Full Judgment Text
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PETITIONER:
DEPUTY COMMERCIAL TAX OFFICER, SAIDAPET & ANR.
Vs.
RESPONDENT:
ENFIELD INDIA LTD., CO-OPERATIVE CANTEEN LTD.
DATE OF JUDGMENT:
23/11/1967
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION:
1968 AIR 838 1968 SCR (2) 421
CITATOR INFO :
RF 1970 SC1212 (9)
D 1985 SC1748 (9)
RF 1986 SC1902 (4)
ACT:
Madras General Sales Tax Act 1 of 1959-Co-operative Society
supplying goods to its members whether ’dealer’--supply of
goods to members whether ’sale’-Explanation to s. 2(g) and
Explanation (1) to s.2(n) whether ultra vires.
HEADNOTE:
The respondent was a registered Co-operative Society under
the Madras Co-operative Societies Act 6 of 1932. Its object
was to provide it canteen for the employees of a company.
The Society was assessed by the Deputy Commercial Tax
Officer to pay sales tax for the years 1959-60 and 1960-61
on its turnover of refreshments supplied to its members. It
challenged the assessments in a writ petition under Art. 226
of the: Constitution contending that supply of goods to its
members did not amount to sale and therefore the Explanation
to s. 2(g) treating it as a ’dealer’ and Explanation (1) to
s. 2(n) treating its transactions as, ’sales’ were ultra
vires. The High Court held in favour of the Society. The
Revenue appealed.
HELD : (i) A cooperative.society registered under the Madras
Cooperative Societies Act, 1932 is by virtue of s. 20 of
that Act a body corporate with perpetual succession and
common seal, and with power to hold property, to enter into
contracts, to institute and defend suits and other legal
proceedings and to do all things necessary for the purposes
for which it was constituted. Such a cooperative society
which carries on the business of supplying goods to its
members for cash or deferred payment falls within the
definition of ’dealer’ in s. 2(g). The Explanation to s.
2(g) was not intended to overstep the limits of legislative
power. By the Explanation the State Legislature has merely
clarified that a taxable entity will be regarded as a dealer
within the meaning of the Act even though it buys, sells,
supplies or distributes goods, from or to its members,
whether in the course of business or not : it is not
intended’ by the Explanation to declare all transactions of
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the taxable entity with its members to he transactions.of
sale or purchase. The explanation is a part of the
definition of ’dealer’ and not of ’sale’. For the purpose
of levying sales tax it was open to the legislature to
devise a definition of the word ’dealer’ and further to
provide that certain bodies shall be deemed to be dealers
within the meaning of the Act. The High Court therefore
wrongly held the Explanation to s. 2(g) to be ultra vires
the State Legislature. [445 H-426 D]
(ii) It cannot be urged as a proposition of law that when a
cooperative society supplies to its members refreshments for
a price under a scheme for distribution and supply of
refreshments, the transaction can in no event be regarded as
a sale of the refreshments supplied at a price. [429 IF]
The question was one of lability under a taxing statute and
the court in determining the liability of the respondent
society could not ignore the form and look at what is called
the ’substance of the transaction’. The Society being
incorporated was a person. It would not be, assumed
422
That the property which it held was property of which its
members were. the owners. It was not an agent of the
members or a trustee of the property on their behalf. The
property in the refreshments which it supplied to the
members vested in the Society and when refreshments were
supplied for a price paid or promised transfer of property
in the refreshments resulted. Ex facie, the transaction was
one in which the legal owner of property transferred it to
another pursuant to a contract for a price. The transaction
must be regarded as a ’sale’ within the substantive part of
the definition of that expression and no assistance from the
Explanation (1) to s. 2(n) was necessary. The question re-
garding the validity of the said Explanation did not
therefore fall to be determined in the present case. [429 F-
430 B]
Young Mens’ Indian Association (Regd.) Madras & Anr. v.
Joint Commercial-Tax Officer, Harbour Division II, Madras,
14 S.T.C. 1030, State of Madras v. Gannon Dunkerley & Co.
Ltd., [1959] S.C.R. 379, .New Indian Sugar Mills v.
Commissioner of Sales Tax, [1963] Supp. 2 S.C.R. 459 and
Bhopal Sugar Industries v. Sales Tax Officer, [1964] 1
S.C.R. 481, referred to.
Trebanog Working Men’s Club and Institute Ltd. v. Macdonald
and Monkwearmouth Conservative Club Ltd. v. Smith, [1940] 1
K.B. 576, Graff v. Evans, [1882] 8 Q.B.D. 373, Metford v.
Edwards, [1915] 1 K.B. 171 and National Sporting Club Ltd.
v. Cope, 82 L.T. 353, distinguished.
[Quaere : Whether an unincorporated club supplying goods for
a pi-ice to its members may be regarded as selling goods to
its members?]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 737 to 739
of 1966.
Appeals by special leave from the judgment and order dated
October 21, 1964 of the Madras High Court in Writ Appeals
Nos. 289 to 291 of 1964.
A. K. Sen and A. V. Rangam, for the appellants (in all the
;appeals).
K. R. Chaudhuri, for the respondents (in all the appeals).
The Judgment of the Court was delivered by
Shah, J. The Enfield India Ltd. Co-operative Canteen Ltd.
respondent herein was registered as a Co-operative Society
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under -the Madras Co-operative Societies Act 6 of 1932. The
object of the Society was to provide a canteen for the
employees of Enfield India Ltd. The Society was assessed by
the Deputy Commercial Tax Officer to pay sales tax for the
years 1959-60 & 1960-61 on its turnover from refreshments
supplied to its members. The respondent Society then moved
in the High Court of Judicature at Madras three petitions
under Art. 226 of the Constitution for orders quashing the
proceedings of the Deputy Commercial Tax Officer, Saidapet
assessing the Society to sales-tax in ’respect of its
transactions. Srinivasan J., following a decision of the
Madras High Court : Young Mens Indian Association (Regd.)
423
Madras and Another v. Joint Commercial Tax Officer, Harbour
Division II, Madras and Another(1) quashed the orders of
assessment. In appeal to the High Court, the orders passed
by Srinivasan , J., were confirmed. With special leave, the
Deputy Commercial Tax Officer has appealed to this Court.
Section 3 of the Madras General Sales Tax Act 1 of 1959
makes every dealer whose total turn-over for a year is not
less than ten thousand rupees, and every casual trader or
agent of a non-resident dealer, whatever be his turnover for
the, year, liable to pay a tax for each year at the rate of
two per cent. of his taxable turnover. ’Dealer’ is defined
in s. 2(g) as meaning-
any person who carries, 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-
Explanation.-A society (including a co-
operative society), club or firm or an
association which whether or not in the course
of business, buys, sells, supplies or
distributes goods from or to its members for
cash, or for deferred payment, or for
commission, remuneration or other valuable
consideration, shall be deemed to be a dealer
for the purposes of this Act;"
Clause (n) of s. 2 defines ’sale’ :
"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, and includes a transfer of
property in goods involved in the execution of
a works contract, but does not include a
mortgage, hypothecation, charge or
pledge;
Explanation (1).The transfer of property in-
volved in the supply or distribution of goods
by a society (including a co-operative
society), club, firm, or any association to
its members, for cash, or for deferred pay-
ment. or other valuable consideration, whether
or not in the course of business shall be
deemed to be a sale for the purposes of this
Act.
Explanation (2)
(1) 14 S.T.C. 1030.
424
Explanation (3).-
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Explanation (4).-
"Turnover" is defined in S. 2(r) and insofar as it is
material it provides
"turnover" means 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 other valuable
consideration, provided...............
The High Court of Madras in the case of Young Mens’ Indian
Association(1) held that the Explanation to s. 2(g) and
Explanation (1) to s. 2(n) of the Act were ultra vires the
State Legislature, because they "created a fiction by which
the concept of the word ’sale’ was extended to include, a
transaction which properly speaking would not amount to
sale". The Court held that within the meaning of the Act an
incorporated members’ club distributing refreshments to its
members was not a ’dealer’ and supply of food by it to its
members for a price was not a ’sale’, since the members of
a. club registered as a Company or as a Society merely
utilise the services of the club for their needs and the
members divide amongst themselves the total expenses.
Essentially, in the view of the Court, the matter is not
different from the case of a number of persons in a family
purchasing jointly an article and later sharing the same
among themselves. In such a case, it was said, there is no
element of transfer of property from one to another, and the
fact that the; club helps its members in arranging to run a
common mess will not make it the owner of the articles
supplied to the members, for it is at best an agent or
mandatory whose services are utilised by the members for
obtaining their needs,, and there is no transfer of property
involved in the arrangement. The Court proceeded further to
observe that the distinction between members’ clubs
unincorporated and incorporated is that in the former the
distribution made by the club to one of its members is a
release by all the members in favour of a joint owner who
takes the goods, in the latter the supply of articles to a
member is tantamount to delivery by an agent or trustee to
the principal or beneficiary, and there is in either case no
transfer of ownership by a person absolutely entitled to the
property to another who acquires title thereto on such
transfer.
In these appeals the Deputy Commercial Tax Officer contends
that the transactions of the respondent Society are taxable
and
(1) 14 S.T.C. 1030.
425
submits that the High Court was in error in holding that the
Explanations to s. 2(g) and s. 2(n) are ultra vires the
powers of the State Legislature. Entry 54 of List II of the
Seventh Schedule of the Constitution authorises the State
Legislature to legislate on the topic of tax on the sale or
purchase of goods other than newspapers, subject to the
provisions of Entry 92A of List I. This Court has
consistently held that the expression "sale of goods" used
in the legislative entries in the Constitution and the
Government of India Act, 1935, bears the same meaning which
it has in the Sale of Goods Act, 1930, and therefore the
State Legislature may under Entry 54 List II legislate in
respect of the series of acts beginning with an agreement of
sale between parties competent to contract and resulting in
transfer of property from one of the parties to the
agreement to the other for a price, and matters incidental
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thereto, but cannot make a transaction which is not a sale
within the Sale of Goods Act a sale by a statutory fiction
and impose tax thereon : State of Madras v. Gannon Dunkerley
& Co. Ltd: (1), New Indian Sugar Mills v. Commissioner of
Sales Tax: ( 2 and Bhopal Sugar Industries v. Sales Tax
Officer(3). Consequently if the element of transfer of
property from one person to another is lacking in any
transaction, there is no sale and the Legislature cannot by
treating it as a sale by a deeming- clause bring it within
the ambit of the taxing statute.
We are however unable to hold that the transactions of
the respondent Society of supplying refreshments-to its
members for a price paid or promised were not taxable under
the Madras General Sales Tax Act, 1959. By the definition
in s. 2(g) a ’dealer’ is a person who carries on the
business of buying, selling. supplying or distributing-
goods, whether for cash, or for deferred payment, or for
other valuable consideration. The expression ’business’ is
defined in s. 2(d) as meaning any trade, commerce or
manufacture or any adventure or concern in the nature of
trade. commerce or manufacture, whether or not any profit
accrues from such trade, commerce, manufacture, adventure or
concern. A scheme for supplying goods to its members by a
Society for price may partake of the activity of the nature
of adventure or concern in the nature of trade, even if the
activity is not actuated by a profit motive. The respondent
Society which has according to its object of incorporation
made arrangements for the supply and distribution of
refreshments, to its members without a profit motive may be
regarded as carrying on trade and would on that account fall
within the definition of a ’dealer’ within the meaning of s.
2(g). A Co-operative Society registered under the Madras
Co-operative Societies Act 6 of 1932 is by virtue of s. 20
of that
(1) [1959] S.C.R. 379. [1963] Supp. 2 S.C.R. 459.
(3) [1964] 1 S.C.R. 481.
426
Act a body corporate with perpetual succession and a common
seal, and with power to hold property, to enter into
contracts, to institute and defend suits and other legal
proceedings and to do all things necessary for the purposes
for which it was constituted. Such a co-operative society
which carries on the business of supplying goods to its
members for cash or deferred payment falls within the
definition of ’dealer’ in s. 2(g). We are unable to hold.
that by the -Explanation to s. 2(g) it was intended to over-
step the limits of legislative power. By the Explanation
the State Legislature has merely clarified that a taxable
entity will be regarded as a dealer within the meaning of
the Act even though it buys, sells, supplies or distributes
goods from or to its members, whether in the course of
business or not : it is not intended by the Explanation to
declare all transactions of the taxable entity with its
members to be transactions of sale or purchase. The
Explanation is a part of the definition of "dealer" and not
of "sale". For the purpose of levying sales tax it was open
to the Legislature to devise a definition of the word
"dealer" and further to provide that certain bodies shall
be, deemed to be dealers within the meaning of the Act. We
are unable, therefore, to agree with the -High Court that
the Explanation to s. 2(g) is ultra vires the State
Legislature.
For turnover from a transaction to be taxable under the Act,
the transaction must have, four constituent elements, viz.
(1) parties competent to contract; (2) mutual assent; (3)
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thin-, the absolute or general property in which is
transferred from the seller to the buyer; and (4) price in
money paid or promised. When a Co-operative Society supplies
to its members for a price refreshments in the canteen
maintained by it the four constituent elements of sale are
normally present : the parties are competent to contract;
there is mutual assent; refreshments which belonged
absolutely to the Society stand transferred to the buyer and
price is either paid or promised.
There is nothing on the record of the case which shows that
the Society is acting merely as an- agent of its members in
providing facilities for making food available to the
members. From the mere fact that the Society. supplies
refreshments to its members only and claims to make no
profit, it cannot be inferred that in preparing
refreshments, and making them available to its members it is
acting as an agent of the members. Nor can it be said that
the Society is holding its property including refreshments
prepared by it for supply to its members as a trustee for
its members. A registered Society is a body ’corporate with
power to hold property and is capable of entering into
contracts. It cannot be assumed that property which it
holds is property of which its members are owners. The
property in law is the property of
427
the Society. The members are undoubtedly entitled to compel
the Society to act according to its constitution and to
apply the property for the purposes for which it is held,
but on that account the property of the Society cannot be
treated as the property of the members. The Society is a
person : the property in the refreshments which it supplies
to its members is vested in the Society and when
refreshments are supplied for a price paid or promised
transfer of property in the refreshment results. In the
case, of an unincorporated Society, club or. a firm or an
association ordinarily the supply and distribution by such a
Society, club, firm or an association of goods belonging to
it to its members may not result in sale of the goods which
are jointly held for the benefit of the members by the
Society, club, firm or the association, when by virtue of
the relinquishment of the common rights of the members the
property stands transferred to a member in payment of a
price, and the transaction may not prima facie be regarded
as a ’sale’ within the meaning of the Act. By providing
that a transfer of property in goods from a corporate body
to its members for a price, the Legislature does not over-
step the limits of its authority,_ and it cannot on that
account be held that the first Explanation to s. 2(n) is in
its entirety ultra vires the State Legislature. It is,
however, unnecessary in this case to say more, for, the case
of the respondent Society falls within the definition of
’sale’ and no assistance need be sought from the first
Explanation to s. 2(n).
Reference may briefly be made to the judgment in Trebanog
Working Men’s Club and Institute Ltd. v. Macdonald and Monk-
wearmouth Conservative Club Ltd. v. Smith(1), on which the
High Court strongly relied. In a members’ club incorporated
under the Industrial and Provident Societies Acts, the
shareholers and the members were identical. The club
purchased intoxicating liquor and supplied it from time to
time to individual members for payment as in an ordinary
club. The Society was convicted of selling by retail,
contrary to s. 65 ,of the Licensing (Consolidation) Act,
1910, certain intoxicating liquor without a justices’
licence. The Court of Appeal quashed the conviction holding
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the incorporated society was a legal entity distinct from
the members, and could act as their agents or trustees, the
real interest in the liquor being in the members, and the
Society was not obliged to take out a licence, for sale of
liquor by retail. The principle of that case has, in our
judgment, no application to the case before us. There was a
long course of authorities in the Courts in England dealing
with the liability of the clubs supplying intoxicating
liquors to their members to obtain the justices’ licence.
In Graff v. Evans (2) , Graff, the manager of an unincor-
(1) [1940] 1 K.B. 576. (2) [1882] 8 Q.B.D. 373.
428
porated club, the property of which was vested in trustees,
and the committee of management whereof arranged to supply
liquor to its, members at a fixed percentage above its cost,
supplied liquor to a member, and he was prosecuted for
selling by retail intoxicating liquor without a licence. It
was held that there was no sale by retail, for the member
was as much a co-owner of the liquor supplied as any other
member of the club. Any member of the club was entitled to
obtain liquor on payment of the price .and since there was
no bargain, nor any contract with the manager in respect of
the liquor supplied, and the member to whom the liquor was
supplied was acting upon his rights as an
member of tile club, not by reason of any new contract, but
under his old contract of association by which he subscribed
a sum to the funds ,of the club, and on that account he
became entitled to have liquor supplied to him as a member
at a certain price.
In Metford v. Edwards(1) a working men’s club was registered
under the Friendly Societies Act, 1896. It was held
that .liquor kept on the premises of the club by the members
who are owners of the liquor and intended for consumption by
the members, is distributed to the members by one of them in
return for payment, is not sold by retail within the meaning
of the Licensing (Consolidation) Act, 1910.
In Notional Sporting Club Ltd. v. Cope(1) it was held that
member’s club formed into a joint stock company, of which
shares were held by persons who were not members, was guilty
of breaches of s. 17 of the Beerhouse Act, 1834, and S. 19
of the Refreshment Houses Act, 1860, when in carrying on the
club retail intoxicating liquors and tobacco were supplied
to the members of the club. The Court held in that case
that the: Company was a separate legal entity from the
members, and the sale of ’intoxicating liquors to members
was not a distribution of the common property of the members
among themselves. Channell -J.,, observed at p. 354 :
"Now the law with reference to purely
members’ clubs may be taken to be settled,
namely, that in the, cases of purely members’
clubs a licence is not required, that the form
that is gone through in the coffee room or in
other parts of the club house where
refreshments are sold is in one sense not a
selling of liquors so as, to make the
licensing laws applicable, but that it is
merely a mode of distributing, common
property."
The question was again raised before the Court of Appeal in
Trebanog working Men’s Club and Institute Ltd. v. Mac-
(1) [1915] 1 K.B. 171
(2) 82 L.T. 353.
429
donald(1). Hewart, C.J., delivering the judgment of the
Court observed that the principle of the decision in Graff
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v. Evans(2) applied even though the clubs before the Court
were incorporated either, under the Industrial and Provident
Societies Acts or the companies Act. The learned Chief
Justice observed at p. 582
"Once it is conceded that a members’ club
does not necessarily require a licence to
serve its members with intoxicating liquor,
because the legal property in the liquor is
not in the members themselves, it is difficult
to draw any legal distinction between the
various legal entities that may be entrusted
with the duty of holding the property on
behalf of the members, be it an individual or
a body of trustees, or a company formed for
the purpose, so long as the real interest in
the liquor remains, as in this case it clearly
does, in the members of the club. There is no
magic in this connection in the expressions
"trustee" or "agent". What is esse
ntial is
that the holding of the property by the agent
or trustee must be a holding for and on behalf
of, and not holding antagonistic to, the
members of the club."
The Courts in these cases were dealing with case of quasi-
criminal nature, and the substance of the transaction rather
than the legal form in which it may be clothed had to be
determined. It was held that if in substance the property
in the liquor held the club-whether incorporated or
unincorporated-was vested in the members, when a member
received and paid for it, there was no sale within the
meaning of the Licensing Act, but was a transfer of a
special property in the goods from all the other members of
the club to the consumer in consideration of the price paid.
We are not dealing in this case with liability criminal or
quasicriminal. The question is one of liability under a
taxing statute and the Court in determining the liability of
the Society to pay tax cannot ignore the form and look at
what is called the "substance of the transaction". Ex
facie, the transaction is one in which the legal owner of
property transfers it to another pursuant to a contract for
a price, and that transaction must be regarded as a sale.
Whether by appropriate provisions in the Articles of
Association or Rules, a scheme may be devised tinder which
the goods supplied may be treated as belonging to the
members of the Society, and the Society merely acts as an
agent in supplying the food to its members, need not be
considered in the present case. It will suffice to state
that it cannot be urged as a proposition of law that when a
Co-operative Society supplies to its members refreshments
for a price under a scheme for distribution or
(1) [1940] 1 K.B. 576.
L1Sup.CI/68-13
(2) [1882] 8 Q.B.D. 373.
430
supply of refreshments, the, transaction can in no event be
regarded as a sale of the Refreshments supplied for a price.
We are not called upon in this case to decide whether an un-
incorporated club supplying goods for a price to its members
may be regarded as selling goods to its members.
We are of the view that the Explanation to s. 2(g) of the
Madras General Sales Tax Act 1 of 1959 is not ultra vires
the Legislature. Whether any part of the Explanation (1) to
S. 2(n) is ultra vires the Legislature does not fall to be
determined in this case, for, we are of the view that the
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transactions of the respondent Society fell within the
substantive part of the definition of the expression "
sale", and on that account those transactions are taxable
under the Madras General Sales Tax Act 1 of 1959.
The appeals must therefore be allowed, and the petitions
file by the Society dismissed. In view of the order passed
by this Court on August 12, 1965, when leave was granted to
appeal to this Court, the appellant will pay costs of these
appeals to the respondent. There will be one hearing fee in
the three appeals.
G.C. Appeals allowed
431