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  • Mr. Justice S.H. Kapadia
  • Mr. Justice B. Sudershan Reddy
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Citation Codes
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Case Number
Judges
  • Mr. Justice S.H. Kapadia
  • Mr. Justice B. Sudershan Reddy
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Smart Summary

Factual and Procedural Background

Cosmopolitan Club, an entity incorporated under Section 26 of the Companies Act, 1913, supplies food and drinks to its members. On 10 March 1993, the Commercial Tax Department issued a show-cause notice alleging that, after the 1984 amendment inserting clause (v) into Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959, such supplies constituted “sales” attract­ing sales-tax liability. The Club challenged the notice by filing a writ petition in the Madras High Court; the matter was transferred to the Sales Tax Appellate Tribunal, which dismissed the Club’s plea. A Division Bench of the High Court, by judgment dated 5 December 2001, affirmed the Tribunal and held the Club liable to sales tax.

The Club appealed to the Supreme Court. Meanwhile, an assessment order dated 28 November 2003 was passed; the Club’s statutory appeal against that order was dismissed and presently remains pending before the Tribunal as T.A. No. 17 of 2000. The Supreme Court’s present judgment addresses the Club’s civil appeal against the High Court decision and a connected matter arising from the assessment order.

Legal Issues Presented

  1. Whether the supply of food and beverages by a members’ club to its own members constitutes a “sale” liable to tax under the Tamil Nadu General Sales Tax Act, 1959, in light of the principle of mutuality and agency.
  2. The effect of clauses (v) and (vi) inserted into Section 2(n) of the 1959 Act (pursuant to the Forty-sixth Constitutional Amendment) on the taxability of such supplies.
  3. Whether the absence of explicit findings on the factual relationship between the Club and its members vitiates the earlier orders and necessitates a remand for fresh determination.

Arguments of the Parties

Appellant: Cosmopolitan Club

  • Invoked the principle of mutuality, contending that a members’ club is indistinguishable from its members; hence, supplies to members do not involve a transfer of property “from one to another” and therefore cannot amount to a taxable sale.
  • Asserted that the Club merely acts as agent for its members when arranging food and beverages, eliminating any sale element.
  • Relied on Supreme Court precedents—Madras Gymkhana Club (1969 1 SCR 742) and Young Men’s Indian Association (1970 1 SCC 462)—to support the above propositions.

Respondent: State/Tax Department

  • Relied on clauses (v) and (vi) of Section 2(n) of the 1959 Act, inserted after the Forty-sixth Amendment, which deem supplies by unincorporated associations or bodies to their members to be “sales.”
  • Argued that, by statutory fiction, the Club’s supplies are taxable irrespective of the mutuality principle previously recognised.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Secretary, Madras Gymkhana Club Employees Union v. Management of the Gymkhana Club (1969) 1 SCR 742 A members’ club is legally identified with its current members; the club lacks an existence separate from them. Quoted by the appellant to negate the existence of a “seller” distinct from the “buyer”; the Supreme Court noted the citation but refrained from ruling on its applicability pending factual findings.
Joint Commercial Taxes Officer, Harbour Division-II, Madras v. Young Men’s Indian Association (1970) 1 SCC 462 A supply by a members’ club to its members does not constitute a sale under the Sale of Goods Act, 1930, absent transfer of property between distinct parties. Relied on by the appellant; the Supreme Court directed the Tribunal to re-examine the factual relationship in light of this authority.

Court's Reasoning and Analysis

The Supreme Court observed that neither the assessing authorities nor the appellate bodies had recorded findings on the pivotal factual question—whether the Club acts as agent for its members or transfers property in food and beverages to them. Because the principle of mutuality turns on this very relationship, the Court considered it inappropriate to decide the legal questions without a factual foundation.

Accordingly, the Court:

  • Set aside the High Court’s judgment sustaining tax liability, noting that it was rendered without the necessary factual determinations.
  • Remitted the matter to the Sales Tax Appellate Tribunal to investigate and decide the exact nature of the relationship between the Club and its members, specifically addressing agency and mutuality.
  • Permitted both sides to amend their pleadings and raise all legally available grounds, including arguments based on clauses (v) and (vi) of Section 2(n) and the Forty-sixth Amendment.
  • Directed that the Tribunal decide the pending appeal uninfluenced by the now-quashed High Court reasoning.
  • In a connected appeal, allowed the Club to file an out-of-time statutory appeal against the assessment order dated 28 November 2003, directing that such appeal be decided on merits and not rejected for limitation.

Holding and Implications

The Supreme Court allowed the civil appeal, set aside the High Court’s judgment, and remitted the case to the Sales Tax Appellate Tribunal for fresh adjudication.

Implications: The decision provides no definitive pronouncement on whether supplies by members’ clubs are taxable sales; instead, it underscores the necessity of factual findings on mutuality and agency before applying statutory deeming provisions. The outcome directly affects only the parties but signals that similar disputes may hinge on detailed factual analysis rather than abstract legal principles alone. No new binding precedent on the substantive tax issue was created.

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    Cosmopolitan Club v. The State Of Tamil Nadu & Ors

    Appellant, Cosmpolitan Club, is incorporated under Section 26 of the Companies Act, 1913. The said Club is in appeal against the judgment and order dated 5th December, 2001, of a Division Bench of Madras High Court, whereby it was held that the appellantwas liable to pay sales tax under the Tamil Nadu General Sales Tax Act, 1959, on the supplies of food and drinks to its members.

    The main contention on behalf of the appellant is that when a members' club supplies food or drinks to its members, there is no sale because a members' club only acts as the agent of the member. Reliance is placed in this behalf upon the judgments of this Court in Secretary, the Madras Gymkhaba Club Employees Union Vs. Management of the Gymkhana Club (1969) 1 SCR 742 and Joint Commercial Taxes Officer, Harbour Division-II, Madras Vs. Young Men's Indian Association (1970) 1 SCC 462. In the former case it was held that a club belongs to the members for the time being on its list of members. Thus, members can deal with the club as they like. A club is identified with its members at a given point of time, so that it cannot be said that a club has an existence apart from its members. Even more relevant to the issue is the decision in the case of Young Men's Indian Association (1970) 1 SCC 462 which dealt with the very question, namely, "whether the supply of various preparations by each club to its members involves a transaction of sale? It was held, based upon the definition of "sale" in the Sale of Goods Act, 1930, that there was no sale exigible to tax "if there is no transfer of property from one to another...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".

    In this case the show cause notice was issued to the Club on 10th March, 1993 in which it was, inter alia, alleged that after the amendment of act 28 of 1984 by insertion of a new clause (v) to Section 2(n) of the said 1959 Act, supply of goods by any unincorporated association or body of a persons to a member thereof for cash, deferred payment or other valuable consideration, shall also be deemed to be sales.

    To complete the chronology of events, it may be further stated that the said show cause notice was challenged in 1993 by the Club by filing a Writ Petition in the High Court which came to be later transferred to the Tribunal. The Tribunal dismissed the matter on merits. That decision of the Tribunal has been confirmed by the impugned judgment. Suffice it to state that in this case there was no determination by the fact finding authorities regarding the relationship between the Club and its members in the matter of supply of food and drinks; that is to say, was the Club acting as an agent of the members or did the property in food and drinks pass from the Club to the members?

    At this stage it may be mentioned that after the judgment of the High Court dismissing the Writ Petition, the Assessment Order was passed against which the Club has preferred an appeal before the First Appellate Authority which has also dismissed this appeal and as of today the matter, being T.A.No. 17 of 2000, is pending before the Tribunal.

    In the circumstances, we think it appropriate that the matter should go back to the Tribunal, who will decide, on facts, as to the exact relationship between the parties in the matter of supply by the Club of food and drinks to its members. In other words, the principle of mutuality and agency among other circumstances shall be gone into by the Tribunal before which the said appeal is pending.

    At this stage it may be noted that the Department is also relying upon clause (vi) inserted to Section 2(n) of the 1959 Act. All these amendments have been brought on the statute book in view of the 46th Amendment of the Constitution. We grant liberty to both sides to add by way of amendment any ground open to them in law in the pending appeal before the Tribunal. All contentions that are available to both the sides are expressly kept open and they may raise the same before the Tribunal. The Tribunal shall decide the said appeal without reference to the impugned judgment of the High Court which is under appeal.

    We express no opinion on the merits of the matter. The judgment under appeal is set aside and the matter is remitted to the Tribunal to decide the pending appeal in accordance with law and in accordance with the directions given hereinabove. Subject to above, the Civil Appeal is disposed of with no order as to costs. ....................J.

    This matter is a sequel to our Order delivered today in the case of Cosmopolitan Club Vs. The State of Tamil Nadu & Ors. (Civil Appeal No. 3950 of 2002).

    For the reasons given in our order delivered today, we grant liberty to the appellant (assessee) to prefer an appeal against the Order passed by the Assessing Officer dated 28th November, 2003 (Annexure P-2). Such appeal would be filed within a period of four weeks from today. It is made clear that the appeal shall be decided on merits. It will not be dismissed on the ground of limitation. All other directions given in our Order in Cosmopolitan Club shall equally apply to the facts of the present case.

    The Civil Appeal is allowed accordingly with no order as to costs.

    ....................J.

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    Comments

    Cosmopolitan Club v. The State Of Tamil Nadu & Ors
    (Sep 25, 2008)