State of West Bengal V. Calcutta Club Ltd. (2017)

Citations: State of West Bengal v. Calcutta Club Ltd. (2017) 5 SCC 356

Date of Judgment: 03/10/2019

Equivalent citations: AIR 2019 SC 5310

Case No: Civil Appeal No. 4184 of 2009

Case Type: Civil Appeal

Appellant: State of West Bengal

Respondent: Calcutta Club Limited

Bench:

• Hon’ble Justice Rohinton Fali Nariman
• Hon’ble Justice Surya Kant
• Hon’ble Justice V. Ramasubramanian

Court: The Supreme Court of India

Statutes Referred:

• West Bengal Sales Tax Act, 1994 [Section 2(30)]
• Article 366(29A) of the Constitution
• Income Tax Act, 1961
• Companies Act, 1956

Cases referred:

• Hindustan Club Limited v. Additional Commissioner of Commercial Taxes and Ors. (1995) 98 STC 347
• The Automobile Association of Eastern India v. State of West Bengal and Ors. (2002) 40 STA 154
• Bharat Sanchar Nigam Ltd. and another v. Union of India and others (2006) 3 SCC 1
• Fateh Maidan Club v. Commercial Tax Officer, Hyderabad (2008) 12 VST 598 (SC)
• Cosmopolitan Club v. State of Tamil Nadu & Others (2009) 19 VST 456 (SC)
• Joint Commercial Tax Officer v. Young Men’s Indian Association (1970) 1 SCC 462

Facts:

• The Assistant Commissioner of Commercial Taxes issued a notice to the Calcutta Club assessee, informing that it had failed to pay sales tax on the sale of food and drinks to the permanent members during the quarter ending.
• After receiving the notice, the respondent Club submitted a representation and the assessing authority was required to appear before it.
• The notice and communication sent for personal hearing was assailed by the respondent before the West Bengal Taxation Tribunal, praying for a declaration that it is not a dealer within the meaning of the West Bengal Sales Tax Act, 1994 as there is no sale of any goods by the Club to its permanent members and hence, it is not liable to pay the sales tax under the Act, 1994.
• Another prayer was also made before the Tribunal for nullifying the action of the Revenue threatening to levy tax on the supply of food to the permanent members.
• A contention was made before the Tribunal that there could be no sale by the respondent Club with its own permanent members, for doctrine of mutuality comes into play and the respondent Club acts as the agent of its permanent members. The Tribunal while referring to Article 366(29A) of the Constitution and Section 2(30) of the Act, 1994, accepted this contention of the respondent Club and opined that the Club is not eligible to pay sales tax under the Act, 1994.
• Being dissatisfied by the order of the Tribunal, the Revenue filed writ petition in the High Court. The High Court, having the opinion that the supply of goods had to be made upon payment of consideration to make it eligible to tax but in the present case, foods and beverages were purchased from the market by the Club in the capacity of the agent of its members ruled that the Club does not come within the net of sales tax. The High Court while supporting the element of mutuality in the case upheld the order of the Tribunal.
• Aggrieved by the decision of the High Court, the matter was appealed in the Supreme Court.

Issues Involved:

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. (1970) 1 SCC 462 and other judgments which applied the doctrine of mutuality still hold the field even after the 46^th Amendment of the Constitution of India?
3. Whether the 46th Amendment to the Constitution 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?

Contentions of the Appellant:

The counsel for appellant contented that-

• Article 366(29-A) was inserted in the Constitution (via 46^th amendment) to discontinue the doctrine of mutuality, the very basis of the judgment of the Court in Young Men’s Indian Association (1970) 1 SCC 462.

To support his abovementioned contention, the counsel presented the following arguments:

• The language of Article 366(29-A) (e) did away with the transfer of the property in goods and was differently worded from 366(29-A) (a) and (b), which referred to such transfer. The expression “unincorporated associations or body of persons” must be read separately and thus include incorporated persons such as companies, cooperative societies etc.
• In West Bengal Sales Tax Act, the reading of the definition of ‘dealer’ in Section 2(10) and explanation(1) stands apart from the main part of the definition of ‘dealer’ which shows a requirement of business of selling and purchasing goods, and seeks to include the members’ clubs which sell goods to their members.
• According to the definition of ‘sale’ falls within the Madras General Sales Tax Act, 1959, the profit-motive is totally unnecessary where includes a supply of goods by a club to its members.
• The doctrine of mutuality cannot possibly apply on the members’ clubs in corporate form as the shareholders are not the owners of the assets of a company. It makes no difference if the company is registered under Section 25 of the Companies Act, 1956.

Contentions of the Respondent:

The counsel for respondent contented that–

• Article 399(29) only refers to unincorporated clubs or associations of people and a company can never fit within ‘a body of persons’. As a result, Article 399(29) will not apply to sales of food or refreshments by a club to its members.
• The 46^th amendment of the Constitution has not done away with the Young Men’s Indian Association(1970) 1 SCC 462 as there cannot possibly be a supply of goods by one person to oneself and therefore the doctrine of mutuality stands and continues as before.
• The pre-requisite for falling under Section 2(5) of the West Bengal Sales Tax Act is that there should be a profit motive. This expression does not refer to surplus being made, but only refers to a motive of making money through sale transactions. The members’ club doesn’t fulfill this requisite to be charged with the section.
• The members’ club does not fall under the Companies Act as only those companies which intends to apply its profits and other income in promoting its object and prohibits payments of dividend to its members can get registered under the Companies Act, 1956.
• The expression “unincorporated associations” must be read in its literal sense with “the body of persons” and thus would not include members’ club in corporate form.

Judgment:

The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India.

1. Young Men’s Indian Association (1970) 1 SCC 462 and other judgments which applied this doctrine continue to hold the field even after the 46th Amendment.
2. Sub-clause (f) of Article 366(29-A) has no application to members’ clubs.

Ratio Decidendi:

• The 61^st Law Commission Report on ‘Certain Problems Connected With Powers of the States to Levy a Tax on the Sale of Goods and with the Central Sales Tax Act 1956’, observed that there cannot be said to be any evasion of taxes in case of member of members’ club taking goods as he is taking his own goods and thus cannot be liable to pay taxes. Also the expression “unincorporated associations or a body of persons” used in the 46^th amendment emphasizes that it does not seek to include clubs in corporate form within the tax net.
• If assumed that “unincorporated associations or a body of persons” should be read separately, then a ‘body of persons’ cannot be equated with a ‘person’. Article 366(29) does not use this expression as a ‘person’ would include a corporate person as well while a ‘body of persons’ is undoubtedly used to refer an incorporated person.
• Also the “supply” of goods by an unincorporated association or body of persons has to be to a member for cash, deferred payment or other valuable consideration. The supply of goods shall be deemed to be sale of those goods by the person making the supply, and the purchase of those goods by the person to whom such supply is made. As there cannot be a sale to oneself, the doctrine of mutuality has not been eliminated by Article 366(29) and thus underlying principle in the judgment of Young Men’s Indian Association (1970) 1 SCC 462 is still valid.
• While analyzing the 46th Amendment Act, it would make it clear that Article 366(29-A) (f) refers to the taxability of food or drink served in hotels and restaurants. This being the case, it is obvious that the taxability of food or drink served in members’ clubs is not the subject matter of sub-clause (f).
• By going through the Section 2(24) (vii) and Section 44 of the Income Tax Act, 1961, it is clear that an insurance company is brought to tax only due to the fact that the business of the insurance company is a mutual insurance company. There is an absence of any such language in sub clause (e) of the Article 366(29), thereby no reference is made to the elimination of the doctrine of mutuality.
• Owing to above viewpoints, it is unnecessary to examine the West Bengal Sales Tax Act.

Obiter Dicta:

N/A

Conclusion:

The case of State of West Bengal vs. Calcutta Club Ltd. is of immense importance and is associated with the doctrine of mutuality. The judgment of this case is a precedent as the Supreme Court in its judgment while upholding the constitutionality of the doctrine of mutuality, clarified the object and intention of the legislature behind Article 366(29), inserted by the 46^th amendment to the Constitution. It was also being held in the case that the members’ club in corporate form does not come within the net of sales tax as the transactions among them cannot be considered as sales owing to the doctrine of mutuality and thus are not taxable.

Drafted By: Purva Singla

Dr. B.R. Ambedkar National Law University, Sonepat

Published on: February 14, 2024 at 13:06 IST