Full Judgment Text
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PETITIONER:
JOINT COMMERCIAL TAX OFFICER, HARBOUR DIV. II MADRAS
Vs.
RESPONDENT:
YOUNG MEN’S INDIAN ASSOCIATION (REG.) MADRAS & ORS.
DATE OF JUDGMENT:
12/02/1970
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HIDAYATULLAH, M. (CJ)
HEGDE, K.S.
RAY, A.N.
DUA, I.D.
CITATION:
1970 AIR 1212 1970 SCR (3) 680
1970 SCC (1) 462
CITATOR INFO :
RF 1978 SC1765 (12)
R 1985 SC1293 (45)
ACT:
Madras General Sales Tax Act, 1959, s. 2(g) Exp. I & S
2(n) Exp.I--Member’s club--Supply of refreshments to Members
and their guests--Whether, sales tax leviable.
HEADNOTE:
The respondents are members’ clubs. They supply
refreshments in the form of ’food, snacks and beverages to
their members or their guest S to be paid for by the
members. The articles necessary for this purpose are
purchased by the clubs in the market out of club funds which
consisted of the subscription of the members. The
preparations are made within the club premises and are
supplied to members at fixed prices. On the question
whether the clubs are "dealers" liable to sales tax under
the Madras General Sales Tax Act, 1959,
HELD : (Per Full Court) As no transaction of sale was
involved there could be no levy of sales tax under the
provisions of the Act.
(Per Hidayatullah, C. J. Hegde, Grover, Ray and Dua,
JJ.) The State Legislature is only competent to legislate on
taxes on sale or purchase of goods under Entry 54, List 11
of the 7th Schedule to the Constitution. If there is no
transfer of property from one to another there is no sale
which would be exigible to tax, in spite of the definition
of ’sale’ in S.2(n) read with Exp. I of the Act. [686G]
In proprietary clubs where some of the shareholders are
not members or some of the members are not shareholders, the
members are not owners of, nor interested in, the property
of the clubs. Unlike proprietary clubs the case of a
members’ club is analogous to that of an agent investing his
own monies for preparing things for the consumption of the
principal and later recouping himself for the expenses
incurred. Therefore, in the present case, even though the
clubs are distinct legal entities they were ,Only acting as
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agents for members in the matter of supply of various pre-
parations to them and no sale would be involved as the
element of transfer would be completely absent. [685 A-B,
686 H]
Cosmopolitan Club, Madras v. District Commercial Tax
Officer, Triplicane (1952) 1 M.L.J. 401; Deputy Commercial
Tax Officer Triplicane Division, Madras v. Cosmopolitan
Club, I.L.R. [1955] Mad. 1042. Graf V. Evans, [1882] 8
Q.B.D. 373, Trebanog Working Men’s Club and Institute Ltd.
v. Macdonald [19401 1 A.E.L.R. 454, Bengal Nagpur Cotton
Mills Club, Rajnandangaon v. Sales Tax Officer Raipur & Anr.
8 S.T.C. 781, Century Club & Anr. v. State of Mysore, 16
S.T.C. 38, Deputy Commercial Tax Officer v. Enfiend India
Ltd. [1968] 2 S.C.R. 421, and Inland Revenue Commissioners
v. Westleigh Estate Co. Ltd. Same v. .South Behar Railway
Co. Ltd. [19241 1 K.B. 390, referred to.
681
(Per Shah, J. concurring) : The analogy of cases decided
under the Licensing Act in the United Kingdom concerning the
supply by clubs of alcoholic drinks to their members is not
appropriate. Whether refreshments, beverages and other
articles supplied by members’ club for consideration, to its
members, are in law sold depends upon the, circumstances in
which the transaction takes place. in each case the
liability to tax -of the transaction will depend upon its
strictly legal form. If an incorporated members’ club
supplies its property to its members at a fixed tariff-the
transaction would readily be deemed to be one for sale, even
if the transaction is on a non-profit basis; such a
transaction would be liable to sales tax. Where, however,
the club is merely acting on behalf of the members to make
available to them refreshments, beverages and other arti-
cles, the transaction will not be regarded as a sale, for
the club is the agency through which the members have
arranged that the refreshments, beverages and other articles
should be made available. The test in each case is whether
the club transfers property belonging to it for a price or
the club acts as an agent for making available property
belonging to its members. [687 G, 688 B]
State of Madras v. Gannon Dunkerley & Co. Ltd. [1959]
S.C.R. 379, Duke of West Minster v. Inland Revenue
Commissioner, 19 T.C. 490, Bank of Chettinad Ltd. v.
Commissioner of Income-tax, Madras, L.R. 67 I.A. 394,
Commissioner of Income-tax, Andhra Pradesh v. Motors &
General Stores (P) Ltd., 66 I.T.R. 692 S.C. and Commissioner
of Income-tax Gujarat v. B. M. Kharwar, 72 I.T.R. 603 S.C.,
referred to.
In the present case on the findings recorded, the
respondents were not transferring property belonging to them
but were merely acting as agents for and on behalf of the
members and hence, the transactions were not sales and could
not therefore be subject to sales tax under the Act. [688 D]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1724
to 1727 of 1967.
Appeals from the judgments and orders dated November
23, 1962 and November 4, 1963 of the Madras High Court in
Writ Petitions Nos. 129, 130 and 181 of 1960 and Writ Appeal
No. 275 of 1963.
M. C. Chagla and A. V. Rangam, for the appellants (in
all the appeals).
D. Narsaraju and R. Gopalakrishnan, for the
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respondents (in C.As. Nos. 1724, 1725 and 1727 of 1967).
P. Ram Reddy, P. Parameswara Rao and A. V. V. Nair,
for the respondent (in S.A. No. 1726 of 1967).
The Judgment of M. HIDAYATULLAH, C.J., K. S. HEGDE,
A.N. GROVER, A. N. RAY and 1. D. DUA, was delivered by
GROVER, J. J. C. SHAH gave a separate opinion. -
Grover, J. These appeals by certificate are directed
against a common judgment, of the Madras High Court in
petitions filed under Art. 226 of the Constitution by the
Cosmopolitan Club, Madras, the Young Men’s Indian
Association, Madras and the Lawley Institute Ootacamund
challenging the proceedings relating to their assessment to
sales tax under the Madras General Sales
682
Tax Act, 1959, hereinafter called the "Act", for supplying
food, snacks, beverages and other articles to their members
or their guests. It was held by the High Court that each of
these clubs could not be regarded as a "dealer" within the
meaning of S. 2 (g) read with Explanation I of the Act nor
was any "sale" involved in the aforesaid activity of the
club within the, meaning of s. 2(n) read with Explanation I
of the Act.
The Cosmopolitan Club, Madras, is a social recreation
club which was started originally in the year 1873 as an
unincorporated association. In 1934 it was registered under
S. 26 of the Indian Companies Act 1913 as a non-profit
earning institution. Its objects, as disclosed in the
memorandum of association, are mainly to promote and
facilitate social intercourse, discussion amongst its
members etc. The articles of association provide that the
members for the time being only constitute the club. It
maintains an establishment for preparing and supplying
refreshment to its members. It has been found by the High
Court and has not -been disputed that the articles necessary
for the aforesaid purpose are purchased by the club in the
market and the preparations are made within its premises at
the direction of a committee. The preparations are supplied
to the members at such prices as are fixed by the committee.
A member is allowed to bring guests with him but if any
article of food is consumed by the guest it is the member
who has to pay for the same.
The Young Men’s Indian Association is a society
registered under the Societies’ Registration Act 1860. It
has, for its objects, the improvement of the moral and
physical standards etc. of the students. The association
provides certain facilities in the shape of a library with a
reading room apart from residential and recreational
facilities. There is a mess together with a canteen serving
the needs of the members. Any member can bring a guest but
the duration of his stay in the hostel or of enjoying the
benefit of the preparations or beverages is limited and
restricted by the rules. It is the member who has to pay
the charges for any articles consumed by his guest. The
employees of the association purchase the various articles
required for supplying the refreshments etc. and the cost
and the expenses incurred therefor inclusive of the salaries
of cooks, servers and others are totalled up and divided
among the members participating in the mess. No profit is
made by the association in providing these amenities to its
members. These facts as found in the judgment of the High
Court are not disputed.
The Lawley Institute came into existence by a deed of
trust dated September 15, 1911 entered into between the
Maharja of Bibbli and the Collector of Nilgiris and others.
The management of the Institute vests absolutely in the
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board of trustees. It is
683
intended to serve its members only and no person other than
a member is entitled to participate in the amenities
provided by the Institute. The supplying of refreshments
and meals to members constitute one of such amenities.
These facts are altogether uncontroverted.
It appears that in the State of Madras levy of sales
tax was first made in 1939. The statute as it stood then
contained the definition of "dealer" in s. 2(b). A dealer
was defined as "any person who carried on any business of
buying, or selling goods" with the following Explanation:
a cooperative society, a club, a firm or any
association which sells goods to its members
is a dealer within the meaning of this
clause".
The Cosmopolitan Club, Madras, which had been paying tax
since 1939 filed a petition under Art. 226 of the
Constitution which was disposed of by Mack J., in
Cosmopolitan Club, Madras v. District Commercial Tax
Officer, Triplicane(1). According to the learned Judge the
supply of refreshments in a members’ club, purchased out of
the club funds and composed of members’ subscription was not
a transfer of property from the club as such to a member nor
did the club do any trade or business in purchasing from
outside the requirements of members and supplying the same
to them at a fixed charge. The levy of sales tax on such
supply of refreshments was held to be illegal. A division
bench to whom an appeal was taken confirmed the above
judgment (Deputy Commercial Tax Officer, Triplicane
Division, Madras v. The Cosmopolitan Club(’). The
definition of "dealer’ in s. 2(g) of the Act is in the
following terms :
"dealer" means any person who carried on the
business of buying, selling, supplying or
distributing goods, directly or otherwise
whether for cash or for deferred payment or
for commission, remuneration or other valuable
consideration and includes-
(i)...................
(ii)..................
(iii).................
(iv)..................
Explanation-1. A society including a
cooperative, society, club or firm or an
association which, whether or not in t
he course
of business, buys, sells or distributes goods
from or to its members for cash or for
deferred
(1) [1952] 1 M.L.J. 401.
(2) I.L.R. [1955] mad. 1042.
684
payment or for commission, remuneration or
other valuable consideration, shall be deemed
to be a dealer for the purpose of this Act;
Explanation II............."
The definition of sale as given in s. 2(n)
reads
"sale" with all its grammatical variations
and cognate expressions means every transfer
of the property in goods by one person to
another in the course of business for cash or
for deferred payment or other valuable
consideration
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Explanation 1. "The transfer of property
involved in the supply or distribution of
goods by a society (including a cooperative
society) club, firm or any association to its
members, for cash, or for deferred payment, or
other valuable consideration, whether or not
in the course of business shall be deemed to
be a sale for the purpose of this Act".
"Turnover" is defined to mean
"the aggregate amount for which goods are
bought or sold or supplied or distributed by a
dealer either directly or through another on
his own account or on account of others
whether for cash or for deferred payment or
for other valuable
consideration..................."
It is common ground that for the levy of sales tax there
must be a sale of refreshments, beverages and other
preparations by the club to its members. If there is no
transfer of property involved in the supply or distribution
of goods by a club it would not fall within Explanation I
contained in the definition of sale in s. 2(n) nor can the
club be regarded as a dealer within s. 2(g) read with
Explanation 1.
The law in England has always been that members’ clubs
to which category the clubs in the present case belong
cannot be made subject to the provisions of the Licensing
Acts concerning sale because the members are joint owners of
all the club property including the excisable liquor. The
supply of liquor to a member at a fixed -price by the club
cannot be regarded to be a sale. If, however, liquor is
supplied to, and paid for by a person who is not a bona fide
member of the club or his duly authorised agent there would
be a sale. With regard to incorporated clubs a distinction
has been drawn. Where such a club has all the
,characteristics of a members’ club consistent with its
incorporation, that is to say, where every member is a
shareholder and every shareholder is a member, no licence
need be taken out if liquor
685
is supplied only to the members. If some of the
shareholders are not members or some of the members are not
shareholders that would be the case of a proprietary club
and would involve sale. Proprietary clubs stand on a
different footing. The members are not owners of or
interested in the property of the club. The supply to them
of food or liquor though at a fixed tariff is a sale.(See
Halsbury’s Laws of England, 3rd Ed., Vol. 5, pp. 280-281.)
The principle laid down in Graff v. Evans(’) had throughout
been followed. In that case Field J., put it thus :
"I think the true construction of the
rules is that the members were the joint
owners of the general property in all the
goods of the club, and that the trustees were
their agents with respect to the general
property in the goods".
The difficulty felt in the legal property ordinarily vesting
in the trustees of the members’ club or in the incorporated
body was surmounted by invoking the theory of agency i.e.
the club or the trustees acting as agents of the members.
According to Lord Hewart (L.C.J.) in Trebanog Working Men’s
Club and Institute Ltd. v. Macdonald (2) once it was
conceded that a members’ club did not -necessarily require a
license to serve its members with intoxicating liquor it was
difficult to draw any distinction between the various legal
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entities which might be entrusted with the duty of holding
the property on behalf of members, be it an individual or a
body of trustees or a company formed for the purpose so long
as the real interest in the liquor remained in the members
of the club. What was essential was that the. holding of
the property by the agent or trustee must be a holding for
and on behalf of and not a holding antagonistic to members
of the club.
In the various cases which came to be decided by the
High Courts in India the view which had prevailed in England
was accepted and applied. We may notice the decisions of
the Madhya Pradesh High Court in Bengal Nagpur Cotton Mills
Club, Rajnandangaon v. Sales Tax Officer Raipur & Another (
3 ) and of the Mysore High Court in Century Club & Another
v. The State of Mysore & Anr. (4). In the former it was
held -that the supply to the member of a members’ club
registered under s. 26 of the Indian Companies Act 1913 of
refreshments purchased out of club funds which consisted of
members’ subscription was not a transfer of property from
the club as such to a member and the club was not liable to
sales tax under the C.P. & Barar Sales Tax Act 1947 in
respect of such supplies of refreshment. The principle
adverted to in Trebanog Working Men’s Club (2) was adopted
(1) [1882] 8 Q. B. D. 373.
(3) 8 S. T. C. 781.
(2) [1940] 1 A.E.L.R. 454.
(4) 16 S. T. C. 38.
686
and it was said that if the agent or a trustee supplied
goods to the members such supplies would not amount to a
transaction of sale. The Mysore court expressed the same
view that a purely member’s club which makes purchases
through a Secretary or manager and supplies the requirements
to members at a fixed rate did not in law sell these goods
to the members.
On behalf of the appellant reliance has been placed on a
decision of this court in Deputy Commercial Tax Officer &
Anr. v. Enfiend India Ltd. (1). In that case the
Explanation to s. 2 (g) was found to be intravires and
within the competence of the State legislature. The
judgment proceeded on the footing that when a cooperative
society supplied refreshments to its members for a price the
following four constituent elements of sale were present :
(1) parties competent to contract; (2) mutual consent; (3)
thing, the absolute or general property in which is
transferred from the seller to the buyer and (4) price in
money paid or promised. The mere fact that the society
supplied the refreshments,to its members alone and did not
make any profit was not considered sufficient to establish
that the society was acting only as an agent of its members.
As a registered society was a body corporate it could not be
assumed that the property which it held was the property of
which its members were owners. The English decisions were
distinguished on the ground that the courts in those cases
were dealing with matters of quasi criminal nature.
It appears that in England even in taxation laws the
position of a members’ club though incorporated has been
recognised to be quite different. In Inland Revenue
Commissioners v. Westleigh Estate Co. Ltd.(’); Same v. South
Behar Railway Co. Ltd. and Same v. Eccentric Club Pollock
M.R. dealing with the case of the Eccentric Club pointed out
that the members’ club was only structurally a company and
it did not carry on trade or business so as to attract the
Corporation Profits Tax.
The essential question, in the present case, is whether
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the supply of the various preparations by each club to its
members involved a transaction of sale within the meaning of
the Sale of Goods Act 1930. The State Legislature being
competent to legislate only under Entry 54, List II of the
7th Schedule to the Constitution the expression "sale of
goods" bears the same meaning -which it has in the aforesaid
Act. Thus in spite of the definition contained in S. 2(n)
read with Explanation I of the Act if there is -no transfer
of property from one to another there is no sale which would
be exigible to tax. If the club even though a distinct
legal entity is only acting as an agent for its members in
the matter of ,supply of various preparations to them no
sale would be involved
(1) [1968] 2 S.C.R. 421.
(2) [1924] 1 K. B. 390.
687
as the element of transfer would be completely absent. This
position has been rightly accepted even in the previous
decision of this Court.
The final conclusion of the High Court in the judgment
under appeal was that the case of each club was analogous to
that of an agent or mandatory investing his own monies for
preparing things for consumption of the principal, and later
recouping himself for the expenses incurred. Once this
conclusion on the facts relating to each club was reached it
was unnecessary for the High Court to have expressed any
view with regard to the vires of the Explanations to S. 2(g)
and 2(n) of the Act. As no transaction of sale was involved
there could be no levy of tax under the provisions of the
Act on the supply of refreshments and preparations by each
one of the clubs to its members.
The appeals must fail and are dismissed but there will
be no order as to costs.
Shah, J. Where general property in goods belonging to a
person is under a contract transferred to another for a
price paid or promised, the transaction is a sale. The
State Legislature has under the Constitution power to
legislate under Entry 54 List 11 in respect of taxes on sale
or purchase of goods and the expression "sale" has the same
meaning it bears in the Sale of Goods Act, 1930: see State
of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.(’). A
transaction which is not of the nature of sale within the
meaning of the Sale of Goods Act, cannot, therefore, be
subjected to tax under a law enacted in exercise of power
under Entry 54 List 11.
Whether refreshments, beverages and other articles
supplied by a Member’s Club for consideration to its members
are in law sold depends upon the circumstances in which the
transaction takes place. In each case the liability to tax
of the transaction will depend upon its strictly legal form.
If an incorporated members’ club supplies its property to
its members at a fixed tariff, the transaction would readily
be deemed to be one for sale, even if the transaction is on
a non-profit basis; such a transaction would be liable to
sales tax. Where, however, the club is merely acting on
behalf of the members to make available to them
refreshments, beverages and other articles, the transaction
will not be regarded as a sale, for the club is the agency
through which the members have arranged that the
refreshments, beverages and other articles should be made
available. The test in each case is whether the
(1) [1959] S.C.R. 379.
688
club transfers property belonging to it for a price or the
club acts as an agent for making available property
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belonging to its members.
In my judgment, the analogy of the cases decided under
the Licensing Act in the United Kingdom concerning the
supply by clubs of alcoholic drinks to their members is not
appropriate. In a criminal trial or a quasi-criminal
proceeding, the Court is entitled to consider the substance
of the transaction and determine the liability of the
offender. But in a taxing statute the strict legal position
as disclosed by the form and not the substance of the
transaction is determinative of its taxability : see Duke of
West Minister v.Inland Revenue Commissioners(’); Bank of
Chittinad Minister v.Inland Revenue Commissioners(’); Bank
of Chittinad Income-tax, Andhra Pradesh v. Motors & General
Stores(P) Ltd.(’); and Commissioner of Income-tax, Gujarat
v. B. M. Kharwar (4).
It appears on the findings recorded by the High Court
that the clubs or associations sought to be rendered liable
in these appeals were not transferring property belonging to
them but were merely acting as agents for and on be-half of
the members. They were not selling goods but were rendering
a service to their members.
I agree therefore that the appeals must fail.
Y.P. Appeals dismissed.
(1) 19 T.C. 490. 519.
(2) L. R. 67 I. A. 394.
(3) 66 I.T.R. 692 S.C.
(4) 72 I.T.R. 603 S.C.
689