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Joint Commercial Tax... v. Young Men'S Indian A...
Factual and Procedural Background
The Deputy Commercial Tax Officer and other revenue authorities in the State of Madras assessed three members’ clubs—the Cosmopolitan Club, Madras; the Young Men's Indian Association, Madras; and the Lawley Institute, Ootacamund—to sales tax under the Madras General Sales Tax Act, 1959 for supplying food, snacks, beverages and other articles to their own members or the members’ guests. Each club challenged the assessment by filing writ petitions under Article 226 of the Constitution before the Madras High Court. The High Court held that the clubs were neither “dealers” under Section 2(g) of the Act nor were their supplies of refreshments “sales” within Section 2(n). The State obtained a certificate of fitness and appealed to the Supreme Court, resulting in the present judgment dismissing the appeals.
Legal Issues Presented
- Whether the supply of food, beverages and other articles by a members’ club to its own members constitutes a “sale” involving a transfer of property under Section 2(n) of the Madras General Sales Tax Act, 1959, read with the Sale of Goods Act, 1930.
- Whether such a club can be regarded as a “dealer” within the meaning of Section 2(g) of the Act, particularly in view of Explanation I deeming clubs to be dealers.
- Whether, in light of the above, levy of sales tax on the clubs is valid and intra vires the State Legislature’s competence under Entry 54 of List II (State List) of the Seventh Schedule to the Constitution.
Arguments of the Parties
Appellants’ Arguments (State Tax Authorities)
- Relied heavily on Deputy Commercial Tax Officer v. Enfield India Ltd., contending that all four elements of a sale (competent parties, mutual consent, transfer of property, price) exist when a cooperative society or club supplies refreshments to its members for a price.
- Asserted that incorporation of a club separates the club’s property from that of its members; therefore, property is transferred from one legal entity (the club) to another (the member), attracting sales tax.
- Maintained that Explanation I to Sections 2(g) and 2(n) validly deems such transactions to be sales by dealers and thus taxable.
Respondent Clubs’ Arguments
- Invoked English authorities such as Graff v. Evans and Trebanog Working Men's Club, stressing the doctrine of mutuality: members are joint owners of club property, so no transfer of property occurs.
- Emphasised earlier Indian decisions (including Madras High Court judgments on the Cosmopolitan Club) holding that supplies by a members’ club merely recoup expenses and are made by the club as agent of its members, not as a seller.
- Contended that, absent a transfer of property, the State lacks legislative competence under Entry 54 to impose sales tax on such supplies.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Cosmopolitan Club v. Deputy Commercial Tax Officer, 1952 1 MLJ 401 (Mad HC) | Supply of refreshments by members’ club is not a transfer of property; levy of sales tax invalid. | Cited to reaffirm that earlier view continues to apply to the present clubs. |
| Deputy Commercial Tax Officer v. Cosmopolitan Club, ILR (1955) Mad 1042 | Confirmed the 1952 single-judge decision; club not liable to sales tax. | Used as prior authoritative Madras precedent supporting respondents. |
| Graff v. Evans, (1882) 8 QBD 373 | Members of a club are joint owners; supply of liquor to them is not a sale. | Adopted as the basic mutuality principle underpinning non-taxability. |
| Trebanog Working Men's Club & Institute Ltd. v. Macdonald, (1940) 1 All ER 454 | Even incorporation does not alter mutuality if property is held for and on behalf of members. | Relied on to counter the argument that separate legal personality necessarily creates a sale. |
| Bengal Nagpur Cotton Mills Club v. Sales Tax Officer (Madhya Pradesh HC) | Members’ club not liable to sales tax on refreshments supplied to members. | Cited as Indian judicial support for the mutuality doctrine. |
| Century Club v. State of Mysore (Mysore HC) | Purchases by club for members and supply at fixed rates is not a sale. | Further Indian authority reinforcing respondents’ position. |
| Deputy Commercial Tax Officer v. Enfield India Ltd., (1968) 2 SCR 421 (SC) | Upheld validity of Explanation deeming supplies by cooperative society to members as sales. | Relied on by appellants; distinguished by the Court on factual agency grounds. |
| Inland Revenue Commissioners v. Westleigh Estate Co. Ltd., 1924 1 KB 390 | Members’ club structurally a company but not carrying on trade for tax purposes. | Used to illustrate recognition of mutuality even in fiscal matters. |
| State of Madras v. Gannon Dunkerlay & Co., (1959) SCR 379 (SC) | “Sale of goods” in State tax laws has the same meaning as in the Sale of Goods Act. | Forms the constitutional backdrop limiting State power; referenced in analysis. |
| Duke of Westminster v. Inland Revenue Commissioners (UK) | In tax law, liability depends on the legal form, not substance, of transaction. | Quoted in Shah, J.’s separate opinion to stress form-based analysis in taxation. |
| Bank of Chettinad Ltd. v. CIT (Privy Council) | Similar form-versus-substance principle in tax matters. | Referred to in Shah, J.’s reasoning. |
| CIT v. Motors & General Stores (P) Ltd. (SC) | Emphasises strict legal form for taxability. | Cited in support of form-based test. |
| Commissioner of Income-Tax, Gujarat v. B.M. Kharwar (SC) | Reiterates that taxing statutes look to legal form. | Relied on in Shah, J.’s analysis to the same effect. |
Court's Reasoning and Analysis
Grover, J. (for the Court) held that the essence of sales tax liability is the existence of a “sale” as understood in the Sale of Goods Act, 1930. Because Entry 54 of List II empowers the State only to tax sales of goods, a transfer of property from one person to another is indispensable. The Court undertook the following analytical steps:
- Examination of Club Structure and Operations. Each club is a purely members’ club: the members alone constitute the club; refreshments are purchased with common funds; prices merely recoup cost; guests’ consumption is ultimately charged to the member.
- Application of the Mutuality Principle. Drawing on English authorities (Graff v. Evans; Trebanog) and Indian High Court precedents, the Court treated the club or its managing committee as an agent of the members. Where the agent supplies goods owned beneficially by the principals (members), no transfer of property arises.
- Distinguishing Prior Supreme Court Precedent. Enfield India concerned a cooperative society—a distinct body corporate—and was decided on different facts; it therefore did not negate the agency finding in the present case.
- Consequence for Statutory Explanations. Even though Explanation I to Sections 2(g) and 2(n) deems such supplies to be sales by a dealer, that deeming provision cannot override the constitutional limitation: without an actual transfer of property, no “sale” exists for purposes of Entry 54. Once the factual finding of agency is reached, the vires of the Explanations becomes academic.
Shah, J. delivered a separate opinion agreeing with the result but emphasised that in taxing statutes the strict legal form of the transaction is decisive. On the High Court’s findings, the clubs were merely agents rendering services to members; hence the supplies were not sales and not taxable.
Holding and Implications
HOLDING — Appeals Dismissed. The Supreme Court affirmed the Madras High Court’s decision that no sales tax is leviable on supplies of refreshments by the respondent clubs to their own members. No order was made as to costs.
Implications: The judgment re-confirms the mutuality principle in the context of sales tax: where a members’ club acts purely as an agent of its members and supplies goods owned beneficially by them, the transaction lacks the element of transfer necessary for a “sale.” The decision maintains the existing legal position and does not create a new doctrinal departure, but it strengthens clubs’ defences against similar assessments under state sales tax laws.
A.N Grover, J.— These appeals by certificate are directed against a common judgment of the Madras High Court in petitions filed under Article 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 Tax Act, 1959, hereinafter called the “Act”, for supplying food, snacks, beverages and another 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 Section 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 Section 2(n), read with Explanation I of the Act.
2. 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 Section 26 of the Indian Companies Act, 1913 as a non-profit earning institution. Its object, 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.
3. 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.
4. The Lawley Institute came into existence by a deed of trust dated September 15, 1911 entered into between the Maharaja of Bhobbli and the Collector of Nilgiris and others. The management of the Institute vests absolutely in the board of trustees. It is 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.
5. 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 Section 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 Article 226 of the Constitution which was disposed of by Mack, J., in Cosmopolitan Club, Madras v. District Commercial Tax Officer, Triplicane. (1952) 1 MLJ 401 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. Cosmopolitan Club). ILR (1955) Mad 1042 The definition of “dealer” in Section 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)-(iv) * * *
Explanation I.—A society including a cooperative society, club or firm or an association which, whether or not in the course of business, buys, sells 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 purpose of this Act;
Explanation II. * * *”
The definition of sale as given in Section 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….”
“Explanation I.— 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….”
6. It is common ground that for the levy of Sales Tax there must be a sale or 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 Section 2(n) nor can the club be regarded as a dealer within Section 2(g) read with Explanation I.
7. The law in England has always been that members' clubs to which category the clubs in the present case belong cannot be made subject to the provisions of the Licensing Acts concerning sale because the members are joint owners of all the club property including the excisable liquor. The supply of liquor to a member at a fixed price by the club cannot be regarded to be a sale. If, however, liquor is supplied to and paid for by a person who is not a bona fide member of the club or his duly authorised agent there would be a sale. With regard to incorporated clubs a distinction has been drawn. Where such a club has all the characteristics of a members' club consistent with its incorporation, that is to say, where every member is a shareholder and every shareholder is a member, no licence need be taken out if liquor is supplied only to the members. If some of the shareholders are not members or some of the members are not shareholders that would be the case of a proprietary club and would involve sale. Proprietary clubs stand on a different footing. The members are not owners of or interested in the property of the club. The supply to them of food or liquor though at a fixed tariff is a sale. (See Halsbury's Laws of England, 3rd Edn., Vol. 5, pp. 280-281). The principle laid down in Graff v. Evans (1882) 8 QBD 373 had throughout been followed. In that case Field, J., put it thus:
“I think the true construction of the Rules is that the members were the joint owners of the general property in all the goods of the club, and that the trustees were their agents with respect to the general property in the goods.”
The difficulty felt in the legal property ordinarily vesting in the trustees of the members' club or in the incorporated body was surmounted by invoking the theory of agency i.e the club or the trustees acting as agents of the members. According to Lord Hewart (L.C.J)in Trebanog Working Men's Club and Institute Ltd. v. Macdonald (1940) 1 AELR 454 once it was conceded that a members' club did not necessarily require a licence to serve its members with intoxicating liquor it was difficult to draw any distinction between the various legal entities which might be entrusted with the duty of holding the property on behalf of members, be it an individual or a body of trustees or a company formed for the purpose so long as the real interest in the liquor remained in the members of the club. What was essential was that the holding of the property by the agent or trustee must be a holding for and on behalf of and not a holding antagonistic to members of the club.
8. In the various cases which came to be decided by the High Courts in India the view which had prevailed in England was accepted and applied. We may notice the decisions of the Madhya Pradesh High Court in Bengal Nagpur Cotton Mills Club, Rajnandangaon v. Sales Tax Officer, Raipur and of the Mysore High Court in Century Club v. State of Mysore. In the former it was held that the supply to the member of a members' club registered under Section 26 of the Indian Companies Act, 1913 of refreshments purchased out of club funds which consisted of members' subscription was not a transfer of property from the club as such to a member and the club was not liable to Sales Tax under the C.P and Berar Sales Tax Act, 1947, in respect of such supplies of refreshments. The principle adverted to in Trebanog Working Men's Club was adopted and it was said that if the agent or a trustee supplied goods to the members such supplies would not amount to a transaction of sale. The Mysore court expressed the same view that a purely members' club which makes purchases through a Secretary or Manager and supplies the requirements to members at a fixed rate did not in law sell those goods to the members.
9. On behalf of the appellants reliance has been placed on a decision of this Court in Deputy Commercial Tax Officer v. Enfiend India Ltd. (1968) 2 SCR 421 In that case the Explanation to Section 2(g) was found to be intra vires and within the competence of the State Legislature. The judgment proceeded on the footing that when a cooperative society supplied refreshments to its members for a price the following four constituent elements of sale were present: (1) parties competent to contract; (2) mutual consent; (3) thing, the absolute or general property in which is transferred from the seller to the buyer and (4) price in money paid or promised. The mere fact that the society supplied the refreshments to its members alone and did not make any profit was not considered sufficient to establish that the society was acting only as an agent of its members. As a registered society was a body corporate it could not be assumed that the property which it held was the property of which its members were owners. The English decisions were distinguished on the ground that the courts in those cases were dealing with matters of quasi-criminal nature.
10. 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. 1924 (1) KB 390; Same v. South Bihar 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.
11. The essential question, in the present case, is whether the supply of the various preparations by each club to its members involved a transaction of sale within the meaning of the Sale of Goods Act, 1930. The State Legislature being competent to legislate only under Entry 54, List II, of the Seventh Schedule to the Constitution the expression “sale of goods” bears the same meaning which it has in the aforesaid Act. Thus in spite of the definition contained in Section 2(n) read with Explanation I of the Act if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court.
12. The final conclusion of the High Court in the judgment under appeal was that the case of each club was analogous to that of an agent or mandatory investing his own monies for preparing things for consumption of the principal, and later recouping himself for the expenses incurred. Once this conclusion on the facts relating to each club was reached it was unnecessary for the High Court to have expressed any view with regard to the vires of the Explanations to Sections 2(g) and 2(n) of the Act. As no transaction of sale was involved there could be no levy of tax under the provisions of the Act on the supply of refreshments and preparation by each one of the clubs to its members.
13. The appeals must fail and are dismissed but there will be no order as to costs.
The dissenting Judgment of the Court was delivered by
J.C 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 II 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 Dunkerlay & Co. (Madras) Ltd. (1959) SCR 379 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 II.
15. Whether refreshments, beverages and other articles supplied by a 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 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 club transfers property belonging to it for a price or the club acts as an agent for making available property belonging to its members.
16. 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 Minster v. Inland Revenue Commissioners; Bank of Chettinad Ltd. v. CIT; CIT v. Motors & General Stores (P) Ltd. and CIT v. B.M Kharwar.
17. 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 behalf of the members. They were not selling goods but were rendering a service to their members.
I agree therefore that the appeals must fail.
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