TMI Blog1962 (11) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation the sales falling within its purview need not be in the course of business. The Explanation to the definition of dealer deems certain persons who sell not in the course of business to be dealers for purposes of the Act. In the course of arguments in these petitions reliance is placed upon a decision of Mack, J., in Cosmopolitan Club, Madras v. Deputy Commercial Tax Officer[1952] 3 S.T.C. 77; (1952) 1 M.L.J. 401., where the learned Judge held: "A sale therefore must in the first place be a transfer of property in goods. I hold that the supply of refreshments in a members' club such as this registered under section 26 of the Companies Act, purchased out of club funds, composed of members' subscriptions is not a transfer of property from the club as such to a member." This point, as I said, was not specifically decided but left open by the Division Bench in the earlier case just referred to. But the learned Judges at the same time made certain observations which appear to support the view Mack, J., took. The point is one of great importance and on first impressions, I must say, I find myself unable to agree with that view of Mack, J. It is desirable, therefore, that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shments by it to its members against payment, as a sale, even if such supply was not made in the course of any trade or business. Conformably with the amended provisions of the Act, the Sales Tax Authorities proceeded to assess the aggregate amount received by the Association from its members to sales tax. The petitioner objected to the proposed levy on the ground that the amendments to sections 2(g) and 2(n) of the Act in so far as they made it a dealer and the tranaction with its members, a sale, were ultra vires the Constitution, as by so doing the Legislature has enabled a tax to be levied on transactions which are not sales within Entry 54 in List II of Schedule VII of the Constitution. The joint Commercial Tax Officer, Harbour Division, in his order dated 5th February, 1960, did not accept the contention. He determined the taxable turnover for the year 1959-60 in the sum of Rs. 1,47,457-28 nP. and levied a tax of Rs. 2,940. On the following day, the officer by his letter Rc. No. 966/59, called upon the Association to register itself as a dealer within six days thereof, failing which he threatened the Association with penal proceedings. The Association did not waste any time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence of such a right will be a matter to be taken into account by the superior Court in arriving at a conclusion whether it should issue a writ of certiorari, for that jurisdiction is a discretionary one: State of U.P.v. Md. Nooh[1958] S.C.J. 242; A.I.R. 1958 S.C. 86. We felt considerable doubt whether we could, in the circumstances of the present case, exercise our discretionary jurisdiction under Article 226 in favour of the petitioner who has a statutory remedy by way of appeal and of ultimate resort to this Court by way of revision under the provisions of the Act. But there are certain circumstances which compel us to exercise our power. The main or only case of the petitioner is that the Explanations to sections 2(g) and 2(n) of the Act are invalid. There is no controversy about the facts, figures or rate of tax etc. The question of constitutional validity of sections 2(g) and 2(n) of the Act is not capable of being determined completely or satisfactorily by the department or the Tribunal. Therefore an appeal to them can, at best, be only a stage in a matter which has ultimately to come up before this Court. Secondly, the alleged turnover of Rs. 1,47,457-28 represents the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is mainly to promote and facilitate social intercourse, discussions amongst its members etc., for whose benefit it maintains a library of literary, historical and political books. The Articles of Association show that the members for the time being only constitute the Club. There are provisions for resignation by the members and also for cessation of membership. Incidental to its above purposes, the Club maintains an establishment for preparing and supplying to its members refreshments. The articles necessary therefor are purchased by the Club in the market. The preparations are made within its premises at the direction of a committee, and they are supplied to the members at a price fixed by the committee. In his judgment in Cosmopolitan Club, Madras v. Deputy Commercial Tax Officer, Triplicane [1952] 3 S.T.C. 77; (1952) 1 M.L.J. 401., Mack, J., has described the object of the club in his felicitous way thus: "The Articles and Memorandum of Association of the Cosmopolitan Club, exhibit P-1, said to be based on those of the Eccentric Club, London, are that of a social members' club, not conducted for gain or profit, but with the objective of providing amenities to its member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicane [1952] 3 S.T.C. 77; (1952) 1 M.L.J. 401. The State preferred an appeal against that judgment and it was heard by Balakrishna Ayyar and Rajagopala Ayyangar, JJ., the judgment in the appeal being reported in Deputy Commercial Tax Officer v. Cosmopolitan Club[1955] 6 S.T.C. 1; I.L.R. 1955 Mad. 1042. The learned judges sustained the judgment of the trial Judge on the ground that there could be no transaction of sale in the supply of refreshments by the Club to its members, as such supply was not done in the course of any business carried on by the Club. Analysing the distinctive elements of a sale, the learned Judges held that there should be present in the transaction, the following three elements: (1) Transfer of property in the goods; (2) such transfer must be in the course of trade; and (3) such transfer must be for valuable consideration. As it was found that the Club had no commercial object, that is, a profit-motive, in its transaction of preparing and selling refreshments to its members, albeit against payment, the learned judges held that the second of the three conditions referred to above was not present in the case and that therefore there was no sale which could a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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." "2(n) '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, but does not include a mortgage, hypothecation, charge or pledge. Explanation.-(1) The transfer of property involved 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 payment, 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." The definition of the term "sale" is not, however, very happy. For example, the Explanation refers to the transfer of property involved in the distribution of goods by a club to its members. But if it were to be held that there could be no transfer at all in such a case, the definition of the term "sale" cannot take in the transaction referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legislature as it brings into the category of sales, transactions which in law are not sales. It was also argued that even if the Explanations to sections 2(g) and 2(n) are held to be intra vires, the Cosmopolitan Club being an incorporated one, would have a persona of its own and will come under the main part of the definition of the term "dealer" and of the term "sale", and that therefore unless the transactions were done in the course of trade, which they were not, there would be no liability to tax. There was also a contention that the terms of the Explanation discriminate clubs, firms and other associations from other persons and that they are therefore void under Article 14 of the Constitution. We shall first consider whether the Explanations to sections 2(g) and 2(n) are ultra vires of the State Legislature for the reason that they enable the State Legislature to tax transactions which are not really sales and therefore fall outside the ambit of its legislative power under the Constitution. The Explanations to which we have made reference deem a club a dealer and the transaction a sale, whether or not the distribution of the goods to the members takes place in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to force. The main Act itself was enacted prior to the Constitution. The power of the State Legislature to levy tax on sales of goods is contained in Article 246 of the Constitution which states that the Legislature of any State shall have power to make laws in respect of any of the matters enumerated in List II to the Seventh Schedule to the Constitution. Item 54 in that List says, "Taxes on the sale or purchase of goods other than newspapers". This entry corresponds to Item 48 in List II to the Seventh Schedule of the Government of India Act, 1935, and it is identical with it except that the latter did not contain the words "other than newspapers". The two entries referred to above authorise a State Legislature to impose a tax either on the sale or on the purchase of goods. That would show that no tax can be imposed unless there has been a transaction of sale, namely, a transfer of property in the goods from one person to another for a price. Thus there is no constitutional restriction as to the levy of sales tax even on casual sales but it is essential that the legislation should impose tax only on sales and not on other transactions. The learned Advocate-General contends, and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dom [see Croft v. Dunphy[1933] A.C. 156.]. The point of the reference is emphatically not to seek a pattern to which a due exercise of the power must conform. The object is to ascertain the general conception involved in the words used in the enabling Act." It would follow from the above that the true meaning of the term "sale of goods" will have to be found in what is ordinarily known and comprehended within the meaning of those words. It cannot be disputed that while interpreting the provisions of entries in our Constitution, reference can be made to the corresponding entry in the Government of India Act, 1935: vide Sales Tax Officer, Pilibhit v. Messrs Budh Prakash Jai Prakash[1954] 5 S.T.C.193; [1955] 1 S.C.R. 243. The learned AdvocateGeneral drew also our attention in this connection to the decision of the Privy Council in Croft v. Dunphy[1933] A.C. 156., where Lord Macmilan observed at page 165: "When a power is conferred to legislate on a particular topic it is important, in determining the scope of the power, to have regard to what is ordinarily treated as embraced within that topic in legislative practice and particularly in the legislative practice of the State which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Act, 1935, which for the first time empowered the legislation on the topic of tax on sale of goods, the Supreme Court observed: "We think that the true legislative intent is that the expression 'sale of goods' in Entry 48 should bear the precise and definite meaning it has in law, and that that meaning should not be left to fluctuate with the definition of 'sale' in laws relating to sale of goods which might be in force for the time being." Adverting to this matter later at page 377, their Lordships said: "If the words 'sale of goods' have to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense, and that, accordingly, the Legislature must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law." The decision of the Supreme Court referred to above which held that in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied to the members by the club were not the absolute property of the club which could be held to have been transferred by it to its members and that the principle recognised in Gannon Dunkerley's case(2) would equally apply. That, where one of the several elements which constitute a sale is lacking, the State Legislature would be incompetent to levy tax by a deeming provision, has been held in a number of cases. We shall refer to a few of them presently. But, before we do so, it is necessary to reiterate what we have stated earlier, namely, that the expression "sale of goods" occurring in Entry 54 of List II of Schedule VII of the Constitution is a composite expression having a definite meaning involving the existence of the four elements stated above and that there can be no sale of goods unless all the component elements are present. In Poppatlal Shah v. State of Madras[1953] 4 S.T.C. 188; A.I.R. 1953 S.C. 274., the Supreme Court dealing with the several elements in the conception of the word "sale" said: "Thus, there are the elements of a bargain or contract of sale, the payment or promise of payment of price, the delivery of goods and the actual passing of title, and each one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 9 S.T.C. 353., which declared void a provision in the Madras General Sales Tax Act which enlarged the definition of the word "sale" so as to include a transfer of property in goods involved in the execution of works contracts. It will follow from the principle accepted in the decisions stated above, that it will not be open to the Legislature to make a transaction which is not a sale, a sale by a statutory fiction and impose a tax thereon. To be more precise, if the element of transfer of property is lacking in any transaction, there can be no sale and the Legislature cannot by treating it as a sale by a deeming clause proceed to bring it within the ambit of the taxing statute. It has therefore to be seen whether there can be said to be a sale when an incorporated club prepares refreshments by investing its moneys in the first instance and recouping the same from the members to whom the products are supplied. The consideration of this question will depend upon the precise relationship between the club and its members. A club is an association of persons united by some common interest, meeting periodically for conviviality, relaxation and social intercourse. In Halsbury's Laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also happen that the proprietor of such a club is an incorporated company. It is not necessary in such a case that the members of the company should be members of the club. An incorporated members' club retains the characteristics of an unincorporated members' club and at the same time, being incorporated under the Companies Act, would obtain the advantage of suing and being sued as a legal entity independent of its individual members. As a members' club is not one run with a view to earning profits, the convenient method adopted is to register the club as a company limited by guarantee, the members for the time being constituting the shareholders of the company. Section 26 of the Indian Companies Act, 1913 (which corresponds to the present section 25) enables the associations run not for profit like a club to be registered as a company. On such registration, the club acquires the status of a legal entity. The true relationship between a club and its members came up for consideration in England with respect to licensing provisions under the Liquor Licensing Laws. The Licensing Act in that country prohibited sale of liquor in unregistered clubs. Questions arose whether the supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer. Taking the transaction to be a purchase by Foster of all the other members' shares in the goods, Foster was as much a co-owner as the vendor. I think it was a transfer of a special property in the goods to Foster, which was not a sale within the meaning of the section." This decision was followed in Metford v. Edwards[1915] 1 K.B. 172., where the question arose whether there was a sale by reason of supply of liquor to the members of a working men's club which had been registered under the Friendly Societies Act, 1896. It was held that there was no sale. The position then will be that the supply of liquor by a members' club to its members is a mere mode of distributing the common property, and not a sale of liquor by the club to its members so as to attract the licensing laws. It will be analogous to a case of several people combining together, ordering for goods on joint account and arranging between themselves the proportion in which they should pay for it or the proportion in which they should consume the same. The purchase in such a case would be a joint purchase of all those who contributed money and a distribution between them can only be termed a partition and not a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty 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 expression 'trustee' or 'agent'. What is essential is 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 the members of the club." From the decisions referred to above, it is clear that so long as no outsider has an interest in an incorporated club which runs only for its members, there is an identity of interest between the club and the members. The club may be a juristic entity capable of holding property. But when it purchases articles for the consumption of its members and supplies the same to them against payment, no element of sale is involved in the transaction, as the club should be regarded only as holding the property for the benefit of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but merely distributes them, all the essential elements of a sale in the transaction being wanting." As pointed out in the appellate judgment, the decisions of the English courts have remained in force for several years and in our opinion they should apply to cases in our country particularly for the reasons that clubs themselves are modelled on the English pattern. The second line of argument adopted by the learned AdvocateGeneral is that a club (whether incorporated or otherwise) in its true concept should not be treated as identical with its members and that, as a substratum at least of the property in the goods remained with the club, any transfer of that property to the member would involve a sale. In this connection the learned Advocate-General invited our attention to the decisions in Rukminiamma v. Ramdas[1940] M.W.N. 1015. and Satyavart Sidhantalankar v. Arya Samaj, BombayA.I.R. 1946 Bom. 516., which held that a society registered under a Societies Registration Act was a legal entity having a persona of its own and he argued by way of analogy that a club as such will have a limited legal existence of its own which would make it competent to sell its goods to its members. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciate that case, it is necessary to digress a little and refer to the law regulating the levy of income-tax with respect to mutual societies, which the appellant claimed to be and which claim was rejected. In a mutual society, e.g., a mutual insurance association, the surplus goes back to the members, viz., (insured persons); in effect it amounts to a return of his own money which the member had overpaid. In other words, in such associations, persons who make contributions receive back a proportionate part of their contribution, if there is a surplus after meeting the liabilities of the association. There is thus a complete identity between the contributors and the recipients of the surplus, the mutual association serving as an agency for a purpose, not itself making any profit. In New York Life Insurance Co. v. Styles[1881] 14 App. Cas. 381. , Lord Watson dealing with such a case said: "When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose shall be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r whom it may choose. From the decision of their Lordships of the Privy Council it appears that three features should exist in a case before an assessee can invoke to his aid the principle of the decision in Styles case(1), namely, (1) that there should be an identity of contributors with the recipients of the surplus; (2) that the company, though incorporated, was a mere entity for the convenience of the members (policyholders); and (3) the impossibility of the contributors receiving profits in that there is only a return of contributions and not an earning of profits which is later distributed. The second of the three features set out above shows that there can be a company established merely for the convenience of the members, conceived as an instrument to obey the mandate of the members. It can be readily conceded that in an incorporated members' club, the legal personality of the club is utilised for securing an advantage and for discharging the mandates of the members. There is no doubt that by the process of incorporation, a club is constituted a juristic person. Such a juristic person can undoubtedly own property: it can deal with it. But it is not necessary that it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not denied that the petitioner Club is not selling its refreshments prepared by it to outsiders. It will be useful in this connection to refer to one of the objects of the Club as stated in paragraph 3(e) of the Memorandum of Association: "And for the purpose of the Club to purchase, hire or otherwise acquire any movable and immovable property, and in particular, any land, building, furniture, club and household effects, utensils, books, newspapers, periodicals, fittings, apparatus for entertainment, sport appliances, conveniences and accommodation and to sell, hire, mortgage or dispose of the same whenever they are superfluous, obsolete or otherwise not required for the use of the members of the Club." The above object which controls the activity of the Club shows that every article purchased by the Club is for the benefit of the Club. In other words, the members get a beneficial interest therein immediately after the purchase of articles intended for the preparation of refreshments. On conversion into refreshments, the Club's ownership will partake the same character. When therefore the refreshments are distributed to individual members against payment, the Club will be onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to their dealings with their members. It therefore created a statutory fiction to make such institutions "dealers" within the meaning of the Act. Therefore, an incorporated club as well as an unincorporated club will come within the terms of the Explanation to section 2(g) for the reason that they will not come under the terms of the main part of the provision. The matter can also be put in another way. The Explanation makes a special provision with regard to co-operative societies, clubs, firms and other associations, and the general words of the main part of section 2(g) will not therefore apply to them. It follows therefore that on the terms of section 2(g) as it stands, a club, whether incorporated or not, will be a dealer only by virtue of the Explanations to that provision and not otherwise. It is therefore not necessary that its transactions with its members should be commercial in their nature so as to attract the tax liability. The next contention relates to the validity of the Explanation with reference to Article 14 of the Constitution. It is contended that, on the terms of section 2(g) and section 2(n), there has been a discrimination between incorporated compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sections 2(g) and 2(n) contemplate an organised activity on the part of the club in the purveying of articles to its members, and the activity of persons or institutions referred to therein is more comparable to that of traders than otherwise. We are therefore of the opinion that there is no difference in treatment between the category of persons coming under the main part of section 2(g) and the Explanation thereto. It follows that neither section 2(g) nor section 2(n) can be challenged as contravening Article 14 of the Constitution. But from what we have stated earlier, it will be clear that in regard to the supply and distribution of refreshments by the Cosmopolitan Club to its members against payment, it cannot be said that there has been a transfer of property by the Club as an absolute owner to its members as purchasers. The case is more analogous to that of an agent or mandatory investing his own moneys for preparing things for consumption of the principal, and later recouping himself for the expenses incurred. The circumstance that a small margin of profit results occasionally in such a transaction can only be regarded as incidental to the transaction, as it is not always ..... X X X X Extracts X X X X X X X X Extracts X X X X
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