Supreme Court Clarifies Taxability of Members’ Clubs Post 46th Amendment: State of West Bengal vs. Calcutta Club Limited (2019)

Introduction

Date of the Judgment: 03 October 2019

Citation: (2019) INSC 1051

Judges: R.F. Nariman, J., Surya Kant, J., V. Ramasubramanian, J.

Can a members’ club, particularly one that is incorporated, be subjected to sales tax or service tax on the services and goods it provides to its members? The Supreme Court of India recently addressed this question, which has significant implications for the operation of clubs and associations across the country. This judgment clarifies the application of the doctrine of mutuality, especially after the 46th Amendment to the Constitution of India, which introduced significant changes to the tax regime.

The core issue revolves around whether the legal fiction of a club being a separate entity from its members should be disregarded for tax purposes. This is particularly relevant for clubs that are registered as companies or cooperative societies. The judgment was delivered by a three-judge bench comprising Justices R.F. Nariman, Surya Kant, and V. Ramasubramanian, with Justice R.F. Nariman authoring the opinion.

Case Background

The case originated from a notice issued by the Assistant Commissioner of Commercial Taxes to the Calcutta Club Limited, alleging non-payment of sales tax on food and drinks sold to its permanent members for the quarter ending June 30, 2002. The club contested this, arguing that it was not a “dealer” under the West Bengal Sales Tax Act, 1994, as there was no sale of goods to its members, invoking the doctrine of mutuality.

The club argued that it acted as an agent for its members, and the payments made were merely reimbursements, not considerations for a sale. The Tribunal initially sided with the club, stating that the payments were not considerations and that the suppliers and recipients were the same. The Revenue then filed a writ petition before the High Court, which also upheld the Tribunal’s decision, stating that the element of mutuality was not obliterated.

The High Court stated that the club acted as an agent of its members when purchasing goods, and the members collectively were the real entity. The club was merely a superstructure. The High Court also mentioned that the mere fact of the presentation of bills and non-payment thereof, leading to striking off of membership, did not bring the club within the ambit of sales tax.

It was an undisputed fact that the club was an incorporated entity under the Companies Act, 1956. The club charged and paid sales tax when it sold products to non-members or guests, but not when it supplied goods to permanent members. The State of West Bengal appealed to the Supreme Court, which led to the present judgment.

Timeline

Course of Proceedings

The case initially went before the Tribunal, which ruled in favor of the club, stating that the supply of food and drinks to permanent members could not be considered “deemed sales” under Section 2(30) of the West Bengal Sales Tax Act, 1994. The Tribunal held that the payments made by permanent members were not considerations, and the club and its members were essentially the same entity.

Dissatisfied with the Tribunal’s order, the Revenue filed a writ petition in the High Court. The High Court upheld the Tribunal’s decision, stating that the club acted as an agent of its members and the element of mutuality was not obliterated.

Given the conflicting interpretations of the law and the doctrine of mutuality, a Division Bench of the Supreme Court referred the matter to a larger bench. The reference order highlighted the need to clarify the impact of sub-clause (e) to clause (29-A) to Article 366 of the Constitution of India, as enacted by the 46th Amendment in 1982. The Division Bench also sought clarification on whether the judgments in Cosmopolitan Club and Fateh Maidan Club, which applied the doctrine of mutuality after the constitutional amendment, were stating the correct principle of law.

Legal Framework

The judgment primarily revolves around the interpretation of Article 366(29-A) of the Constitution of India, which defines “tax on the sale or purchase of goods” to include certain deemed sales. Specifically, sub-clause (e) of Article 366(29-A) states:

“(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;”

The Supreme Court also examined the following sections of the West Bengal Sales Tax Act, 1994:

✓ Section 2(5) defines “business” and includes any trade, commerce, manufacture, execution of works contract 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 works contract, adventure or concern is carried on with the motive to make profit and whether or not any profit accrues from such trade, commerce, manufacture, execution of works contract, adventure or concern.

✓ Section 2(10) defines “dealer” as any person who carries on the business of selling or purchasing goods in West Bengal or any person making sales under section 15, and includes a co-operative society or a club or any association which sells goods to its members.

✓ Section 2(30) defines “sale” and includes any supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

✓ Section 9 outlines the incidence of tax on sale.

The Court also considered the definition of “consideration” under Section 2(d) of the Indian Contract Act, 1872, which states:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

The Court also analysed the provisions of the Finance Act, 1994, relating to service tax, particularly those introduced in 2005 and amended in 2012. These included definitions of “club or association,” “taxable service,” and “service.”

The Court also looked at Section 25 of the Companies Act, 1956, which deals with companies formed for promoting commerce, art, science, religion, charity, or any other useful object and prohibits payment of dividend to its members.

The Court also referred to Section 2(24)(vii) and Section 44 of the Income Tax Act, 1961, which deal with the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society.

The Court also referred to Section 45(2) of the Income Tax Act, 1961, which deals with capital gains.

Arguments

Appellants’ (Revenue) Arguments:

• Shri Rakesh Dwivedi, representing the Appellants, argued that Article 366(29-A)(e) was specifically inserted to nullify the doctrine of mutuality as it applied to members’ clubs. He contended that the language of 366(29-A)(e) was different from 366(29-A)(a) and (b), as it did not require a transfer of property in goods.

• He argued that the expression “unincorporated association or body of persons” in sub-clause (e) should be read disjunctively, thus including incorporated entities like companies and cooperative societies.

• He argued that even if “body of persons” did not include incorporated entities, 366(29-A)(f) would cover the supply of food and drinks, as it uses the wide phrase “in any other manner whatsoever.”

• He relied on Deputy Commercial Tax Officer, Saidapet & Anr. v. Enfield India Ltd., Co-operative Canteen Ltd. [1968] 2 SCR 421 to assert that English cases on mutuality do not apply to taxing statutes. He also argued that profit motive is unnecessary where a supply of goods falls within the definition of “sale”.

• He argued that the doctrine of mutuality does not apply to corporate clubs, citing Bacha F. Guzdar v. Commissioner of Income Tax, Bombay [1955] 1 SCR 876, where the Court held that a shareholder is not the owner of the company’s assets.

• Shri Dhruv Agarwal, representing the Revenue, argued that service tax was levied on members’ clubs from 2005 and continued post-2012, even for incorporated clubs. He contended that the principle of mutuality was expressly done away with in the service tax context.

Respondents’ (Club) Arguments:

• Shri Jaideep Gupta, representing the Respondent, argued that Section 2(5) of the West Bengal Sales Tax Act requires a profit motive, which is absent in members’ clubs. He contended that the charging section would not be attracted.

• He argued that Section 25 of the Companies Act prohibits dividend payments to members, making the ratio of Bacha F. Guzdar inapplicable to Section 25 companies.

• He argued that the Statement of Objects and Reasons made it clear that Article 366(29-A)(e) only referred to unincorporated clubs.

• He contended that there cannot be a supply of goods by one person to itself, and the doctrine of agency/trust/mutuality continues as before.

• He argued that “consideration” under Section 2(d) of the Indian Contract Act must flow from one person to another, which is absent in the case of a member’s club.

• He argued that 366(29-A)(f) was enacted to address the service element in restaurants, not to tax members’ clubs.

• He argued that the expression “unincorporated associations” must be read ejusdem generis with “body of persons” and would not include corporate clubs.

• The Respondents argued that when service tax was introduced in 1994, the legislature selected specific activities for taxation. Despite including members’ clubs in 2005, incorporated clubs were excluded from service tax. They argued that this position continued even after 2012, despite the introduction of Explanation 3 to Section 65B(44).

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the doctrine of mutuality is still applicable to incorporated clubs or any club after the 46th Amendment to Article 366(29-A) of the Constitution of India?

2. Whether the judgment of this Court in Young Men’s Indian Assn. still holds the field even after the 46th Amendment of the Constitution of India; and whether the decisions in Cosmopolitan Club and Fateh Maidan Club which remitted the matter applying the doctrine of mutuality after the constitutional amendment can be treated to be stating the correct principle of law?

3. Whether the 46th Amendment to the Constitution, by deeming fiction provides that provision of food and beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• C.T.O. v. Young Men’s Indian Association [1970] 1 SCC 462 (Supreme Court of India): The Court reiterated that if a club acts as an agent for its members, there is no sale involved.

• Deputy Commercial Tax Officer, Saidapet & Anr. v. Enfield India Ltd., Co-operative Canteen Ltd. [1968] 2 SCR 421 (Supreme Court of India): This case was distinguished, as it dealt with a cooperative society and not a members’ club.

• Inland Revenue Commissioners v. Westleigh Estates Company, Limited 1924 K.B. 390 (English Court): This case was distinguished as it dealt with the taxability of a business corporation’s profits.

• Walter Fletcher v. Income Tax Commissioner [1972] Appeal Cases 414 (English Court): This case was cited to show that the mutuality principle is not of universal application.

• Bacha F. Guzdar v. Commissioner of Income Tax, Bombay [1955] 1 SCR 876 (Supreme Court of India): This case was distinguished, as it dealt with a public limited company, not a Section 25 company.

• State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 1 SCR 618 (Supreme Court of India): This case was cited to show that “profit-motive” refers to making money from sale transactions.

• Graff v. Evans [1882] 8 Q.B. 373 (English Court): This case established that the supply of liquor to a member of a club is not a sale.

• Trebanog Working Men’s Club and Institute Ltd. v. Macdonald [1940] 1 K.B. 576 (English Court): This case applied and followed Graff v. Evans, stating that the form of the club is not relevant.

• Cricket Club of India Ltd. v. Bombay Labour Union [1969] 1 SCR 600 (Supreme Court of India): This case held that a club incorporated as a limited company is not an “industry” under the Industrial Disputes Act.

• Bangalore Club v. Commissioner of Income Tax and Anr. [2013] 5 SCC 509 (Supreme Court of India): This case discussed the doctrine of mutuality in detail.

• Income Tax Officer, Mumbai v. Venkatesh Premises Cooperative Society Limited [2018] 15 SCC 37 (Supreme Court of India): This case followed the doctrine of mutuality.

• BSNL v. Union of India [2006] 3 SCC 1 (Supreme Court of India): This case discussed the nature of transactions in mobile phone connections and the scope of Article 366(29-A).

• State of Madras v. Gannon Dunkerley & Co. AIR 1958 SC 560 (Supreme Court of India): This case was referred to show the definition of “sale” for the purposes of the Constitution.

• State of Punjab v. Associated Hotels of India Limited AIR 1972 SC 1131 (Supreme Court of India): This case was referred to show the service element in a hotel bill.

• Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [1978] 4 SCC 36 (Supreme Court of India): This case was referred to show the service element in a restaurant bill.

• K. Damodarasamy Naidu & Bros. and Ors. v. State of T.N. and Anr. [2000] 1 SCC 527 (Supreme Court of India): This case referred to Article 366(29-A)(f) regarding the tax on supply of food and drink.

• Federation of Hotel and Restaurant Associations of India v. Union of India and Ors. [2018] 2 SCC 97 (Supreme Court of India): This case referred to the reason for the enactment of sub-clause (f) of Article 366(29-A).

• Union of India and Ors. v. Margadarshi Chit Funds Private Limited and Ors. [2017] 13 SCC 806 (Supreme Court of India): This case outlined the history of service tax.

• All-India Federation of Tax Practitioners and Ors. v. Union of India and Ors. [2007] 7 SCC 527 (Supreme Court of India): This case upheld the constitutional validity of the levy of service tax.

• DALCO Engineering Private Limited v. Satish Prabhakar Padhye and Ors. Etc. [2010] 4 SCC 378 (Supreme Court of India): This case was cited by the Revenue to show that a company incorporated under the Companies Act cannot be said to be “established” by that Act.

• CIT, Kanpur and Anr. v. Canara Bank [2018] 9 SCC 322 (Supreme Court of India): This case was cited by the Revenue to show that a company incorporated under the Companies Act cannot be said to be “established” by that Act.

• R.C. Mitter & Sons, Calcutta v. CIT, West Bengal, Calcutta [1959] Supp. 2 SCR 641 (Supreme Court of India): This case was cited to construe what is meant by “constituted” under an instrument of partnership.

• ICT, Bombay North, Kutch and Saurashtra, Ahmedabad v. Indira Balkrishna [1960] 3 SCR 513 (Supreme Court of India): This case was cited to show the meaning of “unincorporated associations”.

Judgment

How each submission made by the Parties was treated by the Court?

Final Judgment

The Supreme Court delivered a landmark judgment, clarifying the taxability of members’ clubs after the 46th Amendment. The Court held that the doctrine of mutuality continues to apply to both incorporated and unincorporated members’ clubs.

The Court rejected the argument that Article 366(29-A)(e) nullified the doctrine of mutuality for members’ clubs. It clarified that the term “unincorporated association or body of persons” does not include incorporated entities like companies or cooperative societies.

The Court also held that sub-clause (f) of Article 366(29-A), which deals with the supply of food and drinks, does not apply to members’ clubs. This sub-clause was enacted to address the service element in restaurants and hotels, not to tax the supply of food and drinks by clubs to their members.

The Court emphasized that the principle of mutuality is based on the concept that one cannot sell to oneself. In the context of a members’ club, the club acts as an agent of its members, and the payments made by members are merely reimbursements, not considerations for a sale.

The Court distinguished the case of Bacha F. Guzdar, stating that it did not apply to Section 25 companies, which are formed for non-profit purposes and do not distribute profits to their members.

The Court also clarified that the judgments in Cosmopolitan Club and Fateh Maidan Club, which applied the doctrine of mutuality after the 46th Amendment, correctly stated the principle of law.

Regarding service tax, the Court held that while service tax could be levied on members’ clubs, it did not nullify the principle of mutuality. The Court acknowledged that incorporated clubs were excluded from service tax before 2012, and this position continued even after the introduction of Explanation 3 to Section 65B(44).

The Court stated that the doctrine of mutuality is based on the principle that there must be a complete identity between the contributors and the recipients.

The Supreme Court upheld the decisions of the Tribunal and the High Court, ruling in favor of the Calcutta Club Limited.

Flowchart of the Judgment

Key Takeaways

The Supreme Court’s judgment in State of West Bengal vs. Calcutta Club Limited has significant implications for the taxation of members’ clubs in India. The key takeaways from this judgment are:

• The doctrine of mutuality continues to be applicable to both incorporated and unincorporated members’ clubs even after the 46th Amendment to the Constitution.

• The term “unincorporated association or body of persons” in Article 366(29-A)(e) does not include incorporated entities like companies or cooperative societies.

• Sub-clause (f) of Article 366(29-A) does not apply to members’ clubs. It was intended to address the service element in restaurants and hotels, not to tax the supply of food and drinks by clubs to their members.

• The principle of mutuality is based on the concept that one cannot sell to oneself. In a members’ club, the club acts as an agent of its members, and payments made by members are reimbursements, not considerations for a sale.

• The judgment in Bacha F. Guzdar does not apply to Section 25 companies, which are formed for non-profit purposes and do not distribute profits to their members.

• The judgments in Cosmopolitan Club and Fateh Maidan Club, which applied the doctrine of mutuality after the 46th Amendment, correctly stated the principle of law.

• While service tax can be levied on members’ clubs, it does not nullify the principle of mutuality. The Court acknowledged that incorporated clubs were excluded from service tax before 2012, and this position continued even after the introduction of Explanation 3 to Section 65B(44).