, 104/2019,7790/2019, 5338/2019, 5215-5217/2019 and 7789/2019.

K. M. Natraj, ASG, Dhruv Agarwal, Shyam Divan, S.K. Bagaria,Arvind P. Datar, Devang Nanavati, Rana Mukherjee, Nakul Dewan,Jaideep Gupta, Sr. Advs., Ms. Madhumita Bhattacharjee, Ms. SrijaChoudhury, Ms. Nisha Bagchi, Ms. Sunita Rani Singh, D.L. Chidananda,Ms. Pooja Sharma, Sharath Nambiar, B. Krishna Prasad, B. V. BalaramDas, Amit Thakkar, Mahesh Agarwal, Shamik Sajanwala, AbhinavAgrawal, Udayaditya Banarjee, Yojit Mehra, E. C. Agrawala, NeeravMainkar, Ms. Dhwani Mainkar, Anil Kumar Gautam, Amar Dave, AjitsinhJadeja, Pradhuman Gohil, Ms. Taruna Singh Gohil, Vikash Singh,Ms. Ranu Purohit, Shiva P., Dhruraj Rana, Krishal H. Patel, Partha Sil,Tavish B. Prasad, Lakshmi N. Kaimal, Rajesh Kumar, Ms. Sunita Rawat,Rahul Krishna, S.K. Kulkarni, M. Gireesh Kumar, Ankur S. Kulkarni,Ejaz Maqbool, Ms. Akriti Chaubey, Kunwar Aditya Singh, GautamPrabhakar, V. Raghuraman, Anand Sukumar, S. Sukumaran, BhupeshKumar Pathak, Mrs. Meera Mathur, Rajeev Singh, M/s. S. Narain &Co., Prateek Chadha, Pratap Venugopal, Ms. Surekha Raman, Ms.Viddusshi, Akhil Abraham Roy (for M/s. K J John and Co,) Ajay Kumar,Vijay Goswami, Ranjith Kumar, Shivam Ojha, Ms. CharanyaLakshmikumaran, V. Lakshmikumaran, Karan Sachdev, AadityaBhattacharya, Ms. Apeksha Mehta, Ms. Ishita Mathur, Ms. MounicaKasturi, Punit Dutt Tyagi, M. P. Devanath, P.K. Sahu, Prashant Shukla,Kedar Nath Tripathy, J.K. Mittal, Ms. Vandana Mittal, Praveen Swarup,Advs. for the appearing parties.

A

B

C

D

E

F

G

AThe Judgment of the Court was delivered by

R. F. NARIMAN, J.

C.A. No.4184 of 2009

1. This Appeal arises out of a reference order by a Division Benchof this Court, reported in State of West Bengal v. Calcutta ClubLimited (2017) 5 SCC 356. The facts of Civil Appeal No. 4184 of 2009are set out in the said reference order as follows:

B

“2. The facts that are necessary to be stated are that the AssistantCommissioner of Commercial Taxes issued a notice to therespondent Club assessee apprising it that it had failed to makepayment of sales tax on sale of food and drinks to the permanentmembers during the quarter ending 30-6-2002. After the receiptof the notice, the respondent Club submitted a representation andthe assessing authority required the respondent Club to appearbefore it on 18-10-2002. The notice and the communication sentfor personal hearing was assailed by the respondent before theTribunal praying for a declaration that it is not a dealer within themeaning of the Act as there is no sale of any goods in the form offood, refreshments, drinks, etc. by the Club to its permanentmembers and hence, it is not liable to pay sales tax under the Act.A prayer was also made before the Tribunal for nullifying theaction of the Revenue threatening to levy tax on the supply offood to the permanent members.

C

D

E

3. It was contended before the Tribunal that there could be nosale by the respondent Club to its own permanent members, fordoctrine of mutuality would come into play. To elaborate, therespondent Club treated itself as the agent of the permanentmembers in entirety and advanced the stand that no considerationpassed for supplies of food, drinks or beverages, etc. and therewas only reimbursement of the amount by the members andtherefore, no sales tax could be levied.

F

G

4. The Tribunal referred to Article 366(29-A) of the Constitutionof India, Section 2(30) of the Act, its earlier decision in HindustanClub Ltd. v. CCT [Hindustan Club Ltd. v. CCT, (1995) 98 STC347 (Tri)] , distinguished the authority rendered in AutomobileAssn. of Eastern India v. State of W.B. [Automobile Assn. of H

Eastern India v. State of W.B., (2017) 11 SCC 811 : (2002) 40STA 154 (SC)] and, eventually, opined as follows:

“Considering the relevant fact presented before us and the differentjudgments of the Supreme Court and the High Court we find thatsupplies of food, drinks and refreshments by the petitioner clubsto their permanent members cannot be treated as “deemed sales”within the meaning of Section 2(30) of the 1994 Act. We find thatthe payments made by the permanent members are notconsiderations and in the case of Members’ Clubs the suppliersand the recipients (Permanent Members) are the same personsand there is no exchange of consideration.”

Being of this view, the Tribunal accepted the contention of therespondent Club and opined that it is not eligible to tax under theAct.

5. Being dissatisfied with the aforesaid order passed by the Tribunal,the Revenue preferred a writ petition and the High Court opinedthat the decision rendered in Automobile Assn. of Eastern India[Automobile Assn. of Eastern India v. State of W.B., (2017) 11SCC 811 : (2002) 40 STA 154 (SC)] , was not a precedent andcame to hold that reading of the constitutional amendment, aswell as the provisions of the definition under the Act, it was clearthat supply of food, drinks and beverages had to be made uponpayment of consideration, either in cash or otherwise, to makethe same exigible to tax but in the case at hand, the drinks andbeverages were purchased from the market by the Club as agentof the members. The High Court further ruled that the memberscollectively was the real life and the Club was a superstructureonly 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 Courtfurther opined that in the obtaining factual matrix the element ofmutuality was not obliterated. The expression of the aforesaidview persuaded the High Court to lend concurrence to the opinionprojected by the Tribunal.

xxx xxx xxx

9. At the very outset, we may mention certain undisputed facts. Itis beyond cavil that the respondent is an incorporated entity under A

B

C

D

E

FG

H

the Companies Act, 1956. The respondent assessee charges andpays sales tax when it sells products to the non-members or guestswho accompany the permanent members. But when the invoicesare raised in respect of supply made in favour of the permanentmembers, no sales tax is collected.”

A

B2. After setting out the definition of “sale” in Section 2(30) of theWest Bengal Sales Tax Act, 1994 (hereinafter referred to as the “WestBengal Sales Tax Act”) and Article 366(29-A) of the Constitution ofIndia, 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. YoungMen’s Indian Assn. [CTO v. Young Men’s Indian Assn., (1970)1 SCC 462] dealing with the liability of a club to pay sales taxwhen there is supply of refreshment to its members, the Courthad concluded thus: (SCC pp. 467-68, para 11)

C

D“11. The essential question, in the present case, is whether thesupply of the various preparations by each club to its membersinvolved a transaction of sale within the meaning of the Sale ofGoods Act, 1930. The State Legislature being competent tolegislate only under Schedule VII List II Entry 54 to the Constitutionthe expression “sale of goods” bears the same meaning which itEhas in the aforesaid Act. Thus in spite of the definition containedin Section 2(n) read with Explanation I of the Act if there is notransfer of property from one to another there is no sale whichwould be eligible to tax. If the club even though a distinct legalentity is only acting as an agent for its members in matter ofFsupply of various preparations to them no sale would be involvedas the element of transfer would be completely absent. Thisposition has been rightly accepted even in the previous decisionof this Court.”

D

3. After then referring to a number of decisions on the doctrine ofGmutuality, the Court observed:

“23. In the light of the aforesaid position and the law of mutualconcerns, we have to ascertain the impact and the effect of sub-clause (e) to clause (29-A) to Article 366 of the Constitution ofIndia, as enacted vide 46th Amendment in 1982 and applicable

and applied to sales or VAT tax. The said clause refers to tax onsupply of goods by an unincorporated association or body ofpersons. The question would be whether the expression “body ofpersons” would include any incorporated company, society,association, etc. The second issue is what would be included andcan be classified as transactions relating to supply of goods by anunincorporated association or body of persons to its members byway of cash, deferred payment or valuable consideration. Suchtransactions are treated and regarded as sales. The decisions ofthe Court in Fateh Maidan Club [Fateh Maidan Club v. CTO,(2017) 5 SCC 638 : (2008) 12 VST 598 (SC)] and CosmopolitanClub [Cosmopolitan Club v. State of T.N., (2017) 5 SCC 635 :(2009) 19 VST 456 (SC)] in that context have drawn a distinctionwhen a club acts as an agent of its members and when the propertyin the goods is sold i.e. the property in food and drinks is passed tothe members. The said distinction, it is apparent to us, has beenaccepted by the two Benches. However, the decisions do notelucidate and clearly expound, when the club is stated and couldbe held as acting as an agent of the members and, therefore,would not be construed as a party which had sold the goods. Theagency precept necessarily and possibly refers to a third partyfrom whom the goods i.e. the food and drinks had been sourcedand provided to by the club acting as an agent of the members, tothe said members. These are significant and relevant facets whichmust be elucidated and clarified so that there is no ambiguity inappreciating and understanding the aforesaid concepts “acting asan agent of the members” or when property is transferred in thegoods sold to the members.”

4. The Division Bench then set out 3 questions to be answered bya larger Bench as follows:

“30.1. (i) Whether the doctrine of mutuality is still applicable toincorporated clubs or any club after the 46th Amendment to Article366(29-A) of the Constitution of India?

30.2. (ii) Whether the judgment of this Court in Young Men’sIndian Assn. [CTO v. Young Men’s Indian Assn., (1970) 1 SCC462] still holds the field even after the 46th Amendment of theConstitution of India; and whether the decisions in Cosmopolitan ABC

D

E

F

G

H

Club [Cosmopolitan Club v. State of T.N., (2017) 5 SCC 635 :(2009) 19 VST 456 (SC)] and Fateh Maidan Club [FatehMaidan Club v. CTO, (2017) 5 SCC 638 : (2008) 12 VST 598(SC)] which remitted the matter applying the doctrine of mutualityafter the constitutional amendment can be treated to be statingthe correct principle of law?

A

B

30.3. (iii) Whether the 46th Amendment to the Constitution, bydeeming fiction provides that provision of food and beverages bythe incorporated clubs to its permanent members constitute salethereby holding the same to be liable to sales tax?”

C5. Shri Rakesh Dwivedi, learned Senior Advocate appearing onbehalf of the Appellants, referred to the ‘Sixty-First Law CommissionReport on Certain Problems Connected With Powers of the States toLevy a Tax on the Sale of Goods and with the Central Sales Tax Act,1956 (May, 1974)’ (hereinafter referred to as the “61[st] Law CommissionReport”), which preceded the enactment of Article 366(29-A) of theDConstitution of India; the ‘Statement of Objects and Reasons’ appendedto the Constitution (Forty-sixth Amendment) Bill, 1981 [enacted as theConstitution (Forty-sixth Amendment) Act, 1982] (hereinafter referredto as the “Statement of Objects and Reasons”), which led to the insertionof Article 366(29-A); and then referred, in particular, to Article 366(29-EA)(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 ormutuality, insofar as it applied to members’ clubs and, therefore, soughtto do away with the basis of the judgment in Young Men’s IndianAssociation (supra). He argued that the language of 366(29-A)(e) didaway with transfer of property in goods and was specifically differentlyFworded from 366(29-A)(a) and (b), which referred to such transfer.According to him, the expression “unincorporated association or body ofpersons” in sub-clause (e) must be read disjunctively, and so read wouldinclude incorporated persons such as companies, cooperative societies,etc. According to him, it is important to construe a provision of theGConstitution broadly, and in consonance with the object sought to beachieved, that being, to do away with the doctrine of mutuality in all itsforms. According to him, even assuming that “body of persons” under366(29-A)(e) did not include incorporated persons, 366(29-A)(f) wouldtake within its wide sweep the supply of goods, being food or any otherarticle for human consumption or drink, given that sub-clause (f) doesH

not refer to incorporated or unincorporated bodies, and takes within itssweep a tax in the supply of goods “in any other manner whatsoever”,which are words of extremely wide import. He then took us through theWest Bengal Sales Tax Act and referred to the definition of “dealer” inSection 2(10) and “sale” in Section 2(30), and then adverted to thecharging Section 9 of the aforesaid Act. According to him, a reading ofthe definition of “dealer” and explanation (1) thereof in particular, wouldmake it clear that the explanation is not really an explanation in theclassical sense, but seeks to rope in members’ clubs which sell goods totheir members. Thus, the explanation stands apart from the main part ofthe definition of “dealer”, which requires a person to carry on the businessof selling and purchasing goods. He then relied heavily on DeputyCommercial Tax Officer, Saidapet & Anr. v. Enfield India Ltd.,Co-operative Canteen Ltd. (1968) 2 SCR 421 for the proposition thatthe English cases which dealt with the doctrine of mutuality had noapplication in the context of a taxing statute, as these judgments dealtwith criminal liability. He also relied strongly on this judgment to showthat profit-motive is totally unnecessary where a supply of goods by aclub to its members, falls within the definition of “sale” under the MadrasGeneral Sales Tax Act, 1959 in that case. He also distinguished InlandRevenue Commissioners v. Westleigh Estates Company, Limited1924 K.B. 390 from the present case, by stating that all observations onmutuality were made in the context of whether a business corporation’sprofits could be brought to tax. He instead relied upon the observationsmade in Walter Fletcher v. Income Tax Commissioner (1972)Appeal Cases 414, stating that the mutuality principle was not of universalapplication, even when it applied to members’ clubs, and it is importantto find out in the facts of a case when relationship of mutuality ends andwhen trading begins. In any case, according to the learned SeniorAdvocate, 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 itwas held that a shareholder is not the owner of the assets of a companyand, therefore, the aforesaid principle cannot possibly apply to members’clubs in corporate form. According to him, it makes no difference thatthe company is one registered under Section 25 of the Companies Act,1956 (“hereinafter referred to as the “Companies Act”), as is the casein the appeal in the present case.

AB

C

D

EF

G

H

AB

C

D

EF

G

H

A6. Shri Jaideep Gupta, learned Senior Advocate appearing onbehalf 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 shouldbe 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. HeBrelied 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 motiveof making money from sale transactions. He then referred to Section 25of the Companies Act and, in particular, Section 25(1)(b), which statesCthat a company is registered under Section 25 only if it intends to applyits profits and other income in promoting its objects, and prohibits paymentof dividend to its members. For this reason, the ratio of Bacha F. Guzdar(supra) cannot possibly apply to members’ clubs in the form of Section25 companies. He then referred to the Statement of Objects and Reasons,which according to him, made it clear that only unincorporated clubs orDassociations of persons were referred to in Article 366(29-A)(e). Healso argued that under no circumstances can a company be fitted within“body of persons”, as a result of which Article 366(29-A)(e) will notapply to sales of food or refreshments by a club to its members. Accordingto him, the Constitution (Forty-sixth Amendment) Act, 1982 (“hereinafterEreferred to as the “46[th] Amendment”), which inserted Clause (29-A)into Article 366 of the Constitution, has not done away with the YoungMen’s Indian Association (supra), as there cannot possibly be a supplyof goods by one person to itself; and that, therefore, the doctrine ofagency/trust/mutuality continues as before. He referred to the definitionof “consideration” in Section 2(d) of the Indian Contract Act, 1872, whichFaccording to him made it clear that consideration must flow from oneperson to another and in the absence of two players, as in the case ofYoung Men’s Indian Association (supra), Article 366(29-A) wouldhave 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 differentGpurpose, namely, to get over the judgment of Northern India Caterers(India) Ltd. v. Lt. Governor of Delhi (1978) 4 SCC 36, which dealtwith the service element contained in a bill for food or drinks beingconsumed in restaurants. The expression “in any other mannerwhatsoever” only seeks to re-emphasise that where goods are supplied H

in such restaurants, then the service element will not interdict the StateLegislature from taxing food etc. under Article 366(29-A)(f). In anycase, going back to sub-clause (e), the learned Senior Advocate saidthat it is clear that the expression “unincorporated associations” must beread as ejusdem generis with “body of persons” and so read would notinclude members’ clubs in corporate form.

7. Having heard the learned Senior Advocates on behalf of bothsides, it is important to first set out the relevant Constitutional and statutoryprovisions. 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 othervaluable consideration; (b) a tax on the transfer of property in goods (whether as goodsor in some other form) involved in the execution of a workscontract;

(c) a tax on the delivery of goods on hire-purchase or any systemof payment by instalments; (d) a tax on the transfer of the right to use any goods for anypurpose (whether or not for a specified period) for cash, deferredpayment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated associationor body of persons to a member thereof for cash, deferred paymentor other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or inany other manner whatsoever, of goods, being food or any otherarticle for human consumption or any drink (whether or notintoxicating), where such supply or service, is for cash, deferredpayment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemedto be a sale of those goods by the person making the transfer,delivery or supply and a purchase of those goods by the person towhom such transfer, delivery or supply is made;”

A

B

C

D

E

F

G

H

8. The relevant Sections in the West Bengal Sales Tax Act arealso set out hereinbelow:

A

“2. Definitions

xxx xxx xxx

(5) “business” includes—

B

(a) any trade, commerce, manufacture, execution of workscontract 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 workscontract, adventure or concern is carried on with the motiveto make profit and whether or not any profit accrues fromsuch trade, commerce, manufacture, execution of workscontract, adventure or concern; and C

(b) Any transaction in connection with, or ancillary or incidentalto, such trade, commerce, manufacture, execution of workscontract, adventure or concern; D

xxx xxx xxx

(10) “dealer” means any person who carries on the business ofselling or purchasing goods in West Bengal or any person makingsales under section 15, and includes—

E

(a) an occupier of a jute-mill or shipper of jute; (b) Government, a local authority, a statutory body, a trust orother body corporate which, or a liquidator or a receiverappointed by a Court in respect of a person, being a dealer asFdefined in this clause, who, whether or not in the course ofbusiness, sells, supplies or distributes directly or otherwisegoods for cash or for deferred payment or for commission,remuneration or other valuable consideration.

Explanation I: A co-operative society or a club or any associationwhich sells goods to its members is a dealer.

G

Explanation II: A factor, a broker, a commission agent, a delcredere agent, an auctioneer, an agent for handling or transportingof goods or handling of document of title to goods or any other STATE OF WEST BENGAL v. CALCUTTA CLUB LIMITED[R.F. NARIMAN, J.]

mercantile agent, by whatever name called, and whether of thesame description as hereinbefore mentioned or not, who carrieson the business of selling goods and who has, in the customarycourse 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, ofproperty in any goods for cash, deferred payment or othervaluable consideration; (b) any delivery of goods on hire-purchase or any system ofpayment by instalments;

(c) any transfer of the right to use any goods for any purpose(whether or not for a specified period) for cash, deferredpayment or other valuable consideration; (d) any supply, by way of, or as part of, any service or in anyother manner whatsoever, of goods, being food or any otherarticle for human consumption or any drink(whether or notintoxicating), where such supply or service is for cash,deferred payment or other valuable consideration; (e) any supply of goods by any unincorporated association or bodyof persons to a member thereof for cash, deferred paymentor other valuable consideration,

and such transfer, delivery, or supply of any goods shall be deemedto be a sale of those goods by the person or unincorporatedassociation or body of persons making the transfer, delivery, orsupply and a purchase of those goods by the person to whomsuch transfer, delivery, or supply is made, but does not include amortgage, hypothecation, charge or pledge.

Explanation: A sale shall be deemed to take place in West Bengalif the goods are within West Bengal –

(a) In the case of specific or ascertained goods, at the time ofthe contract of sale is made; and A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

(b) In the case of unascertained or future goods, at the time oftheir appropriation to the contract of sale by the seller, whetherthe assent of the buyer to such appropriation is prior orsubsequent to the appropriation:

PROVIDED that where there is a single contract of sale inrespect of goods situated in West Bengal as well as in placesoutside West Bengal, provisions of this Explanation shall applyas if there were a separate contract of sale in respect of thegoods situated in West Bengal.

xxx xxx xxx

9. Incidence of tax on sale

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

(a) Every dealer –

(i) who has been liable immediately before the appointed dayto pay tax under section 4 or section 8 of the BengalFinance (Sales Tax) Act, 1941 (Bengal Act VI of 1941),and who would have continued to be so liable on suchappointed day under that Act had this Act not come intoforce, or

(ii) whose gross turnover during a year first exceeds thetaxable quantum as applicable to him under the BengalFinance (Sales Tax) Act, 1941, on the day immediatelypreceding the appointed day, (b) Every dealer registered under the West Bengal Sales TaxAct, 1954 (West Bengal Act IV of 1954), who is inpossession of a registration certificate under that Act onthe day immediately before the appointed day, and to whomclause (a) does not apply, and

(c) Every dealer registered under the West Bengal MotorSpirits Sales Tax Act, 1974, (West Bengal Act XI of 1974),who is in possession of a registration certificate under thatAct on the day immediately before the appointed day, andto whom clause (a) or clause (b) does not apply, shall be liable to pay tax under this Act on all sales, other thanthose referred to in section 15, effected on or after the appointedday.

(2) Every dealer to whom sub-section (1) does not apply shall, ifhis gross turnover of sales calculated from thecommencement of any year exceeds the taxable quantum atany time within such year, be liable to pay tax under this Acton all sales, other than those referred to in section 15,effected on and from the date immediately following the dayon which such gross turnover of sales first exceeds thetaxable 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) [***]

(c) In relation to any dealer who manufactures or produces anygoods, other than those specified in Schedule IV [***] forsale, 1,00,000 rupees; or (d) [***]

(e) In relation to any other dealer, 5,00,000 rupees, excludingturnover of sales of goods specified in Schedule IV.

(4) Every dealer who has become liable to pay tax undersub-section (1) or sub-section (2) shall continue to be soliable until the expiry of three consecutive years, during eachof which his gross turnover of sales has failed to exceed thetaxable quantum, and such further period after the date ofsuch expiry as may be prescribed, and on the expiry of thislater period his liability to pay tax under sub-section (1) orsub-section (2) shall cease.

Explanation: For the purposes of sub-section (4), in computingthe period of three consecutive years in respect of a dealer whohas become liable to pay tax under sub-section (1), the year oryears which expired before the appointed day during which oreach of which the gross turnover failed to exceed the taxablequantum 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 A

B

C

D

E

F

G

H

gross turnover of sales calculated from the commencement ofany year again exceeds the taxable quantum at any time withinsuch year, be liable to pay such tax on all sales, other than thosereferred to in Section 15, effected on and from the date immedi-ately following the day on which such gross turnover of salesagainst first exceeds the taxable quantum.

A

B

(6) The Commissioner shall, after making such enquiry as he maythink necessary and after giving the dealer an opportunity ofbeing heard, fix the date on and from which such dealer shallbecome liable to pay tax under sub-section (2) or sub-section(5).”

C

9. The 61[st] Law Commission Report, which deliberated on thesubject matter of Article 366(29-A), dealt with sales by associations tomembers under Chapter 1-D. of the Report. It began by referring toEnfield India Ltd. (supra) and then referred to Young Men’s IndianAssociation (supra) as follows:D

“1D.3. Unincorporated associations- Though the above caserelated to a co-operative society, the court (Shah, J.) did makecertain observations as to the position in regard to unincorporatedsocieties, as follows:- “In the case of an unincorporated society, club or a firm or anassociation, ordinarily the supply and distribution by such a society,club, firm or an association, of goods belongs to its members, maynot result in sale of the goods which are jointly held for the benefitof the members of the society, club, firm or the association, when,by virtue of the relinquishment of the common rights of themembers, the property stands transferred to a member in paymentof a price, and the transaction may not prima facie be regard asa ‘sale’ within the meaning of the Act.”

E

F

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 anunincorporated club which supplies goods for a price to itsmembers, may be regarded as selling goods to its members.

G

1D.4. Supply by club to members not ‘sale’.- Then, there areclubs. In a case decided by the Supreme Court on appeal fromMadras, the Cosmopolitan club, Madras, the Youngmen’s Indian

Association, Madras and the Lawley Institute, Ootacamund, filedwrit petitions under Article 226 of the Constitution, challengingthe levy of sales tax under Madras General Sales Tax Act, 1959,on snacks, beverages and other articles supplied to their membersor guests. The High Court held that the club was not a ‘dealer’within the meaning of section 2(g), read with Explanation I, of theMadras Act and that there was no ‘sale’ within the meaning ofsection 2(h), read with Explanation I, of the Act. On appeal to theSupreme Court it was held that a member’s club cannot be madesubject 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 Clubcannot be regarded as a “sale”; 1D.5.No ‘sale’ in such circumstances in England.- It isnecessary to mention here that, in England, it was held in Graff v.Evans, that a transaction whereby a member of a club acquiredliquor which was the property of the club was not sale but merelytransfer of special property. This case was decided eleven yearsbefore the English Act relating to the sale of goods was passed in1893.

The basis of the decision was that the transaction was a releaseof the rights of the other members to the “purchaser”. It mighthave been thought, therefore, that when section 1(1) of the Saleof Goods act specifically enacted (in 1893) that—

“…………There may be a contract of sale between one partowner 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 similarprovision. But in Davies v. Burnett, a Divisional Court followedthe earlier case, and the Sale of Goods Act was not even referredto. A well-known writer has stated, that “this view of the law hasnow been accepted for so long that it is unlikely to be upset by ahigher court.”

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

ABC

D

E

F

G

H

AThe position in this respect, as was observed in an Australiancase, is simply that “a part of the common property is appropriatedto the separate use of the members, and he makes a correspondingcontribution from his separate property to the common fund.”The question must, of course, always be as to the meaning of theword “sale’ or “sell” in the particular statute which comes underBconsideration. If no reason is seen for giving the word an extendedmeaning, one would think it perfectly correct to say that an ordinaryunincorporated members’ club does not “sell”, in the true sense,liquor which a member obtains from the common store on paymentof money to the common fund.

A

C

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

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

D

1D.7. Amendment of Constitution not needed.- We do notthink that it would be appropriate to amend the Constitution of thispurpose. The number of such clubs and associations would not bevery large. Moreover, taxation of such transactions mightdiscourage the co- operative movement.

E

1D.8. Unincorporated associations exist variousFarrangements.- Unincorporated associations exist in a “myriadof structural arrangements.” As a general proposition, each isliable for the activities of its members when the activity has beenauthorised, supported, or ratified by the association.

1D.9. No evasion.- It should be also noted that there can be noGserious question of evasion in such cases. A member really takeshis own goods.

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

10. It will be seen from the above that the Law Commission wasof the view that the Constitution ought not to be amended so as to bring H

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 notbe very large; second, taxation of such transactions might discouragethe cooperative movement; and third, no serious question of evasion oftax arises as a member of such clubs really takes his own goods.

11. However, despite the aforesaid, Article 366(29-A) includedwithin it sub-clause (e).

12. At this point, it is important to refer to the Statement of Objectsand Reasons which led upto the 46[th] Amendment. The relevant portionsof the Statement of Objects and Reasons read as follows:

“Sales tax laws enacted in pursuance of the Government of IndiaAct, 1935 as also the laws relating to sales tax passed after thecoming into force of the Constitution proceeded on the footingthat the expression “sale of goods”, having regard to the rule as tobroad interpretation of entries in the legislative lists, would be givena wider connotation. However, in Gannon Dunkerley’s case(A.I.R. 1958 S.C. 560), the Supreme Court held that theexpression “sale of goods” as used in the entries in the SeventhSchedule to the Constitution has the same meaning as in the Saleof Goods Act, 1930. This decision related to works contracts.

By a series of subsequent decisions, the Supreme Court has, onthe basis of the decision in Gannon Dunkerley’s case, held variousother transactions which resemble, in substance, transactions byway of sales, to be not liable to sales tax. As a result of thesedecisions, a transaction, in order to be subject to the levy of salestax under entry 92A of the Union List or entry 54 of the StateList, should have the following ingredients, namely, partiescompetent to contract, mutual assent and transfer of property ingoods from one of the parties to the contract to the other partythereto for a price.

This position has resulted in scope for avoidance of tax in variousways. An example of this is the practice of inter-State consignmenttransfers, i.e., transfer of goods from head office or a principal inone State to a branch or agent in another State or vice versa ortransfer of goods on consignment account, to avoid the paymentof 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 A

B

C

D

EF

G

H

A

B

C

D

E

F

G

A

B

C

D

EF

G

H

A

B

C

D

E

F

G

sale of materials separately from the cost of the labour, the saleof materials would be taxable, but in the case of an indivisibleworks contract, it is not possible to levy sales tax on the transferof property in the goods involved in the execution of such contractas it has been held that there is no sale of the materials as suchand the property in them does not pass as moveables. Thoughpractically the purchaser in a hire-purchase agreement gets thegoods on the date of the hire-purchase, it has been held that thereis sale only when the purchaser exercises the option to purchaseat a much later date and therefore only the depreciated value ofthe goods involved in such transaction at the time the option topurchase is exercised becomes assessable to sales tax. Similarly,while sale by a registered club or other association of persons(the club or association of persons having corporate status) to itsmembers is taxable, sales by an unincorporated club or associationof persons to its members is not taxable as such club or association,in law, has no separate existence from that of the members. Inthe Associated Hotels of India case (A.I.R. 1972 S.C. 1131), theSupreme Court held that there is no sale involved in the supply offood or drink by a hotelier to a person lodged in the hotel.

xxx xxx xxx

The proposed amendments would help in the augmentation of theState revenues to a considerable extent. Clause 6 of the Bill seeksto validate laws levying tax on the supply of food or drink forconsideration and also the collection or recoveries made by wayof tax under any such law. However, no sales tax will be payableon food or drink supplied by a hotelier to a person lodged in thehotel during the period from the date of the judgment in theAssociated Hotels of India case and the commencement of thepresent Amendment Act if the conditions mentioned in sub-clause(2) of clause 6 of the Bill are satisfied. In the case of food or drinksupplied by Restaurants this relief will be available only in respectof the period after the date of judgment in the Northern IndiaCaterers (India) Limited case and the commencement of thepresent Amendment Act.”

(emphasis supplied)

13. At this juncture, it is important to advert to the decision of thisCourt in BSNL v. Union of India (2006) 3 SCC 1. This judgmentconcerned itself with the nature of the transaction by which mobile phoneconnections are enjoyed. The question that arose before this Court waswhether the transaction in question was a service transaction and not atransaction for sale or supply of goods. In answering this question, theCourt, after referring to Article 366(29-A), observed as follows:

“41. Sub-clause (a) covers a situation where the consensualelement is lacking. This normally takes place in an involuntarysale. Sub-clause (b) covers cases relating to works contracts.This was the particular fact situation which the Court was facedwith in Gannon Dunkerley [State of Madras v. GannonDunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR 1958SC 560 : 1959 SCR 379] and which the Court had held was not asale. The effect in law of a transfer of property in goods involvedin the execution of the works contract was by this amendmentdeemed to be a sale. To that extent the decision in GannonDunkerley [State of Madras v. Gannon Dunkerley & Co.(Madras) Ltd., (1958) 9 STC 353 : AIR 1958 SC 560 : 1959 SCR379] was directly overcome. Sub-clause (c) deals with hire-purchase where the title to the goods is not transferred. Yet byfiction of law, it is treated as a sale. Similarly the title to the goodsunder sub-clause (d) remains with the transferor who only transfersthe right to use the goods to the purchaser. In other words, contraryto A.V. Meiyappan decision [(1967) 20 STC 115 (Mad)] a leaseof a negative print of a picture would be a sale. Sub-clause (e)covers cases which in law may not have amounted to sale becausethe member of an incorporated association would have in a sensebegun as both the supplier and the recipient of the supply of goods.Now such transactions are deemed sales. Sub-clause (f) pertainsto contracts which had been held not to amount to sale in State ofPunjab v. Associated Hotels of India Ltd. [(1972) 1 SCC 472 :(1972) 29 STC 474] That decision has by this clause beeneffectively legislatively invalidated.”

14. In the separate concurring judgment of Lakshmanan, J., thelearned Judge observed thus:

A

B

C

D

E

F

G

A“105. The amendment introduced fiction by which six instancesof transactions were treated as deemed sale of goods and thatthe said definition as to deemed sales will have to be read in everyprovision of the Constitution wherever the phrase “tax on sale orpurchase of goods” occurs. This definition changed the lawdeclared in the ruling in Gannon Dunkerley & Co. [State ofBMadras v. Gannon Dunkerley & Co. (Madras) Ltd., (1958) 9STC 353 : AIR 1958 SC 560 : 1959 SCR 379] only with regard tothose transactions of deemed sales. In other respects, law declaredby this Court is not neutralised. Each one of the sub-clauses ofArticle 366(29-A) introduced by the Forty-sixth Amendment wasCa result of ruling of this Court which was sought to be neutralisedor modified. Sub-clause (a) is the outcome of New India SugarMills Ltd. v. CST [(1963) 14 STC 316 : 1963 Supp (2) SCR 459]and Vishnu Agencies (P) Ltd. v. CTO [(1978) 1 SCC 520 : 1978SCC (Tax) 31 : AIR 1978 SC 449] . Sub-clause (b) is the result ofGannon Dunkerley & Co. [State of Madras v. GannonDDunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR 1958SC 560 : 1959 SCR 379] Sub-clause (c) is the result of K.L. Joharand Co. v. CTO [(1965) 2 SCR 112 : AIR 1965 SC 1082] . Sub-clause (d) is consequent to A.V. Meiyappan v. CCT [(1967) 20STC 115 (Mad)] . Sub-clause (e) is the result of CTO v. YoungEMen’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] andState of Punjab v. Associated Hotels of India Ltd. [(1972) 1SCC 472 : (1972) 29 STC 474]”

F15. The observations made in the judgment on sub-clause (e)cannot possibly be said to form the ratio-decidendi of the judgment, aswhat came up for consideration in that case was whether electro-magnetic waves can be said to be ‘goods’, so as to be the subject matterof taxation within Article 366. This was answered in the negative asfollows:G

“71. For the reasons stated by us earlier we hold that theelectromagnetic waves are not “goods” within the meaning of theword either in Article 366(12) or in the State legislations. It is notin the circumstances necessary for us to determine whether thetelephone system including the telephone exchange is not goodsHbut 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 contraryto 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 judgmentin State of Madras v. Gannon Dunkerley AIR 1958 SC 560 was notdone away with altogether and actually survived the 46[th] Amendment inat least two respects as follows:

“43. Gannon Dunkerley [State of Madras v. GannonDunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 : AIR 1958SC 560 : 1959 SCR 379] survived the Forty-sixth ConstitutionalAmendment in two respects. First with regard to the definition of“sale” for the purposes of the Constitution in general and for thepurposes of Entry 54 of List II in particular except to the extentthat the clauses in Article 366(29-A) operate. By introducingseparate categories of “deemed sales”, the meaning of the word“goods” was not altered. Thus the definitions of the compositeelements of a sale such as intention of the parties, goods, delivery,etc. would continue to be defined according to known legalconnotations. This does not mean that the content of the conceptsremain static. The courts must move with the times. [See AttorneyGeneral v. Edison Telephone Co. of London Ltd., (1880) 6QBD 244 : 43 LT 697] But the Forty-sixth Amendment does notgive a licence, for example, to assume that a transaction is a saleand then to look around for what could be the goods. The word“goods” has not been altered by the Forty-sixth Amendment. Thatingredient of a sale continues to have the same definition. Thesecond respect in which Gannon Dunkerley [State of Madrasv. Gannon Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353: AIR 1958 SC 560 : 1959 SCR 379] has survived is with referenceto the dominant nature test to be applied to a composite transactionnot covered by Article 366(29-A). Transactions which are mutantsales are limited to the clauses of Article 366(29-A). All othertransactions would have to qualify as sales within the meaning ofthe Sales of Goods Act, 1930 for the purpose of levy of salestax.”

A

B

C

D

E

F

G

A17. We have thus to discover for ourselves whether the doctrineof mutuality has been done away with by Article 366(29-A)(e), andwhether the ratio of Young Men’s Indian Association (supra) wouldcontinue to operate even after the 46[th] Amendment.

18. At this juncture, it is important to set out the two pillars, so toBspeak, on which the Young Men’s Indian Association (supra) is largelybased. In Graff v. Evans (1882) 8 Q.B. 373, the Grosvenor Club wasincorporated in the form of a trust, the Appellant Graff acting as Managerof the club, for and on behalf of a Managing Committee, which conductedthe general business of the club. Food and refreshments such as wine,beer and spirits were served to members on payment for the same. TheCquestion was whether a license was required under the Licence Act,1872, to sell liquor by retail. In this context, the Queen’s Bench Divisionheld:

“I think the true construction of the rules is that the memberswere the joint owners of the general property in all the goods ofDthe club, and that the trustees were their agents with respect tothe general property in the goods, although they had other agentswith respect to special properties in some of the goods. I amunable to follow the reasoning of the learned magistrate in sayingthat the question depends upon whether or not a profit was madeEupon the sale of the liquors. It appears to me immaterial whetherthe sum a member pays for the liquor is equal to or more or lessthan the cost price. The transaction does not become the more orthe less a sale on that account. It cannot be the true view that ifthe member pays a sum exactly equal to the cost price there is nosale within the section, but that if he pays more than the cost priceFthere is. The section must be construed by looking at the languageused, and taking a large view of the object of the legislation. Thelegislature have come to the conclusion that it is unadvisable thatintoxicating liquors should be sold anywhere without a license.The enactment is limited to “sales” of intoxicating liquors, andGonly seems aimed at sales by retail traders, because the wholesaletrader is not touched. The question here is, Did Graff, the manager,who supplied the liquors to Foster, effect a “sale” by retail? Ithink not. I think Foster was an owner of the property togetherwith all the other members of the club. Any member was entitledto obtain the goods on payment of the price. A sale involves the H

element of a bargain. There was no bargain here, nor any contractwith Graff with respect to the goods. Foster was acting upon hisrights as a member of the club, not by reason of any new contract,but under his old contract of association by which he subscribed asum to the funds of the club, and became entitled to have ale andwhisky supplied to him as a member at a certain price. I cannotconceive it possible that Graff could have sued him for the priceas the price of goods sold and delivered. There was no contractbetween two persons, because Foster was vendor as well as buyer.Taking the transaction to be a purchase by Foster of all the othermembers’ shares in the goods, Foster was as much a co-owneras the vendor.”

19. Likewise, in Trebanog Working Men’s Club and InstituteLtd. v. Macdonald (1940) 1 K.B. 576, a similar question arose beforethe Kings Bench Division. Graff (supra) was applied and followed thus:

“In our opinion, the decision in Graff v. Evans applies to andgoverns the present case. Once it is conceded that a members’club does not necessarily require a licence to serve its memberswith intoxicating liquor, because the legal property in the liquor isnot in the members themselves, it is difficult to draw any legaldistinction between the various legal entities that may be entrustedwith the duty of holding the property on behalf of the members,be it an individual, or a body of trustees, or a company formed forthe purpose, so long as the real interest in the liquors remains, asin this case it clearly does, in the members of the club. There is nomagic in this connection in the expressions “trustee” or “agent.”What is essential is that the holding of the property by the agentor trustee must be a holding for and on behalf of, and not a holdingantagonistic to, the members of the club. We are dealing herewith a quasi-criminal case, where the Court seeks to deal withthe substance of a transaction rather than the legal form in whichit may be clothed.”

20. The stage is now set for a consideration of the judgment inYoung Men’s Indian Association (supra). Three separate appealswere heard and decided by a Six Judge Bench of this Court in this case.The first considered the Cosmopolitan Club, Madras, which wasregistered under Section 26 of the Companies Act, 1913 as a non-profit A

B

C

D

E

F

G

H

Aearning 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 existenceby a deed of trust. In all these cases, food preparations were supplied tomembers at prices fixed by the club. In the Cosmopolitan Club case, amember is allowed to bring guests with him, but if any article of food isBconsumed 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 theaforesaid judgment. This Court referring to the two English cases citedhereinabove held:C“

“7. The law in England has always been that members’ clubs towhich category the clubs in the present case belong cannot bemade subject to the provisions of the Licensing Acts concerningsale because the members are joint owners of all the club propertyincluding the excisable liquor. The supply of liquor to a member atDa 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 nota bona fide member of the club or his duly authorised agent therewould be a sale. With regard to incorporated clubs a distinctionhas been drawn. Where such a club has all the characteristics ofa members’ club consistent with its incorporation, that is to say,Ewhere every member is a shareholder and every shareholder is amember, no licence need be taken out if liquor is supplied only tothe members. If some of the shareholders are not members orsome of the members are not shareholders that would be thecase of a proprietary club and would involve sale. ProprietaryFclubs stand on a different footing. The members are not ownersof or interested in the property of the club. The supply to them offood or liquor though at a fixed tariff is a sale. (See Halsbury’sLaws of England, 3rd Edn., Vol. 5, pp. 280-281). The principlelaid down in Graff v. Evans [(1882) 8 QBD 373] had throughoutbeen followed. In that case Field, J., put it thus:

G

“I think the true construction of the Rules is that the memberswere the joint owners of the general property in all the goods ofthe club, and that the trustees were their agents with respect tothe general property in the goods.”

H

The difficulty felt in the legal property ordinarily vesting in thetrustees of the members’ club or in the incorporated body wassurmounted by invoking the theory of agency i.e. the club or thetrustees acting as agents of the members. According to LordHewart (L.C.J.)in Trebanog Working Men’s Club and InstituteLtd. v. Macdonald [(1940) 1 AELR 454] once it was concededthat a members’ club did not necessarily require a licence to serveits members with intoxicating liquor it was difficult to draw anydistinction between the various legal entities which might beentrusted with the duty of holding the property on behalf ofmembers, be it an individual or a body of trustees or a companyformed for the purpose so long as the real interest in the liquorremained in the members of the club. What was essential wasthat the holding of the property by the agent or trustee must be aholding for and on behalf of and not a holding antagonistic tomembers of the club.

8. In the various cases which came to be decided by the HighCourts in India the view which had prevailed in England wasaccepted and applied. We may notice the decisions of the MadhyaPradesh High Court in Bengal Nagpur Cotton Mills Club,Rajnandangaon v. Sales Tax Officer, Raipur [8 STC 781] andof the Mysore High Court in Century Club v. State of Mysore[16 STC 38] . In the former it was held that the supply to themember of a members’ club registered under Section 26 of theIndian Companies Act, 1913 of refreshments purchased out ofclub funds which consisted of members’ subscription was not atransfer of property from the club as such to a member and theclub was not liable to Sales Tax under the C.P. and Berar SalesTax Act, 1947, in respect of such supplies of refreshments. Theprinciple adverted to in Trebanog Working Men’s Club wasadopted and it was said that if the agent or a trustee suppliedgoods to the members such supplies would not amount to atransaction of sale. The Mysore court expressed the same viewthat a purely members’ club which makes purchases through aSecretary or Manager and supplies the requirements to membersat a fixed rate did not in law sell those goods to the members.”

A

B

C

D

E

F

G

A

B

C

D

E

F

G

H

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 adecision of this Court in Deputy Commercial Tax Officer v.Enfiend India Ltd. [(1968) 2 SCR 421] In that case theExplanation to Section 2(g) was found to be intra vires and withinthe competence of the State Legislature. The judgment proceededon the footing that when a cooperative society suppliedrefreshments to its members for a price the following fourconstituent elements of sale were present: (1) parties competentto contract; (2) mutual consent; (3) thing, the absolute or generalproperty in which is transferred from the seller to the buyer and(4) price in money paid or promised. The mere fact that the societysupplied the refreshments to its members alone and did not makeany profit was not considered sufficient to establish that the societywas acting only as an agent of its members. As a registered societywas a body corporate it could not be assumed that the propertywhich it held was the property of which its members were owners.The English decisions were distinguished on the ground that thecourts in those cases were dealing with matters of quasi-criminalnature.”

22. Finally, the Court concluded:

“11. The essential question, in the present case, is whether thesupply of the various preparations by each club to its membersinvolved a transaction of sale within the meaning of the Sale ofGoods Act, 1930. The State Legislature being competent tolegislate only under Entry 54, List II, of the Seventh Schedule tothe Constitution the expression “sale of goods” bears the samemeaning which it has in the aforesaid Act. Thus in spite of thedefinition contained in Section 2(n) read with Explanation I of theAct if there is no transfer of property from one to another there isno sale which would be eligible to tax. If the club even though adistinct legal entity is only acting as an agent for its members inmatter of supply of various preparations to them no sale would beinvolved as the element of transfer would be completely absent.This position has been rightly accepted even in the previousdecision of this Court.

12. The final conclusion of the High Court in the judgment underappeal was that the case of each club was analogous to that of anagent or mandatory investing his own monies for preparing thingsfor consumption of the principal, and later recouping himself forthe expenses incurred. Once this conclusion on the facts relatingto each club was reached it was unnecessary for the High Courtto have expressed any view with regard to the vires of theExplanations to Sections 2(g) and 2(n) of the Act. As no transactionof sale was involved there could be no levy of tax under theprovisions of the Act on the supply of refreshments and preparationby 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, whereasthe present case was the case of a taxing statute.

24. It can be seen that Young Men’s Indian Association (supra)expressly distinguished Enfield India Ltd. (supra), in paragraph 9 therein.The judgment in Enfield India Ltd. (supra), held on the facts of thatcase that there was nothing to show that the society in that case wasacting as an agent of its members in providing facilities for making foodavailable to them. A distinction was then made between a society whichis a body corporate and its members, stating that the body corporate is aseparate person in law. It then referred to various English judgmentsincluding Trebanog (supra), and refused to apply them on the groundthat they were cases which dealt with criminal proceedings. The judgmentthen ended by stating that the Court was not called upon to decide whetheran unincorporated club, supplying goods for a price to its members, maybe regarded as selling goods to its members.

25. It can be seen from the above, that the ratio of the ThreeJudge Bench in Enfield India Ltd. (supra) does not square with theratio of the Six Judge Bench in Young Men’s Indian Association(supra). Young Men’s Indian Association (supra) is expressly basedupon the English judgments which disregarded the corporate form andstated that there could not be a sale, on the facts of those cases, betweentwo persons because Foster, i.e. a member of the club, could be regardedas vendor as well as purchaser in Graff (supra). Likewise, in Trebanog A

B

C

D

E

F

G

H

A(supra), the form in which the club was clothed was of no moment, itbeing 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 oragent must be a holding for and on behalf of, and not a holding antagonisticto, the members of the club.

B26. It is thus clear that Enfield India Ltd. (supra) does not takethe matter any further. Young Men’s Indian Association (supra) madeno distinction between a club in the corporate form and a club by way ofa registered society or incorporated by a deed of trust. What is theessence of the judgment is that the holding of property must be a holdingfor and on behalf of the members of the club, there being no transfer ofCproperty 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 assetsDof the company, as a result of which the judgment in Young Men’sIndian Association (supra) needs to be revisited. The present appealdeals with a company that is registered under Section 25 of the CompaniesAct. Section 25(1) reads as follows:

“25. Power to dispense with “Limited” in name of charitableEor other company. – (1) Where it is proved to the satisfaction ofthe Central Government that an association–

(a) is about to be formed as a limited company for promotingcommerce, art, science, religion, charity or any other useful object,andF(b) intends to apply its profits, if any, or other income in promotingits objects, and to prohibit the payment of any dividend to itsmembers, the Central Government may by licence, direct that the associationmay be registered as a company with limited liability, without theGaddition to its name of the word “Limited” or the words “PrivateLimited”.

28. It will thus be seen that in these companies, payment of dividendto shareholders is prohibited, and the profits, if any, have to be applied topromote the objects of the company. Bacha F. Guzdar (supra) did notH

deal with a Section 25 company - it dealt with two tea companies whichwere 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 ofthe company may be readily conceded but it is not possible toaccept the contention that the shareholder acquires any interestin the assets of the company. The use of the word ‘assets’ in thepassage quoted above cannot be exploited to warrant the inferencethat a shareholder, on investing money in the purchase of shares,becomes entitled to the assets of the company and has any sharein the property of the company. A shareholder has got no interestin the property of the company though he has undoubtedly a rightto participate in the profits if and when the company decides todivide them…The company is a juristic person and is distinct fromthe shareholders. It is the company which owns the property andnot the shareholders. The dividend is a share of the profits declaredby the company as liable to be distributed among the shareholders.Reliance is placed on behalf of the appellant on a passage inBuckley’s Companies Act (12th Edn.), p. 894 where theetymological meaning of dividend is given as dividendum, the totaldivisible sum but in its ordinary sense it means the sum paid andreceived as the quotient forming the share of the divisible sumpayable to the recipient. This statement does not justify thecontention that shareholders are owners of a divisible sum or thatthey are owners of the property of the company. The properapproach to the solution of the Question 1s to concentrate on theplain words of the definition of agricultural income which connectsin no uncertain language revenue with the land from which itdirectly springs and a stray observation in a case which has nobearing upon the present question does not advance the solutionof the question. There is nothing in the Indian law to warrant theassumption that a shareholder who buys shares buys any interestin the property of the company which is a juristic person entirelydistinct from the shareholders. The true position of a shareholderis that on buying shares an investor becomes entitled to participatein the profits of the company in which he holds the shares if andwhen the company declares, subject to the Articles of Association,that the profits or any portion thereof should be distributed by A

BC

D

E

F

G

H

910SUPREME COURT REPORTS

Away of dividends among the shareholders. He has undoubtedly afurther right to participate in the assets of the company whichwould be left over after winding up but not in the assets as awhole as Lord Anderson puts it.”

In Cricket Club of India Ltd. v. Bombay Labour Union (1969)B1 SCR 600, this Court decided a preliminary objection taken in favour ofthe Cricket Club of India, that the said Club is not an “industry”, andconsequently, the Industrial Disputes Act, 1947 would not apply to suchmembers’ club. A contention was raised against this proposition - thatthe said Club had been incorporated as a limited company under theCompanies Act, and would thus have to be treated as a separate legalCentity apart from its members, and would therefore fall within thedefinition of “industry” under the Industrial Disputes Act, 1947. Thiswas negatived by the Court, stating at page 614 of the said judgment:

“Lastly, reference was made to the circumstance that, unlike theMadras Gymkhana Club, the Club has been incorporated as aLimited Company under the Indian Companies Act. It was urgedthat the effect of this incorporation in law was that the Club becamean entity separate and distinct from its Members, so that, inproviding catering facilities, the Club, as a separate legal entity,was entering into transactions with the Members who were distinctfrom the Club itself. In our opinion, the Tribunal was right in holdingthat the circumstance of incorporation of the Club as a LimitedCompany is not of importance. It is true that, for purposes ofcontract law and for purposes of suing or being sued, the fact ofincorporation makes the Club a separate legal entity; but, in decidingwhether the Club is an industry or not, we cannot base our decisionon such legal technicalities. What we have to see is the nature ofthe activity in fact and in substance. Though the Club isincorporated as a Company, it is not like an ordinary Companyconstituted for the purpose of carrying on business. There are noshareholders. No dividends are ever declared and no distributionof profits takes place. Admission to the Club is by payment ofadmission fee and not by purchase of shares. Even this admissionis subject to balloting. The membership is not transferable like theright of shareholders. There is the provision for expulsion of aMember under certain circumstances which feature never existsin the case of a shareholder holding shares in a Limited Company.

D

E

F

G

H

The membership is fluid. A person retains rights as long as hecontinues as a Member and gets nothing at all when he ceases tobe a Member, even though he may have paid a large amount asadmission fee. He even loses his rights on expulsion. In thesecircumstances, it is clear that the Club cannot be treated as aseparate legal entity of the nature of a Limited Company carryingon business. The Club, in fact, continues to be a Members’ Clubwithout any shareholders and, consequently, all services providedin 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 theCompanies Act and other companies, it is clear that the ratio decidendiin the judgment in Bacha F. Guzdar (supra) would not apply to suchclubs - there being no shareholders, no dividends declared, and nodistribution of profits taking place. Such clubs, therefore, cannot be treatedas separate in law from their members.

30. The doctrine of mutuality as applied to clubs is elaboratelydiscussed in Bangalore Club v. Commissioner of Income Taxand Anr. (2013) 5 SCC 509. In discussing the fact that in members’clubs there is a complete identity between contributors andparticipators, this Court held:

“16. On this aspect of the doctrine, especially with regard to thenon-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 tradeor activity is mutual, the fact that as regards certain activities,certain members only of the association take advantage of thefacilities which it offers does not affect the mutuality of theenterprise.

***

224. Clubs, etc.—Members’ clubs are an example of a mutualundertaking; 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:

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

“… it is settled law that if the persons carrying on a trade do so insuch a way that they and the customers are the same persons, noprofits or gains are yielded by the trade for tax purposes andtherefore no assessment in respect of the trade can be made.Any surplus resulting from this form of trading represents onlythe extent to which the contributions of the participators haveproved to be in excess of requirements. Such a surplus is regardedas their own money and returnable to them. In order that thisexempting element of mutuality should exist it is essential that theprofits should be capable of coming back at some time and insome form to the persons to whom the goods were sold or theservices rendered….

***

It has been held that a company conducting a members’ (and nota proprietary) club, the members of the company and of the clubbeing identical, was not carrying on a trade or business orundertaking of a similar character for purposes of the formercorporation profits tax.

***

A members’ club is assessable, however, in respect of profitsderived from affording its facilities to non-members. Thus, inCarlisle and Silloth Golf Club v. Smith (Surveyor of Taxes)[(1913) 3 KB 75 (CA)] , where a members’ golf club admittednon-members to play on payment of green fees it was held that itwas carrying on a business which could be isolated and defined,and the profit of which was assessable to income tax. But there isno liability in respect of profits made from members who availthemselves of the facilities provided for members.”

18. In short, there has to be a complete identity between the classof participators and class of contributors; the particular label orform by which the mutual association is known is of noconsequence. Kanga and Palkhivala explain this concept in TheLaw and Practice of Income Tax (8th Edn., Vol. I, 1990) atp. 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 meanthat each member should contribute to the common fund orthat each member should participate in the surplus or getback from the surplus precisely what he has paid.’ The Madras,Andhra Pradesh and Kerala High Courts have held that the testof mutuality does not require that the contributors to the commonfund should willy-nilly distribute the surplus amongst themselves:it is enough if they have a right of disposal over the surplus, and inexercise of that right they may agree that on winding up the surpluswill be transferred to a similar association or used for somecharitable objects.”

Rowlatt, J.’s observations in Thomas (Inspector of Taxes) v.Richard Evans & Co. Ltd. (1927) 1 K.B. 33 were then referred to asfollows:

“… But a company can make a profit out of its members ascustomers, although its range of customers is limited to itsshareholders. If a railway company makes a profit by carrying itsshareholders, or if a trading company, by trading with theshareholders even if it is limited to trading with them, makes aprofit, that profit belongs to the shareholders in a sense, but itbelongs to them qua shareholders. It does not come back tothem as purchasers or customers; it comes back to them asshareholders upon their shares. Where all that a company doesis to collect money from a certain number of people—it [does notmatter] whether they are called members of the company orparticipating policy-holders—and apply it for the benefit of thosesame people, not as shareholders in the company, but as the peoplewho subscribed it, then, as I understand Styles case [New YorkLife Insurance Co. v. Styles (Surveyor of Taxes), (1889) LR 14AC 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 legalentity 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 collectedfrom those people and handed back to them, not in the characterof shareholders, but in the character of those who have paid it.That, as I understand [it], is the effect of the decision in Styles AB

C

DEFG

H

914SUPREME COURT REPORTS

Acase [New York Life Insurance Co. v. Styles (Surveyor of Taxes),(1889) LR 14 AC 381 : (1886-90) All ER Rep Ext 1362 : (1889) 2TC 460 (HL)] .”

Given these observations, it is clear that if persons carry on acertain activity in such a way that there is a commonality betweenBcontributors of funds and participators in the activity, a complete identitybetween the two is then established. This identity is not snapped becausethe surplus that arises from the common fund is not distributed amongthe members – it is enough that there is a right of disposal over thesurplus, and in exercise of that right they may agree that on winding up,the surplus will be transferred to a club or association with similarCactivities. Most importantly, the surplus that is made does not come backto the members of the club as shareholders of a company in the form ofdividends upon their shares. Since the members perform the activities ofthe club for themselves, the fact that they incorporate a legal entity to doit for them makes no difference. This judgment was also followed byDthis Court in Income Tax Officer, Mumbai v. Venkatesh PremisesCooperative Society Limited (2018) 15 SCC 37. What is of essence,therefore, in applying this doctrine is that there is no sale transactionbetween two persons, as one person cannot sell goods to itself.

31 What arises for deliberation now is whether the 46[th]EAmendment has done away with the principles contained in Young Men’sIndian Association (supra) and the other judgments on the doctrine ofmutuality, as applied to members’ clubs.

32. It can be seen that the 61[st] Law Commission Report hadobserved that there cannot be said to be any evasion of tax as a memberFof members’ clubs “really takes his own goods” and, therefore, did notseek to tax such goods. The framers of the 46[th] Amendment thoughtotherwise, and made it plain that they sought to bring to tax sales madeby unincorporated clubs or an association of persons to their members,as it was thought that such transactions were not taxable, as such clubor associations in law has no separate existence from that of the members.G

33. Quite obviously, the Statement of Objects and Reasons hasnot read the case of Young Men’s Indian Association (supra) in itscorrect perspective. As has been noticed hereinabove, Young Men’sIndian Association (supra) had three separate appeals before it, in oneof which a company was involved. To state, therefore, that under the H

law as it stood on the date of the 46[th] Amendment, a sale of goods by aclub having a corporate status to members is taxable, is wholly incorrect.Proceeding on this incorrect basis, what the 46[th] Amendment sought todo was to then bring to tax sales by clubs which have no separateexistence from that of their members. In so doing, the 46[th] Amendmentused 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 thatwere sought to be brought within the tax net, as it was wrongly assumedthat sale of goods by members’ clubs in the corporate form were taxable.“Any” is the equivalent of “all”. This word, therefore, also lends itself tothe aforesaid interpretation, as the emphasis of the legislature is on allunincorporated associations or bodies being brought withinsub-clause (e).

34. Thus, it is clear that even going by Shri Dwivedi’s eloquentargument as to the intention of the legislature, as seen through the objectthat the legislature sought to achieve, would lead to the aforesaidexpression applying only to clubs which were not in the corporate form.

35. Even otherwise, on the assumption that “unincorporatedassociation or body of persons” must be read disjunctively, “a body ofpersons” cannot be equated with “person”. “Person” as defined by theGeneral Clauses Act, (which applies to the interpretation of theConstitution vide Article 367) reads as follows:

“3. Definitions.-

xxx xxx xxx

(42) “person” shall include any company or association or bodyof individuals, whether incorporated or not; Article 366(29-A) does not use this expression, as “person” wouldthen include corporate persons as well. On the other hand, “bodyof persons” is used to make it clear beyond doubt that corporatepersons are not referred to.

36. The definition of “person” in other Acts such as the IncomeTax Act, 1961 is also very wide, and includes an association of personsor body of individuals, whether incorporated or not – see Section 2(31)of the Income Tax Act, 1961. Quite clearly, this language was availableand in common usage by the legislature, as the definition of “person”

A

BC

D

E

F

G

H

Aunder the Income Tax Act has stood in the statute book since 1961. Thecontrast 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 notrefer to the corporate form unless “person” by itself is accompanied bythe expression “whether incorporated or not”.

B37. Even otherwise, the “supply” of goods by an unincorporatedassociation or body of persons has to be to a member for cash, deferredpayment or other valuable consideration. As has been correctly arguedby Shri Jaideep Gupta, the definition of “consideration” in Section 2(d)of the Indian Contract Act, 1872 necessarily posits consideration passingfrom one person to another. The definition of “consideration” as statedCin the Indian Contract Act, 1872 is as follows:

“2. Interpretation-clause.- In this Act the following words andexpressions are used in the following senses, unless a contraryintention appears from the context:- Dxxx xxx xxx (d) When, at the desire of the promisor, the promisee or any otherperson has done or abstained from doing, or does or abstainsfrom doing, or promises to do or to abstain from doing,something, such act or abstinence or promise is called aconsideration for the promise;”

E

The expression “valuable consideration” has, as has been pointedout in ‘Pollock and Mulla, The Indian Contract & Specific Relief Acts(16[th] ed.)’, been taken from an old English case Currie v. Misa (1875)LR 10 EX 153, and explained as follows:

F“A valuable consideration in the sense of the law, may consisteither in some right, interest, profit, or benefit accruing to oneparty, or some forbearance, detriment, loss or responsibility given,suffered, or undertaken by the other.

The above definition brings out the idea of reciprocity as theGdistinguishing mark; it is the gratuitous promise that isunenforceable 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 besale of those goods by the person making the supply, and the purchase H

of those goods by the person to whom such supply is made. As theYoung Men’s Indian Association (supra) case and the doctrine ofmutuality state, there is no sale transaction between a club and itsmembers. As has been pointed out above, there cannot be a sale ofgoods to oneself. Here again, it is clear that the ratio of Young Men’sIndian Association (supra) has not been done away with by the limitedfiction 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 theStatement of Objects and Reasons, is the doing away with of twojudgments of this Court, namely, State of Punjab v. Associated Hotelsof India Limited AIR 1972 SC 1131 and Northern India Caterers(India) Ltd. (supra).

40. This is clear not only from the Statement of Objects andReasons, but from the subject matter of sub-clause (f) (which does notinclude “goods” in their entirety, but only food or any other article forhuman consumption, or any drink), which is the serving of such food ordrink in hotels or restaurants. This is further made clear by Section 6 ofthe 46[th] Amendment Act, which is a validation and exemption provision.Section 6(1)(a) specifically refers to transactions referable to the aforesaidtwo Supreme Court judgments. The exemption provision puts the matterbeyond doubt. Section 6(2) of the Amendment Act reads as follows:

“…(2) Notwithstanding anything contained in sub-section (1), anysupply of the nature referred to therein shall be exempt from theaforesaid tax- (a) where such supply has been made, by any restaurant or eatinghouse (by whatever name called), at any time on or after the7th day of September, 1978 and before the commencement ofthis Act and the aforesaid tax has not been collected on suchsupply on the ground that no such tax could have been leviedor collected at that time; or (b) where such supply, not being any such supply by anyrestaurant or eating house (by whatever name called), has beenmade at any time on or after the 4th day of January, 1972 andbefore the commencement of this Act and the aforesaid tax AB

C

D

E

F

G

H

has not been collected on such supply on the ground that nosuch tax could have been levied or collected at that time:

A

Provided that the burden of proving that the aforesaid tax wasnot collected on any supply of the nature referred to in clause(a) or, as the case may be, clause (b), shall be on the personBclaiming the exemption under this sub-section.”

41. Sub-clause (a) refers to 7[th] September, 1978, which is the dateon which Northern India Caterers (supra) was pronounced and sub-clause (b) refers to 4[th] January, 1972, which is the date on whichAssociated Hotels of India Ltd. (supra) was pronounced. The 46[th]CAmendment Act, therefore, when read as a whole, would make it clearthat Article 366(29-A)(f) refers only to an undoing of the aforesaid twojudgments, the subject matter being the taxability of food or drink servedin hotels and restaurants. This being the case, it is obvious that thetaxability of food or drink served in members’ clubs is not the subjectmatter of sub-clause (f).D

42. Looked at from another point of view, a members’ club maysupply goods which are not food or drink – for example, soap, cosmeticsand other household items. These items would be “goods”, but wouldnot 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 supplyEof food and drink being taxable in members’ clubs, and the supply ofother 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 differentand distinct from that of sub-clause (e), and cannot possibly apply tomembers’ clubs. In this view of the matter, the expression “in any mannerFwhatsoever”, being part and parcel of sub-clause (f) cannot be held toextend to a supply of all goods so as to bring such goods to tax whenapplied to members’ clubs.

43. Judgments of this Court have also held that the subject matterof sub-clause (f) related to food and drink supplied in hotels andGrestaurants, the deeming fiction of sub-clause (f) being introduced onlyto 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, thisCourt referred to Article 366(29-A)(f) as follows:

“9. The provisions of sub-clause (f) of clause (29-A) of Article366 need to be analysed. Sub-clause (f) permits the States to H

impose a tax on the supply of food and drink. The supply can beby way of a service or as part of a service or it can be in anyother manner whatsoever. The supply or service can be for cashor deferred payment or other valuable consideration. The wordsof sub-clause (f) have found place in the Sales Tax Acts of mostStates and, as we have seen, they have been used in the saidTamil Nadu Act. The tax, therefore, is on the supply of food ordrink and it is not of relevance that the supply is by way of aservice or as part of a service. In our view, therefore, the pricethat the customer pays for the supply of food in a restaurant can-not be split up as suggested by learned counsel. The supply offood by the restaurant-owner to the customer though it may be apart of the service that he renders by providing good furniture,furnishing and fixtures, linen, crockery and cutlery, music, a dancefloor and a floor show, is what is the subject of the levy. Thepatron of a fancy restaurant who orders a plate of cheese sand-wiches whose price is shown to be Rs 50 on the bill of fare knowsvery well that the innate cost of the bread, butter, mustard andcheese 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 andRestaurant Associations of India v. Union of India and Ors. (2018)2 SCC 97, this Court referred to the reason for the enactment of sub-clause (f) as follows:

“11. As has been stated in the trilogy of judgments in AssociatedHotels of India Ltd. [State of Punjab v. Associated Hotels ofIndia Ltd., (1972) 1 SCC 472] and the two Northern India Ca-terers (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 hotelsand restaurants, there is really one indivisible contract of servicecoupled incidentally with sale of food and drinks. Since it is notpossible to divide the “service element”, which is the dominantelement, from the “sale element”, it is clear that such compositecontracts cannot be the subject-matter of sales tax legislation, aswas held in those judgments.

A

B

CD

E

F

G

H

12. Bearing these judgments in mind, Parliament amended theConstitution and introduced the Constitution (Forty-sixthAmendment) Act, by which it introduced Article 366(29-A).Sub-clause (f), with which we are directly concerned, reads asfollows:

A

“366. (29-A)(f) a tax on the supply, by way of or as part ofany service or in any other manner whatsoever, of goods, beingfood or any other article for human consumption or any drink(whether or not intoxicating), where such supply or service, is forcash, deferred payment or other valuable consideration, and suchtransfer, delivery or supply of any goods shall be deemed to be asale of those goods by the person making the transfer, delivery orsupply and a purchase of those goods by the person to whomsuch transfer, delivery or supply is made.”

B

C

A reading of the constitutional amendment would show thatsupply by way of or as part of any service of food or other articlefor human consumption is now deemed to be a sale of goods bythe person making the transfer, delivery or supply.”

D

45. That the doctrine of mutuality has not been done away withby sub-clause (e) is also clear when sub-clause (e) is contrasted withcertain provisions of the Income Tax Act, 1961. Section 2(24)(vii) of theEIncome Tax Act, 1961, reads as under:

“2. Definitions.-

xxx xxx xxx

(24) “income” includes-

F

xxx xxx xxx

(vii) the profits and gains of any business of insurance carried onby a mutual insurance company or by a co-operative society,computed in accordance with section 44 or any surplus taken tobe such profits and gains by virtue of the provisions contained inGthe First Schedule”

This has to be read with Section 44 of the Income Tax Act, 1961which reads as under:

“44. Insurance business.-Notwithstanding anything to thecontrary contained in the provisions of this Act relating to thecomputation of income chargeable under the head “Interest onsecurities”, “Income from house property”, “Capital gains” or“Income from other sources”, or in section 199 or in sections 28to 43B, the profits and gains of any business of insurance,including any such business carried on by a mutual insurancecompany or by a co-operative society, shall be computed inaccordance with the rules contained in the First Schedule.”

46. A reading of the aforesaid provisions makes it clear that whenprofits and gains of a mutual insurance company are sought to be broughtto tax, they are so done by express reference to the fact that the businessof insurance is carried on by a mutual insurance company. The absenceof any such language in sub-clause (e) of Article 366(29-A) is also animportant pointer to the fact that the doctrine of mutuality cannot be saidto have been done away with by the said 46[th] Amendment.

47. In fact, Section 2(24)(vii) has been expressly noticed inVenkatesh Premises Cooperative Society Limited (supra) asfollows:

“14. The doctrine of mutuality, based on common law principles,is premised on the theory that a person cannot make a profit fromhimself. An amount received from oneself, therefore, cannot beregarded as income and taxable. Section 2(24) of the Income TaxAct defines taxable income. The income of a cooperative societyfrom business is taxable under Section 2(24)(vii) and will standexcluded from the principle of mutuality.”

48. Also, Section 45(2) of the Income Tax Act, 1961 is an exampleof a provision by which a deemed transfer by a person to himself getstaxed. Section 45(2) reads as follows:

“45. Capital gains.-

xxx xxx xxx

(2) Notwithstanding anything contained in sub-section (1), the profitsand gains arising from the transfer by way of conversion by theowner of a capital asset into, or its treatment by him as, stock-in- A

B

C

D

E

F

G

H

Atrade of a business carried on by him shall be chargeable toincome-tax as his income of the previous year in which suchstock-in-trade is sold or otherwise transferred by him and, for thepurposes of Section 48, the fair market value of the asset on thedate of such conversion or treatment shall be deemed to be thefull value of the consideration received or accruing as a result ofBthe transfer of the capital asset.”

It can be seen from this provision that profits or gains arising froma transfer by way of conversion by the owner of a capital asset into, orits treatment by him as stock-in-trade of a business, is by a deemingfiction brought to tax, despite the fact that there is no transfer in law byCthe owner of a capital asset to another person. Modalities such as theseto bring to tax amounts that would do away with any doctrine of mutualityare conspicuous by their absence in the language of Article366(29-A)(e).

49. In light of the view that we have taken, it is unnecessary toDadvert to Shri Dwivedi’s arguments that the explanation (1) to Section2(10) of the West Bengal Sales Tax Act is a stand-alone provision andnot an explanation in the classical sense. We, therefore, answer thethree questions posed by the Division Bench in State of West Bengalv. Calcutta Club Limited (supra) as follows:

E(1) The doctrine of mutuality continues to be applicable toincorporated and unincorporated members’ clubs after the46[th] Amendment adding Article 366(29-A) to the Constitution of India.

(2) Young Men’s Indian Association (supra) and otherjudgments which applied this doctrine continue to hold the field evenFafter the 46[th] Amendment.

(3) Sub-clause (f) of Article 366(29-A) has no application tomembers’ clubs.

50. Having gone through the judgment and order of the WestBengal Taxation Tribunal dated 3[rd] July, 2006 and the impugned CalcuttaGHigh Court judgment dated 1[st] February, 2008, and in view of the answersto the three questions referred to the present Three Judge Bench (aslisted hereinabove), we are of the view that no interference is called forin the findings of fact or declaration of law in this case. Accordingly,C.A. No. 4184 of 2009 stands dismissed.H

C.A. No.7497 of 2012 and other connected matters

51. Delay condoned. Leave is granted.

52. By an order dated 13[th] December, 2017 by a Division Benchof this Court in Civil Appeal No.7497 of 2012 and its connected matters,this Court listed these appeals involving the levy of service tax uponmembers’ clubs as follows:

“The issue involved in these cases has been referred to the largerBench and the reference order is reported as ‘State of West Bengal& Ors. v. Calcutta Club Ltd.’ [2017(5) SCC 356][Civil AppealNo. 4184 of 2009].

Let these appeals be also listed before the larger Bench alongwith the aforesaid matter after taking orders from Hon’ble theChief Justice of India.”

53. Primarily two judgments have been impugned before us bythe Revenue; one by the High Court of Jharkhand at Ranchi in W.P (T)No.2388 of 2007 dated 15[th] March, 2012; and the other by the HighCourt of Gujarat in S.C.A. Nos.13654-13656 of 2005 dated 25[th] March,2013. The impugned judgment dated 15[th] March, 2012 by the High Courtof Jharkhand set out the relevant provisions of the Finance Act, 1994(hereinafter referred to as the “Finance Act”), by which service taxwas levied on members’ clubs, and arrived at the conclusion that suchclubs stand on a different footing from proprietary clubs, as has beenheld in Young Men’s Indian Association (supra). The High Courtfollowing Young Men’s Indian Association (supra) then held, stating:

“18. However, learned counsel for the petitioner submits that saleand service are different. It is true that sale and service are twodifferent and distinct transaction. The sale entails transfer ofproperty whereas in service, there is no transfer of property.However, the basic feature common in both transactions requiresexistence of the two parties; in the matter of sale, the seller andbuyer, and in the matter of service, service provider and servicereceiver. Since the issue whether there are two persons or twolegal entity in the activities of the members’ club has been alreadyconsidered and decided by the Hon’ble Supreme Court as well asby the Full Bench of this Court in the cases referred above, A

B

C

D

E

F

G

Atherefore, this issue is no more res integra and issue is to beanswered in favour of the writ petitioner and it can be held that inview of the mutuality and in view of the activities of the club, ifclub provides any service to its members may be in any formincluding as mandap keeper, then it is not a service by one toanother in the light of the decisions referred above asBfoundational facts of existence of two legal entities in suchtransaction is missing. However, so far as services by the club toother than members, learned counsel for the petitioner submittedthat they are paying the tax.

A

19. Therefore, this writ petition deserves to be allowed and it isCheld that rendering of service by the petitioner- club to itsmembers is not taxable service under the Finance Act, 1994 andthe writ petition of the petitioner is allowed accordingly.”

54. Likewise, the Gujarat High Court by the judgment dated25[th] March, 2013, followed the judgment of the High Court of JharkhandDand declared the following:

“8. In the result, these petitions are allowed and it is herebydeclared that Section 65(25a), Section 65(105) (zzze) and Section66 of the Finance (No.2) Act, 1994 as incorporated/ amended bythe Finance Act, 2005 to the extent that the said provisionsEpurport to levy service tax in respect of services purportedlyprovided 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 impugnedjudgments that have in essence followed these two judgments, insofarFas service tax that is levied on members’ clubs is concerned. The vastmajority of cases before us concerns members’ clubs that have beenregistered as Companies under Section 25 of the Companies Act, orregistered co-operative societies under various State Acts, such societiesbeing bodies corporate under the aforesaid Acts.G56. Shri Dhruv Agarwal, learned Senior Advocate appearing on

56. Shri Dhruv Agarwal, learned Senior Advocate appearing onbehalf of the Revenue, after taking us through the relevant provisions,submitted that service tax was levied on members’ clubs with effectfrom 2005. With effect from 2012, after statutory changes had beenmade, service tax continued to be levied on such clubs and was attracted H

even to members’ clubs in incorporated form, i.e., as companies or asregistered cooperative societies. According to Shri Agarwal, the principleof mutuality that is laid down in Young Men’s Indian Association(supra) has been expressly done away with in the service tax context,as there is in these cases no transaction of sale, unlike the sales taxcases that have just been heard. He cited a number of judgments tobuttress his proposition that the High Courts of Jharkhand and Gujaratwrongly applied the judgment of Young Men’s Indian Association(supra), which was in the context of Sales Tax acts, to Service Tax, andhence did not lay down the law correctly.

57. On the other hand, learned counsel appearing on behalf of theRespondents in these cases argued that when service tax was introducedin 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’ clubsin incorporated form were expressly excluded from service tax. Post-2012, there was a sea change, as a result of which service tax wasimposed on all taxable services, short of those which were in a negativelist contained in Section 66D of the Finance Act. According to the learnedcounsel appearing on behalf of the Respondents, the same position thatobtained re: incorporated members’ clubs continued after 2012, despitethe introduction of Explanation 3 to Section 65B(44). All the learnedcounsel argued that the doctrine of mutuality, insofar as incorporatedinstitutions are concerned, was not done away with in the service taxregime, and the Jharkhand and Gujarat High Court were correct inapplying the judgment in Young Men’s Indian Association (supra) tothese cases.

58. As was stated hereinabove, service tax was introduced forthe first time by the Finance Act, 1994. Under Section 64(3), Chapter Vof the Finance Act applied to taxable services as defined, with effectfrom 16[th] June, 2005. Under Section 65(25a), “club or association” wasdefined as follows:

“club or association” means any person or body of personsproviding services, facilities or advantages, for a subscription orany other amount, to its members, but does not include-

(i) anybody established or constituted by or under any law forthe time being in force, or A

B

C

D

E

F

G

H

A(ii) any person or body of person engaged in the activities oftrade unions, promotion of agriculture, horticulture oranimal husbandry, or

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

(iv) any person or body of persons associated with press ormedia.59. Under Section 65(105)(zze), “taxable service” was definedas follows:C

“”Taxable service” means any service provided- (zze) to its members by any club or association in relation toprovision of services, facilities or advantages for a subscription orany other amount.”

D60. With effect from 1[st] May, 2011, “club or association” wasdefined by Section 65(25aa) as follows:

“club or association” means any person or body of personsproviding services, facilities or advantages, primarily to itsmembers for a subscription or any other amount but does notEinclude-

(i) anybody established or constituted by or under any law forthe time being in force, or

(ii) any person or body of person engaged in the activities oftrade unions, promotion of agriculture, horticulture or animalFhusbandry, or

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

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

G

61 Likewise, in Section 65(105)(zzze), the expression “or any otherperson” was added after the expression “to its members”, thus makingit clear that the tax net had now been widened so as to include non-members of clubs or associations as well.H

62. Under Section 66, it was stated that there shall be levied thetax (referred to as “the service tax”) at the rate of 12% of the value oftaxable services referred to in sub-clauses…(zzze) of clause (105) ofsection 65, and collected in such manner as may be prescribed.

63. Under Section 67, where service tax is chargeable on anytaxable 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 ischargeable 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 considerationin money, be the gross amount charged by the serviceprovider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a considerationnot wholly or partly consisting of money, be such amount inmoney as, with the addition of service tax charged, isequivalent to the consideration;

(iii) in a case where the provision of service is for considerationwhich is not ascertainable. be the amount as may bedetermined 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 shallpay service tax at the rate specified in section 66 in suchmanner and within such period as may be prescribed.”

65. With effect from 1[st] July, 2012, Sections 65 and 65A weremade inapplicable, and a new Section 65B introduced, in which underSection 65B(37), the term “person” was defined as follows:

“(37) “person” includes,-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

A

B

C

D

E

F

G

H

(iv) a society,

A

(v) a limited liability partnership

(vi) a firm,

(vii) an association of persons or body of individuals, whether incorporated or not, B

(viii) Government,

(ix) a local authority, or

(x) every artificial juridical person, not falling within any of the preceding sub-clauses; C

66. Under Section 65B(44), “service” was defined as follows:

“(44) “service” means any activity carried out by a person foranother for consideration and includes a declared service but shallnot include- D

(a) an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way ofsale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods, which is deemedto be sale within the meaning of clause (29A) of article 366of the Constitution; or E

(iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in thecourse of or in relation to his employment;F(c) fees taken in any Court or tribunal established under any law forthe time being in force.

xxx xxx xxx

Explanation 3. For the purposes of this Chapter;- G

(a) an unincorporated association or a body of persons, as thecase may be, and a member thereof shall be treated asdistinct persons; H

(b) an establishment of a person in the taxable territory and anyof his other establishment in a non-taxable territory shall betreated as establishments of distinct persons.”

67. A new Section 66B was then introduced, which states asfollows:

“66B.Charge of service tax on and after Finance Act, 2012

There shall be levied a tax (hereinafter referred to as the servicetax) at the rate of fourteen per cent on the value of all services,other than those services specified in the negative list, providedor agreed to be provided in the taxable territory by one person toanother and collected in such manner as may be prescribed.”

68. As was stated hereinabove, service tax was thus leviable onall services as defined, short of a negative list of services which wasthen set out in Section 66D of the Act.

69. In an interesting judgment of this Court, Union of India andOrs. 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 thewords “but does not include cash management” were deleted.This provision remained on statute book up to 30-6-2012. By theFinance Act, 2012, entire scheme of service tax was completelychanged and overhauled with the introduction of altogether newsystem of service tax. There was a paradigm shift in the servicetax regime. Initially, service tax was levied only on three servicesby the Finance Act, 1994. The Finance Act, 1996 extended thelevy to three more services. Twelve more services were broughtunder the service tax net by the Finance Act, 1997 and its scopewas further enlarged by the Finance Act, 1998 when twelve moreservices were brought under the service tax net. Three serviceswere exempted from the service tax by the Finance Act, 1998and one more service by the Finance Act, 2000. Its scope wasfurther widened by the Finance Act, 2001 when service tax wasextended to include fifteen more services. The Finance Act, 2002further levied service tax on ten more services. The Finance Act,2003 brought 8 new services within the ambit of service tax.

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Further, the Finance (No. 2) Act, 2004 brought 13 new servicesunder service tax which included reintroduction of service tax on3 services and also made applicable service tax on risk cover inlife insurance under the life insurance service, whereas thisservice was introduced in the year 2002. The Finance Act, 2005brought 9 new services under the service tax net. The FinanceAct, 2006 brought 15 new services under the service tax net. TheFinance Act, 2007 brought 7 new services under the service taxnet and six telecom related services were omitted and mergedinto one new category of taxable service. Further, the FinanceAct, 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 newservices. Likewise, the Finance Act, 2010 w.e.f. 1-7-2010 videNotification No. 24/2010-ST, dated 22-6-2010 introduced 8 newservices. By the Finance Act, 2011 w.e.f. 1-5-2011 videNotification No. 29/2011-ST dated 25-4-2011, 2 new services werebrought within its net and at the same time, health service wasexempted w.e.f. 1-5-2011 by Notification No. 30/2011-ST dated25-4-2011. Thus, the service tax was on a total of 115 services.

20. Thus, right from 1994 till 2011, the mode adopted was tospecify those services on which it was intended to levy servicetax. However, Parliament by the Finance Act, 2012 w.e.f.1-7-2012 has introduced altogether new system of taxation ofservices by making a paradigm shift. Now, the scheme oftaxation of services is based on negative list of services. There-fore, earlier list of taxable services is no longer applicable.Instead two things have happened. First, the term “service” isdefined whereas there was no definition of “service” in theFinance Act, 1994 which position remained till 2012. Earlier, eachindividual service on which tax was levied (known as taxableservice) was defined. Secondly, the definition of “service” givennow contains a negative list which is contained in Section 66-D ofthe Act. In other words, it specifically excludes certaintransactions from the ambit of service. Thus, those transactionswhich are specifically excluded are not liable for service tax. Anyother 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 theconstitutional validity of the levy of service tax, also stating:

“8. As stated above, service tax is VAT. Just as excise duty is atax on value addition on goods, service tax is on value addition byrendition of services. Therefore, for our understanding, broadly“services” fall into two categories, namely, property basedservices and performance based services. Property basedservices cover service providers such as architects, interiordesigners, real estate agents, construction services, mandapwalas,etc. Performance based services are services provided byservice providers like stockbrokers, practising chartered accoun-tants, practising cost accountants, security agencies, tour opera-tors, event managers, travel agents, etc.”

After exhaustively reviewing a number of judgments, the Courtstated that Parliament has legislative competence to levy service taxunder Entry 97 List I of the Constitution of India.

71 With this background, it is important now to examine theFinance Act as it obtained, firstly from 16[th] June, 2005 uptil 1[st] July,2012.

72. The definition of “club or association” contained in Section65(25a) makes it plain that any person or body of persons providingservices for a subscription or any other amount to its members would bewithin the tax net. However, what is of importance is that anybody“established or constituted” by or under any law for the time being inforce, is not included. Shri Dhruv Agarwal laid great emphasis on thejudgments in DALCO Engineering Private Limited v. SatishPrabhakar Padhye and Ors. Etc. (2010) 4 SCC 378 (in particularparagraphs 10, 14 and 32 thereof) and CIT, Kanpur and Anr. v. CanaraBank (2018) 9 SCC 322 (in particular paragraphs 12 and 17 therein), tothe effect that a company incorporated under the Companies Act cannotbe said to be “established” by that Act. What is missed, however, is thefact that a Company incorporated under the Companies Act or acooperative society registered as a cooperative society under a StateAct can certainly be said to be “constituted” under any law for the timebeing in force. In R.C. Mitter & Sons, Calcutta v. CIT, West Bengal, A

B

C

D

EF

G

H

ACalcutta (1959) Supp. 2 SCR 641, this Court had occasion to construewhat is meant by “constituted” under an instrument of partnership, whichwords occurred in Section 26A of the Income Tax Act, 1922. The Courtheld:

“The word “constituted” does not necessarily mean “created” orB“set up”, though it may mean that also. It also includes the idea ofclothing the agreement in a legal form. In the Oxford EnglishDictionary, Vol. II, at pp. 875 & 876, the word “constitute” issaid to mean, inter alia, “to set up, establish, found (an institution,etc.)” and also “to give legal or official form or shape to (anassembly, etc.)”. Thus the word in its wider significance, wouldCinclude both, the idea of creating or establishing, and the idea ofgiving a legal form to, a partnership. The Bench of the CalcuttaHigh 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”,Dwhen clearly it could also mean putting a thing in a legal shape.The Bombay High Court, therefore, in the case of DwarkadasKhetan and Co. v. CIT [(1956) 29 ITR 903, 907] , was right inholding that the section could not be restricted in its applicationonly to a firm which had been created by an instrument of part-nership, and that it could reasonably and in conformity with com-Emercial practice, be held to apply to a firm which may have comeinto existence earlier by an oral agreement, but the terms andconditions of the partnership have subsequently been reduced tothe form of a document. If we construe the word “constitute” inthe larger sense, as indicated above, the difficulty in which theFlearned Chief Justice of the Calcutta High Court found himself,would be obviated inasmuch as the section would take in casesboth of firms coming into existence by virtue of written docu-ments as also those which may have initially come into existenceby oral agreements, but which had subsequently been constitutedunder written deeds.”

D

G

73. It is, thus, clear that companies and cooperative societies whichare registered under the respective Acts, can certainly be said to beconstituted under those Acts. This being the case, we accept the argumenton behalf of the Respondents that incorporated clubs or associations orprior to 1[st] July, 2012 were not included in the service tax net.H

74. The next question that arises is - was any difference made tothis position post 1[st] July, 2012?

75. It can be seen that the definition of “service” contained inSection 65B(44) is very wide, as meaning any activity carried out by aperson for another for consideration. “Person” is defined in Section65B(37) as including, inter alia, a company, a society and every artificialjuridical person not falling in any of the preceding sub-clauses, as alsoany association of persons or body of individuals whether incorporatedor not.

76. What has been stated in the present judgment so far as salestax is concerned applies on all fours to service tax; as, if the doctrine ofagency, trust and mutuality is to be applied qua members’ clubs, therehas to be an activity carried out by one person for another forconsideration. 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 toanother for consideration, as one cannot sell something to oneself. Thiswould 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, undersub-clause (a) of which unincorporated associations or body of personsand their members are statutorily to be treated as distinct persons.

78. The explanation to Section 65, which was inserted by theFinance Act of 2006, reads as follows:

“Explanation: For the purposes of this section, taxable serviceincludes any taxable service provided or to be provided by anyunincorporated 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 substantiallythe 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 theexpression “body of persons” will not include an incorporated company,nor will it include any other form of incorporation including an incorporatedco-operative society.

80. It will be noticed that “club or association” was earlier definedunder Section 65(25a) and 65(25aa) to mean “any person” or “body ofpersons” providing service. In these definitions, the expression “body of A

B

C

D

E

F

G

H

Apersons” 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 anylaw for the time being in force”. “Body of persons”, therefore, wouldnot, within these definitions, include a body constituted under any lawfor the time being in force.B

81. When the scheme of service tax changed so as to introduce anegative list for the first-time post 2012, services were now taxable ifthey were carried out by “one person” for “another person” forconsideration. “Person” is very widely defined by Section 65B(37) asincluding individuals as well as all associations of persons or bodies ofindividuals, whether incorporated or not. Explanation 3 to Section65B(44), instead of using the expression “person” or the expression “anassociation of persons or bodies of individuals, whether incorporated ornot”, uses the expression “a body of persons” when juxtaposed with “anunincorporated association”.

C

D

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 incorporatedcooperative society. As the same expression has been used in Explanation3 post-2012 (as opposed to the wide definition of “person” contained inESection 65B(37)), it may be assumed that the legislature has continuedwith the pre-2012 scheme of not taxing members’ clubs when they arein the incorporated form. The expression “body of persons” may subsumewithin it persons who come together for a common purpose, but cannotpossibly include a company or a registered cooperative society. Thus,Explanation 3(a) to Section 65B(44) does not apply to members’ clubsFwhich are incorporated.

83. The expression “unincorporated associations” would includepersons 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 eitherbunched together in the form of an association also, or otherwise as agroup 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.

G

H

STATE OF WEST BENGAL v. CALCUTTA CLUB LIMITED[R.F. NARIMAN, J.]

84. We are therefore of the view that the Jharkhand High Courtand the Gujarat High Court are correct in their view of the law in followingYoung Men’s Indian Association (supra). We are also of the viewthat from 2005 onwards, the Finance Act of 1994 does not purport tolevy service tax on members’ clubs in the incorporated form.

85. The appeals of the Revenue are, therefore dismissed. WritPetition (Civil) No.321 of 2017 is allowed in terms of prayer (i) therein.Consequently, show-cause notices, demand notices and other action takento levy and collect service tax from incorporated members’ clubs aredeclared to be void and of no effect in law.

Divya Pandey

Matters disposed of.

A

B

C

D

E

F

G

H